U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40-F
(Check One)
[ ] Registration statement pursuant to Section 12 of the Securities Exchange Act
of 1934
or
[X] Annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2004 Commission file number: 333-101591
GERDAU AMERISTEEL CORPORATION
(Exact name of registrant as specified in its charter)
ONTARIO 3312 59-0792436
(Province or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number (if Identification Number (if
applicable)) Applicable))
5100 WEST LEMON STREET
TAMPA, FLORIDA 33629
(813) 286-8383
(Address and Telephone Number of Registrant's Principal Executive Offices)
PHILLIP E. CASEY
CHIEF EXECUTIVE OFFICER
GERDAU, AMERISTEEL CORPORATION
5100 WEST LEMON STREET
TAMPA, FLORIDA 33629
(813) 286-8383
(Name, Address (Including Zip Code) and Telephone Number
(Including Area Code) of Agent For Service in the United States)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
TITLE OF EACH CLASS NAME OF EXCHANGE WHICH REGISTERED
------------------- ---------------------------------
COMMON STOCK NEW YORK STOCK EXCHANGE
Securities registered or to be registered pursuant to
Section 12(g) of the Act: NONE
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act. SENIOR NOTES DUE 2011 AND COMMON STOCK
For annual reports, indicate by check mark the information filed with this Form:
[X] Annual Information Form [X] Audited Annual Financial Statements
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report: 304,028,122
Indicate by check mark whether the registrant by filing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
(the "Exchange Act"). If "Yes" is marked, indicate the file number assigned to
the registrant in connection with such rule.
Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
FORM 40-F
PRINCIPAL DOCUMENTS
The following documents have been filed as part of this Annual Report on Form
40-F, beginning on the following page:
(a) Renewal Annual Information Form dated March 25, 2005
(b) Management's Discussion and Analysis for the fiscal year ended
December 31, 2004; and
(c) Consolidated Audited Financial Statements for the fiscal year ended
December 31, 2004.
GERDAU AMERISTEEL CORPORATION
RENEWAL ANNUAL INFORMATION FORM
MARCH 25, 2005
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS................................................ 1
REPORTING CURRENCY AND FINANCIAL INFORMATION.............................. 3
OVERVIEW.................................................................. 3
CORPORATE STRUCTURE....................................................... 8
Name and Incorporation................................................. 8
Operating Structure.................................................... 10
GENERAL DEVELOPMENT OF THE BUSINESS....................................... 11
History................................................................ 11
Industry and Trends.................................................... 16
NARRATIVE DESCRIPTION OF THE BUSINESS..................................... 19
Minimills.............................................................. 19
BEAUMONT MILL, TEXAS................................................ 23
CALVERT CITY MILL, KENTUCKY......................................... 24
CAMBRIDGE MILL, ONTARIO............................................. 24
CARTERSVILLE MILL, GEORGIA.......................................... 25
CHARLOTTE MILL, NORTH CAROLINA...................................... 26
JACKSON MILL, TENNESSEE............................................. 26
JACKSONVILLE MILL, FLORIDA.......................................... 27
KNOXVILLE MILL, TENNESSEE........................................... 28
MANITOBA MILL, MANITOBA............................................. 28
PERTH AMBOY MILL, NEW JERSEY........................................ 30
ST. PAUL MILL, MINNESOTA............................................ 30
SAYREVILLE MILL, NEW JERSEY......................................... 31
WILTON MILL, IOWA................................................... 31
WHITBY MILL, ONTARIO................................................ 32
GALLATIN MILL, KENTUCKY............................................. 32
DEPOTS.............................................................. 33
Downstream Operations.................................................. 34
RAILROAD SPIKE OPERATIONS........................................... 34
COLD DRAWN OPERATIONS............................................... 35
SUPER LIGHT BEAM PROCESSING AND ELEVATOR GUIDE RAILS................ 35
GRINDING BALL OPERATIONS............................................ 36
REBAR FABRICATION................................................... 37
WIRE DRAWING........................................................ 40
Joint Ventures......................................................... 41
Other Properties....................................................... 42
Products............................................................... 44
MERCHANT BARS/SPECIAL SECTIONS/SPECIAL BAR QUALITY.................. 45
STOCK REBAR......................................................... 47
ROD................................................................. 47
FLAT ROLLED STEEL................................................... 48
FABRICATED STEEL.................................................... 48
BILLETS............................................................. 50
Marketing.............................................................. 50
Competition............................................................ 54
LOCAL COMPETITION................................................... 54
FOREIGN COMPETITION................................................. 56
COMPETITIVE STRENGTHS............................................... 59
RISK FACTORS.............................................................. 63
Excess Global Capacity................................................. 63
Cyclical and Seasonal Nature of the Business........................... 63
Cost of Scrap, Energy and Other Raw Materials.......................... 64
Imports of Steel into North America.................................... 66
Capital Investment and Maintenance..................................... 67
Unexpected Equipment Failure........................................... 67
Indebtedness........................................................... 68
Bankruptcy Protection.................................................. 68
Environmental and Occupational Health and Safety Laws.................. 69
Pension Plans.......................................................... 71
Collective Bargaining Agreements....................................... 71
Senior Management...................................................... 73
Joint Ventures......................................................... 74
Foreign Operations Risk................................................ 74
ENVIRONMENTAL AND REGULATORY MATTERS...................................... 75
EMPLOYEES................................................................. 81
MANAGEMENT'S DISCUSSION AND ANALYSIS...................................... 82
MARKET FOR SECURITIES..................................................... 82
DIVIDENDS................................................................. 85
DIRECTORS AND OFFICERS.................................................... 85
Share Ownership........................................................ 97
DIRECTOR INDEPENDENCE..................................................... 98
PRESIDING DIRECTOR AT MEETINGS............................................ 99
COMMUNICATION WITH NON-MANAGEMENT DIRECTORS............................... 99
CORPORATE GOVERNANCE...................................................... 100
BOARD COMMITTEE MANDATES.................................................. 101
LEGAL PROCEEDINGS......................................................... 102
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS................ 103
AUDITOR, TRANSFER AGENT AND REGISTRAR..................................... 105
AUDIT FEES................................................................ 105
AUDIT COMMITTEE........................................................... 107
STANDARDS OF BUSINESS CONDUCT............................................. 111
MATERIAL CONTRACTS........................................................ 111
SIGNIFICANT ACQUISITIONS.................................................. 114
ADDITIONAL INFORMATION.................................................... 115
SCHEDULE A - SUBSIDIARIES........................................... 118
SCHEDULE B - AUDIT COMMITTEE CHARTER................................ 120
SCHEDULE C - WHISTLE BLOWER POLICY.................................. 121
As used in this document, unless the context otherwise requires, (i) the
"Company" and "Gerdau Ameristeel" refer to Gerdau Ameristeel Corporation and its
subsidiaries and 50% owned joint ventures, (ii) "Ameristeel" refers to Gerdau
Ameristeel US Inc. (formerly AmeriSteel Corporation), (iii) "Gerdau North
America" refers to the North American operations of Gerdau S.A., on or before
October 23, 2002, and (iv) "we", "us" and "our" refers to the Company and its
subsidiaries and 50% owned joint ventures. Unless otherwise indicated, all
information in this Annual Information Form is given as of March 25, 2005.
FORWARD-LOOKING STATEMENTS
Some statements included in this Annual Information Form constitute
forward-looking statements within the meaning of the U.S. Private Securities
Litigation Reform Act of 1995. 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, often identify
forward-looking statements. Forward-looking statements may also be included in
various filings that we make with Canadian securities regulatory authorities and
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 these 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, including the risk factors discussed in
greater detail under the heading "Risk Factors".
Any forward-looking statements that we make in this Annual Information
Form speak only as of the date of such statement, and we undertake no ongoing
obligation to update such statements, except as required by law. 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.
REPORTING CURRENCY AND FINANCIAL INFORMATION
In this Annual Information Form, references to "dollars" and "$" are
to United States dollars. For reporting purposes, the Company's financial
results are presented in United States dollars and in accordance with United
States generally accepted accounting principles ("U.S. GAAP"). Effective January
1, 2004, the Company reports financial results under U.S. GAAP. Prior period
results were originally presented in accordance with Canadian GAAP, and also
under U.S. GAAP for comparative purposes. The Company's financial statements
presented in accordance with Canadian GAAP are available on SEDAR at
www.sedar.com.
OVERVIEW
Gerdau Ameristeel is the second largest minimill steel producer in
North America with annual manufacturing capacity of over 8.4 million tons of
mill finished steel products. Through its vertically integrated network of 15
mills (including one 50% owned minimill), 16 scrap recycling facilities and 42
downstream operations, Gerdau Ameristeel primarily serves customers in the
eastern two thirds of North America. The Company's products are generally sold
to steel service centers, steel fabricators, or directly to original equipment
manufacturers (or "OEMs") for use in a variety of industries, including
construction, automotive, mining, cellular and electrical transmission, metal
building manufacturing and equipment manufacturing.
The Company's operations are segmented into two operating divisions,
minimills and downstream operations.
1
Minimills. Gerdau Ameristeel owns and operates eleven mills in the United
States (including the four former North Star Steel long steel product minimills
acquired on November 1, 2004 from Cargill, Incorporated, located in St. Paul,
Minnesota, Wilton, Iowa, Calvert City, Kentucky and Beaumont, Texas) and three
in Canada and also has a 50% interest in the Gallatin minimill located in
Kentucky, a joint venture with Dofasco Inc. The Company manufactures and markets
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 year ended December 31, 2004, shipments
were approximately 5.9 million tons of mill finished steel products. Over 90% of
the raw material feed for the minimill operations is recycled steel scrap,
making Gerdau Ameristeel the second largest steel recycler in North America. Six
of the mills are provided with scrap by an internal network of 16 scrap
recycling facilities. The Company believes the recycling operations provide a
stable supply of these mills' primary raw material.
Downstream operations. The Company has secondary value-added steel
businesses referred to as downstream operations. These steel fabricating and
product manufacturing operations process steel principally produced in our
minimills. For the year ended December 31, 2004, downstream shipments were
755,818 tons of processed steel products. The downstream operations consist of
the following:
- Rebar fabrication and epoxy coating -- Gerdau Ameristeel has one of
the largest rebar fabricating and epoxy coating operations in North
America, consisting of 29 rebar fabricating facilities (including the
five rebar fabrication facilities and one epoxy coating facility
acquired from Gate City Steel, Inc. and RJ Rebar, Inc. on December 10,
2004) and two epoxy coating plants, servicing the concrete
construction industry in the eastern half of the United States and
Canada. The rebar facilities have the capacity to produce
approximately 775,000 tons (including 150,000 tons of capacity at the
six rebar fabrication facilities acquired from Gate City Steel, Inc.
and RJ Rebar, Inc. on December 10, 2004) of fabricated and epoxy
coated rebar per year. The fabricating facilities purchase the
majority of their rebar requirements from the Company's mills, at
market prices, and cut and bend it to meet our customers' engineering,
architectural and other end-product specifications. The 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 -- Gerdau Ameristeel has two railroad spike
operations that forge steel square bars produced at the Charlotte mill
into track spikes. The rail spike operations manufacture and
distribute the spikes on an annual contract basis to the railroad
industry throughout North America.
- Cold drawn plants -- Gerdau Ameristeel has two cold drawn plants that
process hot rolled merchant and light structural steel bars into cold
drawn bars with improved physical characteristics. The cold drawn
operations purchase approximately 40% of their raw material
requirements from the Company's mills.
- Super light beam processing and elevator guide rails -- Gerdau
Ameristeel has downstream operations that process super light steel
beams into cross members for the truck trailer industry and process
steel guide rail sections for elevator manufacturers.
- Wire mesh, collated nails, chain link fabric fencing and wire drawing
-- Gerdau Ameristeel has four downstream operations that specialize in
producing different wire end products (including the three North Star
Steel wire rod processing facilities located in Beaumont, Texas,
Carrollton, Texas and Memphis, Tennessee) acquired on November 1, 2004
from Cargill, Incorporated. The Atlas and Beaumont facilities focus on
wire mesh and nails; the Memphis facility produces galvanized after
weave (GAW) chain link fabric fencing; and the Carrollton facility
produces mainly wire drawing and heat treating products.
- Grinding balls - At the grinding ball facility located in Duluth,
Minnesota acquired on November 1, 2004 from Cargill, Incorporated,
Gerdau Ameristeel produces grinding balls from 1" through 3.5"
diameter using forging machines. The raw material is supplied from the
St. Paul mill. Grinding balls are used in milling and dispersion
processes for various mineral mining operations.
2
CORPORATE STRUCTURE
NAME AND INCORPORATION
Gerdau Ameristeel Corporation (formerly Co-Steel Inc.) was
incorporated under the laws of the Province of Ontario by letters patent dated
September 10, 1970. The Company is the result of a combination of the North
American operations of Brazilian steelmaker Gerdau S.A. and Canadian steelmaker
Co-Steel Inc. ("Co-Steel") on October 23, 2002. The registered office of the
Company is located at Hopkins Street South, Whitby, Ontario, L1N 5T1, Canada.
For 2004 and until approximately April 22, 2005, the executive office is located
at 5100 West Lemon Street, Tampa, Florida, United States, 33609. Effective April
22, 2005, the executive office will be located at 4221 Boy Scout Blvd., Suite
600, Tampa, Florida, United States, 33607.
Subsequent to incorporation, the following amendments to the Company's
articles and constating documents were made:
- December 27, 1985 - Co-Steel was amalgamated with its subsidiary,
Lake Ontario Steel Company Limited;
- June 10, 1986 - the name was changed from Co-Steel International
Limited to Co-Steel Inc. and each of the outstanding shares
(except the first preference shares) was reclassified and
subdivided into two multiple voting shares and three subordinate
voting shares;
- December 31, 1993 - all of the outstanding multiple voting shares
of the Company were automatically converted into subordinate
voting shares;
- April 27, 1994 - the subordinate voting shares were redesignated
as the common shares of the Company (the "Common Shares");
- December 31, 2000 - 877449 Ontario Limited, a subsidiary,
amalgamated with Co-Steel;
- October 23, 2002 - the name was changed to Gerdau Ameristeel
Corporation;
- May 6, 2003 - By-law No. A2, which amended the Company's general
by-law, was approved by the Company's shareholders;
- September 26, 2003 - Gerdau Ameristeel amalgamated with its
wholly-owned subsidiaries Gerdau MRM Holdings Inc, Gerdau
Ameristeel Cambridge Inc., Gerdau Ameristeel Distribution Canada
Ltd., 1102590 Ontario Limited, 2017387 Ontario Limited and
1585947 Ontario Limited.
OPERATING STRUCTURE
Gerdau Ameristeel conducts its operations directly and indirectly
through subsidiaries and joint ventures in Canada and the United States. The
following chart shows Gerdau Ameristeel Corporation, our principal subsidiaries
and joint ventures and their respective operations. Unless otherwise indicated,
all entities are 100%-owned and are owned directly or indirectly through an
intermediate holding company. "Schedule A" to this Annual Information Form lists
all of the Company's subsidiaries, their jurisdiction of incorporation and the
percentage of shares beneficially owned by the Company.
3
(FLOW CHART)
GENERAL DEVELOPMENT OF THE BUSINESS
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 Gerdau Ameristeel, 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 approximately 48% market share of
the long steel market in Brazil. The Gerdau group has global annual
manufacturing capacity of 16.2 million short tons of mill-finished steel
products, over 21,000 employees and total assets exceeding $7.0 billion. For the
year ended December 31, 2004, Gerdau S.A. had approximately $7.0 billion in
consolidated net sales and a market capitalization of over $5.0 billion.
Over the last 14 years, Gerdau S.A. has increased its investments
abroad, including its investments 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 operated a minimill in
Cambridge, Ontario, Canada. In 1995, Gerdau S.A. acquired MRM Steel Inc. (now
Gerdau Ameristeel MRM Special Sections Inc.), which operated a minimill in
Selkirk, Manitoba, Canada. In 1999, Gerdau S.A. acquired an indirect majority
interest in AmeriSteel Corporation (now Gerdau Ameristeel US Inc.), which owned
four minimills and operated rebar fabricating plants, epoxy coating plants and
other downstream operations. In April 2001, AmeriSteel Bright Bar, Inc., an
80%-owned subsidiary of Ameristeel, acquired the assets of American Bright Bar,
a manufacturer of cold drawn steel bars in Orrville, Ohio. In December 2001,
Ameristeel acquired the assets of the Cartersville mill in Georgia, expanding
Ameristeel's structural bar size range and adding beams to its product line. In
June 2002, Ameristeel acquired certain assets and assumed certain liabilities of
a 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.
In October 2002, the majority shareholder of Gerdau S.A.'s North
American operations, referred to as Gerdau North America, acquired Co-Steel.
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 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 acquirer and was assumed to have purchased the
assets and liabilities of Co-Steel.
4
In December 2002, Ameristeel was an 87%-owned subsidiary. In March
2003, the Company effected an exchange, referred to as the minority exchange, in
which Gerdau Ameristeel acquired the shares of Ameristeel not previously owned
by 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 held approximately 69% of the
Company's Common Shares.
In June 2003, the Company refinanced most of its outstanding debt by
issuing $405 million of 10 3/8% Senior Notes due 2011 and entering 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 completion of the
refinancing, the Company reorganized its subsidiaries to more efficiently
integrate its operations and bring its U.S. operations within the same U.S.
group.
In March 2004, the Company completed the asset acquisition of
downstream operations of Potter Form & Tie Company. The acquisition of Potter
Form & Tie locations not only extended product lines coverage but also expanded
market coverage into the midwest U.S.
In April 2004, the Company issued and sold 26.8 million Common Shares
to Gerdau S.A. through a private placement for total proceeds of $97.9 million.
This transaction increased Gerdau S.A.'s ownership to approximately 72% of
Common Shares then outstanding.
In October 2004, the Company completed an equity offering of
70,000,000 Common Shares in Canada and the United States. In November 2004, an
additional 8,762,000 Common Shares were issued upon exercise by the underwriters
of an over-allotment option. Of the aggregate 78,762,000 Common Shares issued,
39,381,000 were purchased by Gerdau S.A. Pursuant to the completion of the
offering, Gerdau S.A. owns approximately 67.0% of the Company's Common Shares.
The proceeds of this offering of approximately $370 million were mainly used to
fund the acquisition of the North Star Steel assets from Cargill, Incorporated.
In November 2004, the Company completed the acquisition of the North
Star Steel assets from Cargill, Incorporated and certain of its subsidiaries,
including land, fixed assets and working capital of four long steel product
mills, four downstream operations and two recycling operations. The purchase
price for the acquired assets was $318 million in cash plus the assumption of
some debt and employee benefit obligations. This acquisition expanded the mill
coverage into the midwest and southwest U.S. We expect to realize a number of
benefits in connection with the acquisition of North Star Steel, including
economies of scale, product and geographic diversification, increased production
capacity and cost savings.
In December 2004, the Company completed the acquisition of the fixed
assets and working capital of the rebar fabrication and epoxy coating facilities
of Gate City Steel, Inc. and RJ Rebar, Inc., resulting in the addition of six
downstream facilities located in the midwest U.S., extending the Company's
coverage and participation in this region.
INDUSTRY AND TRENDS
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, 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 continuing through 2002, 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. As a result of these conditions,
5
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 were to decrease each year they were 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. 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 had achieved their purpose and changed economic circumstances indicated
it was time to terminate them. International trade negotiations, such as the
ongoing Organization for Economic Cooperation and Development steel subsidy
agreement negotiations and the WTO Doha Round negotiations, may affect future
international trade rules with respect to trade in steel products.
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 in 2002, the combination of Gerdau North America and Co-Steel in October
2002 and Nucor Corporation's acquisition of Birmingham Steel Corporation in
December 2002 significantly consolidated the market. The Company's acquisition
of the North Star Steel assets from Cargill, Incorporated in November 2004
contributed to this consolidation trend. The Company believes 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.
NARRATIVE DESCRIPTION OF THE BUSINESS
MINIMILLS
Gerdau Ameristeel operates minimills, which are steel mills that use
electric arc furnaces to melt scrap metal by charging it with electricity.
During melting of scrap metal, alloys and other ingredients (such as fluxes) are
added 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, finished products are shipped by rail
to a depot before delivery to customers. The following picture shows the typical
steel production process in our mills:
6
(FLOW CHART)
All of the mills are located on Company-owned property, typically
located with convenient access to raw materials, means of transportation (road,
and in some cases, rail and water) and customers. In general, scrap is supplied
by owned or third party scrap recycling operations located within 500 miles of
the mills. Six of the Company's mills are vertically integrated with sixteen
scrap recycling facilities that supply a portion of their scrap needs. Rebar
finished product deliveries are generally concentrated within 350 miles of a
mill, and merchant bar deliveries are generally concentrated within 500 miles.
Some products, such as special sections produced by the Manitoba mill, are
shipped greater distances, including overseas.
The table below presents information regarding the Company's mills,
including the estimated annual production capacity and actual production for the
year ended December 31, 2004. Annual melting and rolling capacities are based on
the best historical months of production and best rolling mill cycles,
respectively, both annualized and assuming eighteen days per year for
maintenance shutdown. Actual capacity utilization may vary significantly from
annual capacity due to changes in customer requirements; sizes, grades and types
of products rolled; and production efficiencies. Capacity calculations may also
change from year to year because of the above mentioned factors. Manufacturer's
design capacity information is not presented because the Company does not
consider it a relevant measure due to differences in the product mix and
production efficiency assumptions.
7
Year Ended December 31, 2004
-----------------------------------------
Melt Shop Rolling Mill
(Thousands of tons) (Thousands of Tons)
------------------- -------------------
Beaumont, Texas 850 800
Calvert City, Kentucky -- 325
Cambridge, Ontario 360 320
Cartersville, Georgia 860 640
Charlotte, North Carolina 460 350
Jackson, Tennessee 670 600
Jacksonville, Florida 640 640
Knoxville, Tennessee 550 520
Manitoba, Manitoba 385 360
Perth Amboy, New Jersey 900 800
St. Paul, Minnesota 600 550
Sayreville, New Jersey 800 600
Whitby, Ontario 960 800
Wilton, Iowa 350 325
----- -----
Total Long Steel 8,385 7,630
----- -----
Gallatin, Kentucky (50%) 750 780
----- -----
Total 9,135 8,410
----- -----
Gerdau Ameristeel operates its mills so inventory levels are
maintained within targeted ranges, therefore, generally the Company does not
utilize 100% of 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.
BEAUMONT MILL, TEXAS
The Beaumont mill began operations in 1976 and was acquired from
Cargill, Incorporated in November 2004. It is located on a 525 acre site on the
Neches River in Beaumont, Texas, with barge load/unload facilities as well as
rail service. It produces industrial quality rod products that are sold to
customers in the construction, automotive, tire, fasteners, furniture and
general manufacturing industries. The Beaumont mill has a 120-ton electric arc
furnace, a ladle arc refining unit, a four-strand continuous caster, and a rod
mill. The caster was rebuilt in February 2004.
CALVERT CITY MILL, KENTUCKY
The Calvert City mill is a rolling mill facility which was acquired
from Cargill, Incorporated in November 2004. It is located on a 357 acre site in
Calvert City, Kentucky. Approximately 20% of the semi-finished billets rolled by
the mill are sourced from third parties and the remainder from Gerdau
Ameristeel's other mills. The Calvert City mill produces merchant bar, medium
structural channel and beams. The Calvert City rolling mill consists of a
120-ton per hour reheat furnace, two high reversing roughers, six vertical and
horizontal mill stands, a cooling bed, an in-line straightener, a cut-to-length
product shear and an automatic stacker.
CAMBRIDGE MILL, ONTARIO
The Cambridge mill began operations in 1980. It is located on a 32
acre lot in Cambridge, Ontario, 60 miles west of Toronto. It produces merchant
bar, special bar quality ("SBQ") products and rebar. Rebar produced at the
Cambridge mill is sold primarily to fabricators and service centers in Canada.
Approximately 75% of the Cambridge mill's production is merchant bar and special
bar quality products. It generally produces smaller sizes in smaller production
runs targeted to niche markets. 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
8
mill, a 256 foot cooling bed, an in-line cut-to-length shear, and a
straightening, stacking, and bundling finishing end. In 2003 a new bag house was
installed for the melt shop.
CARTERSVILLE MILL, GEORGIA
The Cartersville mill began its melting operations in 1989 and its
rolling operations in 1999. It is located on a 267 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 58,000 square foot finished product warehouse was completed in October 2003.
In 2003 the melt shop introduced new oxygen injection technology, as well as
current conductive arms.
CHARLOTTE MILL, NORTH CAROLINA
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, a ladle refining
station and a 3-strand continuous caster. 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. An upgrade to Charlotte's rolling mill electrical
control system was completed in December 2003. A new rolling mill and finishing
end control system was installed during 2004.
JACKSON MILL, TENNESSEE
The Jackson mill began operations in 1981. It is located on a 283 acre
site in Jackson, Tennessee. The Jackson mill is the Company's largest single
producer of merchant bars and also produces some larger size rebar. The merchant
bars are marketed primarily in the southeast and midwest U.S. 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 which is used to process
scrap purchased from third parties. A caster upgrade project at the Jackson mill
was completed in December 2003. During 2004, the melt shop operations completed
an upgrade in the caster and invested in a multi-point carbon injection system.
JACKSONVILLE MILL, FLORIDA
The Jacksonville mill began operations in 1976. It is located on a 550
acre site in Jacksonville, Florida and produces rebar and rods. Straight 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 90 tons per hour reheat furnace,
a 16-stand, 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 operated by a division of OmniSource
Corporation, solely for the benefit of the mill. In 2004, the rolling mill
invested in a new cropping shear. Also in 2004, a new oxygen burner system
upgrade was completed. During 2005, the Company intends to begin construction of
a new melt shop that, when completed, will increase the Jacksonville mill's
capacity by 200,000 tons and will also provide operational improvements in the
steel-making process.
KNOXVILLE MILL, TENNESSEE
The Knoxville mill began operations in its present location in 1903.
It is located on a 52 acre site in Knoxville, Tennessee and produces almost
exclusively rebar. The rebar is marketed throughout the southern and midwestern
United States. Knoxville's melt shop completed a $34.5 million modernization in
July 2000. The new facility includes a 95-ton electric arc furnace and a
continuous scrap feeding and preheating system. The rolling mill consists of a
90-tons per hour reheat furnace, 17 in-line mill stands
9
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.
MANITOBA MILL, MANITOBA
The Manitoba mill began operations in 1917. It is located on a 529
acre site in Selkirk, Manitoba. It produces special sections, merchant bars and
rebar. Approximately 15% of the Manitoba 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 Manitoba mill
increased production capabilities to include flats with a width of more than 10
inches. Approximately 75% of the Manitoba mill's shipments are special sections
sold to the earth moving, material handling and transportation industries. The
Manitoba mill has a 65-ton electric arc furnace, a ladle refining station and a
3-strand continuous caster. The Manitoba mill operates two rolling mills.
Rolling mill #1 has a 15-stand rolling mill. Rolling mill #2 includes two
in-line stands, one horizontal and the other vertical, along with a cooling bed.
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, shears and rail car
dismantling operations for processing scrap on site. The mill's scrap facilities
can supply all of the mill's scrap requirements. 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.
PERTH AMBOY MILL, NEW JERSEY
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. In 2004, the
melt shop operations invested in a casting machine upgrade, and implemented a
mill speed control and a rod mill finishing block.
ST. PAUL MILL, MINNESOTA
The St. Paul mill began operations in 1967 and was acquired from
Cargill, Incorporated in November 2004. It is located on a 188 acre site in
central Minnesota. The St. Paul mill produces merchant bar quality and special
bar quality round bars and rebar. St. Paul's melting equipment includes a 95-ton
electric arc furnace and a multiple size, four strand continuous billet caster.
The rolling mill consists of an 80-ton per hour reheat furnace, 14 in-line mill
stands, four finishing mill stands, a cooling bed, an in-line straightener, a
cut-to-length product shear and a semi-automatic stacker. The St. Paul facility
has a shredder which is used to process raw scrap purchased from third parties
and supplies the mill with a portion of its scrap raw material needs.
SAYREVILLE MILL, NEW JERSEY
The Sayreville mill began operations in 1972 and revamped the melt
shop and caster in 1997. It is located on a 117 acre site in Sayreville, New
Jersey, 30 miles south of New York City. It primarily produces rebar, which is
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. In 2004, the rolling mill approved the purchase of a new reheat
furnace to be completed by May 2005.
WILTON MILL, IOWA
The Wilton mill began operations in 1976 and was acquired from
Cargill, Incorporated in November 2004. It is located on a 167 acre site in
Wilton, Iowa. The Wilton mill produces merchant bar, mostly flats and angles,
and some rebar. The Wilton mill's melting equipment includes an 80-ton electric
arc furnace and a three-strand continuous billet caster. The rolling mill
consists of a 90-ton per hour reheat furnace, 14 in-line mill stands, a cooling
bed, an in-line straightener, a cut-to-length product shear and an automatic
stacker. The Wilton minimill has a scrap shredder facility which is used to
process raw scrap purchased from third parties and supplies the mill with a
portion of its scrap raw material needs.
10
WHITBY MILL, ONTARIO
The Whitby mill began operations in 1964. It is located on a 350 acre
site in Whitby, Ontario, 35 miles east of Toronto. It produces principally
merchant bar, structural shapes and rebar. 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. 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 recycling facilities. The electrical control system at the
Whitby bar mill was upgraded in August 2003. A new 110,000 square foot warehouse
is expected to be completed during the first quarter of 2005.
GALLATIN MILL, KENTUCKY
The Gallatin mill began operations in 1995. It is a joint venture with
Dofasco Inc. Gerdau Ameristeel owns 50% of Gallatin Steel. The mill is located
in Gallatin County, Kentucky, 40 miles southwest of Cincinnati, Ohio on a
1,000-acre site owned by Gallatin Steel. 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.
Gallatin also operates a downstream cut-to-length operation.
DEPOTS
The Company leases depots in Chicago, Illinois; North Jackson, Ohio;
and Montreal, Quebec. The Montreal depot is scheduled to be decommissioned in
March 2005. The Company owns a warehouse in Milton, Ontario, which the Company
expects to sell upon completion of the new warehouse being built at the Whitby
mill, which the Company expects to be completed in March 2005. Finished product
is shipped by rail from several of the Company's mills to the depots, stored,
then shipped to customers. The following table provides information on these
facilities:
LOCATION ACREAGE LEASE EXPIRATION
-------- ------- ----------------
Milton, Ontario....... 32.27 Owned Property
Montreal, Quebec...... 1.89 June 30, 2007
Chicago, Illinois..... 8.88 June 30, 2017
North Jackson, Ohio... 21.75 May 31, 2016
DOWNSTREAM OPERATIONS
The Company has secondary value-added steel businesses, referred to as
downstream operations. These steel fabricating and product manufacturing
operations process steel principally produced in our minimills.
RAILROAD SPIKE OPERATIONS
Gerdau Ameristeel owns two railroad spike facilities: a 52,000 square
foot facility on 41 acres in Lancaster, South Carolina and a 23,000 square foot
facility on 7.7 acres in Paragould, Arkansas. The railroad spike operations
purchase steel square bars from the Charlotte mill and forge the bars into rail
track spikes. These track spikes are generally sold on an annual contract basis
to the major railroad companies in North America. Gerdau Ameristeel is one of
the leading rail spike producers and sells approximately 50,000 tons of track
spikes per year.
11
COLD DRAWN OPERATIONS
Gerdau Ameristeel has two cold drawn plants. The Orrville, Ohio plant
is a 45,000 square foot greenfield facility built on 6.5 acres of land in 2000.
The Orrville plant is leased by AmeriSteel Bright Bar, Inc., of which a
subsidiary of the Company owns 80% and the remaining 20% is owned by members of
the plant's management. The Orrville plant has capacity to produce 30,000 tons
of cold drawn flats and squares per year. The Cartersville, Georgia cold drawn
plant is a 90,000 square foot facility constructed in 1989. The Cartersville
cold drawn plant expanded the Company's cold drawn product offering to include
rounds and hexagons. The Cartersville plant has the capacity to produce 45,000
tons of cold drawn bars per year. Cold drawn bars are sold primarily to steel
service centers. The Jackson, St. Paul, Cambridge and Cartersville mills, along
with third party mills, supply the Orrville and Cartersville cold drawn
facilities.
SUPER LIGHT BEAM PROCESSING AND ELEVATOR GUIDE RAILS
Gerdau Ameristeel operates a super light beam processing facility in
Memphis, Tennessee that fabricates and coats super light beams produced at the
Manitoba mill into cross members for the truck trailer industry. This facility
is located on leased property, with the lease expiring on August 31, 2007.
Bradley Steel Processors Inc., a 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 the Manitoba mill, and
processes beams produced by that mill. Bradley's lease expires on September 30,
2008.
SSS/MRM Guide Rail Inc., a 50%-joint venture with Monteferro S.p.A.,
processes the Manitoba mill's guide rail sections for elevator manufacturers.
SSS/MRM does business under the name Monteferro North America and has facilities
in Steinbach, Manitoba and in Birds Hill, Manitoba. Both the Steinbach and Birds
Hill, Manitoba facilities are located on leased property, with the leases
expiring 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.
GRINDING BALL OPERATIONS
The grinding ball facility began operations in 1977 and was acquired
from Cargill, Incorporated in November 2004. The facility is located on 36.5
acre site in Duluth, Minnesota. The grinding ball facility has four production
lines which produce approximately 100,000 tons per year of 1" through 3.5"
diameter grinding balls using forging machines. The plant has automatic
unscrambling, four induction heaters, four ball forgers, rounders and a quench
tank. The raw material for this facility is supplied by the St. Paul minimill.
REBAR FABRICATION
Gerdau Ameristeel operates one of North America's largest rebar
fabricating and epoxy coating groups, which has a 50-year history of quality
workmanship and service. Our network, consisting of 21 rebar fabricating plants
(including the six rebar fabrication facilities acquired from Gate City Steel,
Inc. and RJ Rebar, Inc. on December 10, 2004) and three epoxy coating plants,
services the concrete construction industry in the eastern half of the United
States. The fabricating facilities cut and bend rebar to meet 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. The Company's rebar fabricating capacity is
approximately 775,000 tons per year. Estimated capacity is based on best
historical months of production, annualized. The following table shows the rebar
fabricating plant locations and their approximate annual capacities:
12
REBAR FABRICATING PLANT (1) CAPACITY (TONS)
--------------------------- ---------------
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
Atlanta, Georgia.............................................. 40,000
Aiken, South Carolina......................................... 15,000
Knoxville, Tennessee.......................................... 50,000
Nashville, Tennessee.......................................... 35,000
Memphis, Tennessee............................................ 20,000
Louisville, Kentucky.......................................... 35,000
York, Pennsylvania............................................ 60,000
Milton, Pennsylvania.......................................... 15,000
Baltimore, Maryland........................................... 30,000
Belvidere, Illinois........................................... 30,000
Decatur, Illinois............................................. 15,000
Madison, Wisconsin............................................ 20,000
Appleton, Wisconsin........................................... 20,000
Hamilton, Ohio................................................ 9,000
Indianapolis, Indiana......................................... 30,000
Muncie, Indiana............................................... 35,000
Eldridge, Iowa................................................ 20,000
Sterling, Illinois............................................ 24,000
Birmingham, Alabama........................................... 48,000
Trussville, Alabama........................................... 9,000
-------
Total......................................................... 775,000
=======
(1) The Company also has a supply facility in Urbana, Illinois which is
included in the rebar fabrication group.
In addition to the fabricating plants listed above, the Company
operates three epoxy coating plants that are located in Knoxville, Tennessee;
Sayreville, New Jersey; and Muncie, Indiana. The Muncie, Indiana plant was
recently added to our operations with the acquisition of Gate City Steel, Inc.
and RJ Rebar, Inc. These facilities apply epoxy coating to fabricated rebar for
rust applications, and have a combined annual coating capacity of approximately
180,000 tons.
WIRE DRAWING
With the recent acquisition of the North Star Steel assets, the
Company increased participation in this segment by adding three facilities
located in Carrollton and Beaumont, Texas and Memphis, Tennessee.
NEW ORLEANS, LOUISIANA FACILITY
The New Orleans facility, Atlas Steel & Wire, 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. The Company leases a 120,000 square foot
facility on five acres of land in New Orleans, Louisiana. The lease was renewed
on August 31, 2004 and renews annually, unless terminated by the Company.
BEAUMONT, TEXAS FACILITY
The Beaumont wire mesh plant began operations in 1991 and was acquired
from Cargill, Incorporated in November 2004. The facility is located in
Beaumont, Texas and produces welded wire reinforcing mesh for slab on grade,
tilt-up panels, pre-cast designs and state highway construction
13
materials. The facility consists of four buildings totaling approximately
244,000 square feet on 13 acres of land.
CARROLLTON, TEXAS FACILITY
The Carrollton plant is located in the Dallas-Fort Worth area and was
acquired from Cargill, Incorporated in November 2004. The Carrollton plant is a
132,000 square foot manufacturing facility located on seven acres of land and
includes state of the art chemical descaling, wire drawing and heat treating
facilities. The Carrollton plant is a leased facility and the current lease
expires in 2006. The plant has a rail siding used for receipt of wire rod and
has four shipping bays for outbound truck shipments.
MEMPHIS, TENNESSEE FACILITY
The Memphis wire plant produces galvanized after weave (GAW) chain
link fabric fencing. The Memphis plant is a 62,000 square foot manufacturing
facility located on seven acres and is geographically well positioned to provide
truck delivery to markets east of the Rocky Mountains.
JOINT VENTURES
Gerdau Ameristeel has three 50%-owned joint ventures. The Gallatin
mill is a joint venture with Dofasco Inc. and produces hot rolled steel
products. Bradley Steel Processors Inc. is a joint venture with Buhler
Industries Inc. and processes super light beams. SSS/MRM Guide Rail is a joint
venture with Monteferro S.p.A. and processes the Manitoba mill's guide rail
sections for elevator manufacturers.
In 1994, Co-Steel and Dofasco Inc. established the Gallatin joint
venture by investing $75.0 million each into Co-Steel Dofasco LLC. The initial
investment was used to purchase $150.0 million of industrial revenue bonds from
Gallatin County, Kentucky. 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 December 31, 2004, there
were approximately $17 million of bonds outstanding. All proceeds received by
Co-Steel Dofasco LLC from Gallatin County are distributed equally to Dofasco and
Gerdau Ameristeel.
OTHER PROPERTIES
In addition to owned and leased facilities used in operations, the
Company owns two industrial properties in Florida and one industrial property in
New Jersey, as set out below. The Company proposes to sell these industrial
properties. The Company leases a 37,000 square foot executive office located in
Tampa, Florida under a lease which expires in May 2005. Effective April 22,
2005, the Company will move its executive office to another location in Tampa,
Florida. The lease for the new executive office, 62,000 square foot office
space, is effective as at March 1, 2005 and expires in November 2015.
LOCATION USE ACREAGE
-------- ------------------- -------
Tampa, Florida............................. Industrial Property 40.0
Indiantown, Florida........................ Industrial Property 151.5
Keasby, New Jersey......................... Industrial property 26.8
14
PRODUCTS
The following tables show the breakdown of tons shipped to third
parties by product for the two years ended December 31, 2003 and 2004:
TONS SHIPPED
YEAR ENDED
DECEMBER 31
-------------
2003 2004
----- -----
(THOUSANDS)
Merchant bar/special sections ... 2,029 2,313
Rebar ........................... 1,526 1,322
Rod ............................. 636 787
Fabricated steel ................ 631 756
----- -----
Sub total ....................... 4,822 5,178
----- -----
Flat rolled (1) ................. 744 758
----- -----
Total finished goods ............ 5,566 5,936
(1) 50% of Gallatin's tons shipped.
MERCHANT BARS/SPECIAL SECTIONS/SPECIAL BAR QUALITY
Merchant bars/special sections refer 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 and 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 that can be used in a variety of
applications. Special sections include custom shapes for use in the
earth moving, material handling and transportation industries. The
Company's 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 (SBQ) are merchant bar shapes that have
stringent chemical and dimensional tolerance requirements, and 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.
15
STOCK REBAR
Stock rebar refers to straight reinforcing steel bars, ranging from 20
to 60 feet in length and from 10 millimeter to 57 millimeter in diameter. Small
diameters of stock rebar may also be sold in coils where the extended lengths
provide improved yield performance for rebar fabricators. 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 refers to coiled wire rod. Gerdau Ameristeel produces industrial
quality rod products that are sold to customers in the automotive, agricultural,
industrial fastener, welding, appliance, and construction industries. The
Company sells rod to downstream manufacturers who further process it by cold
drawing into various shapes, including twisted or welded configurations such as
coat hangers, supermarket baskets and chain link fences. Other end uses of wire
rod products include the manufacture of fences, fine wire, chain, welding wire,
plating wire, fasteners and springs. Depending on market conditions and
availability, some rod from the Company's mills may be sold to the Company's
downstream operations that manufacture wire mesh and collated nails.
FLAT ROLLED STEEL
Flat rolled steel is steel that is rolled flat and then packaged into
coils. Gallatin Steel, the Company's joint venture with Dofasco Inc., is the
only mill in Gerdau Ameristeel 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.
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. Fabricated steel also includes flats and squares processed at the
cold drawn plants, and guide rails, super light beams, wire mesh and nails at
other downstream facilities.
16
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 and finished into steel products. The Company's melt shops produce
billets for conversion in the rolling mills into the finished products listed
above, such as rebar, merchant bar, structural shapes and special sections. A
small portion of billet production is sold in the open market to other steel
producers for rolling into finished products.
MARKETING
The Company's products are generally sold to steel service centers,
fabricators, or directly to OEMs in the eastern two thirds of North America.
Products sold by the Company are used in a variety of industries, including
construction, mining, automotive, commercial, cellular and electrical
transmission, metal building manufacturing and equipment manufacturing. The
Company also sells fabricated rebar to contractors performing work in both
private (commercial) and public (road, bridge and other construction or
infrastructure) projects.
In the Company's rebar fabrication business, the market areas covered
is the eastern two thirds of North America, with plants located in or near most
major cities. The Company's strategy is to have production facilities located in
close proximity (normally 200 miles) to customers' job-sites so quick delivery
times are provided to satisfy their reinforcing steel needs and construction
schedules.
The following table shows information on customers during 2003 and
2004:
PERCENT OF NET SALES
BY CUSTOMER
--------------------
2003 2004
---- ----
Fabricators/OEM ......................................... 40% 36%
Steel service centers ................................... 37 45
Wire drawing ............................................ 14 15
Other ................................................... 9 4
--- ---
Total ................................................... 100% 100%
=== ===
In the year ended December 31, 2004, the Company sold products to over
1,000 customers. Given the diversity of the Company's products and markets, no
one customer comprises 3% or greater of consolidated net sales. The five largest
customers comprised approximately 9% of total consolidated net sales in the year
ended December 31, 2004. The following table provides a percentage breakdown of
total net sales by customer location for 2003 and 2004:
17
PERCENTAGE OF NET
SALES BY COUNTRY
-----------------
2003 2004
----- -----
United States .............................................. 76.9% 81.0%
Canada ..................................................... 23.1 18.4
----- -----
Other Countries ............................................ -- 0.6
----- -----
100.0% 100.0%
===== =====
In general, sales of mill finished products to U.S. customers are
centrally managed by the Tampa sales office and sales to Canadian customers are
managed by the Whitby sales office. The Company has a sales office in Selkirk,
Manitoba, for managing sales of special sections. Metallurgical service
representatives at the mills provide technical support to the sales group. Sales
of the cold drawn and super light beam products are managed by sales
representatives located at their respective facilities. Fabricated rebar and
elevator guide rails are generally sold through a bidding process in which
employees at our facilities work closely with customers to tailor product
requirements, shipping schedules and prices.
COMPETITION
LOCAL COMPETITION
The Company's geographic market encompasses the eastern two thirds of
Canada and the United States, predominantly throughout the eastern seaboard, the
southeast and the midwest U.S. The Company experiences 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 pricing 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 inventories to customers, together
with competitive freight costs and low-cost manufacturing processes, are key to
maintaining margins on rebar and merchant bar products. Rebar deliveries are
generally concentrated within a 350 mile radius of the mills and merchant bar
deliveries are generally concentrated within a 500 mile radius. Some products,
such as special sections produced by the Manitoba 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.
Principal competitors to Gerdau Ameristeel include Ispat Sidbec Inc.,
Stelco Inc. and Ivaco Inc. in Canada; and Bayou Steel Corporation, Commercial
Metals Corporation, Marion Steel Company, Nucor Corporation, Roanoke Electric
Steel Corporation, Sheffield Steel Corporation, and Steel Dynamics Inc. in the
United States. Gallatin Steel competes with numerous other integrated and
minimill steel producers.
Despite the commodity characteristics of the rebar, merchant bar and
structural markets, Gerdau Ameristeel believes it distinguishes itself from
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. The Company believes it produces one of the largest
ranges of bar products and shapes east of the Mississippi River. The Company's
product diversity is an important competitive advantage in a market where many
customers are looking to fulfill their requirements from a few key suppliers.
18
FOREIGN COMPETITION
All North American steel producers have experienced significant and,
in some cases, unfair competition from foreign steel 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 were to progressively decline in the three years they
were to be in effect.
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 were estimated to
have covered 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. The Office of the United States Trade Representative and the
United States Department of Commerce 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 did not effectively
reduce steel imports. The AISI does point to some early indications that the
President's program worked, including improved operating performance, 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.
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 were 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 the tariffs.
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 the Company's 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 made a determination of injury
against wire rod 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 over-capacity 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
over-capacity in the steel industry would adversely affect the Company's ability
to compete and affect the Company's sales levels.
In the beginning of 2004, the global steel supply-demand balance
shifted from an apparent surplus to an apparent shortage. With China's economic
growth fueling worldwide steel and raw material demand, steel industry
conditions changed dramatically for the better in 2004. As China's steel output
has increased at double-digit rates, the global steel industry has witnessed
unprecedented escalation of scrap raw material costs and steel prices have risen
well past historic highs. These positive trends are being further fueled by
19
fluctuations in currency exchange rates and the recent upturn in the North
American and other world economies.
COMPETITIVE STRENGTHS
LEADING MARKET POSITION. Gerdau Ameristeel is the second largest
minimill steel producer in North America. Through a network of minimills and
downstream operations strategically located throughout the eastern two thirds of
the United States and Canada, we are able to efficiently service customers on a
local basis 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 customers' steel and
fabricated product needs. Our broad geographic reach and product diversity,
combined with our centralized order management system, is particularly well
suited to serve larger steel service centers and other customers that are
increasingly seeking to fulfill their steel supply requirements from a small
number of suppliers. Our acquisition of North Star Steel on November 1, 2004
will enable us to more effectively and efficiently service our customers
throughout the midwestern U.S. market, enhance our geographic reach west of the
Mississippi River and broaden the range of products we offer to our customers.
VERTICALLY INTEGRATED OPERATIONS. Our minimills are integrated with 42
downstream steel fabricating facilities and 16 upstream scrap raw material
recycling facilities. Downstream integration provides a captive market for
approximately 13 of our mills' production, and valuable market information on
the end-use demand for steel products. Our downstream operations have
historically produced a high return on investment, been less capital intensive
and been subject to less import competition compared to our minimill operations.
Our downstream operations also balance some of the cyclicality and volatility of
the base minimill business and enable us to capture additional value-added
margins on the steel produced at our minimills. In the year ended December 31,
2004, our downstream businesses accounted for approximately 13% of our shipments
of total finished steel shipments and generated approximately 15% of our net
sales. Our 16 upstream scrap recycling facilities provide approximately 30% of
our minimill scrap needs, thereby decreasing our dependency on third-party scrap
suppliers.
SCOPE FOR FUTURE OPERATIONAL IMPROVEMENT. We have achieved significant
cost savings from the integration of the operations of Co-Steel and Gerdau North
America through the sharing of best operating practices, freight optimization,
minimill production scheduling efficiencies, consolidated procurement activities
and efficiencies in administrative and management functions. We believe we may
achieve additional cost savings over the mid- to long-term from these sources,
as well as from operational improvements through the coordination of
manufacturing technologies, knowledge-sharing and the fostering of an operating
culture focused on continuous improvement. We expect to achieve similar cost
savings from the integration of the acquired North Star Steel operations.
DISCIPLINED BUSINESS SYSTEM PLATFORM. We believe that our employees
are our most valuable resource and are key to maintaining a competitive
advantage. Our corporate culture is geared toward engaging all employees in a
common, disciplined business system focused on continuous improvement. We have
implemented a 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 employees.
STRONG SPONSORSHIP. We have access to the knowledge base of, and
sponsorship from, our majority shareholder, 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. Gerdau S.A. and its subsidiaries,
including us, have global annual manufacturing capacity of 16.2 million tons of
mill finished steel products with 26 steel plants and two strategic
shareholdings. With the talent depth, technical support and financial strength
of Gerdau S.A., we believe we are strategically positioned to grow and succeed
within the North American steel industry.
EXPERIENCED MANAGEMENT TEAM. We have a growth-oriented senior
management team that has an average of over 20 years of experience in the steel
industry. Management's extensive experience has been instrumental in our
historical growth and provides a solid base on which to expand our operations.
For instance, our management has a proven track record in successfully managing
and integrating acquisitions.
20
RISK FACTORS
EXCESS GLOBAL CAPACITY
We compete with numerous foreign and domestic steel producers, largely
minimill producers that produce steel by melting scrap in electric arc furnaces,
but also integrated producers that produce steel from coke and iron ore.
Competition is based on price, quality and the ability to meet customers'
product specifications and delivery schedules. Global overcapacity in steel
manufacturing has in the past had a negative impact on steel pricing and could
adversely affect our sales and profit margins in the future. The construction of
new mills, expansion and improved production efficiencies of existing mills,
restarting of currently idled facilities and the expansion of foreign steel
production capacity all contribute to an increase in global steel production
capacity. Increases in global steel production capacity combined with high
levels of steel imports into North America could exert downward pressure on the
prices of our products, which would adversely affect our sales and profit
margins.
CYCLICAL AND SEASONAL NATURE OF THE BUSINESS
The North American steel industry is highly cyclical in nature and is
affected significantly by prevailing economic conditions in the major world
economies. The Company is 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 the
Company's products. In addition, certain 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 owed to the Company and reduce sales levels.
Market conditions for steel products in the U.S. and Canadian market
have fluctuated over the years. A significant portion of our products is also
destined for the steel service center industry. Many of our markets are cyclical
in nature and affect the demand for our finished products. A disruption or
downturn in any of these industries could negatively impact our financial
condition, production, sales, margins and earnings. We are also sensitive to
trends and events that may impact these industries, including strikes and labor
unrest.
COST OF SCRAP, ENERGY AND OTHER RAW MATERIALS
Our operating results are significantly affected by the cost of steel
scrap and scrap substitutes that are the primary raw material for our minimill
operations. Prices for steel scrap are subject to market forces largely beyond
our control, including demand by U.S. and international steel producers, freight
costs and speculation. The increasing rate of worldwide steel scrap consumption,
especially in China, has placed significant upward pressure on the price of
steel scrap. A combination of a weaker U.S. dollar, strong global demand for
steel scrap and lower production of domestic steel scrap due to a weaker
domestic manufacturing economy have reduced the domestic steel scrap supply
resulting in steel scrap prices which are currently at a ten-year high. Metal
spread, the difference between mill selling prices and scrap raw material cost,
is also currently well above previous ten-year highs. We do not know how long
these levels can be maintained and if scrap prices increase significantly
without a commensurate increase in finished steel selling prices, our profit
margins could be materially adversely affected. We may not be able to pass on
higher scrap costs to our customers by increasing mill selling prices and prices
of downstream products. Further increases in the prices paid for scrap and other
inputs could also impair our ability to compete with integrated mills and cause
our production to decline and adversely affect sales and profit margins.
Most of our minimill operations have long-term electricity supply
contracts with either major utilities or energy suppliers. The electric supply
contracts typically have two components: a firm portion and an interruptible
portion. The firm portion supplies a base load for the rolling mill and
auxiliary operations. The interruptible portion supplies the electric arc
furnace power demand and represents the majority of the total electric demand
and, for the most part, is based on spot market prices of electricity.
Therefore, we have significant exposure to the variances of the electricity
market that could materially adversely affect operating margins and results of
operations. Generally, we do not have long-term contracts for natural gas and
oxygen and therefore are subject to market supply variables and pricing that
could materially adversely affect operating margins and results of operations.
21
IMPORTS OF STEEL INTO NORTH AMERICA
Imports of steel into North America have exerted in recent years, and
may again in the future exert, downward pressure on steel prices, which
adversely affects our sales and profit margins. Competition from foreign steel
producers is strong and may increase due to increases in foreign steel
production capacity, the relative conversion rate of the U.S. dollar compared to
foreign currencies and the reduction of domestic steel demand in the economies
of the foreign producers. These factors encourage higher levels of steel exports
to North America at lower prices. In the past, protective actions taken by the
U.S. government to regulate the steel trade, including import quotas and
tariffs, have been temporary in nature and have been found by the World Trade
Organization to violate global trade rules. Protective actions may not be taken
in the future and, despite trade regulation efforts, unfairly priced imports
could enter into the North American markets in the future resulting in price
depression which would adversely affect our ability to compete and maintain our
sales levels and profit margins.
CAPITAL INVESTMENT AND MAINTENANCE
Steel manufacturing is very capital intensive, requiring us and other
steel producers to maintain a large fixed-cost base requiring substantial
maintenance expenditures. 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 may exert additional downward pressure on selling
prices and profit margins in those periods.
UNEXPECTED EQUIPMENT FAILURE
Interruptions in our production capabilities would increase our
production costs and reduce our sales and earnings for the affected period. In
addition to periodic equipment failures, our facilities are also subject to the
risk of catastrophic loss due to unanticipated events such as fires, explosions
or violent weather conditions. Unexpected interruptions in our production
capabilities would adversely affect our productivity and results of operations.
Our insurance may not cover our losses.
INDEBTEDNESS
We had $524 million of indebtedness as of December 31, 2004. Our
degree of leverage 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 portion of
our cash flows from operations must be dedicated to the payment of interest on
our indebtedness and is not available for other purposes, including operations,
capital expenditures and future business opportunities. Under the terms of our
existing indebtedness, we are permitted to incur additional debt in certain
circumstances; doing so could increase these risks.
BANKRUPTCY PROTECTION
Many U.S. and Canadian steel companies have sought bankruptcy
protection over the last few years. Several of these companies have continued to
operate, while reducing prices to maintain volumes and cash flow, and have
obtained concessions from their employees, suppliers and lenders. Upon emerging
from bankruptcy, these companies, or new entities that purchased their
facilities through the bankruptcy process, have been relieved of many
obligations including debt, environmental, employee and retiree benefits and
other obligations, commonly referred to as legacy costs. As a result, they may
be able to operate more competitively than us and other producers that have
remained solvent.
ENVIRONMENTAL AND OCCUPATIONAL HEALTH AND SAFETY LAWS
Our business units are required to comply with an evolving body of
environmental and occupational health and safety laws and regulations. These
laws and regulations concern, among other things, air emissions, discharges to
soil, surface water and ground water, noise control, the generation, handling,
storage, transportation and disposal of hazardous substances and wastes, the
clean-up of contamination, indoor air quality and worker health and safety.
These laws and regulations vary by location and can fall within federal,
provincial, state or municipal jurisdictions. There is a risk that we have not
been
22
or will not be in the future in compliance with all such requirements.
Violations could result in penalties or the curtailment or cessation of
operations, any of which could have a material adverse effect on us.
Our operations involve the use of large and complex machinery and
equipment and exposure to various substances. As a consequence, there is an
inherent risk to our workers' health and safety. From time to time, workplace
illnesses and accidents, including serious injury and fatalities, do occur. Any
serious occurrences of this nature may have a material adverse effect on our
operations.
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 and financial condition.
Changes, such as new laws or enforcement policies, including currently
proposed restrictions on the emissions of mercury and other pollutants, a
currently proposed interpretation of existing rules applicable to the disposal
of scrap metal shredder residue 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. In addition, our environmental and
occupational health and safety capital expenditures could materially increase in
the future. See "Risk Factors -- Environmental and Regulatory Matters"
PENSION PLANS
We have several pension plans that are currently underfunded and
adverse market conditions could require us to make substantial cash payments to
fund the plans which could reduce cash available for other business needs. Our
funding requirements may rise above expected amounts commencing in the year
ended December 31, 2005 if temporary relief provisions enacted by the United
States Congress are not extended.
COLLECTIVE BARGAINING AGREEMENTS
Approximately 40% of our employees are represented by the United
Steelworkers of America (USWA) and other unions under different collective
bargaining agreements.
The collective bargaining agreements have different expiration dates
beginning in March 2005. The collective bargaining agreements with employees at
the Beaumont, Cambridge, St. Paul and Wilton minimills and the Memphis,
Tennessee wire rod processing facility will expire in 2005 as set forth below.
Negotiations have begun with respect to the agreement with employees at the
Beaumont plant which expires on March 31, 2005.
EMPLOYEES
PLANT EMPLOYEES REPRESENTED BY UNION UNION EXPIRATION DATE
- ----- --------- -------------------- --------- ------------------
Minimills
Beaumont ............ 367 283 USWA March 31, 2005
Cambridge ........... 272 187 USWA May 15, 2005
St. Paul ............ 428 347 USWA July 31, 2005
Wilton .............. 322 246 USWA September 30, 2005
----- -----
Total ............... 1,389 1,063
===== =====
Downstream Operations
Memphis ............. 79 30 Teamsters August 1, 2005
Total ............... 1,468 1,093
===== =====
We may be unable to successfully negotiate new collective bargaining
agreements for these employees without any labor disruption. A labor disruption
could, depending on the operations affected and the length of the disruption,
have a material adverse effect on our operations. Labor organizing activities
23
could occur at one or more of our other facilities or at other companies upon
which we are dependent for raw materials, transportation or other services. Such
activities could result in a significant loss of production and revenue and have
a material adverse effect on our results of operations or financial condition.
SENIOR MANAGEMENT
Our operations and prospects depend in large part on the performance
of our senior management team. We do not have employment contracts with any of
our executive officers and we cannot assure you that these individuals will
remain with us as employees. In addition, we cannot assure you that we 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.
JOINT VENTURES
We have three 50%-owned joint ventures that contribute to our
financial results but that we do not control. These joint ventures contributed
$141.5 million to our net income for the year ended December 31, 2004 and $7.7
million to our net income for the year ended December 31, 2003. We received
$82.8 million of cash distributions from our joint ventures in the year ended
December 31, 2004 and $3.6 million of cash distributions for the year ended
December 31, 2003. 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.
FOREIGN OPERATIONS RISK
No material foreign operations risks exist other than currency
fluctuations. Gerdau Ameristeel reports results in U.S. dollars. A portion of
net sales and operating costs are in Canadian dollars. As a result, fluctuations
in the exchange rate between the U.S. dollar and the Canadian dollar may affect
operating results. In addition, the Canadian operations compete with U.S.
producers and are less competitive as the Canadian dollar strengthens relative
to the U.S. dollar.
ENVIRONMENTAL AND REGULATORY MATTERS
We are required to comply with a complex and evolving body of
environmental and occupational health and safety 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 waste, the
clean-up of contamination, indoor air quality and worker health and safety.
These laws and regulations vary by location and can fall within federal,
provincial, state or municipal jurisdictions.
We generate certain wastes, including electric arc furnace (EAF) 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 clean-up 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 clean-up for which we could
be liable. Reserves based on estimated costs have been made for the clean-up of
sites of which we have knowledge. However, there is no assurance that the costs
of such clean-ups or the clean-up of any potential contamination not yet
discovered will not materially adversely affect us.
In 2000, the 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
24
environmental audit. The results of the audit were disclosed to the EPA along
with a list of corrective actions, all of which were completed. None of the
identified and disclosed items have resulted, or will result, in material costs
being incurred.
Carbon monoxide and other emissions at our Perth Amboy minimill
frequently exceeded permitted levels during 2001 and 2002. We have conducted
investigations to determine the cause of these episodes, and steps have been
taken to reduce emissions and to modify the Perth Amboy minimill's environmental
permit requirements. Discussions with the New Jersey Department of Environmental
Protection (NJDEP) have largely resolved these permit and compliance issues.
Penalty assessments of approximately $250,000 have been agreed upon, and the
terms of a settlement agreement are under negotiation.
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
fertilizer manufacturer in operation from 1910 through 1992, lastly operated by
Stoller Chemical Company, a now bankrupt corporation. The EPA has filed suit
under the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") with us named as a defendant. CERCLA imposes joint and several strict
liability in connection with environmental contamination. We are included in
this action because we allegedly shipped EAF dust to this property during 1978.
In 2003, the EPA offered a settlement to the named PRPs totaling $15.5 million
under which our allocation was approximately $1.8 million. One of the named PRPs
is in bankruptcy proceedings. The EPA has recently indicated that it is
reconsidering the appropriate allocation; that reconsideration could cause the
EPA's view of the Company's allocation to substantially increase. We object to
our inclusion as a PRP on several bases, have asserted defenses and are pursuing
legal alternatives, including adding a larger third party which we believe was
incorrectly excluded from the original lawsuit. In 2004, the court denied a
motion asserting some, but not all, of our defenses. Also in 2004, the EPA and
the Company had further discussions on a settlement and, based on these
discussions, the Company believes that the EPA has a settlement range of $8.0 to
$10.0 million. The Company is not in agreement with this assessment and is
considering legal alternatives including pursuing other contributing parties'
insurance carriers. At this time, the ultimate exposure is uncertain. While we
do not anticipate that the outcome of this matter will have a material adverse
effect on our financial position or consolidated earnings, we cannot assure you
that the final outcome of this matter will not have a material adverse effect on
us.
The potential presence of radioactive materials in our scrap supply
presents a significant economic exposure and may present a safety risk to
workers. In addition to the risk to 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. Past
regulations for generally licensed devices did not provide for tracking of
individual owners. This lack of accountability makes it easy for third parties
to negligently or purposely discard sealed sources in scrap without
consequences. In response to this regulatory gap, we have installed
sophisticated radiation detection systems at our minimills to monitor all
incoming shipments of scrap. If radioactive material is in the scrap received
and is not detected, and is accidentally melted in an electric furnace,
significant costs would be incurred to clean up the contamination of facilities
and to dispose of the contaminated material. While we have redundant detection
systems at our minimills, there is no assurance that radioactive materials will
be detected.
No assurance can be given that regulatory changes, such as new laws or
enforcement policies, including currently proposed restrictions on the emission
of mercury and other pollutants, a currently proposed interpretation of existing
rules applicable to the disposal of scrap metal shredder residue, 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. In December
2002, the Canadian federal government officially ratified the Kyoto Protocol to
the United Nations Framework Convention on Climate Change. We anticipate that
our Canadian minimills may, in the future, be in some way affected by proposed
federal initiatives intended to contribute to Canada meeting its Kyoto target.
The steel industry has been involved in ongoing dialogue with the Canadian
government and several options are being discussed, ranging from covenants to
emissions cap and trade. We expect that a system will be in place in time to
meet the first
25
Kyoto target period of 2008 to 2012. It is too early to determine the outcome of
these discussions or the impact on our results of operations and financial
condition.
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
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 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.
In meeting our environmental goals and government-imposed standards in
2003, we incurred operating costs of approximately $14.3 million and spent $7.9
million on environmental-related capital improvements. We expect to spend
approximately $3.3 million on pollution control capital expenditures in 2005.
EMPLOYEES
Gerdau Ameristeel believes it has been, and continues to be, proactive
in establishing and fostering a climate of positive employee relations. The
Company has an "open book" management system and provides opportunities for
employees to participate in employee involvement teams. The Company believes
high employee involvement is a key factor in the success of its operations.
Gerdau Ameristeel strives to ensure that its compensation programs are designed
to make employees' financial interests congruous with those of the Company's
shareholders and competitive within the market place.
Safety is the most important corporate value and the Company makes
every effort to put safety first in its operations. The Company also strives to
involve employees in our safety programs and in improving operations. The
Company has implemented the Gerdau Ameristeel business system, in which
benchmarks are identified for key operational and safety measures and then
processes are developed to improve performance relative to these benchmarks.
Training and safety programs are currently embedded within this initiative.
Gerdau Ameristeel currently employs approximately 7,200 employees
(including 50% of the employees at the joint ventures), of which approximately
4,650 employees work in minimills, 1,700 work in downstream and recycling
operations and 230 work in corporate and sales offices. Approximately 40% of our
employees are represented by unions under a number of different collective
bargaining agreements. A number of the collective bargaining agreements will
expire in 2005. See "Risk Factors -- Collective Bargaining Agreements". The
Company and the United Steelworkers members at the Company's Whitby, Ontario
steel mill reached an agreement extending the labor contract for the Whitby mill
employees through February 28, 2007. 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 Manitoba mill.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The section entitled "Management's Discussion and Analysis" in the
Company's Annual Report for the year ended December 31, 2004 is incorporated
herein by reference.
MARKET FOR SECURITIES
The Company's Common Shares are listed on the Toronto Stock Exchange
(the "TSX") under the symbol "GNA.TO", and effective October 25, 2004, are
listed on the New York Stock Exchange (the "NYSE") under the symbol "GNA".
26
The following table sets forth the reported high and low trading
prices and trading volumes of the Company's common shares as reported by the TSX
and NYSE from January through December 2004.
TSX(1) NYSE(2)
------------------------- -----------------------
PRICE (CDN$) PRICE ($)
------------ -----------
MONTH HIGH LOW VOLUME HIGH LOW VOLUME
----- ---- ---- ---------- ---- ---- ---------
January 5.45 4.00 6,232,755 -- -- --
February 4.82 4.11 1,735,904 -- -- --
March 5.15 4.30 3,083,530 -- -- --
April 5.43 4.65 5,289,110 -- -- --
May 5.05 4.60 2,987,411 -- -- --
June 5.37 4.71 6,990,113 -- -- --
July 6.00 4.87 4,983,590 -- -- --
August 6.20 5.50 3,683,829 -- -- --
September 6.64 5.50 6,394,854 -- -- --
October 7.14 5.51 16,216,282 4.88 4.42 7,908,900
November 7.28 5.80 11,853,129 6.50 4.74 5,684,000
December 8.65 6.80 14,303,353 7.32 5.56 9,124,500
- ----------
(1) Source, Bloomberg.
(2) Source, Reuters Investor. The Company's common shares began trading on the
NYSE effective October 25, 2004
DIVIDENDS
The predecessor of the Company for accounting purposes, Gerdau North
America, paid dividends of $2,181,000 in aggregate in 2002, prior to the
combination with Co-Steel Inc. No dividends were paid from 2002 until January
2005 when the board of directors of Gerdau Ameristeel approved the initiation of
a quarterly cash dividend of $0.02 cents per common share. The first quarterly
dividend was paid on March 4, 2005 to shareholders of record at the close of
business on February 16, 2005.
DIRECTORS AND OFFICERS
Gerdau Ameristeel's board of directors (the "Board of Directors" or
the "Board")consists of nine directors, each of whom will hold office until the
next annual meeting of shareholders or until his successor is elected or
appointed. The Company has an Audit Committee, a Corporate Governance Committee
and a Human Resources Committee. During 2004, the Board of directors had a
Safety, Health and Environmental Committee which was dissolved in 2005. The
names, municipalities of residence, position with the Company, principal
occupations of the directors and executive officers of the Company and Committee
memberships are as shown below:
27
NAME, AGE AND PROVINCE/STATE AND MAJOR POSITIONS WITH THE COMPANY AND PRINCIPAL
COUNTRY OF RESIDENCE SIGNIFICANT AFFILIATES OCCUPATION
- ----------------------------------- ------------------------------------------- ------------------------------
Andre Beaudry, 45 Vice President, Steel Product Sales of the Vice President, Steel Product
Florida, U.S. Company Sales of the Company
Paulo F. Bins De Vasconcellos, 58 Vice President, Northern Mill Operations of Vice President, Northern Mill
Manitoba, Canada the Company Operations of the Company
Phillip E. Casey, 62 Director since 2002, and Chief Executive Director, Chief Executive
Florida, U.S. Officer and President of the Company Officer and President of the
Company
Kenneth W. Harrigan, 77 Director since 1994 Chairman, K.W. Harrigan
Ontario, Canada Consultants (business
consultant)
Independent
Member of:
- the Audit Committee
- the Human Resources Committee
Joseph J. Heffernan, 58 Director since 1996 Chairman, Rothmans Inc.
Ontario, Canada (tobacco manufacturer)
Independent
Member of:
- the Human Resources Committee
- the Corporate Governance Committee
(Chair)
Jorge Gerdau Johannpeter, 68 Director since 2002, and Chairman of the Director and Chairman of the
Rio Grande do Sul, Brazil Board of Directors of the Company Board of Directors of Gerdau
S.A.
Frederico C. Gerdau Johannpeter, 62 Director since 2002 Vice President of Gerdau S.A.
Rio Grande do Sul, Brazil
Andre Bier Johannpeter, 42 Director since 2002, and Vice-President and Director, Vice President and
Florida, U.S. Chief Operating Officer of the Company Chief Operating Officer of the
Company
Tom J. Landa, 53 Vice President, Finance, Chief Financial Vice President, Finance, Chief
Florida, U.S. Officer and Assistant Secretary of the Financial Officer and
Company Assistant Secretary of the
Company
Robert E. Lewis, 44 Vice President, General Counsel and Vice President, General
Florida, U.S. Corporate Secretary of the Company Counsel and Corporate
Secretary of the Company
J. Spencer Lanthier, 64 Director since 2000 Corporate Director
Ontario, Canada
Independent
Member of:
- the Audit Committee (Chair)
Michael P. Mueller, 58 Vice President, Southern Mill Operations of Vice President, Southern Mill
Florida, U.S. the Company Operations of the Company
28
NAME, AGE AND PROVINCE/STATE AND MAJOR POSITIONS WITH THE COMPANY AND PRINCIPAL
COUNTRY OF RESIDENCE SIGNIFICANT AFFILIATES OCCUPATION
- ----------------------------------- ------------------------------------------- ------------------------------
Arthur Scace, 66 Director since 2003 Counsel, McCarthy Tetrault LLP
Ontario, Canada (law firm)
Independent
Member of:
- the Audit Committee
- the Corporate Governance Committee
Dr. Michael D. Sopko, 66 Director since 1997 Corporate Director
Ontario, Canada
Independent
Member of:
- the Human Resources Committee
(Chair)
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 25 years experience in the steel industry.
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 Corporation starting in June 1994 and President of
Ameristeel Corporation 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 including Camco Inc. and Samuel
Manu-Tech Inc. 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 non-executive 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
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 1971 and was
appointed Chairman of the Board of Directors and President in 1983. Since 2002,
after the implementation of Gerdau S.A.'s new corporate governance structure, he
also became the President of Gerdau S.A.'s Executive Committee. He holds a
degree in Law from the Federal University of Rio Grande do Sul, Brazil.
FREDERICO C. GERDAU JOHANNPETER has worked for the Gerdau group since 1961.
Mr. Johannpeter became an executive officer of Gerdau S.A. in 1971 and has been
a director since 1973. Under Gerdau S.A.'s new corporate governance structure,
he also became Senior Vice President of Gerdau S.A.'s Executive Committee. He
holds a degree in Business Administration from the Federal University of Rio
Grande do Sul, Brazil and a Masters degree in Business, Finance, Costs and
Investments from the University of Cologne, Germany.
ANDRE BIER JOHANNPETER was named Chief Operating Officer on August 1, 2004.
He has been working for the Gerdau companies since 1980. Mr. Johannpeter became
an Executive Officer of Gerdau
29
S.A. in 1989. In 1998, Mr. Johannpeter was appointed Director of Information
Systems of Gerdau S.A. and in 1999 became Director of New Business Development
of Gerdau S.A. and in 2002 he was appointed Vice President, North American
Operations of Gerdau S.A. Mr. Johannpeter became a director and was appointed
Vice-President, Chief Operating Officer of Gerdau Ameristeel, Canadian
Operations in October 2002 and was appointed Vice President, Business
Development of Gerdau Ameristeel in November 2003. He received a degree in
Business Management from the Catholic Pontiff University of Rio Grande do Sul,
Brazil.
TOM J. LANDA has been our Vice President, Finance and Chief Financial
Officer 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 a director of a number of other Canadian public companies
including the Bank of Canada, Emergis Inc., Torstar Corporation, TSX Group Inc.
and Zarlink Semiconductor Inc.
ROBERT E. LEWIS has been our Vice President, General Counsel and
Corporate Secretary since January 31, 2005. Mr. Lewis was Senior Vice President,
General Counsel and Secretary of Eckerd Corporation from August 1994 through
January 2005. Prior to August 1994 he was an attorney and shareholder with the
Tampa law firm Shackleford, Farrior, Stallings, & Evans, P.A.
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 has been a director of Gerdau Ameristeel since 2003. Mr.
Scace is counsel to 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 and Sceptre Investment
Counsel Limited. Mr. Scace is a Rhodes Scholar with degrees from the University
of Toronto, Harvard University and Oxford University.
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 a Canadian chartered bank.
Messrs. Jorge and Frederico Johannpeter are brothers. Andre Bier
Johannpeter is the son of Jorge Johannpeter. None of the other directors are
related to one another.
SHARE OWNERSHIP
As a group, the directors and executive officers of the Company
beneficially own, directly or indirectly, or exercise control or direction over
210,998,761 Common Shares, representing approximately 70% of our total
outstanding Common Shares.
DIRECTOR INDEPENDENCE
Four of the directors of the nine directors on the Company's Board of
Directors are considered related to the business, because they are part of
management or because of their involvement with Gerdau S.A., the Company's
majority shareholder. The other five directors, constituting a majority of the
Board of Directors, are unrelated to the business and meet the independence and
other qualifications of the Sarbanes-Oxley Act of 2002, the New York Stock
Exchange, the Canadian securities regulatory authorities and all other
applicable laws and regulations.
30
The independent directors are Kenneth W. Harrigan, Joseph J.
Heffernan, J. Spencer Lanthier, Arthur Scace and Dr. Michael D. Sopko
The Chairman of the Board of Directors is not a member of management,
but he is an officer and director of Gerdau S.A., the Company's majority
shareholder.
All of the Committee members are unrelated and independent, with each
Committee chaired by a person who is not the Chairman of the Board of Directors
or the Chairman of another Committee.
PRESIDING DIRECTOR AT MEETINGS
Following each regularly scheduled Board meeting, the independent
directors meet separately in an executive session. The chairman of the Corporate
Governance Committee has the responsibility to preside over the independent
director executive sessions and is referred to as the presiding director. The
independent directors may also meet at such other times as determined by the
presiding director or at the request of any independent director. The presiding
director will, from time to time, discuss with the Chairman of the Board
potential items for inclusion in the agendas of future meetings of the Board.
COMMUNICATION WITH NON-MANAGEMENT DIRECTORS
Shareholders may send communications to the Company's non-management
directors by writing to:
The Presiding Director of the Independent Directors
c/o Robert E. Lewis
Vice President, General Counsel and Corporate Secretary
Gerdau Ameristeel Corporation
P.O. Box 31328
Tampa, Florida
United States, 33631-3328
CORPORATE GOVERNANCE
The Corporate Governance Committee develops the Company's approach to
corporate governance and recommends to the Board corporate governance principles
to be followed by the Company. The Board has adopted corporate governance
guidelines (the "Corporate Governance Guidelines"), which set out the functions
of the Board and details regarding the composition of the Board (including
director independence), Board and Committee meetings, the Committees of the
Board, director access to management and independent advisors, director
orientation and continuing education, the appointment, supervision, succession
and development of senior management and a performance assessment of the Board
and its Committees.
The Board maintains the Company's corporate integrity by ensuring that
the Chief Executive Officer and the senior management create a culture of
integrity throughout the organization.
The Corporate Governance Committee and the directors have reviewed and
approved this summary of governance practices with reference to the guidelines
for effective corporate governance issued by the Toronto Stock Exchange (TSX).
The Company's Corporate Governance Guidelines are posted on the
Company's website at www.gerdauameristeel.com and are attached to the management
information circular of the Company dated March 23, 2005. They are also
available in print to any shareholder who requests them. Requests for copies of
these documents may be made by contacting:
Robert E. Lewis
Vice President, General Counsel and Corporate Secretary
Gerdau Ameristeel Corporation
P.O. Box 31328
Tampa, Florida
United States, 33631-3328
31
BOARD COMMITTEE MANDATES
The directors have established three Committees of the Board: a
Corporate Governance Committee, an Audit Committee and a Human Resources
Committee. The directors and each of the Committees on which they serve are
listed above under "Directors and Officers".
The charters for each of the Committees are posted on the Company's
website at www.gerdauameristeel.com and are attached to the management
information circular of the Company dated March 23, 2005. They are also
available in print to any shareholder who requests them. Requests for copies of
these documents should be made by contacting:
Robert E. Lewis
Vice President, General Counsel and Corporate Secretary
Gerdau Ameristeel Corporation
P.O. Box 31328
Tampa, Florida
United States, 33631-3328
LEGAL PROCEEDINGS
The Company is occasionally named as a party in various claims and
legal proceedings which arise during the normal course of its business. Although
there can be no assurance that any particular claim will be resolved in the
Company's favour, the Company does not believe that the outcome of any claims or
potential claims of which it is currently aware will have a material adverse
effect on the Company.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
To the knowledge of the directors and officers of the Company, the
only persons or companies who beneficially own, directly or indirectly, or
exercise control or direction over, securities of the Company carrying more than
10% of the voting rights attached to any class of outstanding voting securities
having a material interest, direct or indirect, in any material transaction or
proposed transaction of the Company or its affiliates from January 1, 2001
through December 31, 2004 are indicated below:
From January 1, 2001 through December 31, 2004, Gerdau S.A., which
beneficially owns securities of the Company carrying approximately 67% of the
voting rights attached to the Company's Common Shares, had a material interest
in the following material transactions:
- During the first quarter of 2004, Gerdau S.A. guaranteed the
following loans from Brazilian banks in favour of the
Company: (i) a $20.0 million, one year, 2.65% interest
bearing loan; and (ii) a $5.0 million, one year, 2.56%
interest bearing loan. Both of these loans were repaid as of
November 30, 2004.
- On April 16, 2004, the Company issued and sold 26.8 million
Common Shares to Gerdau S.A. through a private placement for
total proceeds of $97.9 million. This transaction increased
Gerdau S.A.'s ownership to approximately 72% of Common
Shares then outstanding.
- On October 19, 2004, Gerdau S.A. purchased 35,000,000 Common
Shares of 70,000,000 Common Shares offered by the Company
pursuant to a supplemental PREP prospectus of the Company
dated October 14, 2004 and filed with the securities
regulatory authorities in Canada and with the U.S.
Securities Exchange Commission on October 15, 2004.
Subsequently, on November 18, 2004, Gerdau S.A. purchased
4,381,000 additional Common Shares pursuant to the
offering's over-allotment option. This transaction
32
reduced Gerdau S.A.'s share ownership to approximately 67.0%
Common Shares then outstanding.
AUDITOR, TRANSFER AGENT AND REGISTRAR
Gerdau Ameristeel's auditor is PricewaterhouseCoopers LLP whose Tampa
office is located at Bank of America Building, 101 East Kennedy Boulevard, Suite
1500, Tampa, Florida, United States, 33602.
The transfer agent and registrar for the Common Shares in Canada is
CIBC Mellon Trust Company at its principal offices in Toronto, Montreal and
Calgary and, in the United States, is its U.S. affiliate, Mellon Investor
Services LLC at its principal office in New York.
AUDIT FEES
PricewaterhouseCoopers LLP billed the Company for the following fees
in the last two fiscal years:
2003 2004
---------- ----------
Fees for Audit Services $1,057,000 $1,020,000
Audit-Related Fees $ 100,000 $ 101,000
Tax Fees $ 277,000 $ 180,00
All Other Fees nil nil
Audit fees include fees for services that would normally be
provided by the external auditor in connection with statutory and regulatory
filings or engagements, including fees for services necessary to perform an
audit or review in accordance with generally accepted auditing standards. This
category also includes services that generally only the external auditor
reasonably can provide, including comfort letters, statutory audits, attest
services, consents and assistance with and review of certain documents filed
with securities regulatory authorities.
Audit-related fees are for assurance and related services, such
as due diligence services, that traditionally are performed by the external
auditor. More specifically, these services include, among others: employee
benefit plan audits, due diligence related to acquisitions, accounting
consultations and audits in connection with acquisitions, accounting
consultations regarding accounting standards, internal control reviews, attest
services that are not required by statute or regulation and consultation
concerning financial accounting and reporting standards.
Tax fees are for professional services rendered for tax compliance,
assistance with tax audits and inquiries, tax advice and tax planning on certain
transactions.
AUDIT COMMITTEE
The Audit Committee is presently comprised of Mr. Spencer Lanthier
(Chair), Mr. Kenneth Harrigan and Mr. Arthur Scace. All members of the Audit
Committee are required to be independent and financially literate and at least
one member of the Committee is to be a "financial expert" as such term is
defined by the U.S. Securities and Exchange Commission. Each member of the Audit
Committee is independent and financially literate within the meaning of
applicable law and stock exchange listing requirements. The Board has determined
that J. Spencer Lanthier is an "audit committee financial expert" as defined in
the Audit Committee Charter.
RELEVANT EDUCATION AND EXPERIENCE
Each member of the Audit Committee has acquired significant financial
experience and exposure to accounting and financial issues. Mr. Lanthier worked
as a public company auditor for 28 years, and has served as a director and a
member of the audit committee of several public and private companies. Mr.
Harrigan holds an HBA and LLD from the Ivey School of Business at the University
of Western Ontario,
33
from 1981 to 1989 was the President and Chief Executive Officer of the Ford
Motor Company of Canada, Limited, and from 1990 to 1992 was the Chairman and
Chief Executive Officer. Mr. Harrigan serves as Chairman of the audit committee
for two other public companies. Mr. Scace has served as a director and a member
of the audit committee of several public companies.
Pursuant to the New York Stock Exchange Listed Company Manual, the
members of the Audit Committee may not serve on the audit committee of more than
two other public companies without prior Board approval. With the Board's
approval, Mr. Lanthier, Mr. Harrigan and Mr. Scace currently serve on the audit
committee of more than two other public companies. The Board has determined that
such simultaneous service will not impair the ability of Mr. Lanthier, Mr.
Harrigan and Mr. Scace to effectively serve the Audit Committee.
AUDIT COMMITTEE MANDATE
The Audit Committee is responsible for assisting the Board in its
oversight of:
- the integrity of the Company's financial statements and related
disclosure;
- the Company's compliance with legal and regulatory requirements;
- the independent auditor's qualifications, performance and
independence;
- the performance of the Company's internal audit function;
- the internal controls and disclosure controls at the Company; and
- any additional matters delegated to the Audit Committee by the
Board.
PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee has established a policy of pre-approving all
auditing services and non-audit services to be performed for the Company by its
external auditors, and the Committee shall not engage the external auditors to
perform those specific non-audit services proscribed by law or regulation. The
Committee may form and delegate authority to subcommittees consisting of one or
more members when appropriate, including the authority to grant pre-approvals of
audit and permitted non-audit services, provided that decisions of such
subcommittee to grant pre-approvals shall be presented to the full Committee at
its next scheduled meeting.
On a quarterly basis, the Audit Committee meets separately with the
external auditors without management being present and meets separately with
management without the external auditors being present.
AUDIT COMMITTEE CHARTER AND WHISTLE BLOWER POLICY
The charter of the Audit Committee is attached to this Annual
Information Form as Schedule "[B]" and is also available on the Company's
website at www.gerdauameristeel.com.
The Audit Committee has adopted a whistle blower policy (the "Whistle
Blower Policy") which establishes procedures for the receipt, retention and
treatment of complaints received by the Company regarding accounting, internal
accounting control or auditing matters, and the confidential, anonymous
submission by Company employees of concerns regarding questionable accounting or
auditing matters. The Whistle Blower Policy is attached to this Annual
Information Form as Schedule "[C]" and is also available on the Company's
web site at www.gerdauameristeel.com.
STANDARDS OF BUSINESS CONDUCT
The Company has adopted a code of ethics entitled the "Code of Ethics
and Business Conduct," which is applicable to all employees, officers and
directors of the Company, and a code of ethics entitled the "Code of Ethics
Applicable to Senior Executives" which is applicable to all senior management of
the
34
Company. The Code of Ethics and Business Conduct and the Code of Ethics
Applicable to Senior Executives embody the commitment of the Company and its
subsidiaries to conduct business in accordance with the highest ethical
standards and applicable laws, rules and regulations. The Code of Ethics and
Business Conduct and the Code of Ethics Applicable to Senior Executives can be
found at the Company's web site at www.gerdauameristeel.com.
MATERIAL CONTRACTS
The following are the only material contracts, other than
contracts entered into in the ordinary course of business, which have been
entered into by Gerdau Ameristeel within the most recently completed fiscal year
or before the most recently completed fiscal year but still in effect:
- - in relation to the acquisition on December 10, 2004 by the Company of
substantially all the fixed assets and working capital of Gate City Steel,
Inc. and RJ Rebar, Inc. of Indianapolis, Indiana with fabrication
facilities in the midwestern U.S.; the Asset Purchase and Sale Agreement
between the Company and Gate City Steel, Inc., RJ Rebar, Inc. and Rebar
Express of Cincinnati, LLC dated as of November 23, 2004;
- - in relation to the acquisition on November 1, 2004 by the Company's U.S.
operating subsidiary, Gerdau Ameristeel US Inc., from Cargill, Incorporated
and certain of its subsidiaries, the North Star Steel assets including
fixed assets and working capital of four long steel product minimills in
St. Paul, Minnesota, Wilton, Iowa, Calvert City, Kentucky and Beaumont,
Texas, three wire processing facilities in Beaumont, Texas, Carrollton,
Texas and Memphis, Tennessee, and a grinding ball facility in Duluth,
Minnesota for approximately $266 million in cash:
- the Asset Purchase and Sale Agreement between Cargill, Incorporated
and Gerdau Ameristeel US Inc. dated as of September 9, 2004; and
- the Asset Purchase and Sale Agreement between North Star Steel
Company, North Star Recycling Company, North Star Steel Texas, Inc.
and North Star Steel Kentucky, Inc. and Gerdau Ameristeel US Inc.
dated as of September 9, 2004.
- - in relation to the Company's offering on October 19, 2004 of 70,000,000
Common Shares pursuant to a supplemental PREP prospectus of the Company
dated October 14, 2004 and filed with the securities regulatory authorities
in Canada and with the U.S. Securities Exchange Commission on October 15,
2004 (of which Gerdau S.A. purchased 35,000,000 Common Shares) and, on
November 18, 2004, the Company's subsequent sale of 8,762,000 additional
Common Shares (of which Gerdau S.A. purchased 4,381,000 Common Shares)
pursuant to the offering's over-allotment option:
- Purchase Agreement between the Company and Merrill Lynch & Co. dated
as of October 14, 2004; and
- Subscription Agreement between the Company and Gerdau Steel Inc. dated
as of October 14, 2004;
- - in relation to the acquisition on March 19, 2004 by the Company of
substantially all the assets of Potter Form & Tie Company, of Belvidere
Illinois of Indianapolis, Indiana; the Asset Purchase and Sale Agreement
between the Company and Potter Form & Tie Company dated as of February 13,
2004; and
- - in relation to the issuance and sale by the Company on April 16, 2004 of
26.8 million Common Shares to Gerdau S.A. through a private placement for
total proceeds of $97.9 million; the Subscription Agreement between the
Company and Gerdau Steel Inc. dated as of April 16, 2004.
SIGNIFICANT ACQUISITIONS
The acquisition on November 1, 2004 by the Company's U.S. operating
subsidiary, Gerdau Ameristeel U.S. Inc. of the North Star Steel assets from
Cargill, Incorporated was a significant acquisition for which disclosure is
required under Part 8 of National Instrument 51-102 with respect to business
35
acquisition reports. The business acquisition report filed on Form 51-105F2
dated January 14, 2005 relating to the Company's acquisition of the North Star
Steel assets from Cargill, Incorporated on November 1, 2004, available through
SEDAR at www.sedar.com, is incorporated by reference in this Annual Information
Form.
ADDITIONAL INFORMATION
Additional information, including directors' and officers'
remuneration and indebtedness and principal holders of the Company's securities
is contained in the Company's Management Information Circular dated March 25,
2005 for the annual meeting of shareholders for 2005, which involves the
election of directors.
Additional financial information is provided in the Company's audited
consolidated financial statements for the year ended December 31, 2004 and the
management's discussion and analysis related thereto in the Company's Annual
Report for the year ended December 31, 2004.
You may access other information about the Company, including
disclosure documents, reports, statements or other information that the Company
files with the Canadian securities regulatory authorities through SEDAR at
www.sedar.com and in the United States with the SEC at www.sec.gov and on the
Company's Web site at www.gerdauameristeel.com.
When the securities of the Company are in the course of a distribution
under a short form prospectus or a preliminary short form prospectus, the
following are available upon request from the Secretary of the Company:
(i) one copy of the AIF of the issuer, together with one copy of any
document, or the pertinent pages of any document, incorporated by
reference in the AIF;
(ii) one copy of the comparative financial statements of the issuer
for its most recently completed financial year for which
financial statements have been filed together with the
accompanying report of the auditor and one copy of the most
recent interim financial statements of the issuer that have been
filed, if any, for any period after the end of its most recently
completed financial year;
(iii) one copy of the information circular of the issuer in respect of
its most recent annual meeting of shareholders that involved the
election of directors or one copy of any annual filing prepared
instead of that information circular, as appropriate; and
(iv) one copy of any other documents that are incorporated by
reference into the preliminary short form prospectus or the short
form prospectus and are not required to be provided under clauses
(i), (ii) or (iii).
At any other time, the Company will provide, upon request to the
Secretary of the Company, a copy of any of the documents referred to above,
provided that the Company may require payment of a reasonable charge if a person
who is not a security holder of the Company makes the request.
36
SCHEDULE A - SUBSIDIARIES
All entities are 100%-owned unless otherwise indicated.
Gerdau Ameristeel MRM Special Sections Inc. (Saskatchewan)
Bradley Steel Processors Inc. (50%) (Manitoba)
SSS/MRM Guide Rail Inc. (50%) (Manitoba)
Canadian Guide Rail Corporation (50%) (Canada)
GUSAP Partners (Delaware)
3038482 Nova Scotia Company (Nova Scotia)
PASUG LLC (Delaware)
Gerdau USA Inc. (Delaware)
Gerdau Ameristeel US Inc. (Florida)
Gerdau Ameristeel North Star (GANS) LLC (Delaware)
AmeriSteel Bright Bar, Inc. (80%) (Florida)
Porter Bros. Corporation (North Dakota)
MFT Acquisition, Corp. (Delaware)
1062316 Ontario limited
Co-Steel Benefit Plans Inc. (Ontario)
1300554 Ontario Limited
1551533 Ontario Limited(1)
Co-Steel C.S.M. Corp. (Delaware)
Gallatin Steel Company (50%) (Kentucky)
Ghent Industries (50%) (Kentucky)
Gallatin Terminal Company (50%) (Kentucky)
Gallatin Transit Authority (50%) (Kentucky)
Gerdau Ameristeel Perth Amboy Inc. (New Jersey)
Raritan River Urban Renewal Corporation (New Jersey)
Gerdau Ameristeel Lake Ontario Inc. (Delaware)
Co-Steel Benefit Plans USA Inc. (Delaware)
Gerdau Ameristeel Sayreville Inc. (Delaware)
N.J.S.C. Investment Co., Inc. (New Jersey)(1)
Co-Steel Dofasco LLC (50%) (Wyoming)
Co-Steel (UK) Limited (United Kingdom)
Goldmarsh Enterprises (Ireland)
Acierco S.A. (Luxembourg)
Co-Steel Liquidity Management Hungary Limited Liability Company (Hungary)
Monteferro International Business S.A. (50%) (Spain)
Monteferro America Latina Ltda. (50%) (Brazil)
(1) These companies are in the process of being dissolved.
37
SCHEDULE B - AUDIT COMMITTEE CHARTER
38
GERDAU AMERISTEEL CORPORATION
AUDIT COMMITTEE CHARTER
(ADOPTED MARCH 23, 2005)
1. PURPOSE
The Audit Committee has been established by the Board for the purposes of
overseeing the accounting and financial reporting processes of the Company,
including the audit of the financial statements of the Company.
The Audit Committee is responsible for assisting the Board in its oversight
of:
o the integrity of the Company's financial statements and related
disclosure;
o the Company's compliance with legal and regulatory requirements;
o the independent auditor's qualifications, performance and
independence;
o the performance of the Company's internal audit function;
o the internal controls and disclosure controls at the Company; and
o any additional matters delegated to the Audit Committee by the Board.
The Audit Committee shall prepare all reports of the Audit Committee
required to be included in the Company's annual proxy statement, as
required by the rules of the Canadian securities regulatory authorities
(the "CSRA") and the U.S. Securities and Exchange Commission (the "SEC")
from time to time. Currently no report of the Audit Committee is required.
2. COMPOSITION AND QUALIFICATIONS
(A) MEMBERS
The Audit Committee shall be comprised of three or more members of the
Board, as the Board may determine from time to time. Members of the Audit
Committee will be appointed by the Board, taking into account any
recommendation that may be made by the Corporate Governance Committee. Any
member of the Audit Committee may be removed and replaced at any time by
the Board, and will automatically cease to be a member if he or she ceases
to meet the qualifications set out below. The Board will fill vacancies on
the Audit Committee by appointment from among qualified members of the
Board, taking into account any recommendation that may be made by the
Corporate Governance Committee. If a vacancy exists, the remaining members
of the Audit Committee may exercise all of their powers so long as there is
a quorum and subject to any legal requirements regarding the minimum number
of members of the Audit Committee.
(B) QUALIFICATIONS
Each Member of the Audit Committee shall meet the independence and other
qualification requirements of the Sarbanes-Oxley Act of 2002, the New York
Stock Exchange, the CSRA and all other applicable laws and regulations.
Each member of the Audit Committee shall be financially literate and at
least one member shall have accounting or related financial management
expertise as such qualification is interpreted by the Board in its business
judgment. At least one member shall be an "Audit Committee Financial
Expert", as such term is defined by the SEC. In addition, at least a
majority of the members must be residents of Canada (so long as this is
required under applicable law). A member of the Audit Committee may not
serve on more than two other public company audit committees except with
prior approval of the Board.
39
(C) INDEPENDENCE
Members of the Audit Committee (i) may not accept any consulting, advisory,
or other compensatory fee from the Company or any of its subsidiaries,
other than director and committee fees and pension or other form of
deferred compensation for prior service and (ii) may not be an affiliated
person (within the meaning of applicable law or regulations) of the Company
or any of its subsidiaries.
3. DUTIES AND RESPONSIBILITIES
The Audit Committee is responsible for performing the duties set out below
and any other duties that may be assigned to it by the Board and performing
any other functions that may be necessary or appropriate for the
performance of its duties.
(A) APPOINTMENT AND REVIEW OF INDEPENDENT AUDITOR
o The Company's independent auditors are ultimately accountable to the
Audit Committee, which has the direct authority and responsibility to
appoint, retain, compensate, oversee and evaluate and, where
appropriate, replace the independent auditors, subject to shareholder
approval where applicable. In connection with the Audit Committee's
oversight of the independent auditor the Audit Committee will have the
following responsibilities and take the following actions:
o The Audit Committee will review and approve the independent
auditor's engagement letters and the fees to be paid to the
independent auditors.
o The Audit Committee will obtain and review with the lead audit
partner annually or more frequently as the Audit Committee
considers appropriate, a report by the independent auditor
describing: (A) the independent auditor's internal
quality-control procedures; (B) any material issues raised by the
most recent internal quality-control review, or peer review, of
the independent auditor, or by any inquiry or investigation by
governmental or professional authorities, within the preceding
five years, respecting independent audits carried out by the
independent auditor, and any steps taken to deal with these
issues; and (C) in order to assess the independent auditor's
independence, all relationships between the independent auditor
and the Company.
o After reviewing the report referred to above and the independent
auditor's performance throughout the year, the Audit Committee
will evaluate the independent auditor's qualifications,
performance and independence. The evaluation will include a
review and evaluation of the lead partner of the independent
auditor. In making its evaluation, the Audit Committee will take
into account the opinions of management and the officer in charge
of internal audit and the Company's internal auditors (or other
personnel responsible for the internal audit function). The Audit
Committee will also consider, if appropriate and in order to
assure continuing auditor independence, whether there should be a
rotation of the audit firm itself. The Audit Committee will
present its conclusions to the Board.
o The Audit Committee will obtain confirmation and assurance as to
the independent auditor's independence, including ensuring that
it submits on a periodic basis (not less than annually) to the
Audit Committee a formal written statement delineating all
relationships between the independent auditors and the Company.
The Audit Committee is responsible for actively engaging in a
dialogue with the independent auditors with respect to any
disclosed relationships or services that may impact the
objectivity and independence of the independent auditor and for
taking appropriate action in response to the independent
auditor's report to satisfy itself of its independence.
40
o The Audit Committee will resolve disagreements between management
and the independent auditor regarding financial reporting.
o The Audit Committee will review with the Board any issues that
arise with respect to the performance and independence of the
independent auditor and make recommendations about whether the
Company should continue with that independent auditor.
o The Audit Committee will ensure the regular rotation of members
of the independent auditor's team as required by law.
o The Audit Committee will review and approve the Company's hiring
of employees and former employees of the independent auditor or
former independent auditors.
(B) PRE-APPROVAL OF NON-AUDIT SERVICES
o The Audit Committee will pre-approve the appointment of the
independent auditor for any non-audit service to be provided to the
Company, provided that it will not approve any service that is
prohibited under the rules of the Canadian Public Accountability Board
or the Public Company Accounting Oversight Board, the Independence
Standards of the Canadian Institute of Chartered Accountants or the
United States Securities Exchange Act of 1934, as amended, and the
rules promulgated thereunder. The Audit Committee may establish
policies and procedures, from time to time, pre-approving the
appointment of the independent auditor for certain non-audit services.
In addition, the Audit Committee may delegate to one or more members
the authority to pre-approve the appointment of the independent
auditor for any non-audit service to the extent permitted by
applicable law, provided that any pre-approvals granted pursuant to
such delegation shall be reported to the full Audit Committee at its
next scheduled meeting.
(C) REVIEW OF THE INTERNAL AUDIT FUNCTION
o The Audit Committee will review the mandate, budget, plan and scope of
activities, staffing and organizational structure of the internal
audit function to confirm that it is independent of management and has
sufficient resources to carry out its mandate. The Audit Committee
will discuss this mandate with the independent auditor.
o The Audit Committee will review the appointment and replacement of the
officer in charge of the internal audit and will review the
significant reports to management prepared by the internal auditing
department and management's responses to such report.
o The Audit Committee has the authority to communicate directly with the
officer in charge of the internal audit. In addition, as frequently as
it deems necessary to fulfill its responsibilities, but not less often
than annually, the Audit Committee will meet privately with the
officer in charge of the internal audit to discuss any areas of
concern to the Audit Committee or the officer in charge of the
internal audit.
(D) REVIEW OF FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
o The Audit Committee will review and discuss the annual audited
financial statements and quarterly financial statements with
management and the independent auditor, including reviewing the
Company's disclosure under "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" and any reconciliation
of the Company's financial statements, before recommending them for
approval by the Board for release and filing with securities
regulatory authorities, including the filing of Form 40-F or Form 6-K,
as applicable.
o The Audit Committee will review with management and the independent
auditor: (A) major issues regarding accounting principles and
financial statement presentations, including any
41
significant changes to the Company's selection or application of
accounting principles, and major issues as to the adequacy of the
Company's internal controls and any special audit steps adopted in
light of material control deficiencies; (B) analyses prepared by
management and/or the independent auditor setting forth significant
financial reporting issues and judgments made in connection with the
preparation of the financial statements, including analysis of the
effects of alternative GAAP methods on the financial statements of the
Company; (C) the effect of regulatory and accounting initiatives, as
well as off-balance sheet structures, on the financial statements of
the Company; and (D) the type and presentation of information to be
included in earnings press releases (including any use of "pro forma"
or "adjusted" non-GAAP information) as well as any financial
information and earnings guidance provided to analysts and rating
agencies.
o The Audit Committee will review reports required to be submitted by
the independent auditors concerning: (A) all critical accounting
policies and practices used; (B) all alternative treatments of
financial information within generally accepted accounting principles
("GAAP") that have been discussed with management, the ramifications
of such alternatives, and the accounting treatment preferred by the
independent auditors; and (C) any other material written
communications with management.
o The Audit Committee will review earnings press releases and other
press releases containing financial information based on the Company's
financial statements prior to their release. The Audit Committee will
also review the use of "pro forma" or "adjusted" non-GAAP information
in such press releases.
o The Audit Committee will discuss generally (meaning a discussion of
the types of information to be disclosed and the type of presentation
to be made) financial information and earnings guidance provided to
analysts and rating agencies. The Audit Committee need not discuss in
advance each earnings release or each instance in which the Company
may provide earnings guidance.
o The Audit Committee will review all other financial statements of the
Company that require approval by the Board before they are released to
the public, including, without limitation, financial statements for
use in prospectuses or other offering or public disclosure documents
and financial statements required by regulatory authorities.
o The Audit Committee will discuss with the independent auditors the
matters required to be disclosed by Statement on Auditing Standards
No. 61 (as may be modified or supplemented) and the matters in the
written disclosures required by Independence Standards Board Standard
No. 1 relating to the conduct of the audit.
o The Audit Committee will review the effect of regulatory and
accounting initiatives as well as off-balance sheet structures on the
Company's financial statements.
o The Audit Committee will review significant changes in accounting or
auditing policies.
o The Audit Committee will oversee management's design and
implementation of an adequate and effective system of internal
controls at the Company, including ensuring adequate internal audit
functions and any significant findings and recommendations with
respect to such internal controls. The Audit Committee will review the
processes for complying with internal control reporting and
certification requirements and for evaluating the adequacy and
effectiveness of internal controls. The Audit Committee will review
the annual and interim conclusions of the effectiveness of the
Company's disclosure controls and procedures and internal controls and
procedures (including the independent auditor's attestation that is
required to be filed with securities regulators).
o The Audit Committee will regularly review with the independent auditor
any problems or difficulties the independent auditor encountered in
the course of its audit work, including any
42
change in the scope of the planned audit activities and any
restrictions placed on the scope of such activities or access to
requested information, management's response to such problems and
difficulties and any significant disagreements with management. The
Audit Committee will also review with the independent auditor any
material communications with the independent auditor, including any
"management" or "internal control" letters or schedule of unadjusted
differences.
o The Audit Committee will review with management and any outside
professionals as the Audit Committee considers appropriate important
trends and developments in financial reporting practices and
requirements and their effect on the Company's financial statements.
o The Audit Committee will review with management and the independent
auditor the scope, planning and staffing of the proposed audit for the
current year.
o The Audit Committee will discuss guidelines and policies governing the
process by which risk assessment and risk management are undertaken
and meet with management to review and assess the Company's major
financial risk exposures and the steps management has taken to monitor
and control such exposures.
o The Audit Committee will review with management and the general
counsel or any external counsel as the Audit Committee considers
appropriate any legal, regulatory or other matters (including pending
litigation, claims, contingencies and tax assessments) which may have
a material effect on the Company and its financial statements, any
material reports or inquiries from regulatory or governmental agencies
and corporate compliance policies or codes of conduct.
o The Audit Committee will review with the Board any issues that arise
with respect to the quality or integrity of the Company's financial
statements, compliance with legal or regulatory requirements or the
performance of the internal audit function.
o The Audit Committee will review with management the status of
significant taxation matters of the Company.
o The Audit Committee will meet separately and periodically with
management, the internal auditors (or other personnel responsible for
the internal audit function) and the independent auditor.
(E) COMPLAINTS PROCEDURE
o The Audit Committee will establish procedures for
(i) the receipt, retention and treatment of complaints and concerns
received by the Company regarding accounting, internal accounting
controls and auditing matters, and
(ii) the confidential and/or anonymous submission by employees of
complaints or concerns regarding questionable accounting or
auditing matters. This will include the establishment of a
whistleblower policy and an employee "hotline" for making
anonymous submissions.
(F) ASSESSMENT
o The Audit Committee will review and reassess annually the adequacy of
this Audit Committee Charter and recommend any proposed changes to the
Board.
4. REPORTING
43
The Audit Committee will regularly report to the Board on:
o the independent auditor's independence;
o the performance of the independent auditor and the Audit Committee's
recommendations regarding its reappointment or termination;
o the performance of the internal audit function;
o the adequacy of the Company's internal controls and disclosure
controls;
o its recommendations regarding the annual and interim financial
statements of the Company and any reconciliation of the Company's
financial statements, including any issues with respect to the quality
or integrity of the financial statements;
o its review of the annual and interim management's discussion and
analysis;
o the Company's compliance with legal and regulatory requirements
related to financial reporting; and
o all other significant matters it has addressed and with respect to
such other matters that are within its responsibilities.
5. CHAIR
Each year, the Board will appoint one member to be Chair of the Audit
Committee. If, in any year, the Board does not appoint a Chair, the
incumbent Chair will continue in office until a successor is appointed. In
the Chair's absence, the Audit Committee may select another member as Chair
by majority vote. The Chair will have the right to exercise all powers of
the Audit Committee between meetings but will attempt to involve all other
members as appropriate prior to the exercise of any powers and will, in any
event, advise all other members of any decisions made or powers exercised.
6. MEETINGS
The Audit Committee will determine the date, time and place of its
meetings, but will meet at least quarterly. The Audit Committee may meet on
not less than 48 hours written or verbal notice from the Chair to all
members (or without notice if all persons entitled to notice have waived or
are deemed to have waived such notice). If the Chair is absent or if the
position is vacant, any member may call a meeting. The Audit Committee may
establish those procedures it deems appropriate, such procedures to be in
keeping with those adopted by the Board. The Audit Committee shall act on
the affirmative vote of a majority of members present at a meeting at which
a quorum is present. In the event of a tie, the Chairperson will have the
second, or casting vote in addition to his or her original vote.Without a
meeting, the Audit Committee may act by unanimous written consent of all
members. However, the Audit Committee may delegate to one or more of its
members the authority to grant pre-approvals of audit and permitted
non-audit services, provided the decision is reported to the full Audit
Committee at the next scheduled meeting.
7. QUORUM
A majority of the members of the entire Audit Committee will constitute a
quorum for the transaction of business decisions.
44
8. SECRETARY AND MINUTES
The Controller of the Company, or such other person as may be appointed by
the Chair of the Audit Committee, will act as the secretary of the Audit
Committee. The minutes of the Audit Committee will be in writing and duly
entered in the books of the Company. The minutes of the Audit Committee
will be available to all other members of the Board.
9. APPOINTMENT AND REMOVAL
The members of the Audit Committee shall be appointed by the Board at its
first meeting following the annual meeting of shareholders and shall serve
until their successors are elected or until their earlier deaths,
resignation or removal, with or without cause in the discretion of the
Board.
Any member may be removed and replaced at any time without cause by the
Board and will automatically cease to be a member as soon as the member
ceases to meet the qualifications set out above. The Board will fill
vacancies on the Audit Committee by appointment from among qualified and
independent members of the Board for the remainder of the unexpired term.
If a vacancy exists on the Audit Committee, the remaining members may
exercise all of its powers so long as a quorum remains in office.
10. ACCESS TO OUTSIDE ADVISORS
The Audit Committee may, in its sole discretion, retain counsel, auditors
or other advisors in connection with the execution of its duties and
responsibilities and may determine the fees of any advisors so retained.
The Company will provide the Audit Committee with appropriate funding for
payment of compensation to such counsel, auditors or other advisors and for
ordinary administrative expenses of the Audit Committee that are necessary
or appropriate in carrying out its duties.
11. LIMITATIONS
While the Audit Committee has the responsibilities and powers set forth in
this Charter, it is not the duty of the Audit Committee to plan or conduct
audits or to determine that the Company's financial statements are complete
and accurate and are in accordance with GAAP. This is the responsibility of
management and the independent auditors.
45
SCHEDULE C - WHISTLE BLOWER POLICY
46
GERDAU AMERISTEEL CORPORATION
PROCEDURES FOR ADDRESSING COMPLAINTS ABOUT ACCOUNTING MATTERS (WHISTLE
BLOWER POLICY)
(ADOPTED MARCH 15, 2005)
1. PURPOSE
The Company is committed to achieving compliance with all applicable
securities laws and regulations, accounting standards, accounting
controls and audit practices. In order to facilitate the reporting of
employee complaints the Company's Audit Committee has established the
following procedures for (a) the receipt, retention and treatment of
complaints and concerns regarding accounting, internal accounting
controls and auditing matters ("Accounting Matters"), and (b) the
confidential and anonymous submission by employees of complaints or
concerns regarding questionable accounting or auditing matters.
Reference is also made to the "Administration and Reporting" section
within the Company's Code of Ethics and Business Conduct, which deals
with reports of wrongdoing generally and the Code of Ethics Applicable
to Senior Executives.
2. SCOPE
These procedures relate to complaints or concerns relating to any questionable
Accounting Matters, including, without limitation, the following:
o fraud or deliberate error in the preparation, evaluation,
review or audit of any financial statement of the Company;
o fraud or deliberate error in the recording and maintaining of
financial records of the Company;
o deficiencies in or noncompliance with the Company's internal
accounting controls;
o misrepresentation or false statement to or by a senior officer
or accountant regarding a matter contained in the financial
records, financial reports or audit reports of the Company; or
o deviation from full and fair reporting of the Company's
financial condition.
3. PROCEDURES
(A) SUBMISSION OF COMPLAINTS
In submitting a complaint or concern regarding Accounting Matters
employees, shareholders and others should exercise due care to ensure
the accuracy of information.
(i) Employees, shareholders or others may report their
complaints or concerns regarding Accounting Matters
to the General Counsel of the Company by phone
(813-207-2322) or by mail addressed to the General
Counsel or the Chairman of the Audit Committee at
Gerdau Ameristeel Corporation, P.O. Box 31328, Tampa,
Florida 33631.
The General Counsel will forward a copy of the same,
to the extent appropriate, to the Chair of the Audit
Committee. The person submitting a complaint or
concern regarding Accounting Matters should include a
telephone number at which she or he can be contacted
if the General Counsel or the Audit Committee
determines that contact is appropriate.
47
(ii) Employees may report their complaints or concerns
regarding Accounting Matters on a confidential or
anonymous basis by telephone to the ethics hotline at
(800) 732-7116.
(B) TREATMENT OF COMPLAINTS
For each complaint or concern regarding Accounting Matters (an
"Accounting Complaint"), an inquiry will be initiated to determine if
the complaint or concern can be substantiated or has merit. The inquiry
will be made by the General Counsel or person designated by the General
Counsel unless the Audit Committee designates another person to review
the Accounting Complaint (the "Investigator").
When possible, the Investigator will acknowledge receipt of the
Accounting Complaint to the person who submitted it.
The Investigator will conduct an informal inquiry or review in order to
determine, in his or her reasonable judgment, whether a reasonable
basis exists for pursuing an investigation or further review of the
Accounting Complaint. The purpose of this informal inquiry or review is
to screen Accounting Complaints so that the Audit Committee does not
have to examine immaterial, frivolous or spurious reports of
wrongdoing.
The Investigator will forward the Accounting Complaint to the Chair of
the Audit Committee along with any conclusions she or he may have
reached about the merit of the Accounting Complaint.
Following receipt of the Investigator's report, the Audit Committee
will review each matter reported and recommend that the Company or
Board take prompt and appropriate corrective or disciplinary action,
where necessary. The Audit Committee may enlist employees of the
Company (including the General Counsel) and/or outside legal,
accounting or other advisors to assist with the investigation or
further review of the Accounting Complaint. The Board will be informed
of all investigations and reviews upon their conclusion.
When possible and when determined appropriate by the Audit Committee,
notice of any corrective action taken will be given to the person who
submitted the Accounting Complaint. If this person is not satisfied
with the treatment of his or her complaint, he or she may follow-up the
matter with the Chair of the Audit Committee.
(C) CONFIDENTIALITY AND ANONYMITY
Employees, shareholders or others with Accounting Complaints may make
their complaint or concern known on a confidential basis or
anonymously, as applicable, to the extent reasonable and practicable
under the law.
The Company will make good faith efforts to protect the confidentiality
of employees making submissions of Accounting Complaints; provided,
however, that the Company or its employees and agents shall be
permitted to reveal the employee's identity and confidential
information to the extent necessary to permit a thorough and effective
investigation.
(D) RECORDS
A confidential file for each Accounting Complaint will be maintained
for an appropriate amount of time. This file will relate to the initial
Accounting Complaint as well as to any inquiry, investigation and
resolution of the Accounting Complaint.
In addition, the General Counsel will maintain a log of all Accounting
Complaints, tracking their receipt, investigation and resolution and
shall prepare a periodic summary report of all Accounting Complaints
for the Audit Committee. Copies of these logs and summary reports will
be maintained for an appropriate amount of time.
48
These records are confidential to the Company and are protected by
attorney-client privilege and/or the attorney work product doctrine.
Such records will be considered privileged and confidential.
4. PROTECTION FOR WHISTLEBLOWERS
The Company will not retaliate or attempt to retaliate and will not
tolerate any retaliation or attempted retaliation by any other person
or group, directly or indirectly, against any person who
o in good faith, submits an Accounting Complaint,
o provides assistance to the Audit Committee, the General
Counsel or the Company's management or any other person or
group, including any governmental, regulatory or law
enforcement body, investigating or otherwise helping to
resolve an Accounting Complaint,
o provides information regarding any conduct the person
reasonably and in good faith believes constitutes a violation
of any law or regulation regarding securities fraud in an
investigation conducted by any state, provincial or federal
regulatory or law enforcement agency or authority or a member
or committee of the US Congress or Canadian or provincial
legislative bodies, or
o participates in an investigation, hearing, court proceeding or
other administrative inquiry in connection with an Accounting
Complaint.
In addition, the Company will not discharge, demote, suspend, threaten,
harass or in any other manner discriminate against any employee in the
terms and conditions of employment based upon any lawful actions of
such employee with respect to good faith submissions of Accounting
Complaints or otherwise as specified in Section 806 of the
Sarbanes-Oxley Act of 2002.
5. UNSUBSTANTIATED CLAIMS
If an employee submits an Accounting Complaint in good faith, which is
not confirmed by subsequent investigation, no action will be taken
against that employee.
Any employee who knowingly or recklessly makes false accusations of
wrongdoing (including making statements or disclosures that are not in
good faith) may be subject to discipline, which may include
termination.
Employees who submit Accounting Complaints can and will continue to be
held to the Company's general job performance standards. Therefore, an
employee against whom legitimate adverse employment actions have been
taken or are proposed to be taken for reasons other than prohibited
retaliatory actions, such as poor job performance or misconduct by the
employee, is prohibited from using this policy as a defense against the
Company's lawful actions.
6. ANNUAL REVIEW
These procedures will be reviewed periodically by the Audit Committee,
taking into account the effectiveness of the procedures in promoting
proper disclosure and with a view to minimizing the opportunities to
cause improper investigations.
7. PUBLICATION
The Company will communicate these procedures to all employees by
posting these procedures on the Company's website
(www.gerdauameristeel.com).
49
12 M.D. & A.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
On October 23, 2002, Gerdau S.A. combined its North American operations,
referred to as Gerdau North America, with Co-Steel Inc. to form Gerdau
Ameristeel Corporation. The accounting treatment for this combination is
the reverse-takeover 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. Gerdau Ameristeel is the second largest
minimill steel producer in North America with annual manufacturing
capacity of more than 8.4 million tons of mill finished steel products.
Through a vertically integrated network of 15 minimills, including one
50%-owned minimill, 16 scrap recycling facilities and 42 downstream
operations (including two 50%-owned joint ventures), the Company primarily
serves customers in the eastern two-thirds of North America. The Company's
products are generally sold to steel service centers, steel fabricators or
directly to original equipment manufacturers for use in a variety of
industries, including construction, automotive, mining and equipment
manufacturing. Over 90% of the raw material for the minimill operations is
recycled steel scrap, making Gerdau Ameristeel the second largest steel
recycler in North America.
BUSINESS UNIT SEGMENTS
Gerdau Ameristeel is organized with two business unit segments: mills and
downstream. The mills segment consists of 11 minimills in the United
States and three in Canada. This segment manufactures and markets a wide
range of steel products, including reinforcing steel bar (rebar), merchant
bars, structural shapes, beams, special sections and coiled wire rod. The
mills segment also produces rebar, merchant, rod and special bar quality
(SBQ) products used by the downstream segment and transfers these
products at an arms-length, market price to the downstream segment. The
downstream segment is secondary value-added steel businesses and consists
of rebar fabrication, railroad spikes, cold drawn products, super light
beam processing, elevator guide rails, grinding balls, wire mesh and
collated nails.
13 M.D. & A.
2004 HIGHLIGHTS
- Record net income of $337.7 million or $1.45 per common share
diluted for the year ended December 31, 2004.
- Record shipments of 5.9 million tons of finished steel for the year
ended December 31, 2004.
- On March 19, 2004, the Company completed the asset acquisition of
Potter Form & Tie Company, a rebar fabricator with six locations
throughout the Midwest.
- On April 16, 2004, the Company sold 26.8 million common shares to
its parent company, Gerdau S.A., for total proceeds of $97.9
million.
- On October 15, 2004, the Company sold 70 million common shares for
$4.70 (Cdn $5.90), including 35 million to Gerdau S.A. and commenced
trading on the New York Stock Exchange.
- On November 1, 2004, Gerdau Ameristeel completed the acquisition of
four long steel product minimills and four downstream facilities,
which are referred to as North Star Steel, from Cargill,
Incorporated.
- On November 18, the over-allotment option was exercised, resulting
in 8,762,000 common shares being issued, of which Gerdau S.A.
purchased 4,381,000.
- On December 10, 2004, the Company completed the acquisition of Gate
City's and RJ Rebar, Inc.'s six rebar fabrication facilities in the
Midwest with annual production capacity of approximately 150,000
tons.
The consolidated financial statements of Gerdau Ameristeel for the years
ended December 31, 2004 and 2003, include the results of the acquired
businesses only subsequent to their acquisition.
14 MD & A
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2004, COMPARED TO THREE MONTHS ENDED DECEMBER
31, 2003
The following tables summarize the results of Gerdau Ameristeel for the three
months ended December 31, 2004, and for the three months ended December 31,
2003.
(US$ in Thousands)
THREE MONTHS ENDED % OF SALES
DECEMBER 31, % OF DECEMBER 31, % OF INCREASE $INCREASE
2004 SALES 2003 SALES (DECREASE) (DECREASE)
------------ ----- ------------ ----- --------- ----------
FINISHED STEEL SHIPMENTS (TONS)
REBAR 284,016 349,474
MERCHANT/SPECIAL SECTIONS 600,084 509,277
ROD 196,968 188,478
FABRICATED STEEL 192,030 151,903
1,273,098 1,199,132
FLAT ROLLED (JOINT VENTURE) 187,136 205,363
------------ ------------
TOTAL 1,460,234 1,404,495
------------ ------------ ----------
NET SALES $ 849,244 100.0% $ 493,176 100.0% $ 356,068
----------
OPERATING EXPENSES
Cost of sales 714,959 84.1% 450,536 91.4% (7.3)% 264,423
Selling and administrative 38,840 4.6% 26,398 5.4% (0.8)% 12,442
Depreciation 22,034 2.6% 19,366 3.9% (1.3)% 2,668
Other operating (income) (909) (0.1)% (1,387) (0.3)% 0.2% 478
------------ ------------ ----------
774,924 91.2% 494,913 100.4% (9.2)% 280,011
------------ ------------ ----------
INCOME (LOSS) FROM OPERATIONS 74,320 8.8% (1,737) (0.4)% 9.2% 76,057
EARNINGS FROM JOINT VENTURES 41,145 4.8% 2,405 0.5% 4.3% 38,740
------------ ------------ ----------
INCOME BEFORE OTHER EXPENSES & INCOME TAXES 115,465 13.6% 668 0.1% 13.5% 114,797
OTHER EXPENSES
Interest, net 10,863 1.3% 17,104 3.4% (2.1)% (6,241)
Foreign exchange loss 926 0.1% 540 0.1% 0.0% 386
Amortization of deferred financing costs 675 0.1% 269 0.1% 0.0% 406
------------ ------------ ----------
12,464 1.5% 17,913 3.6% (2.1)% (5,449)
------------ ------------ ----------
INCOME (LOSS) BEFORE INCOME TAXES 103,001 12.1% (17,245) (3.5)% 15.6% 120,246
INCOME TAX EXPENSE (BENEFIT) 36,589 4.3% (13,876) (2.8)% 7.1% 50,465
------------ ----- ------------ ----- ---- ----------
NET INCOME (LOSS) $ 66,412 7.8% $ (3,369) (0.7)% 8.5% $ 69,781
------------ ----- ------------ ----- ---- ----------
EARNINGS (LOSS) PER COMMON SHARE - BASIC $ 0.23 $ (0.02)
EARNINGS (LOSS) PER COMMON SHARE - DILUTED $ 0.23 $ (0.02)
THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, $ INCREASE % INCREASE
2004 2003 (DECREASE) (DECREASE)
------------ ------------ ---------- ----------
WEIGHTED AVERAGE SELLING PRICE ($/TON)
Mill external shipments $ 551.08 $ 332.63 $ 218.45 65.7%
Fabricated steel shipments 694.14 451.38 242.76 53.8%
SCRAP CHARGES ($/TON) 215.50 126.20 89.30 70.8%
METAL SPREAD ($/TON)
Mill external shipments 335.58 206.43 129.15 62.6%
MILL MANUFACTURING COST ($/TON) 240.75 186.49 54.26 29.1%
15 MD & A
NET SALES: Finished tons shipped for the three months ended December 31, 2004,
increased 73,966 tons, or 6.2%, compared to the three months ended December 31,
2003. The four new mills contributed shipments of approximately 167,000 tons
since the date of the acquisition, offset by a reduction in shipments of the
existing ten mills in comparison to the prior year. The existing mills
experienced a normal seasonal decrease in shipments in the fourth quarter.
During 2003, fourth quarter shipments were strong as customers were buying steel
in advance of announced price increases for early 2004. The average mill
finished goods selling price was $551 per ton for the three months ended
December 31, 2004, up approximately $218 per ton or 65.7% from the average
selling price for the three months ended December 31, 2003. The increase in
selling price is the result of the dramatic rise in scrap and other raw
materials costs as well as tight market supply in the North American long
products market. Scrap raw material costs increased 70.8% to $216 per ton for
the three months ended December 31, 2004, compared to $126 per ton for the three
months ended December 31, 2003. Resurgence in domestic steel capacity
utilization, fluctuating demand for scrap materials from China and declines in
global scrap supply continue to create volatility in scrap prices.
COST OF SALES: Cost of sales as a percentage of net sales decreased 7.3% for the
three months ended December 31, 2004, when compared to the three months ended
December 31, 2003. The decrease in the fourth quarter of 2004 is primarily
attributable to sales revenue increases greater than the increases in raw
materials and production costs. Historically, scrap costs typically account for
approximately 35% to 45% of mill production costs. In the three months ended
December 31, 2004, average scrap costs represented approximately 47% of mill
production costs compared to approximately 41% for the same period in 2003. Mill
manufacturing costs were approximately 29.1% higher in the fourth quarter of
2004 compared to the fourth quarter of 2003, primarily as a result of increased
yield costs due to the higher cost of scrap, energy and expenses from planned
maintenance shutdowns, partially offset by higher production levels, which
reduced costs, on a per ton basis, by spreading fixed costs over an increased
volume. Margins earned on shipments from the acquired North Star Steel mills
were minimal. This is consistent with current purchase price accounting
requirements as the finished steel inventories of these mills were recorded at
market value. Approximately $24.0 million of the $28.5 million write-up of
finished steel inventories for the year ended December 31, 2004, was charged to
cost of goods sold in the December quarter.
SELLING AND ADMINISTRATIVE: Selling and administrative expenses for the three
months ended December 31, 2004, increased $12.4 million compared to the three
months ended December 31, 2003. Included in selling and administrative expenses
for the three months ended December 31, 2004, is a non-cash pretax expense of
$12.5 million ($7.8 million in the prior period) to mark-to-market outstanding
stock appreciation rights (SARs) held by employees. Other selling and
administrative expenses increased $7.7 million for the three months ended
December 31, 2004, when compared to the three months ended December 31, 2003.
The increase is due to increased consulting services and increased salaries and
benefits due to an increase in sales and administrative headcount.
DEPRECIATION: Depreciation expense for the three months ended December 31, 2004,
increased $2.7 million when compared to the three months ended December 31,
2003. The increase in depreciation for the three months ended December 31, 2004,
reflects the additional depreciation expense from the acquisitions and normal
increases in depreciation expense from routine equipment additions placed in
service over the last year.
OTHER OPERATING INCOME: Other operating income for the three months ended
December 31, 2004, of $0.9 million was primarily earned from the mark-to-market
of trading securities and a payment received from the U.S. Continued Dumping
Subsidy Offset Act. Other operating income for the three months ended December
31, 2003, was approximately $1.4 million.
INCOME FROM OPERATIONS: As a percentage of net sales, operating income for the
fourth quarter of 2004 was 8.8% compared to the operating loss of 0.4% for the
fourth quarter of 2003. Metal spread, the difference between mill selling prices
and scrap raw material cost, increased $129 per ton for the three months ended
December 31, 2004, compared to the three months ended December 31, 2003. The
improvement in metal spread is the primary factor for the increased operating
income in the fourth quarter of 2004. As discussed in cost of sales above, the
operating margins for 2004 were impacted by the minimal margins on the acquired
North Star Steel inventories.
EARNINGS FROM JOINT VENTURES: Earnings from the Company's 50% joint ventures
were $41.1 million for the three months ended December 31, 2004, compared to
$2.4 million for the three months ended December 31, 2003. The increase in joint
venture earnings in the fourth quarter 2004 compared to fourth quarter 2003 is
primarily due
16 MD & A
to increased metal spread at the Company's Gallatin Steel joint venture. Selling
price increases were significantly greater than the increase in scrap and raw
materials costs resulting in an increase in metal spread of $243 per ton in the
fourth quarter of 2004 compared to the same period in 2003.
INTEREST EXPENSE AND OTHER EXPENSE ON DEBT: Interest expense and other expense
on debt, primarily amortized deferred financing costs, decreased $5.8 million
for the three months ended December 31, 2004, compared to the three months ended
December 31, 2003. The net decrease in expense for the three months ended
December 31, 2004, reflects lower interest expense on reduced debt levels and
also a favorable effect of the mark-to-market adjustment on interest rate swaps
of $2.5 million versus an expense of $0.8 million in 2003.
INCOME TAXES: Statutory income tax rates in the United States (including both
federal and state) and Canada (including both federal and provincial) are
approximately 39% and 34%, respectively, for the three months ended December 31,
2004 and 2003. Through effective tax planning, the Company reduced the income
tax expense from the statutory rates by approximately $2.9 million in the three
months ended December 31, 2004.
SEGMENTS: Gerdau Ameristeel is organized with two business unit segments: mills
and downstream.
Mills segment sales increased to $952.3 million for three months ended December
31, 2004, from $500.8 million for the three months ended December 31, 2003.
Mills segment sales include sales to the downstream segment of $254.1 million
and $79.7 million for the three months ended December 31, 2004 and 2003,
respectively. Included in the current year mill segment sales are $106.0 million
in sales related to the acquired mills. Mills segment operating income for three
months ended December 31, 2004, was $112.8 million compared to operating income
of $6.5 million for the three months ended December 31, 2003, an increase of
$106.3 million. The increase in operating income in the fourth quarter of 2004
is primarily the result of higher metal spreads and higher shipment volumes.
Downstream segment sales increased to $151.1 million for the three months ended
December 31, 2004, from $72.1 million for the three months ended December 31,
2003. Downstream segment operating income was $4.0 million for the three months
ended December 31, 2004, compared to a $2.3 million operating income for the
three months ended December 31, 2003.
See "Note 17" to Gerdau Ameristeel Corporation and Subsidiaries Consolidated
Financial Statements for the years ended December 31, 2004 and 2003 - "Segment
information" for a reconciliation of segment sales and income to consolidated
results.
EBITDA: EBITDA is earnings before interest, taxes, depreciation and amortization
and includes cash distributions from joint ventures, but excludes earnings from
joint ventures. Management believes EBITDA, a non-GAAP measure, is a useful
supplemental measure of cash available prior to debt service, capital
expenditures and income tax. The reader is cautioned that EBITDA should not be
construed as an alternative to net income determined in accordance with GAAP as
a performance indicator or to cash flows from operations as a measure of
liquidity and cash flows. Reconciliation of EBITDA to net income (loss) for the
three months ended December 31, 2004 and 2003 is shown below:
FOR THE THREE MONTHS ENDED
($000S) DECEMBER 31, 2004 2003
- ----------------------------- -------- --------
NET INCOME (LOSS) $ 66,412 $ (3,369)
INCOME TAX EXPENSE
(BENEFIT) 36,589 (13,876)
INTEREST AND OTHER
EXPENSE ON DEBT 10,863 17,104
DEPRECIATION AND AMORTIZATION 22,709 19,635
EARNINGS FROM JOINT VENTURES (41,145) (2,405)
CASH DISTRIBUTION FROM
JOINT VENTURES 35,425 -
-------- --------
EBITDA $130,853 $ 17,089
-------- --------
17 MD & A
YEAR ENDED DECEMBER 31, 2004, COMPARED TO YEAR ENDED DECEMBER 31, 2003.
The following tables summarize the results of Gerdau Ameristeel for the year
ended December 31, 2004, and for the year ended December 31, 2003.
(US$ in Thousands)
YEAR ENDED % OF SALES
DECEMBER 31, % of DECEMBER 31, % of INCREASE $ INCREASE
2004 SALES 2003 SALES (DECREASE) (DECREASE)
------------ ----- ------------ ----- --------- -----------
FINISHED STEEL SHIPMENTS (TONS)
REBAR 1,322,826 1,525,981
MERCHANT/SPECIAL SECTIONS 2,312,704 2,029,054
ROD 786,662 636,207
FABRICATED STEEL 755,818 630,904
5,178,010 4,822,146
FLAT ROLLED (JOINT VENTURE) 757,509 743,976
------------ -----------
TOTAL 5,935,519 5,566,122
------------ -----------
NET SALES $ 3,009,854 100.0% $ 1,811,171 100.0% $ 1,198,683
OPERATING EXPENSES
Cost of sales 2,450,945 81.4% 1,668,478 92.1% (10.7)% 782,467
Selling and administrative 109,384 3.6% 81,565 4.5% (0.9)% 27,819
Depreciation 79,311 2.5% 71,951 4.0% (1.5)% 7,360
Other operating (income) (3,062) 0.1% (1,480) (0.1)% 0.2% (1,582)
------------ ----------- -----------
2,636,578 87.6% 1,820,514 100.5% (12.9)% 816,064
------------ ----------- -----------
INCOME (LOSS) FROM OPERATIONS 373,276 12.4% (9,343) (0.5)% 12.9% 382,619
EARNINGS FROM JOINT VENTURES 141,474 4.7% 7,667 0.4% 4.3% 133,807
------------ ----------- -----------
INCOME BEFORE OTHER EXPENSES & INCOME TAXES 514,750 17.1% (1,676) (0.1%) 17.2% 516,426
OTHER EXPENSES
Interest, net 56,330 1.9% 59,880 3.3% (1.4)% (3,550)
Foreign exchange loss 8,123 0.2% 726 0.1% 0.1% 7,397
Amortization of deferred financing costs 2,551 0.1% 4,399 0.2% (0.1)% (1,848)
67,004 2.2% 65,005 3.6% (1.4)% 1,999
------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 447,746 14.9% (66,681) (3.7)% 18.6% 514,427
INCOME TAX EXPENSE (BENEFIT) 110,077 3.7% (39,770) (2.2)% 5.9% 149,847
------------ ----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST 337,669 11.2% (26,911) (1.5)% 12.7% 364,580
MINORITY INTEREST - 0.0% 217 0.0% 0.0% (217)
------------ ----- ----------- ----- ------ -----------
NET INCOME (LOSS) $ 337,669 11.2% $ 26,694) (1.5)% 12.7% $ 364,363
------------ ----- ----------- ----- ------ -----------
EARNINGS (LOSS) PER COMMON SHARE - BASIC $ 1.46 $ (0.14)
EARNINGS (LOSS) PER COMMON SHARE - DILUTED $ 1.45 $ (0.14)
YEAR ENDED
DECEMBER 31, DECEMBER 31 $ INCREASE % INCREASE
2004 2003 (DECREASE) (DECREASE)
------------ ------------ ---------- ----------
WEIGHTED AVERAGE SELLING PRICE ($/TON)
Mill external shipments $ 491.77 $ 310.19 $ 181.58 58.5%
Fabricated steel shipments 601.07 438.83 162.24 37.0%
SCRAP CHARGES ($/TON) $ 189.34 $ 112.51 $ 76.83 68.3%
METAL SPREAD ($/TON)
Mill external shipments 302.43 197.68 104.75 53.0%
MILL MANUFACTURING COST ($/TON) $ 210.62 $ 177.88 $ 32.74 18.4%
18 MD & A
NET SALES: Finished tons shipped for the year ended December 31, 2004, increased
355,864 tons, or 7.4%, compared to the year ended December 31, 2003. The
increase in tons reflects stronger steel demand from the prior year as well as
two months shipments from the acquired mills of approximately 167,000 tons.
Average mill finished goods selling prices increased $182 per ton, or 58.5%,
from the average selling prices for the year ended December 31, 2003. Selling
price increases were partially offset by scrap raw material costs that increased
68.3% for the year ended December 31, 2004, compared to the year ended December
31, 2003. In 2004, the Company and other minimill producers have increased steel
selling prices in response to higher scrap and other manufacturing costs. Strong
demand for scrap materials from China, combined with the relative valuation of
the U.S. dollar versus the currencies of Europe, Japan, Canada and other steel
producing countries has increased the attractiveness of scrap material exports
pushing the cost of scrap raw material up dramatically. Also, resurgence in
domestic steel capacity utilization and declines in global scrap supply have
added volatility to scrap prices.
COST OF SALES: Cost of sales as a percentage of net sales decreased 10.7% for
the year ended December 31, 2004, compared to the year ended December 31, 2003.
The decrease is primarily attributable to sales revenue increases greater than
the increases in raw materials and production costs. Historically, scrap costs
typically account for approximately 35% to 45% of mill production costs. In the
year ended December 31, 2004, average scrap costs represented approximately 47%
of mill production costs, compared to approximately 39% for the same period in
2003. Mill manufacturing costs were approximately 18.4% higher as a result of
increased yield costs due to the higher cost of scrap, higher energy cost and
higher maintenance expenses partially offset by higher production levels that
reduced costs on a per ton basis, by spreading fixed costs over an increased
volume. Margins earned on shipments from the acquired North Star Steel mills
were minimal. This is consistent with current purchase price accounting
requirements as the finished steel inventories of these mills were recorded at
market value. Approximately $24.0 million of the $28.5 million write-up in steel
inventories for the year ended December 31, 2004, was charged to cost of goods
sold in the December quarter.
SELLING AND ADMINISTRATIVE: Selling and administrative expenses for the year
ended December 31, 2004, increased $27.8 million when compared to the year ended
December 31, 2003. Included in selling and administrative expenses for the year
ended December 31, 2004, is a non-cash pretax expense of $21.8 million to
mark-to-market outstanding stock appreciation rights (SARs) and other
equity-based compensation held by employees compared to $9.4 million for the
same period in the prior year. Other selling and administrative expenses
increased $15.4 million for the year ended December 31, 2004, when compared to
the year ended December 31, 2003. The increase is due to increased consulting
services and increased salaries and benefits due to an increase in sales and
administrative headcount.
DEPRECIATION: Depreciation for the year ended December 31, 2004, increased $7.4
million when compared to the year ended December 31, 2003. The increase in
depreciation for the year ended December 31, 2004 reflects normal increases in
depreciation expense from routine equipment additions placed in service during
the last year and the depreciation expense recorded at the acquired operations.
OTHER OPERATING INCOME: Other operating income for the year ended December 31,
2004, was $3.1 million of which $1.2 million was recorded from an insurance
settlement relating to a power interruption claim from a prior year, $1.0
million of gains from mark-to-market of trading securities, and $1.0 million
collected under the U.S. Continued Dumping Subsidy Offset Act. Other operating
income for the year ended December 31, 2003, was approximately $1.5 million,
which included an electricity power rebate in the Province of Ontario from our
Cambridge and Whitby facilities offset by a charge for a settlement of
environmental warranties from the May 2000 sale of Co-Steel's Mayer Parry
Recycling unit in England, asset write-downs, costs associated with a
fabricating plant shutdown expense and start-up costs associated with new
process automation controls at the Knoxville, Tenn., rolling mill.
INCOME FROM OPERATIONS: As a percentage of net sales, operating income for 2004
was 12.4% compared to an operating loss of 0.5% for 2003. Metal spread, the
difference between mill selling prices and scrap raw material cost, increased
53.0% to $302 per ton for the year ended December 31, 2004, from $198 per ton
for the year ended December 31, 2003. The improvement in metal spread is the
primary factor for the increase in operating income in 2004; however, improved
operating performances and increased shipment volumes also contributed to the
increase. As discussed in cost of sales above, the improvement in operating
margins for 2004 was partly offset by the minimal margins on the acquired North
Star Steel inventories.
EARNINGS FROM JOINT VENTURES: Earnings from the Company's 50% joint ventures
were $141.5 million for the year ended December 31, 2004, compared to $7.7
million for the year ended December 31, 2003. Flat rolled sheet selling prices
rising in excess of previous historical level highs, combined with excellent
operating performance, offset increased scrap, alloy and
19 MD & A
energy costs to produce record results at Gallatin Steel. Metal spread at
Gallatin Steel for the year ended December 31, 2004, was $361 per ton in
comparison to $163 per ton for the same period in the prior year.
INTEREST EXPENSE AND OTHER EXPENSE ON DEBT: Interest expense and other expense
on debt, including amortized deferred financing costs, decreased $5.4 million
for the year ended December 31, 2004, compared to the year ended December 31,
2003. Included in the interest expense for the year ended December 31, 2004, is
$1.6 million of income relating to a favorable mark-to-market adjustment on
interest rate swap arrangements in comparison to a $5.6 million expense for the
year ended December 31, 2003. Included in the deferred finance costs for the
year ended December 31, 2003, was a charge of $2.1 million relating to the
write-off of un-amortized costs of the extinguished debt.
INCOME TAXES: Statutory income tax rates in the United States (including both
federal and state) and Canada (including both federal and provincial) are
approximately 39% and 34%, respectively, for the years ended December 31, 2004
and 2003. Through effective tax planning, the Company reduced the income tax
expense from the statutory rates by approximately $15 million and $7.5 million
in the years ended December 31, 2004 and 2003, respectively.
The Company also recorded the utilization of net operating losses related to the
U.S. operations that resulted in a $48.6 million reduction of tax expense. The
net operating losses are related to the U.S. operations of the former Co-Steel
entity. At the time of the acquisition of Co-Steel, the tax assets were recorded
at their estimated realization rate according to purchase accounting under U.S.
GAAP. Due to the high profitability of our U.S. operations, the Company was able
to utilize these losses. This resulted in approximately an 11% reduction of the
Company's effective annual income tax rate.
SEGMENTS: Gerdau Ameristeel is organized with two business unit segments: mills
and downstream.
Mills segment sales increased to $3,180.6 million for year ended December 31,
2004, from $1,821.8 million for the year ended December 31, 2003. Mills segment
sales include sales to the downstream segment of $688.5 million and $314.7
million for the years ended December 31, 2004 and 2003, respectively. Included
in the current year mill segment sales are $106 million related to the acquired
mills. Mills segment operating income for the year ended December 31, 2004, was
$428.8 million compared to $3.1 million operating loss for the year ended
December 31, 2003, an increase of $431.9 million. The increase in operating
income in 2004 is primarily the result of higher metal spreads, higher shipment
volumes and improved operating performance at the Perth Amboy, Sayreville and
Whitby mills.
Downstream segment sales increased to $517.7 million for the year ended December
31, 2004, from $304.1 million for the year ended December 31, 2003. Downstream
segment operating income for the year ended December 31, 2004, was $18.9 million
compared to $10.7 million for the year ended December 31, 2003, an increase of
$8.2 million. The increase in profit is primarily due to increased average
selling prices of $162 per ton.
See "Note 17" to Gerdau Ameristeel Corporation and Subsidiaries Consolidated
Financial Statements for the years ended December 31, 2004 and 2003 - "Segment
information" for a reconciliation of segment sales and income to consolidated
results.
EBITDA: Reconciliation of EBITDA to net income (loss) for the years ended
December 31, 2004 and 2003, is shown below:
FOR THE YEAR ENDED ($000S) DECEMBER 31, 2004 DECEMBER 31, 2003
- ----------------------------- ----------------- -----------------
NET INCOME (LOSS) $ 337,669 $ (26,694)
INCOME TAX EXPENSE
(BENEFIT) 110,077 (39,770)
INTEREST AND OTHER
EXPENSE ON DEBT 56,330 59,880
DEPRECIATION AND AMORTIZATION 81,862 76,350
EARNINGS FROM JOINT VENTURES (141,474) (7,667)
CASH DISTRIBUTION
FROM JOINT VENTURES 82,803 3,620
MINORITY INTEREST - (217)
------------- -------------
EBITDA $ 527,267 $ 65,502
------------- -------------
20 MD & A
CANADIAN GAAP
The Company makes available to all shareholders consolidated financial
statements prepared in accordance with Canadian GAAP and files these financial
statements with Canadian regulatory authorities. Results reported under Canadian
GAAP may differ from results reported under U.S. GAAP. Under Canadian GAAP, for
the three months ended December 31, 2004 and 2003, net income (loss) was $66.2
million and $(2.6) million, an increase of $68.8 million. Under Canadian GAAP
for the years ended December 31, 2004 and 2003, net income (loss) was $341.5
million and $(24.1) million, an increase of $365.6 million. The material
differences between Canadian GAAP and U.S. GAAP are described in Note 18 to the
audited consolidated financial statements for the years ended December 31, 2003
and 2004. The following is a summary of these differences:
- - Under U.S. GAAP, joint ventures are accounted for using the equity method.
Under Canadian GAAP, joint ventures are proportionately consolidated. This
means that 50% of each line item is recorded, such as individual assets
and liabilities, sales, costs of sales, interest, depreciation and
amortization. This means, among other differences, that depreciation
expense associated with our joint ventures is not reported under U.S.
GAAP.
- - As a result of proportionate accounting, 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, negative goodwill
was only allocated 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
the equity investment and property, plant and equipment.
- - Comprehensive income is not reported 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.
- - Under U.S. GAAP, an additional minimum pension liability is 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. The recognition of an additional minimum
liability is not required under Canadian GAAP.
- - Under U.S. GAAP, the Company accrues for scheduled annual maintenance
shutdowns. Canadian GAAP does not allow this accounting practice.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
OPERATING ACTIVITIES: Net cash provided by operations for the year ended
December 31, 2004, was $125.0 million compared to net cash provided by
operations of $36.9 million for the year ended December 31, 2003. Excluding the
impact of the acquired operations, for the year ended December 31, 2004,
accounts receivable increased $13.4 million as a result of increased sales
volumes and higher selling prices. In 2004, inventories increased $278.7 million
as a result of higher costs associated with scrap, billets and finished products
caused by the dramatic increase in scrap costs. Offsetting these uses of cash,
accounts payable and other liabilities increased $58.2 million in 2004 primarily
as a result of the increased cost of scrap.
21 MD & A
INVESTING ACTIVITIES: Net cash used in investing activities was $380.6 million
in the year ended December 31, 2004, compared to $52.5 million in the year ended
December 31, 2003. For the year ended December 31, 2004, capital expenditures
totaled $82.1 million. During 2004, Gerdau Ameristeel made the following
acquisitions: in March 2004, the Company acquired the operating assets of Potter
Form & Tie Co., a rebar fabricator in the Midwest United States for $11.1
million in cash; in November of 2004, the Company acquired four North Star Steel
mills and three downstream facilities from Cargill for $320.8 million, of which
$51.8 million was accrued at December 31, 2004; and in December, the Company
acquired the fixed assets and working capital of Gate City's and RJ Rebar,
Inc.'s rebar fabrication facilities for $16.4 million. Also, in 2004, the
Company received $82.8 million in cash distributions from its joint venture
investments.
FINANCING ACTIVITIES: Net cash provided by financing activities was $329.8
million in the year ended December 31, 2004, compared to net cash provided by
financing activities of $13.3 million in the year ended December 31, 2003.
Revolving credit payments were $212.8 million in 2004. Also, in the first
quarter 2004, the Company obtained a short-term $25.0 million loan, guaranteed
by Gerdau S.A., from a Brazilian bank which was repaid in the fourth quarter.
On April 16, 2004, the Company sold 26.8 million common shares to its majority
shareholder, Gerdau S.A., for total proceeds of $97.9 million (Cdn $131.3
million). The proceeds were used for general corporate purposes, including
capital expenditures, working capital and repayment of debt.
On October 15, 2004, the Company sold 70 million common shares for $4.70 (Cdn
$5.90) per share, including 35 million common shares to Gerdau S.A., and on
November 18, the over-allotment option was exercised for 8,762,000 common shares
of which Gerdau S.A. purchased 4,381,000. These transactions generated net
proceeds of approximately $362.4 million after deducting underwriters' fees and
estimated expenses. The proceeds were used primarily for the purchase of the
North Star Steel assets.
OUTSTANDING SHARES
As of December 31, 2004, the Company had outstanding 304,028,122 common shares
and Cdn $125.0 million of convertible debentures. The convertible debentures are
convertible to common shares of the Company at a conversion price of Cdn $26.25
per share. See "Credit Facilities and indebtedness - Convertible debentures."
On October 15, 2004, the common shares of the Company commenced trading on the
New York Stock Exchange under the symbol "GNA." The common shares will continue
to trade on the Toronto Stock Exchange, also under the symbol "GNA."
CREDIT FACILITIES AND INDEBTEDNESS
On June 27, 2003, the Company refinanced most of its outstanding debt by issuing
$405.0 million of 10 3/8% Senior Notes and entered into a $350.0 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 are cash flow generated from operations and borrowings
under the new Senior Secured Credit Facility and the Company believes these
sources will be sufficient to meet its cash flow requirements. The principal
liquidity requirements are working capital, capital expenditures and debt
service.
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 $350.0 million. The Company 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 the Company's operating units less certain
reserves), minus outstanding loans, letter of credit obligations and other
obligations owed under the Senior Secured Credit Facility. Since the
22 MD & A
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 the Company's inventory and accounts receivable. At December 31,
2004, borrowings were $27,000, and there was $295.0 million available under the
Senior Secured Credit Facility compared to $135.0 million borrowed and $130.3
million available at December 31, 2003.
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 the option of the Company. 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 may limit our ability to, among other things: incur additional debt,
issue redeemable stock and preferred stock, pay dividends on our common shares,
sell or otherwise dispose of certain assets and enter into mergers or
consolidations.
SENIOR NOTES: On June 27, 2003, the Company issued $405.0 million of 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 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, the Company 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 notes permits the Company and its
restricted subsidiaries to incur additional indebtedness, including secured
indebtedness, subject to certain limitations. On January 23, 2004, the Company
completed an exchange of the Senior Notes. The exchanged notes have
substantially the same form and terms as the original notes issued on June 27,
2003. The exchanged notes were issued under a prospectus in Ontario, and the
exchanged notes and subsidiary guarantees were registered under the U.S.
Securities Act of 1933, as amended, and are not subject to restrictions on
transfer.
AMERISTEEL BRIGHT BAR, INC. TERM LOAN: At December 31, 2004, AmeriSteel Bright
Bar, Inc. had a $2.7 million term loan outstanding. The loan bears interest at a
fixed rate of 6% and matures in September 2011.
INDUSTRIAL REVENUE BONDS: The Company had $31.6 million of industrial revenue
bonds outstanding as of December 31, 2004. $23.8 million of the bonds were
issued by Gerdau Ameristeel US Inc. in prior years to construct facilities in
Jackson, Tennessee. The Company 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 in 2014, 2017 and 2018. These
bonds are secured by letters of credit issued under the Senior Secured Credit
Facility.
RELATED PARTY LOANS: In the first quarter of 2003, a subsidiary of Gerdau S.A.
made loans totaling $30.0 million to the Company to increase liquidity within
the group. These loans were used for working capital purposes, bore interest at
the rate of 6.5% and were repaid in the second quarter of 2003 using proceeds
from the refinancing. In conjunction with the issuance of the $405 million
Senior Notes in June 2003, $35.0 million of the notes were sold to an indirect
wholly owned subsidiary of the Company's parent, Gerdau S.A. (See Senior Notes
above.) In the first quarter of 2004, the Company obtained a $25 million, one
year, 2.65% interest bearing loan from a Brazilian bank. The loan was guaranteed
by Gerdau S.A and has subsequently been repaid.
CONVERTIBLE DEBENTURES: The Company has 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
23 MD & A
required if the Company issues common shares in a customary offering. The
debentures are redeemable, at the Company's option, at par plus accrued
interest, and 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 redemption.
CAPITAL LEASES: Gerdau Ameristeel had $1.3 million of capital leases as of
December 31, 2004.
CAPITAL EXPENDITURES
Gerdau Ameristeel spent $82.1 million on capital projects in the year ended
December 31, 2004, compared to $55.2 million in the same period in 2003. Major
capital projects in 2004 included caster upgrades of $10.0 million, mill control
upgrades of $5.5 million, warehouse and material handling improvements of $16.0
million, sub-station upgrades of $3.5 million, reheat furnace improvements of
$10.0 million and information system upgrades of $4.0 million.
OFF-BALANCE SHEET ARRANGEMENTS
Other than non-cancelable operating lease commitments, the Company does not have
any off-balance sheet arrangements, financings or other relationships with
unconsolidated special purpose entities. The Company's operating lease
commitments are set out in the contractual obligation table below.
CONTRACTUAL OBLIGATIONS
The following table presents the Company's contractual obligations as of
December 31, 2004.
LESS THAN 1 - 3 4 - 5 AFTER 5
CONTRACTUAL OBLIGATIONS ($000'S) TOTAL ONE YEAR YEARS YEARS YEARS
- ------------------------------------- ------------- ----------- --------- ---------- ----------
LONG-TERM DEBT (1) $ 434,016 $ 1,193 $ 1,509 $ 634 $ 430,680
CONVERTIBLE DEBENTURES 103,855 - 103,855 - -
INTEREST (2) 311,116 43,013 135,563 85,677 46,863
OPERATING LEASES (3) 76,641 14,530 18,886 13,183 30,042
CAPITAL EXPENDITURES (4) 161,559 113,091 48,468 - -
UNCONDITIONAL PURCHASE OBLIGATIONS (5) 88,374 88,374 - - -
PENSION FUNDING OBLIGATIONS (6) 20,700 20,700 - - -
------------- ----------- --------- ---------- ----------
TOTAL CONTRACTUAL OBLIGATIONS $ 1,196,261 $ 280,901 $ 308,281 $ 99,494 $ 507,585
------------- ----------- --------- ---------- ----------
(1) Total amounts are included in the December 31, 2004, consolidated balance
sheet. See Note 7, Long-term Debt, to the consolidated financial
statements.
(2) Interest payments related to our short-term debt are not included in the
table as they do not represent a significant obligation as of December 31,
2004.
(3) Includes minimum lease payment obligations for equipment and real property
leases in effect as of December 31, 2004.
(4) Purchase obligations for capital expenditure projects in progress.
(5) A majority of these purchase obligations are for inventory and operating
supplies and expenses used in the ordinary course of business.
(6) Pension funding obligations are included only for 2005 as the amount of
funding obligations beyond the next year are not yet determinable.
24 MD & A
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial data below is presented in U.S. GAAP.
ANNUAL RESULTS
YEARS ENDED DECEMBER 31, 2002 2003 2004
- ---------------------------------- ----------- ------------- -----------
NET SALES $ 1,053,76 $ 1,811,171 $ 3,009,854
NET INCOME (LOSS) 11,049 (26,694) 337,669
EARNINGS PER COMMON SHARE, BASIC 0.08 (0.14) 1.46
EARNINGS PER COMMON SHARE, DILUTED 0.08 (0.14) 1.45
TOTAL ASSETS 1,513,724 1,665,540 2,582,023
TOTAL LONG-TERM DEBT $ 463,423 $ 641,005 $ 519,333
Revenues have significantly increased over the past three years as a result of
acquisitions and increases in selling prices. The increase in net income is a
result of increases in metal spread.
QUARTERLY RESULTS MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- -------------------------------------------------- ----------- ----------- ------------- ------------
2004
NET SALES $ 618,953 $ 733,774 $ 807,883 $ 849,244
COST OF SALES 541,257 556,288 638,441 714,959
----------- ----------- --------- ------------
NET INCOME 21,505 105,466 144,286 66,412
----------- ----------- --------- ------------
EARNINGS PER COMMON SHARE, BASIC AND DILUTED 0.11 0.48 0.64 0.23
2003
NET SALES $ 416,563 $ 440,797 $ 460,635 $ 493,176
COST OF SALES 391,699 399,580 426,663 450,536
----------- ----------- --------- ------------
NET LOSS (6,311) (6,886) (10,128) (3,369)
----------- ----------- --------- ------------
EARNINGS (LOSS) PER COMMON SHARE,BASIC AND
DILUTED (0.03) (0.03) (0.05) (0.02)
The increase in metal spread is the primary factor for the significant increase
in net income for the four quarters ending December 31, 2004, as compared to
2003. The increase in net sales is primarily the result of increased selling
prices over the past eight quarters.
CRITICAL ACCOUNTING POLICES
Gerdau Ameristeel's Consolidated Financial Statements are prepared in accordance
with U.S. generally accepted accounting principles that often require management
to make judgments, estimates and assumptions regarding uncertainties that affect
the reported amounts presented and disclosed in the financial statements.
Management reviews these estimates and assumptions based on historical
experience, changes in business conditions and other relevant factors as it
believes to be reasonable under the circumstances.
Critical accounting policies are those that may have a material impact on the
consolidated financial statements and also require management to exercise
significant judgment due to a high degree of uncertainty at the time the
estimates are made. Senior management has reviewed the development and selection
of the Company's accounting policies, related account estimates and the
disclosures set forth below with the Audit Committee of the Board of Directors.
25 MD & A
REVENUE RECOGNITION
The Company's products are usually sold on credit terms. The credit terms, which
are established in accordance with local and industry practices, typically
require payment within 30 days of delivery and may allow discounts for early
payment. Revenue is recognized at the time products are shipped to customers.
ALLOWANCES FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is evaluated on a regular basis and adjusted
based upon management's best estimate of probable losses inherent in accounts
receivable. In estimating probable losses, the Company reviews accounts that are
past due, non-performing or in bankruptcy. The Company also reviews accounts
that may be at risk using information available about the customer, such as
financial statements and published credit ratings. General information regarding
industry trends and the general economic environment is also used. The Company
determines an estimated loss for specific accounts and estimates an additional
amount for the remainder of receivables based on historical trends and other
factors. Adverse economic conditions or other factors that might cause
deterioration of the financial health of customers could change the timing and
level of payments received and necessitate a change in estimated losses.
ACCOUNTING FOR GOODWILL
In assessing the recoverability of goodwill and other intangible assets with
indefinite lives, management must make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the respective
assets. If these estimates and related assumptions change in the future, the
Company may be required to record impairment charges not previously recorded.
The Company has adopted SFAS No. 142, Goodwill and Other Intangible Assets, and
is required to assess goodwill for impairment at a minimum annually, using a
two-step process that begins with an estimation of the fair value of the
reporting unit. The first step is a screen for impairment, and the second step
measures the amount of any impairment. These tests utilize fair value amounts
that are determined by estimated future cash flows developed by management.
LONG-LIVED ASSETS
The Company is required to assess potential impairments of long-lived assets in
accordance with SFAS No. 144, Accounting for Impairment of Long-lived Assets, if
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impaired asset is written down to its estimated fair
value based upon the most recent information available. Estimated fair market
value is generally measured by discounting estimated future cash flows developed
by management. Long-lived assets that are held for disposal are recorded at the
lower of the carrying value or the fair market value less the estimated cost to
sell. The Company's long-lived assets primarily include property, plant and
equipment used in operations and property held for sale.
ACCOUNTING FOR INCOME TAXES
The Company accounts for income taxes in accordance with FASB Statement No. 109,
Accounting for Income Taxes. Significant judgment is required in determining the
provision for income taxes and related accruals, deferred tax assets and
liabilities. In the ordinary course of business, there are transactions and
calculations where the ultimate tax outcome is uncertain. Additionally, the
Company's tax returns are subject to audit by various domestic and foreign tax
authorities. Although the Company believes its estimates are reasonable, no
assurance can be given that the final tax outcome will not be materially
different from that which is reflected in the income tax provisions and
accruals.
The Company has recorded deferred tax assets related to domestic and foreign tax
loss carry-forwards. Limitations on the utilization of these tax assets may
apply, and the Company may in the future provide a valuation allowance to reduce
certain of these deferred tax assets if it concludes that it is more likely than
not that the deferred tax assets will not be fully realized.
ENVIRONMENTAL REMEDIATION
The Company is subject to environmental laws and regulations established by
federal, state and local authorities and makes provisions for the estimated cost
of compliance based on currently available facts, present laws and regulations
and current technology. The liability estimates are reviewed periodically and,
26 MD & A
as investigations and remediation proceed, the Company makes necessary
adjustments to the estimates. The liability estimates are not reduced by
possible recoveries from insurance or other third parties.
POST RETIREMENT BENEFITS
Primary actuarial assumptions are determined as follows:
- - The expected long-term rate of return on plan assets is based on the
Company's estimate of long-term returns for equities and fixed income
securities weighted by the allocation of assets in the plans. The rate is
impacted by changes in general market conditions, but because it
represents a long-term rate, it is not significantly impacted by
short-term market swings. Changes in the allocation of plan assets would
also impact this rate.
- - The assumed discount rate is used to discount future benefit obligations
back to today's dollars. The U.S. discount rate is as of the measurement
date, December 31. A similar process is used to determine the assumed
discount rate for the non-U.S. plans. This rate is sensitive to changes in
interest rates. A decrease in the discount rate would increase the
Company's obligation and expense.
- - The expected rate of compensation increase is used to develop benefit
obligations using projected pay at retirement. This rate represents
average long-term salary increases and is influenced by the Company's
long-term compensation policies. An increase in the rate would increase
the Company's obligation and expense.
- - The assumed health care trend rate represents the rate at which health
care costs are assumed to increase and is based on historical and expected
experience. Changes in projections of future health care costs due to
general economic conditions and those specific to health care will impact
this trend rate. An increase in the trend rate would increase the
Company's obligation and expense.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board (FASB) issued a
revised Statement of Financial Accounting Standard (SFAS) No. 123, "Share Based
Payment." The revised SFAS No. 123 requires that the fair value of stock options
be recorded in the results of operations beginning with the first interim or
annual period after June 15, 2005. The pro forma disclosures permitted under
SFAS 123 will no longer be an alternative to financial statement recognition.
The Company expects to adopt this revised standard as of July 1, 2005. The
Company is currently evaluating the requirements of SFAS 123R and expects that
the adoption will not have a material impact on consolidated results of
operations and earnings per share; however, the effect of adopting the new rule
is dependent on the number of options granted in the future, the terms of those
awards and their fair values. The Company has not yet determined the method of
adoption or the effect of adopting SFAS 123R, and has not determined whether the
adoption will result in amounts that are similar to the current pro forma
disclosures under SFAS 123.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." This
statement clarifies the accounting for the abnormal amount of idle facilities
expense, freight, handling costs and wasted material. This statement requires
that those items be recognized as current-period expenses. In addition, the
statement requires that allocation of fixed overhead to the cost of conversion
be based on the normal capacity of the production facilities. This statement is
effective for fiscal years beginning after June 15, 2005. The Company's current
inventory accounting policy generally follows SFAS 151; therefore, the adoption
of SFAS 151 is not expected to have a significant impact on the consolidated
results of operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities," an interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements." In December 2003, the FASB
issued a revised version of FIN 46. FIN 46R addresses consolidation by business
enterprises of variable interest entities in which an enterprise absorbs a
majority of the entity's expected losses, receives a majority of the entity's
expected residual returns, or both, as a result of ownership, contractual or
27 MD & A
other financial interest in the entity. The interpretation requires that if a
business has a controlling financial interest in a variable interest entity, the
entity must be consolidated.
The Company adopted FIN 46 as of January 1, 2004. The Company has a 50% interest
in a number of joint ventures (see note 6). Certain of these joint ventures are
considered variable interest entities under the provisions of FIN 46. The
Company has evaluated the terms of the agreements between the joint ventures and
has determined that the Company is not the primary beneficiary of the joint
venture agreements and should not be consolidated. The joint ventures were
previously accounted for under the equity method; therefore, the adoption of FIN
46 had no impact on the Company for the year ended December 31, 2004.
RISKS AND UNCERTAINTIES
EXCESS GLOBAL CAPACITY IN THE STEEL INDUSTRY AND THE AVAILABILITY OF COMPETITIVE
SUBSTITUTE MATERIAL HAVE RESULTED IN INTENSE COMPETITION, WHICH MAY EXERT
DOWNWARD PRESSURE ON THE PRICES OF THE COMPANY'S PRODUCTS.
The Company competes with numerous foreign and domestic steel producers, largely
minimill producers that produce steel by melting scrap in electric arc furnaces,
but also integrated producers that produce steel from coke and iron ore.
Competition is based on price, quality and the ability to meet customers'
product specifications and delivery schedules. In the past, global overcapacity
in steel manufacturing has had a negative impact on steel pricing and could
adversely affect sales and profit margins in the future. The construction of new
mills, expansion and improved production efficiencies of existing mills,
restarting of currently idled facilities and the expansion of foreign steel
production capacity all contribute to an increase in global steel production
capacity. Increases in global steel production capacity combined with high
levels of steel imports into North America could exert downward pressure on the
prices of the Company's products, which would adversely affect sales and profit
margins.
THE CYCLICAL NATURE OF THE STEEL INDUSTRY AND THE INDUSTRIES WE SERVE AND
ECONOMIC CONDITIONS IN NORTH AMERICA AND WORLDWIDE MAY CAUSE FLUCTUATIONS IN THE
COMPANY'S REVENUE AND PROFITABILITY.
The North American steel industry is cyclical in nature and is affected
significantly by prevailing economic conditions in the major world economies. In
particular, the North American steel industry is influenced by a combination of
factors, including periods of economic growth or recession, strength or weakness
of the U.S. or Canadian dollar relative to other currencies, worldwide
production capacity and levels of steel imports and applicable tariffs. Future
economic downturns, stagnant economic conditions or currency fluctuations could
decrease the demand for the Company's products or increase the amount of imports
of steel into its markets, any of which could cause fluctuations in the
Company's revenue and profitability.
Market conditions for steel products in the U.S. and Canadian market have
fluctuated over recent years. The Company is particularly sensitive to trends in
cyclical industries, such as the North American construction, transportation,
appliance, machinery and equipment industries, which are significant markets for
the Company's products. A significant portion of the Company's products is
destined for the construction industry and the steel service center industry.
Many of the Company's markets are cyclical in nature and affect the demand for
its finished products. A disruption or downturn in any of these industries could
negatively impact the Company's financial condition, production, sales, margins
and earnings. The Company is also sensitive to trends and events that may impact
these industries, including strikes and labor unrest.
IMPORTS OF STEEL INTO NORTH AMERICA HAVE ADVERSELY AFFECTED AND MAY AGAIN
ADVERSELY AFFECT STEEL PRICES, AND DESPITE TRADE REGULATION EFFORTS, THE
INDUSTRY MAY NOT BE SUCCESSFUL IN REDUCING STEEL IMPORTS.
Imports of steel into North America have exerted in recent years, and may again
in the future exert, downward pressure on steel prices, which adversely affects
the Company's sales and profit margins. Competition from foreign steel producers
is strong and may increase due to increases in foreign steel production
capacity, the relative strengthening of the U.S. dollar compared to foreign
currencies and the reduction of domestic steel demand in the economies of the
foreign producers. These factors encourage higher levels of steel exports to
North America at lower prices. In the past, protective actions taken by the U.S.
government to regulate the steel trade, including import quotas and tariffs,
have been temporary in nature and have been found by the World Trade
Organization to violate global trade rules. Protective actions may not be taken
in the future and, despite trade regulation efforts, unfairly priced imports
could enter the North American
28 MD & A
markets in the future, resulting in price depression that would adversely affect
our ability to compete and maintain our sales levels and profit margins.
STEEL OPERATIONS REQUIRE SUBSTANTIAL CAPITAL INVESTMENT AND MAINTENANCE
EXPENDITURES THAT MAY ENCOURAGE PRODUCERS TO MAINTAIN PRODUCTION IN PERIODS OF
REDUCED DEMAND, WHICH MAY IN TURN EXERT DOWNWARD PRESSURE ON PRICES FOR THE
COMPANY'S PRODUCTS.
Steel manufacturing is very capital intensive, requiring the Company and other
steel producers to maintain a large fixed-cost base requiring substantial
maintenance expenditures. 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 may exert additional downward pressure on selling
prices and profit margins in those periods.
UNEXPECTED EQUIPMENT FAILURES MAY LEAD TO PRODUCTION CURTAILMENTS OR SHUTDOWNS.
Interruptions in the Company's production capabilities would increase production
costs and reduce sales and earnings for the affected period. In addition to
periodic equipment failures, the Company's facilities are also subject to the
risk of catastrophic loss due to unanticipated events such as fires, explosions
or violent weather conditions. Unexpected interruptions in production
capabilities would adversely affect productivity and results of operations. The
Company's insurance may not cover its losses.
THE COMPANY'S PROFITABILITY CAN BE ADVERSELY AFFECTED BY INCREASES IN RAW
MATERIAL AND ENERGY COSTS.
The Company's operating results are significantly affected by the cost of steel
scrap and scrap substitutes that are the primary raw material for the Company's
minimill production facilities. Prices for steel scrap are subject to market
forces largely beyond the Company's control, including demand by U.S. and
international steel producers, freight costs and speculation. The increasing
rate of worldwide steel scrap consumption, especially in China, has placed
significant upward pressure on the price of steel scrap. A combination of a
weaker U.S. dollar, strong global demand for steel scrap and lower production of
domestic steel scrap due to a weaker domestic manufacturing economy has reduced
the domestic steel scrap supply resulting in steel scrap prices that are
currently at a ten-year high. Metal spread, the difference between mill selling
prices and scrap raw material cost, is also currently well above previous
ten-year highs. The Company does not know how long these levels can be
maintained and, if scrap prices increase significantly without a commensurate
increase in finished steel selling prices, profit margins could be materially
adversely affected. The Company may not be able to pass on higher scrap costs to
its customers by increasing mill selling prices and prices of downstream
products. Further increases in the prices paid for scrap and other inputs could
also impair our ability to compete with integrated mills and cause production to
decline and adversely affect sales and profit margins.
Most of the Company's minimill operations have long-term electricity supply
contracts with either major utilities or energy suppliers. The electric supply
contracts typically have two components: a firm portion and an interruptible
portion. The firm portion supplies a base load for the rolling mill and
auxiliary operations. The interruptible portion supplies the electric arc
furnace power demand, which represents the majority of the total electric demand
and, for the most part, is based on spot market prices of electricity.
Therefore, the Company has significant exposure to the variances of the
electricity market that could materially adversely affect operating margins and
results of operations. Generally, the Company does not have long-term contracts
for natural gas and oxygen and, therefore, is subject to market supply variables
and pricing that could materially adversely affect operating margins and results
of operations.
THE COMPANY MAY NOT BE ABLE TO SUCCESSFULLY RENEGOTIATE COLLECTIVE BARGAINING
AGREEMENTS WHEN THEY EXPIRE AND FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED BY
LABOR DISRUPTIONS.
Approximately 40% of the Company's employees are represented by the United
Steelworkers of America under collective bargaining agreements. The agreements
have different expiration dates beginning in March 2005. Negotiations have begun
with respect to the agreement expiring in March 2005. The Company may be unable
to successfully negotiate new collective bargaining agreements without any labor
disruption. A labor disruption could, depending on the operations affected and
the length of the disruption, have a material adverse effect on the Company's
operations. Labor organizing activities could occur at one or more of the
Company's other facilities or at other companies upon which the Company is
dependent for raw materials, transportation or other services. Such activities
could result in a significant loss of production and revenue and have a material
adverse effect on the Company's financial results and results of operations.
29 MD & A
ENVIRONMENTAL LAWS AND REGULATIONS AFFECT THE COMPANY AND COMPLIANCE MAY BE
COSTLY AND REDUCE PROFITABILITY.
As the Company is involved in steel production, it produces and uses certain
substances that may pose environmental hazards. The principal hazardous waste
generated by steel producing operations is electric arc furnace (EAF) dust, a
residual from the production of steel in electric arc furnaces. EAF dust is
collected, handled and disposed of in a manner the Company believes meets all
current federal, state and provincial environmental regulations, and the costs
of collection and disposal of EAF dust are being expensed as operating costs
when incurred. Environmental legislation and regulations at the federal, state
and provincial levels over EAF dust are subject to change, which may change the
cost of compliance and have a material adverse effect on the Company's financial
results and results of operations.
BY SEEKING PROTECTION UNDER BANKRUPTCY LAWS, SOME OF THE COMPANY'S COMPETITORS
HAVE BEEN RELIEVED OF DEBT BURDENS AND LEGACY COSTS, WHICH MAY ENABLE THEM TO
OPERATE MORE COMPETITIVELY.
Many U.S. and Canadian steel companies have sought bankruptcy protection over
the last few years. Several of these companies have continued to operate, while
reducing prices to maintain volumes and cash flow, and have obtained concessions
from their employees, suppliers and lenders. Upon emerging from bankruptcy,
these companies, or new entities that purchased their facilities through the
bankruptcy process, have been relieved of many obligations including debt,
environmental, employee and retiree benefits and other obligations, commonly
referred to as legacy costs. As a result, they may be able to operate more
competitively than the Company and other producers that have remained solvent.
CURRENCY FLUCTUATIONS COULD ADVERSELY AFFECT THE COMPANY'S FINANCIAL RESULTS OR
COMPETITIVE POSITION.
The Company reports its results in U.S. dollars. As a result, fluctuations in
the exchange rate between the U.S. and Canadian dollar will affect reported
results. The percentage of the Company's costs that are denominated in Canadian
dollars is greater than the percentage of net sales, which means results are
negatively affected when the Canadian dollar strengthens compared to the U.S.
dollar. In addition, the Company's Canadian operations compete with U.S.
producers and are less competitive as the Canadian dollar strengthens relative
to the U.S. dollar. Similarly, the U.S. and Canadian operations are more
susceptible to the threat of imports during times when the U.S. and Canadian
dollars strengthen relative to the currencies of exporting countries. To the
extent the Company has borrowings that are denominated in Canadian dollars,
results of operations are also negatively affected by a strengthening in the
Canadian dollar compared to the U.S. dollar.
THE COMPANY'S LEVEL OF INDEBTEDNESS COULD AVERSELY AFFECT ITS ABILITY TO RAISE
ADDITIONAL CAPITAL TO FUND OPERATIONS, LIMIT ITS ABILITY TO REACT TO CHANGES IN
THE ECONOMY OR ITS INDUSTRY AND PREVENT IT FROM MEETING OBLIGATIONS UNDER ITS
DEBT AGREEMENTS.
The Company's degree of leverage could have the following consequences:
- - it may limit the Company's ability to obtain additional financing for
working capital, capital expenditures, product development, debt service
requirements, acquisitions and general corporate or other purposes;
- - it may limit the Company's ability to declare dividends;
- - a portion of the Company's cash flows from operations must be dedicated to
the payment of interest on indebtedness and is not available for other
purposes, including operations, capital expenditures and future business
opportunities;
- - certain of the Company's borrowings, including borrowings under the senior
secured credit facility, are at variable rates of interest, exposing the
Company to the risk of increased interest rates;
- - it may limit the Company's ability to adjust to changing market conditions
and place the Company at a competitive disadvantage compared to
competitors that have less debt;
- - the Company may be vulnerable in a downturn in general economic
conditions; and
- - the Company may be unable to make capital expenditures that are important
to growth and strategies.
30 AUDIT REPORT
THE COMPANY IS EXPOSED TO FLUCTUATIONS IN INTEREST RATES.
Certain of the Company's borrowings, primarily borrowings under the senior
secured credit facility, are at variable rates of interest and expose the
Company to interest rate risk. If interest rates increase, debt service
obligations on the variable rate indebtedness would increase and net income
would decrease. Significant changes in interest rates can increase the Company's
interest expense and have a material adverse effect on the Company's results of
operations or financial condition.
THE COMPANY'S PENSION PLANS ARE UNDERFUNDED.
The Company has several pension plans that are currently underfunded, and
adverse market conditions could require the Company to make substantial cash
payments to fund the plans, which would reduce cash available for other business
needs. Funding requirements may rise above expected amounts commencing in 2005
if temporary relief provisions enacted by the United States Congress are not
extended.
THE COMPANY USES ESTIMATES.
The Company prepares financial statements in conformity with generally accepted
accounting principles, which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, amounts
reported as contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses in the accounting
period. Actual results could differ from the estimates made by management.
Significant differences between actual results and estimates could have a
material adverse effect on the Company's financial results and results of
operations.
THE COMPANY DEPENDS ON SENIOR MANAGEMENT AND MAY BE UNABLE TO REPLACE KEY
EXECUTIVES IF THEY LEAVE.
The Company's operations and prospects depend in large part on the performance
of its senior management team. The Company does not have employment contracts
with any of its executive officers and cannot assure you that these individuals
will remain with the Company as employees. In addition, the Company cannot
assure you that it 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 the senior management team or the difficulty in
attracting, retaining and maintaining additional senior management personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations.
THE COMPANY RELIES ON ITS JOINT VENTURES FOR A PORTION OF ITS INCOME AND CASH
FLOW, BUT DOES NOT CONTROL THEM OR THEIR DISTRIBUTIONS.
The Company has three 50%-owned joint ventures that contribute to its financial
results but that it does not control. These joint ventures contributed $141.5
million to net income for the year ended December 31, 2004, and $7.7 million to
net income for the year ended December 31, 2003. The Company received $82.8
million of cash distributions from its joint ventures in the year ended December
31, 2004, and $3.6 million of cash distributions for the year ended December 31,
2003. However, the Company does not control the joint ventures and cannot,
without agreement from its partner, cause any joint venture to distribute its
income from operations to the Company. In addition, Gallatin Steel's existing
financing agreement prohibits it from distributing cash to the Company unless
specified financial covenants are satisfied. Additionally, since the Company
does not control its joint ventures, they may not be operated in a manner that
the Company believes would be in the joint ventures', or the Company's, best
interests.
31 AUDIT REPORT
REPORT OF INDEPENDENT REGISTERED
CERTIFIED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF GERDAU AMERISTEEL CORPORATION:
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets of Gerdau Ameristeel Corporation
and its subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of earnings (loss), of shareholders' equity and
comprehensive income and of cash flows present fairly, in all material
respects, the financial position of Gerdau Ameristeel Corporation and its
subsidiaries at December 31, 2004 and 2003, and the results of their
operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of
America. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements
of Gallatin Steel Company, a 50% owned joint venture, which statements
comprise assets of 6 percent of the related consolidated totals as of
December 31, 2004 and earnings from joint ventures which comprises 29
percent of the related consolidated income before income taxes for the
year ended December 31, 2004. Those statements were audited by other
auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for
Gallatin Steel Company, is based solely on the report of the other
auditors. We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion
/s/ PricewaterhouseCoopers LLP
Tampa, Florida
March 4, 2005
32 FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(US$ in Thousands)
DECEMBER 31, DECEMBER 31,
2004 2003
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 88,132 $ 9,950
Restricted cash and cash equivalents 465 -
Accounts receivable, net of allowance of $4,000 in 2004
and $4,100 in 2003 360,379 205,226
Inventories (note 4) 853,155 352,842
Deferred tax assets (note 10) 8,754 13,269
Other current assets 28,808 20,701
----------- -----------
TOTAL CURRENT ASSETS 1,339,693 601,988
----------- -----------
INVESTMENTS (note 6) 177,795 118,630
PROPERTY, PLANT AND EQUIPMENT (note 5) 919,862 795,063
GOODWILL 122,716 116,564
DEFERRED FINANCING COSTS 13,616 16,063
DEFERRED TAX ASSETS (note 10) 8,234 17,160
OTHER ASSETS 107 72
----------- -----------
TOTAL ASSETS $ 2,582,023 $ 1,665,540
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 295,001 $ 208,612
Accrued salaries, wages and employee benefits 56,428 29,732
Accrued interest 21,071 23,730
Other current liabilities 54,715 34,357
Acquisition liability 51,790 -
Current portion of long-term borrowings (note 7) 4,644 2,774
----------- -----------
TOTAL CURRENT LIABILITIES 483,649 299,205
----------- -----------
LONG-TERM BORROWINGS, LESS CURRENT PORTION (note 7) 432,823 562,703
CONVERTIBLE DEBENTURES (note 9) 86,510 78,302
ACCRUED BENEFIT OBLIGATIONS (note 11) 107,174 93,047
OTHER LIABILITIES 68,325 45,172
DEFERRED TAX LIABILITIES (note 10) 38,778 53,504
----------- -----------
TOTAL LIABILITIES 1,217,259 1,131,933
----------- -----------
SHAREHOLDERS' EQUITY
Capital stock (note 13) 1,008,511 547,601
Retained earnings (accumulated deficit) 311,853 (25,816)
Accumulated other comprehensive income 44,400 11,822
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 1,364,764 533,607
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,582,023 $ 1,665,540
----------- -----------
See accompanying notes to consolidated financial statements.
33 FINANCIAL STATEMENTS
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(US$ in Thousands, Except Earnings per Share Data)
YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------
NET SALES $ 3,009,854 $ 1,811,171
OPERATING EXPENSES
Cost of sales 2,450,945 1,668,478
Selling and administrative 109,384 81,565
Depreciation 79,311 71,951
Other operating (income) expense (3,062) (1,480)
----------- -----------
2,636,578 1,820,514
----------- -----------
INCOME (LOSS) FROM OPERATIONS 373,276 (9,343)
EARNINGS FROM JOINT VENTURES 141,474 7,667
----------- -----------
INCOME (LOSS) BEFORE OTHER EXPENSES AND INCOME TAXES 514,750 (1,676)
OTHER EXPENSES
Interest, net 56,330 59,880
Foreign exchange loss 8,123 726
Amortization of deferred financing costs 2,551 4,399
----------- -----------
67,004 65,005
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 447,746 (66,681)
INCOME TAX EXPENSE (BENEFIT) (NOTE 10) 110,077 (39,770)
----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST 337,669 (26,911)
MINORITY INTEREST - 217
----------- -----------
NET INCOME (LOSS) $ 337,669 $ (26,694)
----------- -----------
EARNINGS (LOSS) PER COMMON SHARE - BASIC $ 1.46 $ (0.14)
EARNINGS (LOSS) PER COMMON SHARE - DILUTED $ 1.45 $ (0.14)
See accompanying notes to consolidated financial statements.
34 FINANCIAL STATEMENTS
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(US$ in Thousands, Except Earnings per Share Data)
RETAINED ACCUMULATED
EARNINGS OTHER
NUMBER OF INVESTED (ACCUMULATED COMPREHENSIVE
SHARES CAPITAL DEFICIT) INCOME (LOSS) TOTAL
----------- ----------- ------------ ------------- ----------
BALANCES AT DECEMBER 31, 2002 184,892,360 $ 513,400 $ 878 $ (21,086) $ 493,192
NET LOSS (26,694) (26,694)
OTHER COMPREHENSIVE INCOME:
Unrealized loss on cash flow hedge 3,465 3,465
Foreign exchange 24,086 24,086
Minimum pension liability, net of
tax of $3.2M 5,357 5,357
COMPREHENSIVE INCOME 6,214
ACQUISITION OF MINORITY INTEREST 13,198,501 34,201 34,201
----------- ----------- ---------- ---------- ----------
BALANCES AT DECEMBER 31, 2003 198,090,861 $ 547,601 $ (25,816) $ 11,822 $ 533,607
----------- ----------- ---------- ---------- ----------
NET INCOME 337,669 337,669
OTHER COMPREHENSIVE INCOME:
Foreign exchange 36,400 36,400
Minimum pension liability, net of
tax of $2.1M (3,822) (3,822)
COMPREHENSIVE INCOME 370,247
STOCK ISSUANCE 105,562,000 460,203 460,203
EMPLOYEE STOCK OPTIONS 375,261 707 707
----------- ----------- ---------- ---------- ----------
BALANCES AT DECEMBER 31, 2004 304,028,122 $ 1,008,511 $ 311,853 $ 44,400 $1,364,764
----------- ----------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements.
35 FINANCIAL STATEMENTS
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$ in Thousands)
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2004 2003
------------ ------------
OPERATING ACTIVITIES
NET INCOME (LOSS) $ 337,669 $ (26,694)
ADJUSTMENT TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation 79,311 71,951
Amortization 2,551 4,399
Deferred income taxes 7,463 (22,327)
Gain on disposition of property, plant and equipment - (45)
Foreign exchange on related party loans - 7,241
Income from joint ventures (141,474) (7,667)
Distributions from joint ventures 82,803 3,620
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF ACQUISITIONS:
Accounts receivable (13,355) (42,406)
Inventories (278,679) 2,577
Other assets (9,531) (5,437)
Liabilities 58,222 51,672
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 124,980 36,884
--------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment (82,149) (55,151)
Acquisitions (298,422) -
Proceeds from dispositions of property, plant, and equipment - 2,643
Sales of short-term investments 60,051 -
Purchases of short-term investments (60,051) -
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (380,571) (52,508)
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of new debt 25,000 542,357
Payments on term loans (25,664) (513,182)
Senior Secured Credit Facility borrowings 82,788 -
Senior Secured Credit Facility payments (212,754) -
Additions to deferred financing costs - (15,639)
Changes in minority interest - (217)
Changes in restricted cash (465) -
Proceeds from issuance of employee stock option purchases 707 -
Proceeds from the issuance of common stock 460,203 -
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 329,815 13,319
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 3,958 (287)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 78,182 (2,592)
--------- ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,950 12,542
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 88,132 $ 9,950
--------- ---------
See accompanying notes to consolidated financial statements.
36 FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(US$ in Thousands)
NOTE 1 - BASIS OF PRESENTATION
Gerdau Ameristeel Corporation (the "Company" or "Gerdau Ameristeel") is a
Canadian corporation, whose indirect majority shareholder is Gerdau S.A., a
Brazilian company. 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. The "Gerdau North America Group"
consisted 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"). 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% 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.
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, primarily 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 an indirect wholly owned subsidiary
of Gerdau Ameristeel. On April 4, 2003, AmeriSteel changed its name to Gerdau
Ameristeel US Inc. ("Ameristeel"). Subsequent to the minority exchange, Gerdau
S.A. owned approximately 67.5% of Gerdau Ameristeel's common shares outstanding.
As of December 31, 2003, Gerdau S.A. increased its interest to 68.6% through
share purchases in the open market. In April 2004, the Company sold 26,800,000
common shares to its majority shareholder, Gerdau S.A., for cash. Subsequent to
this transaction, Gerdau S.A. held 72.3% of the Company's shares. In October
2004, the Company issued and sold 70 million shares for $4.70 (Cdn $5.90) per
share, including 35 million to Gerdau S.A., and in November 2004, the
over-allotment option was exercised for 8,762,000 common shares of which Gerdau
S.A. purchased 4,381,000. As of December 31, 2004, Gerdau S.A. owned
approximately 66.5% of common shares outstanding.
The Company operates steel minimills, 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, and rail and
truck carriers.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) in the United States. All dollar
amounts are reported in United States dollars unless otherwise indicated.
CONSOLIDATION: The consolidated financial statements include the accounts of the
Company, its subsidiaries and joint ventures. The results of companies acquired
during the year are included in the consolidated financial statements from the
effective date of acquisition. All significant intercompany transactions and
accounts have been eliminated in consolidation.
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 recorded under the equity method. Other investments where the
Company does not exercise significant influence are accounted for by the cost
37 FINANCIAL STATEMENTS
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 reviewing 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: 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. Freight costs are classified as part of cost of sales.
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 classified as restricted is restricted from use as the result
of bonds pledged to environmental regulatory bodies. A book overdraft of $68.5
million from the Company's main disbursement account was offset against a money
market account at the same institution.
SHORT-TERM INVESTMENTS: From time to time, the Company invests excess cash in
short-term investments that are comprised of investment grade variable rate debt
obligations, which are asset-backed and categorized as available for sale.
Accordingly, the Company's investments in these securities are recorded at cost,
which approximates fair value due to their variable interest rates, which
typically reset every 28 days. Despite the long-term nature of their stated
contractual maturities, the Company has the ability to quickly liquidate these
securities. All income generated from these investments was recorded as interest
income. There was no investment in these securities at December 31, 2004 or
2003.
INVENTORIES: Billets and finished goods are valued at the lower of cost
(calculated on an average cost basis) or net realizable value. Scrap,
consumables and operating supplies inventories are valued at the lower of cost
(calculated on an average cost basis) or replacement value. Consumables include
mill 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 repair expenses are charged against
operating expenses as incurred; however, as is typical in the industry, certain
major maintenance requires occasional shutdown and production curtailment. The
Company accrues for planned periodic major maintenance activities and the
estimated cost of these shutdowns. The Company has accrued $2.0 million and $1.9
million as of December 31, 2004 and 2003. Interest incurred in connection with
significant capital projects is capitalized. 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. Property, plant and equipment held for sale are carried
at the lower of cost or net realizable value.
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 10 to 30 years for buildings and improvements and 4 to 15 years
for other equipment.
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 Statement of Financial Accounting Standard 142,
Goodwill and Other Intangible Assets. This standard 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. 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.
38 FINANCIAL STATEMENTS
DEFERRED FINANCING COSTS: Deferred financing costs were incurred in relation to
long-term debt, 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. Deferred financing costs are amortized using the
effective interest method.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amount of the Company's
floating rate debt instruments approximates fair value, because the interest
rates adjust periodically to the current market rates. The fair value of the
Company's fixed rate notes, the Senior Notes, was $474.9 million and $447.5
million as of December 31, 2004 and 2003, respectively. The fair value of the
Company's Convertible Debentures was Cdn $126.9 million and Cdn $116.3 million
as of December 31, 2004 and 2003, respectively. Fair values were estimated based
on quoted market prices from the trading desk of a nationally recognized
investment bank.
DEFERRED INCOME TAXES: The liability method of accounting for income taxes is
used, whereby deferred income taxes arise from temporary differences between the
book value of assets and liabilities and their respective tax value. Deferred
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 deferred
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 deferred
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 provides 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. 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 other comprehensive income.
39 FINANCIAL STATEMENTS
Assets and liabilities of 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. Equity is translated at historical rates, and the resulting cumulative
foreign currency translation adjustments resulting from this process are
included in accumulated other comprehensive income.
The consolidated financial statements have been prepared in U.S. dollars as the
majority of the Company's transactions occur in U.S. dollars.
EARNINGS (LOSS) PER SHARE: The Company's diluted earnings per share is
determined using the treasury stock method for the effect of outstanding share
purchase options.
STOCK OPTIONS: 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 options granted subsequent to January 1, 2002, and excludes options
issued prior to January 1, 2002. The following assumptions were used:
EXPECTED DIVIDEND YIELD 0%
EXPECTED SHARE PRICE VOLATILITY 55%
RISK-FREE RATE OF RETURN 4%
EXPECTED PERIOD UNTIL EXERCISE 5 YEARS
(Amounts in $000s except per share data)
FOR THE YEAR ENDED DECEMBER 31,
2004 2003
--------- --------
NET (LOSS) INCOME, AS REPORTED $ 337,669 $(26,694)
--------- --------
PRO FORMA STOCK-BASED COMPENSATION COST 260 497
--------- --------
PRO FORMA, NET INCOME $ 337,409 $(27,191)
--------- --------
EARNINGS (LOSS) PER SHARE
Basic, as reported $ 1.46 $ (0.14)
--------- --------
Basic, pro forma 1.45 (0.14)
--------- --------
Diluted, as reported 1.45 (0.14)
--------- --------
Diluted, pro forma 1.45 (0.14)
--------- --------
DEFERRED SHARE UNIT PLAN: The Corporation offers a Deferred Share Unit Plan
(DSUP) for independent members of the board of directors. Under the DSUP, each
director receives a percentage of his 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 dates, and an expense is recognized at that time. The
shares are subsequently marked to market and expensed accordingly. 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 was $354,000 and
$123,000 at December 31, 2004 and 2003, respectively.
USE OF ESTIMATES: The preparation of financial statements in conformity with
U.S. 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.
40 FINANCIAL STATEMENTS
RECLASSIFICATIONS: Certain amounts for prior years have been reclassified to
conform to the 2004 presentation. Such reclassifications had no effect on
amounts previously reported for net income or shareholders' equity.
NOTE 3 - ACQUISITIONS
On March 19, 2004, the Company acquired certain assets and assumed certain
liabilities of Potter Form & Tie Co., a rebar fabricator with six locations
throughout the Midwest, for approximately $11.1 million. As a result of this
transaction, $1.4 million of goodwill was recorded. The transaction was
accounted for as a purchase.
On December 10, 2004, the Company completed the acquisition of the fixed assets
and working capital of Gate City's and RJ Rebar, Inc.'s rebar fabrication
facilities in the Midwest with annual production capacity of approximately
150,000 tons for approximately $16.4 million. As a result of this transaction,
$4.7 million of goodwill was recorded. The transaction was accounted for as a
purchase.
On November 1, 2004, Gerdau Ameristeel completed the acquisition of four long
steel product minimills and four downstream facilities, which are referred to as
North Star Steel, from Cargill, Incorporated. This acquisition increased mill
manufacturing capacity by approximately 2.0 million tons for finished long steel
products. The facilities acquired consist of four long steel product minimills
located in St. Paul, Minnesota; Wilton, Iowa; Calvert City, Kentucky; and
Beaumont, Texas; and four downstream facilities - one that processes grinding
balls located in Duluth, Minnesota and three wire rod processing facilities
located in Beaumont, Texas; Memphis, Tennessee; and Carrollton, Texas. The St.
Paul and Wilton minimills have scrap shredder facilities, which process raw
scrap into shredded scrap to supply a large part of the minimills' raw material
needs. North Star's products are generally sold to steel service centers, steel
fabricators or directly to OEMs, for use in a variety of industries. The
purchase price for the acquired assets was $266 million in cash plus the
assumption of certain liabilities of the businesses being acquired and changes
in working capital from April 30, 2004, to the date of closing. Of the purchase
price, $181 million was for working capital computed as of April 30, 2004. On
November 1, 2004, working capital of the acquired business had increased $51.8
million. This amount was accrued as of December 31, 2004, and paid subsequent to
year end.
The following table summarizes the fair value of assets acquired and liabilities
assumed for the North Star acquisition at the date of the acquisition, November
1, 2004 ($000s):
NET ASSETS (LIABILITIES) ACQUIRED
CURRENT ASSETS $ 325,751
CURRENT LIABILITIES (67,674)
PROPERTY, PLANT AND EQUIPMENT 86,244
OTHER LONG-TERM LIABILITIES (23,789)
---------
$ 320,532
---------
PURCHASE PRICE $ 266,000
PLUS TRANSACTION COSTS 2,742
ACCRUED WORKING CAPITAL ADJUSTMENT 51,790
---------
$ 320,532
---------
The following unaudited pro forma data summarizes the results of operations for
the periods indicated as if the 2004 North Star Steel acquisition had been
completed as of January 1, 2003.
FOR THE YEAR ENDED DECEMBER 31,
2004 2003
---------- ----------
NET SALES $3,760,139 $2,396,446
NET INCOME (LOSS) 460,454 (18,351)
EARNINGS (LOSS) PER SHARE - BASIC 1.98 (0.09)
DILUTED 1.97 (0.09)
41 FINANCIAL STATEMENTS
NOTE 4 - INVENTORIES
Inventories consist of the following ($000s):
AT DECEMBER 31, AT DECEMBER 31,
2004 2003
--------------- ---------------
FERROUS AND NON-FERROUS SCRAP $148,273 $ 64,173
WORK IN-PROCESS 121,618 31,764
FINISHED GOODS 376,528 151,014
RAW MATERIALS (EXCLUDING SCRAP)
AND OPERATING SUPPLIES 206,736 105,891
-------- --------
$853,155 $352,842
-------- --------
NOTE 5 - PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment consist of the following ($000s):
ACCUMULATED NET
COST DEPRECIATION BOOK VALUE
----------- ------------ ----------
AT DECEMBER 31, 2004
LAND AND IMPROVEMENTS $ 74,443 $ (3,725) $ 70,718
BUILDINGS AND IMPROVEMENTS 157,654 (26,880) 130,774
MACHINERY AND EQUIPMENT 1,017,979 (376,402) 641,577
CONSTRUCTION IN PROGRESS 63,895 - 63,895
PROPERTY, PLANT AND EQUIPMENT HELD FOR SALE 12,898 - 12,898
----------- --------- --------
$ 1,326,869 $(407,007) $919,862
----------- --------- --------
AT DECEMBER 31, 2003
LAND AND IMPROVEMENTS $ 63,175 $ (2,680) $ 60,495
BUILDINGS AND IMPROVEMENTS 128,243 (20,327) 107,916
MACHINERY AND EQUIPMENT 862,610 (285,909) 576,701
CONSTRUCTION IN PROGRESS 36,375 - 36,375
PROPERTY, PLANT AND EQUIPMENT HELD FOR SALE 13,576 - 13,576
----------- --------- --------
$ 1,103,979 $(308,916) $795,063
----------- --------- --------
Capitalized interest costs for property, plant and equipment construction
expenditures were approximately $353,000 and $124,000 for the years ended
December 31, 2004 and 2003, respectively.
NOTE 6 - JOINT VENTURES
The Company's investments in Gallatin Steel Company, Bradley Steel Processors
and MRM Guide Rail are 50% joint ventures. The Company's interests in the joint
ventures have been accounted for using the equity method under which the
Company's proportionate share of earnings has been included in these
consolidated financial statements.
The following table sets forth selected data for the Company's joint ventures
($000s):
DECEMBER 31,
2004 2003
------------ -----------
BALANCE SHEET
CURRENT ASSETS $ 128,004 $ 53,137
PROPERTY, PLANT AND EQUIPMENT, NET 132,472 124,144
CURRENT LIABILITIES 27,517 23,224
LONG-TERM DEBT 1,709 4,259
STATEMENT OF EARNINGS
SALES $ 465,493 $ 224,179
OPERATING INCOME 142,429 9,685
INCOME BEFORE INCOME TAXES 142,538 9,440
NET INCOME 141,474 7,667
42 FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT
On June 27, 2003, the Company refinanced its debt by issuing $405.0 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 up to $350.0 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
December 31, 2004, there was $27,000 drawn against this facility, and, based
upon available collateral under the terms of the agreement, approximately $295.0
million was available under the Senior Secured Credit Facility.
During the first quarter of 2004, the Company obtained a $25.0 million, one
year, 2.65% interest bearing loan from a Brazilian bank. This loan was
guaranteed by Gerdau S.A. In the fourth quarter of 2004, this loan was repaid.
Debt includes the following ($000s):
DECEMBER 31, DECEMBER 31,
2004 2003
------------ ------------
SENIOR NOTES, BEARING INTEREST OF 10.375%, DUE JULY 2011, NET OF ORIGINAL ISSUE DISCOUNT $ 397,986 $ 397,271
SENIOR SECURED CREDIT FACILITY, BEARING INTEREST OF 5.75%, DUE THROUGH DECEMBER 2005 27 135,027
INDUSTRIAL REVENUE BONDS, BEARING INTEREST OF 1.74% TO 6.38%, DUE THROUGH DECEMBER 2018 31,600 27,400
AMERISTEEL BRIGHT BAR TERM LOAN, BEARING INTEREST OF 5.25%, DUE JUNE 2011 2,734 3,172
OTHER, BEARING INTEREST OF 3.75%, DUE THROUGH JUNE 2006 5,120 2,607
--------- ---------
437,467 565,477
LESS CURRENT PORTION (4,644) (2,774)
--------- ---------
$ 432,823 $ 562,703
--------- ---------
The maturities of borrowings for the years subsequent to December 31, 2004, are
as follows ($000s):
AMOUNT
2005 $ 4,644
2006 733
2007 450
2008 323
2009 323
THEREAFTER 430,994
--------
$437,467
--------
Cash paid for interest was $54.5 million and $32.2 million for the years ended
December 31, 2004 and 2003, respectively.
The Company's debt agreements contain covenants that require the Company to,
among other things, maintain a minimum fixed charge coverage ratio, a specified
minimum level of tangible shareholders equity, a minimum working capital ratio
and limits the debt to equity ratio. In addition, if the Company's business
suffers a material adverse change or if other events of default under the loan
agreements are triggered, then pursuant to cross default acceleration clauses,
substantially all of the outstanding debt could become due and the underlying
facilities could be terminated. At December 31, 2004, the Company was in
compliance with all of its debt covenants.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company is affiliated with a group of companies controlled by Gerdau S.A. In
February 2003, Gerdau S.A. made loans totaling $30.0 million to GUSA to increase
liquidity within Gerdau Ameristeel. These loans bore interest at 6.5% and were
repaid under the June 2003 refinancing. Through the June 2003 refinancing, an
indirect wholly owned subsidiary of Gerdau S.A. purchased $35.0 million of
bonds. These bonds were exchanged subsequent to the exchange offer in 2004.
Accrued liabilities due to related parties were $6.2 million and $5.8 million as
of December 31, 2004 and 2003, respectively.
43 FINANCIAL STATEMENTS
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, 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 the time of redemption.
NOTE 10 - INCOME TAXES
The income tax expense is comprised of ($000s):
2004 2003
----------- ---------
CURRENT $ 102,614 $ 1,311
DEFERRED 7,463 (41,081)
----------- ---------
$ 110,077 $ (39,770)
----------- ---------
CURRENT INCOME TAXES:
Canada $ 1,216 $ 713
U.S. 101,381 700
Other 17 (102)
----------- ---------
102,614 1,311
----------- ---------
DEFERRED INCOME TAXES:
Canada 12,333 (13,014)
U.S. (4,870) (28,067)
7,463 (41,081)
----------- ---------
TOTAL PROVISION FOR INCOME TAXES $ 110,077 $ (39,770)
----------- ---------
The income tax expense (benefit) differs from the amount computed by applying
Canadian income tax rate (federal and provincial) to income before income taxes,
as follows:
2004 2003
--------- --------
INCOME TAX EXPENSE (BENEFIT) COMPUTED USING
CANADIAN STATUTORY TAX RATES $ 151,481 $(26,365)
INCREASED (DECREASED) BY THE TAX EFFECT OF:
Tax exempt income (16,679) (7,158)
Deferred tax asset valuation adjustment (48,563) -
Effect of different rates in foreign jurisdictions 18,965 (7,007)
Net future income tax benefit resulting from changes
in tax rates - (1,475)
Convertible debenture purchase price adjustment 2,235 2,235
Unrealized foreign exchange losses 2,504 -
Other, net 134 -
--------- --------
INCOME TAX EXPENSE (BENEFIT) $ 110,077 $(39,770)
--------- --------
CASH PAYMENTS FOR INCOME TAXES $ 95,766 $ 1,517
--------- --------
44 FINANCIAL STATEMENTS
The components of the deferred tax assets and liabilities consisted of the
following:
CANADA 2004 2003
- ------ -------- ----------
NON-CURRENT ASSETS:
Operating loss carryforwards $ 29,891 $ 25,532
Property, plant and equipment (41,348) (34,769)
Recycling and AMT credits 523 -
Pension and retirement accruals 16,835 18,044
Long-term liabilities not 2,333 8,353
currently deductible
-------- ----------
NET NON-CURRENT DEFERRED TAX ASSETS $ 8,234 $ 17,160
-------- ----------
UNITED STATES 2004 2003
- ------------- --------- ---------
CURRENT ASSETS:
Accounting provisions not currently
deductible for tax purposes $ 8,754 $ 13,269
--------- ---------
NON-CURRENT LIABILITIES:
Operating loss carryforwards $ (34,805) $ (42,856)
Property, plant and equipment 129,842 123,521
Recycling and AMT credits (4,927) (5,394)
Pension and retirement accruals (19,784) (14,313)
Long-term liabilities not currently (32,420) (12,164)
deductible
Other 872 4,710
--------- ---------
NET NON-CURRENT DEFERRED TAX LIABILITIES $ 38,778 $ 53,504
--------- ---------
During 2004, the Company recorded the utilization of net operating losses (NOL)
related to the former Co-Steel U.S. group resulting in a $48.6 million reduction
of U.S. tax expense. The NOL carryforward from the predecessor company is
subject to annual limitations as outlined in Internal Revenue Code (IRC) S. 382
and IRC S. 1502, Separate Return Limitation Year provisions. At the time of the
acquisition of Co-Steel, the tax assets were recorded at their estimated
realization rate under purchase accounting, which resulted in a portion of the
existing NOLs being reserved. Due to the high profitability of the former
Co-Steel U.S. group in 2004, the Company now believes it is more likely than not
that it will be able to realize the benefit of these losses and as such the
valuation reserve related to these NOLs has been reversed. Substantially all of
the federal NOLs that are available to the Company under the applicable change
in ownership rules (which limit a company's ability to utilize NOLs that existed
as of the date of an ownership change) have been recognized.
As of December 31, 2004, the Company has a combined non-capital loss carry
forward of approximately $85.5 million for Canadian tax purposes that expires on
various dates between 2008 through 2011. The Company also has a combined net
operating loss carryforward of approximately $136.9 million for U.S. federal and
state income tax purposes that expires on various dates between 2005 and 2023.
The Company believes its Canadian net deferred tax asset at December 31, 2004,
of $8.2 million is more likely than not to be realized based on the combination
of future taxable income from operations and various tax planning strategies
that will be implemented, if necessary.
NOTE 11 - POST RETIREMENT BENEFITS
The Company maintains defined benefit pension plans 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 maximum deductible limitations. Many employees
are also covered by defined contribution retirement plans for which Company
contributions and expense amounted to approximately $3.4 million and $2.6
million for the years ended December 31, 2004 and 2003, respectively.
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 Company uses a December 31
measurement date for its plans. The following tables summarize the accumulated
pension benefits and postretirement medical benefit obligations included in the
Company's consolidated statements of financial position ($000s).
Settlement losses were recognized in the prior year due to payments to former
employees under the former Co-Steel plans. The following tables summarize the
components of the net periodic pension costs and the net periodic post
retirement medical benefits costs in thousands and in percents:
45 FINANCIAL STATEMENTS
PENSION BENEFITS OTHER BENEFIT PLANS
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
2004 2003 2004 2003
----------- ------------- ----------- -----------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 10,980 $ 8,027 $ 1,133 $ 880
Interest cost 22,274 20,831 2,153 2,247
Expected return on plan assets (20,975) (18,683) - -
Amortization of transition liability 174 162 - -
Amortization of prior service cost 293 461 (212) -
Recognized actuarial loss 2,214 957 30 -
Settlement loss - 140 - -
----------- ------------- ----------- -----------
NET PERIODIC BENEFIT COST $ 14,960 $ 11,895 $ 3,104 $ 3,127
----------- ------------- ----------- -----------
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligation at beginning of period $ 359,568 $ 301,352 $ 38,554 $ 31,978
Acquisition of North Star - - 8,716 -
Service cost 10,980 8,027 1,133 880
Interest cost 22,274 20,831 2,153 2,247
Plan participants' contributions - - 733 647
Amendments 3,149 - (3,161) -
Actuarial loss 25,193 11,248 1,793 1,188
Benefits and administrative expenses paid (19,381) (14,918) (2,501) (2,260)
Settlement loss - 275 - -
Foreign exchange gain 14,851 32,753 1,766 3,874
----------- ------------- ----------- -----------
BENEFIT OBLIGATION AT END OF PERIOD $ 416,634 $ 359,568 $ 49,186 $ 38,554
----------- ------------- ----------- -----------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of $ 278,243 $ 206,070 $ - $ -
period
Actual return on plan assets 30,509 42,448 - -
Employer contribution 20,815 18,470 1,769 1,612
Plan participants' contributions - - 732 648
Benefits and administrative expenses paid (19,381) (14,918) (2,501) (2,260)
Foreign exchange loss 12,533 26,173 - -
----------- ------------- ----------- -----------
FAIR VALUE OF PLAN ASSETS AT END OF PERIOD $ 322,719 $ 278,243 $ - $ -
----------- ------------- ----------- -----------
RECONCILIATION OF FUNDED STATUS - END OF PERIOD
Funded status $ (93,915) $ (81,325) $ (49,186) $ (38,554)
Unrecognized transition liability 1,857 1,905 - -
Unrecognized prior service cost 5,962 2,673 (2,948) -
Unrecognized actuarial loss 52,610 39,069 3,052 1,878
----------- ------------- ----------- -----------
NET AMOUNT RECOGNIZED $ (33,486) $ (37,678) $ (49,082) $ (36,676)
----------- ------------- ----------- -----------
AMOUNTS RECOGNIZED IN BALANCE SHEET
Accrued benefit liability $ (58,092) $ (56,371) $ (49,082) $ (36,676)
Accumulated pretax charge to
other comprehensive income 24,606 18,693 - -
----------- ------------- ----------- -----------
NET AMOUNT RECOGNIZED $ (33,486) $ (37,678) $ (49,082) $ (36,676)
----------- ------------- ----------- -----------
46 FINANCIAL STATEMENTS
ASSUMPTIONS
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE
BENEFITS OBLIGATIONS AT DECEMBER 31
2004 2003
------------ ------------
Discount rate 5.75% - 6.00% 6.25% - 6.50%
Rate of compensation increases 2.50% - 4.25% 2.50% - 4.50%
ASSUMED HEALTH CARE COST TREND RATES AT DECEMBER 31
2004 2003
------------- -------------
Health care cost trend rate assumed
for next year 9.50% - 13.00% 9.00% - 10.00%
Rate to which the cost trend rate is
assumed to decline (ultimate trend rate) 4.50% - 5.50% 5.50%
Year that the rate reaches
the ultimate trend rate 2010 - 2013 2008
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE NET
PERIODIC BENEFIT COST FOR THE YEAR ENDED DECEMBER 31
2004 2003
------------ ------------
Discount rate 6.25% - 6.50% 6.50% - 6.75%
Expected long-term return on
plan assets 7.25% - 8.40% 7.25% - 8.40%
Rate of compensation increase 2.50% - 4.50% 2.50% - 4.50%
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1 PERCENTAGE POINT 1 PERCENTAGE POINT
INCREASE DECREASE
------------------ ------------------
Effect on total service and interest cost $ 383 $ (308)
Effect on postretirement benefit obligation 6,052 (4,900)
PLAN ASSETS: The Company's pension plan weighted-average asset allocations at
December 31, 2004 and 2003, by asset category are as follows:
ASSET CATEGORY PLAN ASSETS AT DECEMBER 31,
2004 2003
---- ----
Equity securities 67.3% 70.4%
Debt securities 26.5% 23.9%
Real estate 2.7% 0.5%
Other 3.5% 5.2%
---- ----
TOTAL 100% 100%
---- ----
The Company has an Investment Committee that defines the investment policy
related to the defined benefit plans. The primary investment objective is to
ensure the security of benefits that have accrued under the plans by providing
an adequately funded asset pool that is separate from and independent of Gerdau
Ameristeel Corporation. To accomplish this objective, the fund shall be invested
in a manner that adheres to the safeguards and diversity to which a prudent
investor of pension funds would normally adhere. Gerdau Ameristeel retains
specialized consultant providers that advise and support the Investment
Committee decisions and recommendations.
The asset mix policy will consider the principles of diversification and
long-term investment goal, as well as liquidity requirements. In order to
accomplish that, the target allocations range between 55% - 85% in equity
securities, 20% - 35% in debt securities and 0% - 10% in real estate and other.
BENEFIT PAYMENTS: The expected benefit payments, in future years, are as follows
($000s):
PENSION OTHER BENEFIT
BENEFITS PLANS
-------- -------------
2005 $ 17,374 $ 1,882
2006 17,867 2,039
2007 18,539 2,179
2008 19,539 2,338
2009 20,673 2,482
2010 TO 2014 125,884 15,233
47 FINANCIAL STATEMENTS
CONTRIBUTIONS
The Company expects to contribute $20.7 million to its pension plans in 2005.
NOTE 12 - 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
interest rate risks arising out of the normal course of business. In order to
reduce its exposure to changes in the fair value of its Senior Notes, the
company entered into interest rate swaps subsequent to the June 2003
refinancing. The agreements have a notional value of $200 million and expiration
dates of July 15, 2011. The Company receives a fixed interest rate and pays a
variable interest rate based on LIBOR. The aggregate mark-to-market (fair value)
of the interest rate agreements, which represents the amount that would be paid
if the agreements were terminated at December 31, 2004, was approximately $4.0
million.
NOTE 13 - SHAREHOLDERS' EQUITY
Capital stock consists of the following shares:
AUTHORIZED ISSUED INVESTED CAPITAL
NUMBER NUMBER (IN THOUSANDS)
---------- ----------- ----------------
DECEMBER 31, 2004 COMMON UNLIMITED 304,028,122 $1,008,511
DECEMBER 31, 2003 COMMON UNLIMITED 198,090,861 $ 547,601
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. 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. The Company's common stock has no
par value. As part of this transaction, minority shareholders of AmeriSteel,
consisting primarily of management and other employees, were required to
exchange their shares of AmeriSteel stock for shares of Gerdau Ameristeel.
Gerdau Ameristeel filed a registration statement on Form F-4 with the Securities
and Exchange Commission and the exchange of shares was completed on March 31,
2003. As a result, an additional 13,198,501 shares of Gerdau Ameristeel were
issued.
On April 16, 2004, shares outstanding increased by 26,800,000 shares as the
Company sold and issued common shares to its majority shareholder, Gerdau S.A.
On October 20, 2004, the Company was listed on the New York Stock Exchange and
sold and issued 70,000,000 common shares including 35,000,000 that were sold and
issued to its majority shareholder, Gerdau S.A. On November 18, the
over-allotment option was exercised for 8,762,000 common shares of which Gerdau
S.A. purchased 4,381,000. Total proceeds from the offerings were $460.2 million,
net of offering costs.
2004 2003
--------- -----------
Cumulative foreign currency translation adjustments, net $ 59,721 $ 23,321
Minimum pension liability adjustments, net (15,321) (11,499)
--------- -----------
TOTAL $ 44,400 $ 11,822
--------- -----------
48 FINANCIAL STATEMENTS
EARNINGS (LOSS) PER SHARE
The following table identifies the components of basic and diluted earnings per
share ($000s except per share data):
YEAR ENDED DECEMBER 31,
2004 2003
-------------- ------------
BASIC EARNINGS (LOSS) PER SHARE:
Basic net earnings (loss) $ 337,669 $ (26,694)
Average shares outstanding 232,047,518 194,791,236
Basic net earnings (loss) per share $ 1.46 $ (0.14)
DILUTED EARNINGS (LOSS) PER SHARE:
Diluted earnings (loss) $ 337,669 $ (26,694)
DILUTED AVERAGE SHARES OUTSTANDING:
Average shares outstanding 232,047,518 194,791,236
Dilutive effect of stock options 1,241,571 -
DILUTED EARNINGS (LOSS) PER SHARE $ 1.45 $ (0.14)
At December 31, accumulated other comprehensive income was as follows ($000s):
At December 31, 2004, options to purchase 692,000 (1,013,700 at December 31,
2003) common shares were not included in the computation of diluted earnings
(loss) per share as their inclusion would be anti-dilutive.
NOTE 14 - STOCK BASED COMPENSATION
The Company has several stock-based compensation plans, which are described
below.
Under the former Co-Steel plan, the 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. The options expire on various dates up to April 13,
2008.
A subsidiary of the Company, AmeriSteel, had several stock compensation plans
for its employees. Under the terms of the Transaction Agreement relating to the
acquisition of Co-Steel, minority shareholders of AmeriSteel exchanged 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 took place on March 31, 2003. All amounts
presented in the discussion below have been restated to reflect the historical
shares at the exchanged value.
AmeriSteel had long-term incentive plans available to executive management (the
"AmeriSteel Plan") to ensure that the interests of AmeriSteel's senior
management were congruent with the interests of its shareholders. Awards were
determined by a formula based on return on capital employed in a given plan
year. The AmeriSteel Plan provided for earned awards to vest and be paid out
over a period of four years. Participants could elect cash payout or investments
in phantom stock of AmeriSteel or Gerdau S.A., for which a 25% premium was
earned if elected. Following the minority exchange, investments in phantom stock
of AmeriSteel became investments in phantom common shares of Gerdau Ameristeel
based on the exchange ratio. The awards were recorded as a liability and
benefits charged to expense under this plan for the years ended December 31,
2004 and 2003, were $1.3 million and $150 thousand, respectively.
For the year ended December 31, 2004, the Gerdau Ameristeel Human Resources
Committee adopted the 2004 Long-
49 FINANCIAL STATEMENTS
Term Incentive Stakeholder Plan (the "Stakeholder Plan"). The Stakeholder Plan
is based on the Ameristeel Plan. The Stakeholder Plan is designed to reward the
Company's senior management with a share of the Company's profits after a
capital charge. Awards, calculated in dollars, are invested in phantom common
shares at a price equal to the closing price of the common shares on the New
York Stock Exchange on the date of the grant, and vest in equal installments on
each of the four anniversary dates of the date of grant. Awards will be made
following the end of each fiscal year and payouts will be calculated based on
the closing price of Common Shares on the New York Stock Exchange on the vesting
date and will be paid as soon as practicable following vesting. An award of
approximately $14 million was earned by participants in the Stakeholder Plan for
the year ended December 31, 2004, and was granted on March 1, 2005. The award
will be accrued over the vesting period. No awards are expected to be granted
under the Stakeholder Plan in the future.
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 authorized
946,170 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
purchased stock were awarded stock appreciation rights ("SARs") equal to four
times the number of shares purchased. SARs were granted at fair value at the
date of the grant, determined based on an independent appraisal as of the
previous year-end. 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. The SARs
are recorded as a liability and benefits charged to expense under this plan for
the years ended December 31, 2004 and 2003, were $6.4 million and $3.5 million,
respectively.
In September 1996, AmeriSteel's board of directors approved the AmeriSteel
Corporation Equity Ownership Plan (the "Equity Ownership Plan"), which provided
for grants of common stock, options to purchase common stock and SARs. After
conversion into common shares of Gerdau Ameristeel, the maximum number of common
shares issuable under the plan is 4,152,286. The Company has granted 492,955
shares of common stock and 4,667,930 incentive stock options under the Equity
Ownership Plan through December 31, 2004. 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. The Company accounts
for stock options granted to employees using the intrinsic-value-based method of
accounting (see note 2).
In July 2002, AmeriSteel's board of directors approved the issuance of SARs that
were granted to officers with exercise prices granted at fair value at the date
of grant: 6,244,722 SARs were authorized and issued. The SARs become one-third
vested two years from the grant date, and one-third in each of the subsequent
two years from the grant date. SARs may be exercised for 10 years from the grant
date. The SARs are recorded as a liability and benefits charged to expense under
this plan for the years ended December 31, 2004 and 2003, were $14.3 million and
$5.9 million, respectively.
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 356,602 shares were sold under the Purchase Plan at
a purchase price of $1.12 per share. 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 2,139,612 options were granted under
the Purchase Plan. No options remain available for future grant. All options
outstanding are currently vested. Options may be exercised for 10 years from the
grant date.
50 FINANCIAL STATEMENTS
A summary of the Company's stock option plans is as follows:
YEAR ENDED DECEMBER 31, 2004 YEAR ENDED DECEMBER 31, 2003
NUMBER OF WEIGHTED- AVERAGE NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ----------------- ----------- -----------------
AMERISTEEL PLANS
OUTSTANDING, BEGINNING OF PERIOD - - 281,197 $ 20.37
EXCHANGE FOR OPTIONS OF GERDAU AMERISTEEL - - (281,197) 20.37
GRANTED - - - -
EXERCISED - - - -
FORFEITED - - - -
--------- ----------------- --------- -----------------
OUTSTANDING, END OF PERIOD - - - -
--------- ----------------- --------- -----------------
GERDAU AMERISTEEL PLANS
OUTSTANDING, BEGINNING OF PERIOD 3,606,570 $ 6.41 1,367,400 $ 9.30
AMERISTEEL PLANS OPTIONS EXCHANGED
FOR GERDAU AMERISTEEL OPTIONS - - 2,660,601 2.15
GRANTED - - - -
EXERCISED (375,261) 1.90 - -
FORFEITED (76,321) 1.92 - -
EXPIRED (321,700) 19.46 (421,431) 19.72
--------- ---------
OUTSTANDING, END OF PERIOD 2,833,288 $ 5.94 3,606,570 $ 6.41
--------- ---------
OPTIONS EXERCISABLE 2,350,378 2,585,767
The following table summarizes information about options outstanding at December
31, 2004:
WEIGHTED-
AVERAGE
REMAINING WEIGHTED-
EXERCISE PRICE NUMBER CONTRACTUAL AVERAGE NUMBER
RANGE US$ OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE
- -------------------- ----------- ----------- -------------- -----------
$1.32 TO $1.43 752,829 4.4 $ 1.38 597,086
$1.80 TO $1.90 824,536 5.9 1.84 497,369
$2.11 TO $2.96 563,923 4.5 2.63 563,923
$15.45 TO $18.69 (1) 342,500 2.1 16.80 342,500
$20.06 TO $20.15 (1) 349,500 1.7 20.15 349,500
----------- -----------
2,833,288 2,350,378
----------- -----------
Note: (1) these options are denominated in Canadian dollars and have been
translated to US$ using the exchange rate at December 31, 2004.
51 FINANCIAL STATEMENTS
NOTE 15 - CONTINGENCIES AND COMMITMENTS
ENVIRONMENTAL
As the Company is involved in the manufacturing 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 are 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 present value of
total remaining costs to be approximately $16.2 million (including $3.6 million
assumed in the North Star acquisition) and $13.6 million as of December 31, 2004
and 2003, respectively. Of the costs recorded as a liability at December 31,
2004, the Company expects to pay approximately $3.3 million within the year
ended December 31, 2005. Included in the amounts outstanding is $8.6 million
recorded in 2002 with respect to certain environmental obligations, which were
triggered by the change in control of Co-Steel Inc. in certain jurisdictions in
which Co-Steel Inc. operated.
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 of 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 Environmental Protection Agency
(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 has
filed suit under the Comprehensive Environmental Response, Compensation, and
Liability Act (CERCA) with the Company named as a defendant. CERCA imposes joint
and several strict liability in connection with environmental contamination. The
Company is included in this action because the Company allegedly shipped EAF
dust to this property during 1978. In 2003, the EPA offered a settlement to the
named PRPs totaling $15.5 million under which the Company's allocation was
approximately $1.8 million. One of the named PRPs is in bankruptcy proceedings.
The EPA has recently indicated that it is reconsidering the appropriate
allocation; that reconsideration could cause the EPA's view of the Company's
allocation to substantially increase. The Company objects to its inclusion as a
PRP on several bases, has asserted defenses and is pursuing legal alternatives,
including adding a larger third party, which the Company believes was
incorrectly excluded from the original lawsuit. In 2004, the court denied a
motion asserting some, but not all, of the Company's defenses. Also in 2004, the
EPA and the Company had further discussions on a settlement and, based on these
discussions, the Company believes that the EPA has a settlement range of $8.0 to
$10.0 million. The Company is not in agreement with this assessment and is
considering legal alternatives including pursuing other contributing parties'
insurance carriers. At this time, exposure is not estimable.
52 FINANCIAL STATEMENTS
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.
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):
YEAR ENDING
DECEMBER 31, AMOUNT
- ------------ -----------
2005 $ 14,530
2006 10,276
2007 8,610
2008 7,300
2009 5,883
THEREAFTER 30,042
-----------
$ 76,641
-----------
Rent expense related to operating leases was $19.8 million and $19.2 million for
the years ended December 31, 2004 and 2003, respectively.
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 was recorded by the Company for the present
value of the unfavorable lease commitments.
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 16 - OTHER INCOME
Other income, net of other expenses for the year ended December 31, 2004,
consists of income of $1.2 million from a power interruption claim, $1.0 million
collected under the US Continued Dumping Subsidy Offset Act, and $1.0 million
from the mark-to-market of trading securities.
Other income, net of other expenses for the year ended December 31, 2003,
consists of income of $3.5 million in electric power rebates from the Province
of Ontario and 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.
NOTE 17 - 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 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.
53 FINANCIAL STATEMENTS
Operational results and other financial data for the geographic and two business
segments for the years ended December 31 are presented below ($000s):
YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------
REVENUE FROM EXTERNAL CUSTOMERS
Steel mills $ 2,492,190 $ 1,507,083
Downstream products 517,664 304,088
----------------- -----------------
TOTAL $ 3,009,854 $ 1,811,171
----------------- -----------------
INTER-COMPANY SALES
Steel mills $ 688,450 $ 314,693
Downstream products - -
Corp/eliminations/other (688,450) (314,693)
----------------- -----------------
TOTAL $ - $ -
----------------- -----------------
TOTAL SALES
Steel mills $ 3,180,640 $ 1,821,776
Downstream products 517,664 304,088
Corp/eliminations/other (688,450) (314,693)
----------------- -----------------
TOTAL $ 3,009,854 $ 1,811,171
----------------- -----------------
OPERATING INCOME (LOSS):
Steel mills $ 428,810 $ (3,067)
Downstream products 18,871 10,655
Corp/eliminations/other (74,405) (16,931)
----------------- -----------------
TOTAL $ 373,276 $ (9,343)
----------------- -----------------
DEPRECIATION AND AMORTIZATION EXPENSE
Steel mills $ 60,693 $ 65,108
Downstream products 7,523 4,383
Corp/eliminations/other 13,646 6,859
----------------- -----------------
TOTAL $ 81,862 $ 76,350
----------------- -----------------
SEGMENT ASSETS
Steel mills $ 1,848,390 $ 1,368,839
Downstream products 265,833 169,599
Corp/eliminations/other 467,800 127,102
----------------- -----------------
TOTAL $ 2,582,023 $ 1,665,540
----------------- -----------------
SEGMENT GOODWILL
Steel mills $ 58,494 $ 58,494
Downstream products 25,389 19,237
Corp/eliminations/other 38,833 38,833
----------------- -----------------
TOTAL $ 122,716 $ 116,564
----------------- -----------------
CAPITAL EXPENDITURES
Steel mills $ 74,797 $ 51,100
Downstream products 3,274 2,198
Corp/eliminations/other 4,078 1,853
----------------- -----------------
TOTAL $ 82,149 $ 55,151
----------------- -----------------
54 FINANCIAL STATEMENTS
Geographic data is as follows:
UNITED STATES CANADA TOTAL
------------- --------- ------------
DECEMBER 31, 2004
REVENUE FROM EXTERNAL CUSTOMERS $ 2,480,627 $ 529,227 $ 3,009,854
LONG-LIVED ASSETS 634,325 285,537 919,862
DECEMBER 31, 2003
REVENUE FROM EXTERNAL CUSTOMERS $ 1,348,107 $ 463,064 $ 1,811,171
LONG-LIVED ASSETS 530,793 264,270 795,063
YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- -----------------
REVENUES BY PRODUCT LINES
MILL FINISHED GOODS:
Stock rebar $ 627,765 $ 459,122
Merchant bar/special sections 1,247,004 834,832
Rod 423,516 205,561
----------------- -----------------
TOTAL MILL FINISHED GOODS 2,298,285 1,499,515
----------------- -----------------
BILLETS 10,442 18,910
----------------- -----------------
TOTAL MILL PRODUCTS 2,308,727 1,518,425
----------------- -----------------
OTHER MILL SEGMENTS 183,463 -
FABRICATING AND DOWNSTREAM 517,664 292,746
----------------- -----------------
TOTAL SEGMENT REVENUES $ 3,009,854 $ 1,811,171
----------------- -----------------
NOTE 18 - DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The Company's consolidated financial statements are prepared in accordance with
U.S. generally accepted accounting principles ("GAAP"). The Company makes
available to all shareholders consolidated financial statements prepared in
accordance with Canadian GAAP and files these financial statements with Canadian
regulatory authorities. Results reported under Canadian GAAP may differ from
results reported under U.S. GAAP. The most significant differences between
United States and Canadian GAAP, in terms of impact on the Company's
consolidated financial statements, relate to the accounting for joint ventures,
pensions and the reporting of comprehensive income.
The following tables reconcile the consolidated statements of earnings (loss) as
reported under U.S. GAAP with those that would have been reported under Canadian
GAAP:
YEAR ENDED ($000s) 2004 2003
- ----------------------------------------- --------- -----------
NET INCOME (LOSS) - U.S. GAAP $ 337,669 $ (26,694)
ADJUSTMENT TO PURCHASE PRICE ALLOCATION
RELATING TO DIFFERENCES UNDER CANADIAN
GAAP (NET OF TAX) (a) 1,360 2,599
MAINTENANCE SHUTDOWN
ACCRUAL (NET OF TAX) (f) 2,507 -
--------- -----------
NET INCOME (LOSS) - CANADIAN GAAP $ 341,536 $ (24,095)
--------- -----------
EARNINGS (LOSS) PER SHARE - CANADIAN GAAP
Basic $ 1.47 $ (0.12)
Diluted $ 1.46 $ (0.12)
55 FINANCIAL STATEMENTS
(a) ADJUSTMENT TO PURCHASE PRICE ALLOCATION RELATING TO DIFFERENCES UNDER
CANADIAN GAAP
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. 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
U.S. GAAP as well as a difference in the treatment for accounting for
convertible debentures at the time of purchase, a permanent difference resulted
from 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 U.S. GAAP, the negative
goodwill is allocated to property, plant and equipment and investment in
subsidiary. As a result, there is a difference in depreciation expense. Also,
due to the difference in accounting for convertible debentures at the time of
purchase, there is a difference in interest expense.
(b) 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. Under Canadian GAAP,
there is no comprehensive income.
(c) DERIVATIVE INSTRUMENTS
The Company early adopted CICA Handbook Accounting Guideline AcG-13 as of
January 1, 2004. This section changed the accounting for derivatives under
Canadian GAAP. As a result of the adoption of this section, there is no
difference in accounting for the Company's interest rate swaps under U.S. and
Canadian GAAP. In accordance with section 1506, prior periods have been restated
to reflect the change in accounting.
(d) ACCUMULATED UNFUNDED PENSION LIABILITY
Under U.S. GAAP, the Company recognizes 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.
(e) CHANGE IN ACCOUNTING POLICIES - CONVERTIBLE DEBENTURES
Under Canadian GAAP, the Company early adopted CICA Handbook Section 3860.20A,
Financial Instruments - Disclosure and Presentation in fiscal 2003. This section
requires that the Company's convertible debentures be treated as liabilities
instead of equity and for the related interest to be included in the statement
of earnings (loss) instead of as a change to retained earnings. This change was
adopted as of and for the year ended December 31, 2003. Prior periods have been
restated to reflect the change in accounting. As a result of the adoption of
this accounting policy, there is no difference in the treatment of convertible
debentures between U.S. and Canadian GAAP; however, a basis difference exists
related to the purchase price allocation.
(f) MAINTENANCE SHUTDOWN ACCRUAL
Under U.S. GAAP, the Company accrues for scheduled annual maintenance shutdowns.
Canadian GAAP does not allow this accounting practice.
56 FINANCIAL STATEMENTS
The following table indicates the cumulative effect of the above adjustments on
balance sheet accounts, displaying results under Canadian GAAP and U.S. GAAP:
CANADIAN GAAP UNITED STATES GAAP
DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
------------- ---------- ------------- ------------
ASSETS
CURRENT ASSET $ 1,456,683 $ 655,125 $ 1,339,693 $ 601,988
PROPERTY, PLANT AND EQUIPMENT 1,036,840 919,207 919,862 795,063
GOODWILL 122,716 116,564 122,716 116,564
OTHER ASSETS 18,662 31,312 199,752 151,925
------------- ---------- ------------- ------------
LIABILITIES
CURRENT LIABILITIES (EXCLUDING INDEBTEDNESS) 502,191 319,171 479,005 296,431
CURRENT PORTION OF LONG-TERM DEBT 4,713 3,305 4,644 2,774
LONG-TERM DEBT 434,532 566,963 432,823 562,703
OTHER LONG-TERM LIABILITIES 250,781 220,258 262,009 216,521
DEFERRED INCOME TAXES 55,682 64,355 38,778 53,504
------------- ---------- ------------- ------------
SHAREHOLDERS' EQUITY
INVESTED CAPITAL 1,008,511 547,601 1,008,511 547,601
RETAINED EARNINGS (DEFICIT) 318,770 (22,766) 311,853 (25,816)
CUMULATIVE TRANSLATION ADJUSTMENT 59,721 23,321 - -
OTHER COMPREHENSIVE INCOME (b) - - 44,400 11,822
------------- ---------- ------------- ------------
Changes in shareholders' equity under Canadian GAAP were as follows:
YEAR ENDED DECEMBER 31, 2004 2003
- ----------------------------------------- ----------- ----------
SHAREHOLDERS' EQUITY AT BEGINNING OF YEAR $ 548,156 $ 513,964
NET EARNINGS (LOSS) 341,536 (24,095)
EMPLOYEE STOCK OPTION 707 -
STOCK ISSUANCE 460,203 -
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 36,400 24,086
MINORITY INTEREST EXCHANGE - 34,201
----------- ----------
SHAREHOLDERS' EQUITY AT END OF PERIOD $ 1,387,002 $ 548,156
----------- ----------
The difference in consolidated shareholders' equity may be reconciled as
follows:
YEAR ENDED DECEMBER 31, 2004 2003
- ------------------------------------------- ----------- ----------
SHAREHOLDERS' EQUITY BASED ON U.S. GAAP $ 1,364,764 $ 533,607
ADJUST PURCHASE PRICE 4,410 3,050
MAINTENANCE SHUTDOWN ACCRUAL 2,507 -
ACCUMULATED UNFUNDED PENSION (d) 15,321 11,499
CUMULATIVE INCREASE IN NET EARNINGS UNDER
CANADIAN GAAP 22,238 14,549
----------- ----------
SHAREHOLDERS' EQUITY BASED ON CANADIAN GAAP $ 1,387,002 $ 548,156
----------- ----------
There are no significant differences with respect to the consolidated statement
of cash flows between U.S. GAAP and Canadian GAAP.
In 2003, results were originally presented in accordance with Canadian GAAP.
Beginning in 2004, the Company is reporting financial results under U.S. GAAP.
Prior year results have been presented under U.S. GAAP for comparative purposes.
The following statements present Canadian GAAP results restated for newly
adopted accounting principles (see (c) and (e) above) as compared to prior
periods as restated in U.S. GAAP. Differences between Canadian GAAP and U.S.
GAAP are described above.
57 FINANCIAL STATEMENTS
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES CONSOLIDATED
BALANCE SHEETS
(US$ in thousands)
DECEMBER 31, 2003
CANADIAN GAAP
(RESTATED) U.S. GAAP
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 10,459 $ 9,950
Accounts receivable, net 233,331 205,226
Inventories 376,458 352,842
Deferred tax assets 13,269 13,269
Other current assets 21,608 20,701
------------- -------------
TOTAL CURRENT ASSETS 655,125 601,988
------------- -------------
INVESTMENTS - 118,630
PROPERTY, PLANT AND EQUIPMENT 919,207 795,063
GOODWILL 116,564 116,564
DEFERRED FINANCING COSTS 16,063 16,063
DEFERRED TAX ASSETS 15,045 17,160
OTHER ASSETS 204 72
------------- -------------
TOTAL ASSETS $ 1,722,208 $ 1,665,540
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 231,352 $ 208,612
Accrued salaries, wages and employee
benefits 29,732 29,732
Accrued interest 23,730 23,730
Other current liabilities 34,357 34,357
Current portion of long-term borrowings 3,305 2,774
------------- -------------
TOTAL CURRENT LIABILITIES 322,476 299,205
------------- -------------
LONG-TERM BORROWINGS, LESS CURRENT PORTION 566,963 562,703
CONVERTIBLE DEBENTURES 96,719 78,302
ACCRUED BENEFIT OBLIGATIONS 74,354 93,047
OTHER LIABILITIES 49,185 45,172
DEFERRED TAX LIABILITIES 64,355 53,504
------------- -------------
TOTAL LIABILITIES 1,174,052 1,131,933
------------- -------------
SHAREHOLDERS' EQUITY
Capital stock 547,601 547,601
Accumulated deficit (22,766) (25,816)
Accumulated other comprehensive income - 11,822
Cumulative translation adjustment 23,321 -
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 548,156 533,607
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,722,208 $ 1,665,540
------------- -------------
58 FINANCIAL STATEMENTS
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(US$ in Thousands, Except Earnings Per Share Data)
YEAR ENDED DECEMBER 31, 2003
CANADIAN GAAP
(RESTATED) U.S. GAAP
------------- ----------
NET SALES $ 2,035,350 $1,811,171
OPERATING EXPENSES
Cost of sales 1,867,389 1,668,478
Selling and administrative 87,247 81,565
Depreciation 83,252 71,951
Other operating income (1,244) (1,480)
------------- ----------
2,036,644 1,820,514
------------- ----------
LOSS FROM OPERATIONS (1,294) (9,343)
EARNINGS FROM JOINT VENTURES - 7,667
------------- ----------
LOSS BEFORE OTHER EXPENSES AND INCOME TAXES (1,294) (1,676)
OTHER EXPENSES
Interest, net 55,200 59,880
Foreign exchange loss 726 726
Amortization of deferred financing costs 4,664 4,399
------------- ----------
60,590 65,005
------------- ----------
LOSS BEFORE INCOME TAXES (61,884) (66,681)
INCOME TAX BENEFIT (37,572) (39,770)
------------- ----------
LOSS BEFORE MINORITY INTEREST (24,312) (26,911)
MINORITY INTEREST 217 217
------------- ----------
NET LOSS $ (24,095) $ (26,694)
------------- ----------
LOSS PER COMMON SHARE - BASIC $ (0.12) $ (0.14)
LOSS PER COMMON SHARE - DILUTED $ (0.12) $ (0.14)
59 FINANCIAL STATEMENTS
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$ in Thousands)
YEAR ENDED DECEMBER 31, 2003
CANADIAN GAAP
(RESTATED) U.S. GAAP
------------- ----------
OPERATING ACTIVITIES
NET LOSS $ (24,095) $ (26,694)
ADJUSTMENT TO RECONCILE NET LOSS
TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 83,252 71,951
Amortization 4,664 4,399
Deferred income taxes (25,016) (22,327)
Gain on disposition of property, plant and equipment 192 (45)
Unrealized foreign exchange on related party loans 7,241 7,241
Income from joint ventures - (7,667)
Distributions from joint ventures - 3,620
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF ACQUISITIONS:
Accounts receivable (51,072) (42,406)
Inventories (263) 2,577
Other assets (6,054) (5,437)
Liabilities 55,043 51,672
--------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 43,892 36,884
--------- ----------
INVESTING ACTIVITIES
Additions to property, plant and equipment (59,203) (55,151)
Proceeds from dispositions 2,643 2,643
--------- ----------
NET CASH USED IN INVESTING ACTIVITIES (56,560) (52,508)
--------- ----------
FINANCING ACTIVITIES
Proceeds from issuance of new debt 542,357 542,357
Revolving credit payments (519,448) (513,182)
Additions to deferred financing costs (15,639) (15,639)
Changes in minority interest (217) (217)
--------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,053 13,319
--------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (287) (287)
--------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (5,902) (2,592)
--------- ----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,361 12,542
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,459 $ 9,950
--------- ----------
60 FINANCIAL STATEMENTS
NOTE 19 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued a
revised Statement of Financial Accounting Standard (SFAS) No. 123, "Share Based
Payment." The revised SFAS No. 123 requires that the fair value of stock options
be recorded in the results of operations beginning with the first interim or
annual period after June 15, 2005. The pro forma disclosures permitted under
SFAS 123 will no longer be an alternative to financial statement recognition.
The Company expects to adopt this revised standard as of July 1, 2005. The
Company is currently evaluating the requirements of SFAS 123R and expect that
the adoption will not have a material impact on consolidated results of
operations and earnings per share; however, the effect of adopting the new rule
is dependent on the number of options granted in the future; the terms of those
awards and their fair values. The Company has not yet determined the method of
adoption or the effect of adopting SFAS 123R, and have not determined whether
the adoption will result in amounts that are similar to the current pro forma
disclosures under SFAS 123.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs." This statement
clarifies the accounting for the abnormal amount of idle facilities expense,
freight, handling costs and wasted material. This statement requires that those
items be recognized as current-period expense. In addition the statement
requires that allocation of fixed overhead to the cost of conversion be based on
the normal capacity of the production facilities. This statement is effective
for fiscal years beginning after June 15, 2005. The Company's current inventory
accounting policy generally follows SFAS 151; therefore, the adoption of SFAS
151 will not have a significant impact on the consolidated results of
operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities," an interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements." In December 2003, the FASB
issued a revised version of FIN 46. FIN 46R addresses consolidation by business
enterprises of variable interest entities in which an enterprise absorbs a
majority of the entity's expected losses, receives a majority of the entity's
expected residual returns, or both, as a result of ownership, contractual or
other financial interest in the entity. The interpretation requires that if a
business has a controlling financial interest in a variable interest entity, the
entity must be consolidated.
The Company adopted FIN 46 as of January 1, 2004. The Company has a 50% interest
in a number of joint ventures (see note 7). Certain of these joint ventures are
considered variable interest entities under the provisions of FIN 46. The
Company has evaluated the terms of the agreements between the joint ventures and
has determined that the Company is not the primary beneficiary of the joint
venture agreements and should not be consolidated. The joint ventures were
previously accounted for under the equity method; therefore, the adoption of FIN
46 had no impact on the Company for the year ended December 31, 2004.
NOTE 20 - FINANCIAL INFORMATION RELATED TO SUBSIDIARY GUARANTORS
Consolidating financial information related to the Company and its Subsidiary
Guarantors and non-Guarantors as of December 31, 2004 and December 31, 2003, and
for the years ended December 31, 2004, and December 31, 2003, is disclosed to
comply with the reporting requirements of the Company's Subsidiary Guarantors.
The Subsidiary Guarantors are wholly owned subsidiaries of the Company, that
have fully and unconditionally guaranteed 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.
Consolidating financial information follows:
61 FINANCIAL STATEMENTS
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
December 31, 2004
(US$ in Thousands)
GERDAU
AMERISTEEL NON-
GUSAP CORPORATION GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ - $ 51,212 $ 36,020 $ 900 $ - $ 88,132
Restricted cash and cash equivalents - - 465 - - 465
Accounts receivable, net - 65,972 292,766 1,641 - 360,379
Inventories - 128,942 721,036 3,177 - 853,155
Deferred tax assets - - 8,754 - - 8,754
Other current assets - 2,453 26,286 69 - 28,808
--------- ----------- ---------- ---------- ------------ ------------
TOTAL CURRENT ASSETS - 248,579 1,085,327 5,787 - 1,339,693
--------- ----------- ---------- ---------- ------------ ------------
INVESTMENT IN SUBSIDIARIES 445,946 768,071 230,954 8,786 (1,275,962) 177,795
PROPERTY, PLANT AND EQUIPMENT - 192,887 723,805 3,170 - 919,862
GOODWILL - - 118,029 4,687 - 122,716
DEFERRED FINANCING COSTS 9,557 109 3,916 34 - 13,616
DEFERRED TAX ASSETS - 21,570 (13,336) - - 8,234
OTHER ASSETS - (21) 128 - - 107
--------- ----------- ---------- ---------- ------------ ------------
TOTAL ASSETS $ 455,503 $ 1,231,195 $2,148,823 $ 22,464 $ (1,275,962) $ 2,582,023
--------- ----------- ---------- ---------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ - $ 75,200 $ 219,513 $ 288 $ - $ 295,001
Intercompany 5,076 (315,055) 433,695 (123,716) - -
Accrued salaries, wages and employee
benefits - 6,465 49,961 2 - 56,428
Accrued Interest 19,259 1,177 635 - - 21,071
Other current liabilities (447) 9,687 44,582 893 - 54,715
Acquisition liability - - 51,790 - - 51,790
Current portion of long-term
borrowings - 104 4,092 448 - 4,644
--------- ----------- ---------- ---------- ------------ ------------
TOTAL CURRENT LIABILITIES 23,888 (222,422) 804,268 (122,085) - 483,649
--------- ----------- ---------- ---------- ------------ ------------
LONG-TERM BORROWINGS 397,986 1,518 31,032 2,287 - 432,823
CONVERTIBLE DEBENTURE - 86,510 - - - 86,510
RELATED PARTY BORROWINGS - 11,702 (11,702) - - -
ACCRUED BENEFIT OBLIGATION - 59,393 47,781 - - 107,174
OTHER LIABILITIES - 1,062 67,263 - - 68,325
DEFERRED TAX LIABILITIES - - 37,850 928 - 38,778
--------- ----------- ---------- ---------- ------------ ------------
TOTAL LIABILITIES 421,874 (62,237) 976,492 (118,870) - 1,217,259
--------- ----------- ---------- ---------- ------------ ------------
SHAREHOLDERS' EQUITY
Capital Stock 61,109 1,264,920 1,020,001 30,471 (1,367,990) 1,008,511
Retained earnings (accumulated
deficit) (17,849) 54,899 154,982 116,325 3,496 311,853
Accumulated other comprehensive
income (9,631) (26,387) (2,652) (5,462) 88,532 44,400
TOTAL SHAREHOLDERS' EQUITY 33,629 1,293,432 1,172,331 141,334 (1,275,962) 1,364,764
--------- ----------- ---------- ---------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 455,503 $ 1,231,195 $2,148,823 $ 22,464 $ (1,275,962) $ 2,582,023
--------- ----------- ---------- ---------- ------------ ------------
62 FINANCIAL STATEMENTS
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
December 31, 2003
(US$ in Thousands)
GERDAU
AMERISTEEL NON-
GUSAP CORPORATION GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ - $ 3,033 $ 5,813 $ 1,104 $ - $ 9,950
Accounts receivable, net - 45,425 158,475 1,326 - 205,226
Inventories - 71,477 279,976 1,389 - 352,842
Deferred tax assets - - 13,269 - - 13,269
Other current assets - 6,101 14,495 105 - 20,701
--------- ----------- ---------- ---------- ------------ ------------
TOTAL CURRENT ASSETS - 126,036 472,028 3,924 - 601,988
--------- ----------- ---------- ---------- ------------ ------------
INVESTMENT IN SUBSIDIARIES 445,946 687,222 290,969 162,126 (1,467,633) 118,630
PROPERTY, PLANT AND EQUIPMENT - 175,654 616,037 3,372 - 795,063
GOODWILL - - 111,877 4,687 - 116,564
DEFERRED FINANCING COSTS 10,977 145 4,902 39 - 16,063
DEFERRED TAX ASSETS - 34,253 (52,185) 35,092 - 17,160
OTHER ASSETS - 124 (52) - - 72
--------- ----------- ---------- ---------- ------------ ------------
TOTAL ASSETS $ 456,923 $ 1,023,434 $1,443,576 $ 209,240 $ (1,467,633) $ 1,665,540
--------- ----------- ---------- ---------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ - $ 44,798 $ 163,065 $ 749 $ - $ 208,612
Intercompany 4,696 111,628 - - (116,324) -
Accrued salaries, wages and employee
benefits - 3,297 26,435 - - 29,732
Accrued Interest 21,360 1,433 937 - - 23,730
Other current liabilities (895) 10,873 23,558 821 - 34,357
Current portion of long-term
borrowings - - 2,322 452 - 2,774
--------- ----------- ---------- ---------- ------------ ------------
TOTAL CURRENT LIABILITIES 25,161 172,029 216,317 2,022 (116,324) 299,205
--------- ----------- ---------- ---------- ------------ ------------
LONG-TERM BORROWINGS 397,271 75,078 87,669 2,685 - 562,703
CONVERTIBLE DEBENTURE - 78,302 - - - 78,302
RELATED PARTY BORROWINGS - (72,681) 73,127 (115,437) 114,991 -
ACCRUED BENEFIT OBLIGATION - 51,076 41,971 - - 93,047
OTHER LIABILITIES - 53 45,119 - - 45,172
DEFERRED TAX LIABILITIES - - 53,504 - - 53,504
--------- ----------- ---------- ---------- ------------ ------------
TOTAL LIABILITIES 422,432 303,857 517,707 (110,730) (1,333) 1,131,933
--------- ----------- ---------- ---------- ------------ ------------
SHAREHOLDERS' EQUITY
Capital Stock 61,109 727,862 951,354 317,220 (1,509,944) 547,601
Retained earnings (accumulated
deficit) (16,987) 29,659 (58,405) 20,183 (266) (25,816)
Accumulated other comprehensive
income (9,631) (37,944) 32,920 (17,433) 43,910 11,822
TOTAL SHAREHOLDERS' EQUITY 34,491 719,577 925,869 319,970 (1,466,300) 533,607
--------- ----------- ---------- ---------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 456,923 $ 1,023,434 $1,443,576 $ 209,240 $ (1,467,633) $ 1,665,540
--------- ----------- ---------- ---------- ------------ ------------
63 FINANCIAL STATEMENTS
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2004
(US$ in Thousands)
GERDAU
AMERISTEEL NON-
GUSAP CORPORATION GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ---------- ---------- ------------ ------------
OPERATING ACTIVITIES
NET (LOSS) INCOME $ (862) $ 32,002 $ 347,706 $ 2,942 $ (44,119) $ 337,669
ADJUSTMENT TO RECONCILE NET INCOME (LOSS)
TO NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES:
Depreciation - 17,941 61,166 204 - 79,311
Amortization 1,463 45 1,043 - - 2,551
Deferred income taxes - 14,115 (6,652) - - 7,463
Income from joint ventures - - 141,474) - - (141,474)
Distributions from joint ventures - - 82,803 - - 82,803
CHANGES IN OPERATING ASSETS AND
LIABILITIES,
NET OF ACQUISITIONS:
Accounts receivable - (15,430) 2,352 (277) - (13,355)
Inventories - (49,523) (227,368) (1,788) - (278,679)
Other assets - 354 (9,883) (2) - (9,531)
Liabilities (1,316) (294,647) 355,124 (939) - 58,222
NET CASH (USED IN) PROVIDED BY OPERATING
--------- ----------- ---------- ---------- ------------ ------------
ACTIVITIES (715) (295,143) 464,817 140 (44,119) 124,980
--------- ----------- ---------- ---------- ------------ ------------
INVESTING ACTIVITIES
Intercompany investments - - (44,119) - 44,119 -
Additions to property, plant
and equipment - (28,457) (53,690) (2) - (82,149)
Acquisitions - (21,316) (277,106) - - (298,422)
Sales of short-term investments - - 60,051 - - 60,051
Purchases of short-term investments - - (60,051) - - (60,051)
NET CASH PROVIDED BY (USED IN) INVESTING
--------- ----------- ---------- ---------- ------------ ------------
ACTIVITIES - (49,773) (374,915) (2) 44,119 (380,571)
--------- ----------- ---------- ---------- ------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of new debt - - 25,000 - - 25,000
Revolving credit borrowings (payments) 715 (71,509) (84,434) (402) - (155,630)
Change in restricted cash - - (465) - - (465)
Proceeds from issuance of employee
stock purchases - 698 9 - 707
Proceeds from issuance of common stock - 460,203 - - - 460,203
NET CASH PROVIDED BY (USED IN) FINANCING
--------- ----------- ---------- ---------- ------------ ------------
ACTIVITIES 715 389,392 (59,890) (402) - 329,815
--------- ----------- ---------- ---------- ------------ ------------
Effect of exchange rate changes - 3,703 195 60 - 3,958
INCREASE (DECREASE) IN CASH AND CASH
--------- ----------- ---------- ---------- ------------ ------------
EQUIVALENTS - 48,179 30,207 (204) - 78,182
--------- ----------- ---------- ---------- ------------ ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD - 3,033 5,813 1,104 - 9,550
--------- ----------- ---------- ---------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ 51,212 $ 36,020 $ 900 $ - $ 88,132
--------- ----------- ---------- ---------- ------------ ------------
64 FINANCIAL STATEMENTS
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003
(US$ in Thousands)
GERDAU
AMERISTEEL NON-
GUSAP CORPORATION GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ---------- ---------- ------------ ------------
OPERATING ACTIVITIES
NET (LOSS) INCOME $ (17,305) $ (15,526) $ (6,049) $ 12,291 $ (105) $ (26,694)
ADJUSTMENT TO RECONCILE NET (LOSS)
INCOME TO NET CASH (USED IN) PROVIDED
BY OPERATING ACTIVITIES:
Depreciation - 14,534 57,177 240 - 71,951
Amortization 2,094 5,321 (1,133) (1,883) - 4,399
Deferred income taxes - (6,582) (15,547) (198) - (22,327)
Gain (Loss) on disposition of property,
plant and equipment - - (45) - - (45)
Foreign exchange on related party loans 4,707 2,534 - - - 7,241
Income from joint ventures - - (7,667) - - (7,667)
Distributions from joint ventures - - 3,620 - 3,620
CHANGES IN OPERATING ASSETS AND
LIABILITIES, NET OF ACQUISITIONS:
Accounts receivable - (1,311) (38,892) (2,203) - (42,406)
Inventories - 593 (3,641) 5,625 - 2,577
Other assets 1,201 (3,246) (3,864) 472 - (5,437)
Liabilities 20,400 40,703 (13,587) 4,156 - 51,672
Intercompany - 129,449 (88,555) 2,668 (43,562) -
--------- ----------- ---------- ---------- ------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 11,097 166,469 (118,183) 21,168 (43,667) 36,884
--------- ----------- ---------- ---------- ------------ ------------
INVESTING ACTIVITIES
Investments (362,715) (840,572) (682,795) (108,024) 1,994,106 -
Additions to property, plant and
equipment - (7,979) (43,120) (4,052) - (55,151)
Proceeds from dispositions - - 2,643 - - 2,643
--------- ----------- ---------- ---------- ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (362,715) (848,551) (723,272) (112,076) 1,994,106 (52,508)
--------- ----------- ---------- ---------- ------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of new debt 357,941 (61,281) (191,321) - 437,018 542,357
Revolving credit payments - (110,567) (52,252) (6,658) (343,705) (513,182)
Increase in related party loans
payable (34,069) (21,096) 222,827 (119,022) (48,640) -
Additions to deferred financing (10,977) - (4,662) - - (15,639)
Changes in minority interest - - (217) - - (217)
Proceeds from issuance of common stock 38,723 869,228 874,551 212,610 (1,995,112) -
--------- ----------- ---------- ---------- ------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 351,618 676,284 848,926 86,930 (1,950,439) 13,319
--------- ----------- ---------- ---------- ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES - (287) - - - (287)
--------- ----------- ---------- ---------- ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS - (6,085) 7,471 (3,978) - (2,592)
--------- ----------- ---------- ---------- ------------ ------------
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD - 9,118 (1,658) 5,082 - 12,542
--------- ----------- ---------- ---------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ - $ 3,033 $ 5,813 $ 1,104 $ - $ 9,950
--------- ----------- ---------- ---------- ------------ ------------
65 FINANCIAL STATEMENTS
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 2004
(US$ in Thousands)
GERDAU
AMERISTEEL NON-
GUSAP CORPORATION GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ---------- ---------- ------------ ------------
NET SALES $ - $ 601,196 $2,387,684 $ 20,974 $ - $ 3,009,854
OPERATING EXPENSES
Cost of sales - 503,954 1,930,478 16,513 - 2,450,945
Selling and administrative - 12,538 95,834 1,012 - 109,384
Depreciation - 17,941 61,166 204 - 79,311
Other operating income - 143 (3,205) - - (3,062)
--------- ----------- ---------- ---------- ------------
- 534,576 2,084,273 17,729 - 2,636,578
--------- ----------- ---------- ---------- ------------
INCOME FROM OPERATIONS - 66,620 303,411 3,245 - 373,276
EARNINGS FROM JOINT VENTURES - - 141,474 - - 141,474
--------- ----------- ---------- ---------- ------------
INCOME BEFORE OTHER EXPENSES & INCOME
TAXES - 66,620 444,885 3,245 - 514,750
OTHER EXPENSES
Interest, net 42,715 5,930 7,528 157 - 56,330
Foreign exchange loss (gain) 26 9,683 (1,581) (5) - 8,123
Amortization of deferred financing costs 1,463 45 1,043 - - 2,551
--------- ----------- ---------- ---------- ------------
44,204 15,658 6,990 152 - 67,004
--------- ----------- ---------- ---------- ------------
(LOSS) INCOME BEFORE TAXES & MINORITY
INTEREST (44,204) 50,962 437,895 3,093 - 447,746
INCOME TAX EXPENSE 777 18,960 90,189 151 - 110,077
--------- ----------- ---------- ---------- ------------
(LOSS) INCOME BEFORE DIVIDEND INCOME (44,981) 32,002 347,706 2,942 - 337,669
DIVIDEND INCOME 44,119 - - - (44,119) -
--------- ----------- ---------- ---------- ------------ ------------
NET INCOME (LOSS) $ (862) $ 32,002 $ 347,706 $ 2,942 $ (44,119) $ 337,669
--------- ----------- ---------- ---------- ------------ ------------
66 FINANCIAL STATEMENTS
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF EARNINGS (LOSS)
YEAR ENDED DECEMBER 31, 2003
(US$ in Thousands)
GERDAU
AMERISTEEL NON-
GUSAP CORPORATION GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ----------- ---------- ---------- ------------ ------------
NET SALES $ - $ 349,728 $1,450,241 $ 16,708 $ (5,506) $ 1,811,71
OPERATING EXPENSES
Cost of sales - 319,105 1,340,053 14,833 (5,513) 1,668,478
Selling and administrative 3 13,088 67,453 909 112 81,565
Depreciation - 14,534 57,177 240 - 71,951
Other operating income - (3,670) 2,242 (52) - (1,480)
3 343,057 1,466,925 15,930 (5,401) 1,820,514
--------- ----------- ---------- ---------- ------------ ------------
INCOME FROM OPERATIONS (3) 6,671 (16,684) 778 (105) (9,343)
EARNINGS FROM JOINT VENTURES - - 7,667 - - 7,667
--------- ----------- ---------- ---------- ------------ ------------
INCOME BEFORE OTHER EXPENSES & INCOME TAXES (3) 6,671 (9,017) 778 (105) (1,676)
OTHER EXPENSES
Interest, net 23,539 26,627 19,337 (9,623) - 59,880
Foreign exchange loss (gain) (8,402) 1,613 7,423 92 - 726
Amortization of deferred financing costs 2,094 5,321 (1,133) (1,883) - 4,399
--------- ----------- ---------- ---------- ------------
17,231 33,561 25,627 (11,414) - 65,005
--------- ----------- ---------- ---------- ------------
(LOSS) INCOME BEFORE TAXES & MINORITY
INTEREST (17,234) (26,890) (34,644) 12,192 (105) (66,681)
INCOME TAX EXPENSE (BENEFIT) 71 (11,364) (28,378) (99) - (39,770)
--------- ----------- ---------- ---------- ------------ ------------
(LOSS) INCOME BEFORE MINORITY INTEREST (17,305) (15,526) (6,266) 12,291 (105) (26,911)
MINORITY INTEREST - - 217 - - 217
--------- ----------- ---------- ---------- ------------ ------------
NET INCOME (LOSS) $ (17,305) $ (15,526) $ (6,049) $ 12,291 $ (105) $ (26,694)
--------- ----------- ---------- ---------- ------------ ------------
ADDITIONAL DISCLOSURE
CERTIFICATIONS AND DISCLOSURE REGARDING CONTROLS AND PROCEDURES.
(a) Certifications. See Exhibits 99.1 and 99.2 to this Annual Report on Form
40-F.
(b) Disclosure Controls and Procedures. As of the end of the registrant's
fiscal year ended December 31, 2004, an evaluation of the effectiveness of
the registrant's "disclosure controls and procedures" (as such term is
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) was carried out by the registrant's
principal executive officer and principal financial officer. Based upon
that evaluation, the registrant's principal executive officer and
principal financial officer have concluded that as of the end of that
fiscal year, the registrant's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the
registrant in reports that it files or submits under the Exchange Act is
(i) recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms and (ii)
accumulated and communicated to the registrant's management, including its
principal executive officer and principal financial officer, to allow
timely decisions regarding required disclosure.
It should be noted that while the registrant's principal executive officer
and principal financial officer believe that the registrant's disclosure
controls and procedures provide a reasonable level of assurance that they
are effective, they do not expect that the registrant's disclosure
controls and procedures or internal control over financial reporting will
prevent all errors and fraud. A control system, no matter how well
conceived or operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.
(c) Internal Controls and Changes in Internal Control Over Financial
Reporting. During the fiscal year ended December 31, 2004, there were no
changes in the registrant's internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect,
the registrant's internal control over financial reporting.
NOTICES PURSUANT TO REGULATION BTR.
None.
AUDIT COMMITTEE FINANCIAL EXPERT.
The required disclosure is included under the heading "Audit Committee" in the
registrant's Annual Information Form for the fiscal year ended December 31,
2004, filed as part of this Annual Report on Form 40-F.
CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to its senior executive
officers, including its chief executive officer, chief financial officer, , the
controller and all of the other persons employed by the registrant or its
subsidiaries who have significant responsibility for preparing or overseeing the
preparation of the registrant's financial statements and other financial data
included in the registrant's periodic reports to the Canadian securities
regulatory authorities and the U.S. Securities and Exchange Commission and in
other public communications made by the registrant ("Code of Ethics Applicable
to Senior Executives"). The registrant has also adopted a code of ethics and
business conduct ("Code of Ethics and Business Conduct") that is applicable to
all directors, officers and employees. You can view our Code of Ethics
Applicable to Senior Executives and Code of Ethics and Business Conduct on our
website at www.gerdauameristeel.com
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The required disclosure is included under the heading "Audit Fees" in the
registrant's Annual Information Form for the fiscal year ended December 31,
2004, filed as part of this Annual Report on Form 40-F.
PRE-APPROVAL POLICIES AND PROCEDURES.
The required disclosure is included under the heading "Pre-Approval Policies and
Procedures" in the registrant's Annual Information Form for the fiscal year
ended December 31, 2004, filed as part of this Annual Report on Form 40-F.
OFF-BALANCE SHEET ARRANGEMENTS.
The required disclosure is included under the heading "Off-Balance Sheet
Arrangements" in the registrant's Management's Discussion and Analysis of
Financial Condition and Results of Operations for the fiscal year ended December
31, 2004, filed as part of this Annual Report on Form 40-F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS.
The required disclosure is included under the heading "Contractual Obligations"
in the registrant's Management's Discussion and Analysis of Financial Condition
and Results of Operations for the fiscal year ended December 31, 2004, filed as
part of this Annual Report on Form 40-F.
IDENTIFICATION OF THE AUDIT COMMITTEE
The required disclosure is under the heading "Audit Committee" in the
registrant's Annual Information Form for the fiscal year ended December 31,
2004, filed as part of this Annual Report on Form 40-F.
ADDITIONAL DISCLOSURE REQUIRED BY THE NEW YORK STOCK EXCHANGE
Director Independence
The required disclosure is included under the heading "Director Independence" in
the registrant's Annual Information Form for the fiscal year ended December 31,
2004, filed as part of this Annual Report on Form 40-F.
Presiding Director at Meetings
The required disclosure is included under the heading "Presiding Director at
Meetings" in the registrant's Annual Information Form for the fiscal year ended
December 31, 2004, filed as part of this Annual Report on Form 40-F.
Communication with Non-Management Directors
The required disclosure is included under the heading "Communication with
Non-Management Directors" in the registrant's Annual Information Form for the
fiscal year ended December 31, 2004, filed as part of this Annual Report on Form
40-F.
Corporate Governance
The required disclosure is included under the heading "Corporate Governance" in
the registrant's Annual Information Form for the fiscal year ended December 31,
2004, filed as part of this Annual Report on Form 40-F.
Board Committee Mandates
The required disclosure is included under the heading "Board Committee Mandates"
in the registrant's Annual Information Form for the fiscal year ended December
31, 2004, filed as part of this Annual Report on Form 40-F.
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
A. UNDERTAKING.
The registrant undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Securities and Exchange
Commission (the "Commission") staff, and to furnish promptly, when requested to
do so by the Commission staff, information relating to: the securities
registered pursuant to Form 40-F; the securities in relation to which the
obligation to file an annual report on Form 40-F arises; or transactions in said
securities.
B. CONSENT TO SERVICE OF PROCESS.
The Company has previously filed a Form F-X in connection with the class
of securities in relation to which the obligation to file this report arises.
Any change to the name or address of the agent for service of process of
the registrant shall be communicated promptly to the Securities and Exchange
Commission by an amendment to the Form F-X referencing the file number of the
relevant registration statement.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant certifies
that it meets all of the requirements for filing on Form 40-F and has duly
caused this annual report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 29, 2005.
GERDAU AMERISTEEL CORPORATION
By /s/ Phillip E. Casey
--------------------------------
Name: Phillip E. Casey
Title: Chief Executive Officer
EXHIBIT INDEX
Exhibit Description
- ------- -----------
99.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
or 15d-14 of the Securities Exchange Act of 1934
99.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
or 15d-14 of the Securities Exchange Act of 1934
99.3 Section 1350 Certification of Chief Executive Officer
99.4 Section 1350 Certification of Chief Financial Officer
99.5 Opinion of Ernst & Young LLP
99.6 Consent of Ernst & Young LLP
99.7 Consent of PricewaterhouseCoopers LLP