GERDAU AMERISTEEL CORPORATION
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ANNUAL INFORMATION FORM
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MAY 20, 2003
TABLE OF CONTENTS
Page
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OVERVIEW...................................................................1
CORPORATE STRUCTURE........................................................2
Name and Incorporation................................................2
Intercorporate Relationships..........................................3
GENERAL DEVELOPMENT OF THE BUSINESS........................................4
History...............................................................4
Industry and Trends...................................................4
NARRATIVE DESCRIPTION OF THE BUSINESS......................................6
Minimills.............................................................6
Downstream Operations.................................................9
Rebar Fabrication.................................................9
Railroad Spike Operations.........................................9
Cold Drawn Plants................................................10
Super Light Beam Processing and Elevator Guide Rails.............10
Wire Mesh and Collated Nails.....................................10
Our Joint Ventures...................................................10
Principal Products...................................................11
Merchant bars/special sections...................................11
Stock rebar......................................................12
Rod..............................................................12
Flat rolled sheet................................................12
Fabricated steel.................................................12
Billets..........................................................12
Marketing............................................................12
Competition..........................................................13
Competitive Conditions...........................................13
Local Competition................................................14
Foreign Competition..............................................14
Competitive Strengths............................................16
Cyclical and Seasonal Nature of the Business.........................17
Scrap, Energy and Other Raw Materials................................17
Environmental and Regulatory Matters.................................18
Employees............................................................19
Foreign Operations Risk..............................................20
Credit Facilities....................................................20
SELECTED CONSOLIDATED FINANCIAL INFORMATION...............................21
DIVIDENDS.................................................................21
MANAGEMENT'S DISCUSSION AND ANALYSIS......................................21
MARKET FOR SECURITIES.....................................................21
DIRECTORS AND OFFICERS....................................................22
AUDITORS..................................................................23
ADDITIONAL INFORMATION....................................................23
SCHEDULE A................................................................24
In this annual information form, references to "dollars" and "$" are to United
States dollars. As used in this document, unless the context otherwise requires,
(i) the "Company and "Gerdau Ameristeel" refer to Gerdau Ameristeel Corporation,
(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., and (iv) "we", "us" and "our" refers to the Company
and its subsidiaries and 50% owned joint ventures.
Our financial results are the financial results for Gerdau North America, the
predecessor company for accounting purposes, with the results of the former
Co-Steel Inc. added for the period since October 23, 2002. We also present pro
forma financial and operating information which gives effect to the combination
of Gerdau North America and Co-Steel Inc. as if the transaction had taken place
at the beginning of the applicable period. Our financial information is prepared
using Canadian generally accepted accounting principles. The results of our
three 50% owned joint ventures, including Gallatin Steel Company, are
proportionately consolidated. In addition, to be consistent with the
presentation of our financial information, information on tons shipped or
similar production information in this offering memorandum includes our 50%
share of the joint ventures' production. "Tons" refers to U.S. short or "net"
tons (i.e. 2,000 pounds). Information on net sales and tons shipped only
includes net sales and tons shipped to third parties.
Unless otherwise indicated, all information in this Annual Information Form is
given as at May 12, 2003.
OVERVIEW
We are the second largest minimill steel producer in North America with
annual manufacturing capacity of over 6.8 million tons of mill-finished steel
products. Through our vertically integrated network of 11 minimills, 13 scrap
recycling facilities and 27 downstream operations, we service the broad
geographical market of eastern North America. Our products are generally sold to
steel service centers, fabricators, or directly to original equipment
manufacturers, or OEMs, for use in a variety of industries, including the
construction, automotive, mining and equipment manufacturing industry.
Our operations are segmented into two operating divisions, minimills
and downstream businesses.
Minimills. We own and operate seven minimills in the United States and
three in Canada. We are also a 50/50 joint venture partner with Dofasco Inc. in
an eleventh minimill located in Ghent, Gallatin County, Kentucky. We manufacture
and market a wide range of steel products, including reinforcing steel bar (or
rebar) merchant bars, structural shapes, beams, special sections, coiled wire
rod (or rod) and rebar, and flat rolled sheet. Over 90% of the raw material feed
for the steel operations is derived from recycled scrap which makes us one of
the largest recycling businesses in North America. Four of our mills are
provided scrap from 13 scrap recycling operations. We believe these recycling
operations lower the overall cost of scrap used in these mills and provide a
stable supply of these mills' primary raw material.
Downstream operations. We have secondary value added steel businesses,
which we refer to as downstream operations. These steel fabricating and product
manufacturing operations process steel principally produced in our minimills.
Our downstream operations consist of the following:
- Rebar fabrication and epoxy coating- We operate one of the
largest rebar fabricating and epoxy coating groups in North
America. Our network, consisting of 15 rebar fabricating
facilities and three epoxy coating plants, services the
concrete construction industry in the eastern half of the
United States. Our rebar fabricating capacity is in excess of
500,000 tons per year. The fabricating facilities purchase
rebar from our mills at competitive market prices, and cut and
bend it to meet our customers' engineering, architectural and
other end-product specifications. Our epoxy coating plants
apply epoxy coating to rebar for rust resistant applications.
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- Railroad spike operations - Our two railroad spike operations
forge steel square bars produced at our Charlotte mill into
track spikes. We manufacture and distribute these spikes on an
annual contract basis to the railroad industry throughout
North America.
- Cold drawn plants - Our two cold drawn plants process hot
rolled merchant and light structural steel bars into cold
drawn bars with improved physical characteristics. The cold
drawn plants purchase sizeable quantities of their raw
material requirements from our minimills.
- Super light beam processing and elevator guide rails - In
accordance with rigid customer specifications, we process
super light steel beams into cross members for the truck
trailer industry and process steel guide rail sections for
elevator manufacturers.
- Wire mesh and collated nails - We produce small diameter drawn
wire from coiled steel rod. The wire is woven into sheets and
rolls of wire mesh for concrete pavement reinforcement or
converted into collated nails for use in high speed nail
machines.
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. on October 23, 2002. The registered office of the Company is located at
Hopkins Street South, Whitby, Ontario, L1N 5T1, Canada. The executive office is
located at 5100 West Lemon Street, Tampa, Florida, United States, 33609.
Subsequent to incorporation, the following amendments to the Company's
articles and constating documents were made:
- December 27, 1985 - we amalgamated with our subsidiary, Lake
Ontario Steel Company Limited;
- June 10, 1986 - our 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 our outstanding multiple voting
shares were automatically converted into subordinate voting
shares;
- April 27, 1994 - our subordinate voting shares were
redesignated as common shares;
- December 31, 2000 - 877449 Ontario Limited, a subsidiary,
amalgamated with us;
- October 23, 2002 - our name was changed to Gerdau Ameristeel
Corporation; and
- May 6, 2003 - By-law No. A2 was approved by the Company's
shareholders.
INTERCORPORATE RELATIONSHIPS
We conduct our operations directly or indirectly through subsidiaries
and joint ventures in Canada and the United States. The following chart shows
Gerdau Ameristeel and its principal operating subsidiaries. Unless otherwise
indicated, all subsidiaries are 100% owned and may be owned directly or
indirectly by an intermediate
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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.
[CHART]
Our current credit facilities prevent us from reorganizing the
relatively complex corporate structure of our operations. Once we complete the
refinancing of our current credit facilities, we will reorganize our
subsidiaries to permit an efficient integration of all aspects of our
operations. The following chart shows Gerdau Ameristeel, the principal
subsidiaries that will remain after that reorganization, their respective
operations and their jurisdictions of incorporation. Unless otherwise indicated,
all subsidiaries will be 100% owned and may be owned directly or indirectly
through an intermediate holding company.
[CHART]
GENERAL DEVELOPMENT OF THE BUSINESS
HISTORY
Gerdau S.A. made its initial investment in the North American steel
market in 1989 by acquiring Courtice Steel Inc. (now our subsidiary Gerdau
Ameristeel Cambridge Inc.), which operates a minimill in Cambridge,
Ontario, Canada. In 1995, it acquired Gerdau MRM (now our subsidiary Gerdau
Ameristeel MRM Special Sections Inc.), which operates our minimill in Selkirk,
Manitoba, Canada. In 1999, it acquired an indirect majority interest in
AmeriSteel Corporation (now our subsidiary Gerdau Ameristeel US Inc.), which we
refer to as Ameristeel, that owned four minimills, and operated rebar
fabricating plants and epoxy coating plants. In April 2001, AmeriSteel Bright
Bar, Inc., our 80%-owned subsidiary, acquired the assets of American Bright Bar,
a manufacturer of cold drawn steel bars in Orrville, Ohio. In December 2001,
Ameristeel acquired our Cartersville mill in Georgia, from Birmingham Steel
Corporation, which expanded Ameristeel's structural bar size range and added
beams to its product line. In June 2002, Ameristeel acquired certain assets and
assumed certain liabilities of Republic Technologies' cold drawn plant in
Cartersville, Georgia, a producer of cold drawn merchant bar products, to
complement the operations of AmeriSteel Bright Bar.
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On October 23, 2002, the parent company of Gerdau S.A.'s North American
operations, referred to as Gerdau North America, entered into a transaction
agreement with Co-Steel Inc. Co-Steel Inc. was a Canadian public company that
owned and operated three minimills, participated in a 50/50 joint venture that
ran a fourth mill and was a major participant in the sourcing, trading and
processing of scrap metal in its markets. This transaction agreement resulted in
Co-Steel Inc. acquiring all of the issued and outstanding shares of the
companies included in Gerdau North America, in exchange for Co-Steel Inc. common
shares representing approximately 74% of Co-Steel Inc.'s total common shares. In
connection with the merger, Co-Steel Inc.'s name was changed to Gerdau
Ameristeel Corporation. As part of this transaction, certain related party loans
payable of Gerdau North America were converted into equity in October 2002. The
transaction was accounted for using the reverse-take-over method of purchase
accounting. Gerdau North America is deemed to be the acquirer and is assumed to
be purchasing the assets and liabilities of Co-Steel Inc., since the original
shareholder of Gerdau North America became owner of more than 50 percent of the
voting shares of Co-Steel Inc. on a fully-diluted basis following the
transaction. As a result, Gerdau North America's historical accounts became the
historical accounts of Co-Steel Inc. for all periods prior to the date of the
merger.
We combined with Gerdau North America in order to create a company
with the financial strength, operational critical mass, geographic and product
range coverage and experienced management team to succeed in the competitive
North American steel market. We are on track to realize approximately $23
million of annual cost savings from the integration of the operations of
Co-Steel Inc. and Gerdau North America through freight rationalization, product
scheduling efficiencies, consolidated procurement activities and economies of
scale in administrative and management functions. Incremental cost savings from
operational improvements are anticipated through the adoption of best operating
practices, the coordination of manufacturing technologies, knowledge, sharing
and the fostering of an operating culture focused on continuous improvement.
On December 31, 2002, Ameristeel was an indirect 87% owned subsidiary
of Gerdau Ameristeel. Effective March 31, 2003, non-controlling shareholders
holding, in the aggregate, approximately 13% of the issued and outstanding
shares of AmeriSteel, had their holdings exchanged for Gerdau Ameristeel common
shares at a ratio of 9.4617 Gerdau Ameristeel shares for each common share of
Ameristeel exchanged. The acquisition of the minority interest of Ameristeel was
accounted for as a step acquisition under the purchase method of accounting,
whereby the purchase price of the shares was allocated to the net assets
acquired based upon their relative fair values. The exchange resulted in the
issuance of an additional 13,198,501 shares of Gerdau Ameristeel. Ameristeel is
now an indirect wholly-owned subsidiary of Gerdau Ameristeel. As a result of the
transaction with Co-Steel Inc. and the acquisition of the shares of Ameristeel,
Gerdau S.A. indirectly holds approximately 67% of the shares of Gerdau
Ameristeel.
INDUSTRY AND TRENDS
The North American steel industry is highly cyclical and competitive.
The industry is affected by global production capacity, the prevailing levels of
steel imports and tariffs, general economic conditions and the strength of the
U.S. dollar. Trends and developments in other cyclical industries such as
construction, appliance, transportation, machinery and equipment, and consumer
and industrial packaging, which are significant markets for steel products, also
affect the steel industry. Recent trends in the steel industry, in particular a
wave of
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consolidation and the introduction of tariffs, have strengthened the competitive
positioning of the North American market participants.
Beginning in mid-2000 and throughout 2001, the North American steel
industry experienced a severe downward cycle due to excess global production
capacity, high import levels at below-market prices ("dumping") and weak general
economic conditions, causing numerous North American steel producers to file for
bankruptcy. Monthly average merchant bar and rebar prices reached lows of $236
and $260 per ton, respectively, in December 2001 and monthly average hot-rolled
sheet prices fell to cyclical lows of $217 per ton in November 2001.
Due to reduced supply resulting from capacity closures, trade
restrictions and the introduction of tariffs on certain steel products imported
into the United States, monthly average merchant bar and rebar prices increased
in 2002. Merchant bar prices increased to $261 per ton in June, while rebar
prices climbed to $275 per ton in August. Monthly average domestic flat-rolled
steel prices increased dramatically in 2002 and reached a high of $370 per ton
in August.
The cycle began to turn downward again toward the end of 2002 due to a
number of unfavorable developments. The reinitiation of previously idled
steelmaking capacity and reduced export opportunities to China have increased
steel supply in North America, and a weak domestic economy has resulted in
softening product demand. Monthly average hot-rolled steel pricing has fallen to
$285 per ton in April 2003, despite an attempt by leading flat-rolled producers
to impose a $30 per ton price increase effective April 1.
In addition, the pricing of scrap, minimills' primary raw material, has
risen sharply in the beginning of 2003 due to increased demand from the Chinese
market and reduced scrap collection resulting from tough weather conditions in
the Northeast United States. Higher energy costs, due to the particular cold
winter, have put additional pressure on the steel industry's profitability.
Scrap pricing has begun to fall, primarily due to reduced scrap exports to China
and improved weather conditions in the Northeast United States.
Recent developments in the bar segment industry have been more
positive. The rebar and merchant bar price increases of $35 per ton, announced
by leading bar producers in the beginning of 2003, have had a positive effect on
pricing, particularly for merchant bars, for which the monthly average price
rose to $295 per ton in April 2003. Merchant bars compete against fewer imports.
Rebar imports have decreased due to stronger demand overseas and a weaker U.S.
dollar.
Overall, the North American steel industry produced 124 million metric
tons of crude steel in 2002, an increase of 3.4% versus 2001. Additionally, for
the first three months of 2003, North American crude steel continued to grow,
totaling 31 million tons, a 7.4% increase versus the equivalent period in 2002.
The North American steel industry has been restructuring since 2002, as
the pace of domestic steel industry consolidation has accelerated, evidenced by
a number of recent acquisitions. International Steel Group added to its 2002
acquisitions of the bankrupt steel assets of LTV Steel and Acme Steel with its
acquisition of Bethlehem Steel's bankrupt assets in 2003. U.S. Steel has also
announced its planned acquisition of National Steel's bankrupt assets in 2003.
These developments are causing formerly idled or inefficient steelmaking
facilities to reenter the market with substantially lower cost structures and
renegotiated labor contracts, and without many previously burdensome retirement
and health care legacy costs and other liabilities. The result of this
consolidation is a more competitive North American steel industry. Other North
American steel producers that have entered bankruptcy in the past several years
may emerge from bankruptcy with lower cost structures and more efficient
operations. In the bar sector, as a result of the Nucor and Birmingham
consolidations, the restructuring of Bayou in Chapter 11 and the cessation of
Kentucky Electric's operations has caused further consolidation and
rationalization of inefficient supply in the steel industry.
Unfavorable foreign economic conditions, excess foreign steelmaking
capacity and a strong North American economy and U.S. dollar resulted in an
oversupply of various steel products, lower domestic steel prices and
significant domestic capacity closures starting in late 2000. These conditions
led to the March 5, 2002 introduction of the Section 201 tariffs and quotas
imposed on various steel products imported into the U.S. from
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certain countries. The duties were imposed for a period of three years and will
decrease each year they are in effect. For flat-rolled products, as well as for
various merchant and special bar quality products, the tariff decreases from 30%
in the first year to 24% in the second year and 18% in the third year. The quota
for slab imports that can enter the United States without tariff imposition
increases from 5.4 million tons in the first year to 5.9 million tons in the
second year and 6.4 million tons in the third year. For rebar products, the
tariff decreases from 15% in the first year to 12% in the second year and 9% in
the third year.
Throughout 2002 and during 2003, the U.S. Department of Commerce and
the Office of the United States Trade Representative granted numerous exclusions
and exemptions from the Section 201 tariffs for various categories of imported
steel products, weakening the protection initially provided by Section 201.
Various countries have challenged President Bush's action with the World Trade
Organization ("WTO"). In May 2003, the WTO announced that the U.S. tariffs
imposed to protect the U.S. steel industry from imports are illegal under
trading rules, confirming its preliminary decision from March 2003. The United
States plans to appeal the WTO decision. The tariffs will also be subject to a
midterm review by the U.S. International Trade Commission, which is due to the
President by September 2003 and will recommend whether the remedies should
remain in effect. In addition, the Organization for Economic Cooperation and
Development recently initiated a process to deal with worldwide overcapacity in
the steel industry and to reduce or eliminate certain steel-trade distorting
subsidies throughout the world.
On July 5, 2002, the Canadian International Trade Tribunal ("CITT")
ruled that imports of certain steel goods from other countries, including the
United States, have injured the Canadian steel industry. On August 20, 2002, the
CITT announced it was recommending the imposition of a three-year quota for
certain categories of imported steel products, with tariffs imposed on imports
exceeding the quota levels, except for rebar, in which case the CITT only
recommended the imposition of a tariff. For imports exceeding the quota levels,
a tariff ranging from 15-25% would be imposed in the first year, 11-18% in the
second year and 7-12% in the third year. The government of Canada has not yet
announced its decision on the remedies that it will implement.
NARRATIVE DESCRIPTION OF THE BUSINESS
MINIMILLS
Minimills are steel mills that use electric arc furnaces, that melt
scrap metal by charging it with electricity. Upon melting the scrap metal, we
add alloys and other ingredients (such as fluxes) in measured quantities to
achieve the desired metallurgical properties for the steel. The resulting molten
steel is cast into long strands called billets in a continuous casting process.
The billets are typically cooled and stored and then transferred to a rolling
mill where they are reheated, passed through roughing mills for size reduction
and then rolled into products such as rebar, merchant bars, structural shapes,
rods or special sections. These products emerge from the rolling mill and are
uniformly cooled on a cooling bed. Most merchant and structural products then
pass through automated straightening and stacking equipment. Finished products
are neatly bundled prior to shipment to customers typically by rail or truck. In
some cases we ship finished products by rail to a depot before delivery to
our customers.
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The following picture shows the typical process of producing steel in
our mills:
[PICTURE]
All of our mills are located on our owned property. Our mills are
typically located with convenient access to raw materials, transportation (road
and in some cases rail and water) and customers. Our rebar deliveries are
generally concentrated within 350 miles of a mill and our merchant bar
deliveries are generally concentrated within 500 miles. Some products, such as
the special sections produced by our Selkirk mill, shipped greater distances,
including overseas.
The table below presents information regarding our 11 mills, including
the current estimated annual production capacity and actual production for the
year ended December 31, 2002. We calculate annual melting and rolling capacities
based on our best historical months of production and best rolling mill cycles,
respectively, annualized and assuming 18 days per year for maintenance shutdown.
Actual capacity may vary significantly from annual capacity due to changes in
customer requirements, sizes, grades and types of products rolled, and
production efficiencies. Our capacity calculations may also change from year to
year because of these reasons. We do not consider manufacturer's design capacity
as a relevant measure due to differences in the product mix and production
efficiency assumptions; we therefore do not present manufacturer's design
capacity information.
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APPROX. YEAR ENDED APPROX. YEAR ENDED
ANNUAL DECEMBER 31, CAPACITY ANNUAL DECEMBER 31, CAPACITY
MELTING 2002 MELTING UTILIZATION ROLLING 2002 ROLLING UTILIZATION
LOCATION CAPACITY PRODUCTION PERCENTAGE CAPACITY PRODUCTION PERCENTAGE
- ---------------------- ---------- ------------ ----------- --------- ---------- ----------
(thousands (thousands (thousands (thousands
of tons) of tons) of tons) of tons)
Cambridge, Ontario ........... 360 333 92.5% 325 313 96.3%
Cartersville, Georgia ........ 860 368 42.8 600 288 48.0
Charlotte, North Carolina .... 460 330 71.7 400 319 79.8
Gallatin, Kentucky (1) ....... 1,500 714 95.2 1,500 706 94.1
Jackson, Tennessee ........... 670 498 74.3 600 446 74.3
Jacksonville, Florida ........ 640 621 97.0 640 620 96.9
Knoxville, Tennessee ......... 455 415 91.2 500 413 82.6
Perth Amboy, New Jersey ...... 900 596 66.2 1,000 654 65.4
Sayreville, New Jersey ....... 800 595 74.4 600 450 75.0
Selkirk, Manitoba ............ 385 334 86.8 330 294 89.1
Whitby, Ontario .............. 960 667 69.5 1,100 644 58.5
Total ........................ 7,990(1) 5,471 75.6%(2) 7,595(1) 5,148 75.2%(2)
===== ===== ==== ===== ===== ===
(1) Includes 100% of the capacity of the Gallatin mill, which is a 50%
owned joint venture.
(2) Utilization % includes Gallatin calculated by dividing our 50%
proportionate production by 50% of total capacity.
We operate our mills so that inventory levels are maintained within
targeted ranges. Although it is normally advantageous to run the mills at full
production levels to achieve the lowest unit costs, producing to targeted
inventory levels balances production with marketing and gives management
flexibility to limit maintenance delays and other downtime. This approach also
results in better working capital management. As a result, depending on market
conditions, we do not generally utilize 100% of our capacity. In addition, some
of our mills are run on a basis that differs from the assumptions used in
calculating production capacity. For example, our Cambridge mill produces a
large number of different products, which requires frequent switching of rolling
equipment. The mills operated by Co-Steel Inc. prior to our combination have
historically had lower capacity utilization for a variety of reasons. As market
conditions in the steel industry improve, we expect that we will be able to
improve the capacity utilization at those facilities, as well as at our
Cartersville mill, so that their performance will be more consistent with that
of our other facilities.
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DOWNSTREAM OPERATIONS
We are one of few minimill steel producers with an integrated operating
base in North America. Our minimills are vertically integrated with 27
downstream businesses that produce specialty steel products and fabricated steel
for the use in the construction, industrial markets and transportation.
REBAR FABRICATION
We believe we are one of the largest rebar fabricating and epoxy
coating groups in North America and have a 50-year history of quality
workmanship and service. Our network, consisting of 15 rebar fabricating plants
and three epoxy coating plants, is located in the eastern half of the United
States. Our rebar fabricating capacity is in excess of 500,000 tons per year.
The fabricating facilities purchase rebar from our mills and cut and bend it to
meet our customers' engineering, architectural and other end-product
specifications. The fabricating plants purchase the majority of their rebar from
our Jacksonville, Knoxville, Charlotte and Sayreville mills. The following table
shows our rebar fabricating plant locations and their approximate annual
capacity:
REBAR FABRICATING PLANT CAPACITY
----------------------- --------
(IN TONS)
Plant City, Florida (Tampa)............ 40,000
Jacksonville, Florida.................. 35,000
Ft. Lauderdale, Florida................ 40,000
Orlando, Florida....................... 15,000
Charlotte, North Carolina.............. 40,000
Raleigh, North Carolina................ 30,000
Duluth, Georgia (Atlanta).............. 40,000
Aiken, South Carolina.................. 15,000
Knoxville, Tennessee................... 45,000
Nashville, Tennessee................... 30,000
Collierville, Tennessee (Memphis)...... 20,000
Louisville, Kentucky................... 30,000
York, Pennsylvania..................... 60,000
Baltimore, Maryland.................... 30,000
Sayreville, New Jersey................. 30,000
---------
Total....................... 500,000
=========
In addition to the above fabricating plants, we operate three epoxy
coating plants that are located in: Knoxville, Tennessee; Milton, Pennsylvania;
and Sayreville, New Jersey. These facilities apply epoxy coating to fabricated
rebar for rust applications and have a combined annual coating capacity of
approximately 150,000 tons.
RAILROAD SPIKE OPERATIONS
Our railroad spike operations, located in Lancaster, South Carolina and
Paragould, Arkansas, forge steel square bars produced at the Charlotte mill into
track spikes. These track spikes are sold generally on an annual contractual
basis to the major railroad companies in North America. Currently we sell
approximately 50,000 tons of track spikes annually and maintain a 65% market
share.
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COLD DRAWN PLANTS
We have two cold drawn plants. Our Orrville, Ohio plant is a 45,000
square foot greenfield facility built in 2000 on 6.5 acres of land. The Orville
plant is owned by AmeriSteel Bright Bar, Inc. We own 80% of AmeriSteel Bright
Bar and the remaining 20% is owned by members of management. It is equipped with
a highly efficient production line designed to produce 30,000 tons of cold drawn
flats and squares per year.
Our Cartersville, Georgia cold drawn plant was acquired in June 2002.
The Cartersville cold drawn plant expanded our product offering to include
rounds and hexagons. The plant has the capacity to produce up to 45,000 tons of
cold drawn bars.
The Jackson, Cambridge and Cartersville mills, along with third party
mills, supply the Orrville and Cartersville cold drawn facilities. The cold
drawn business, with two producing locations, expands our product offering and
provides a downstream shipping opportunity for the our minimills. We sell cold
drawn bars primarily to steel service centers.
SUPER LIGHT BEAM PROCESSING AND ELEVATOR GUIDE RAILS
We operate a super light beam processing facility in Memphis,
Tennessee, where we fabricate and coat super light beams purchased from a third
party into cross members for the truck trailer industry. This facility is
located on leased property. Bradley Steel Processors Inc., our 50% owned joint
venture with Buhler Industries Inc., also operates a super light beam processing
facility. Bradley's facility is located on leased property in Winnipeg,
Manitoba, near our Selkirk mill, and processes beams produced by that mill.
SSS/MRM Guide Rail Inc., our 50% joint venture with Monteferro S.p.A.,
processes our Selkirk mill's guide rail sections for elevator manufacturers.
SSS/MRM carries on business under the name Monteferro North America and has two
facilities, one in Steinbach, Manitoba and the other in Birds Hill, Manitoba, on
leased property. SSS/MRM Guide Rail also has a 50% interest in a guide rail
processing facility in Brazil.
WIRE MESH AND COLLATED NAILS
Our facility in New Orleans, Louisiana produces wire from 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.
OUR JOINT VENTURES
We have three 50% owned joint ventures. The Gallatin mill is our 50%
owned joint venture with Dofasco Inc., located in Gallatin County, Kentucky. It
produces hot rolled steel products. Bradley Steel Processors Inc. is our 50%
owned joint venture with Buhler Industries Inc., which processes super light
beams. SSS/MRM Guide Rail is our 50% joint venture with Monteferro S.p.A. which
processes the Selkirk mill's guide rail sections for elevator manufacturers.
Under Canadian GAAP, our three 50% owned joint ventures are
proportionately consolidated, which means that 50% of individual items such as
assets, sales and cost of sales are included in our results. In addition, to be
consistent with the presentation of our financial information, information on
tons shipped and other production information includes our 50% share of the
joint ventures' production.
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PRINCIPAL PRODUCTS
The following table shows the breakdown of our tons shipped to third
parties and average net selling prices by product for the two years ended
December 31, 2002:
Tons Shipped Average Net Selling Prices (1)
----------------------- ------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
2001 2002 2001 2002
----- ---- ----- ------
(Thousands) (Per Ton)
Merchant bar/special sections 1,553 1,859 $305 $295
Stock rebar 1,203 1,275 264 251
Rods 741 653 265 291
Flat rolled(2) 667 710 228 299
----- -----
Total mill finished goods 4,164 4497
Fabricated steel 683 656 441 433
----- -----
Total finished goods 4,847 5,153
----- -----
Billets 131 -- 182 --
----- -----
Total 4,978 5,153
===== =====
(1) Selling prices are net of freight.
(2) Includes 50% of Gallatin's production.
The following principal products are produced by the Company.
MERCHANT BARS/SPECIAL SECTIONS
Merchant bars/special sections refers to merchant bars, structural
products, special sections and special bar quality products.
- - Merchant bars consist of rounds, squares, flats, angles, and channels
with a size dimension of less than three inches. 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 with a size
dimension of three inches and larger. Structural products are used in a
wide variety of manufacturing applications, including housing,
trailers, structural support for buildings, and other construction
purposes. Like smaller merchant bars, structural products typically
require specialized processing and handling and are produced in shorter
production runs. Structural products are generally sold to service
centers, fabricators and OEMs.
- - Special sections are generally 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. For
example, our special sections products include grader blades for
tractors, elevator guide rails, light rails for crane and mine
applications and super light weight beams for truck trailer cross
members.
-12-
- - Special bar quality products or SBQs are generally merchant bar shapes
that have stringent chemical and dimensional tolerance requirements,
and therefore are often more costly to produce and command a higher
margin. SBQs are widely used in industries such as mining and
automobile production. These products are generally sold to OEMs.
STOCK REBAR
Stock rebar refers to reinforcing steel bars in straight lengths
ranging from 20 to 60 feet and ranging from 3/8th of an inch to 2 1/4th inches
in diameter. Stock rebar is sold to companies that either fabricate it
themselves or warehouse it for sale to others who will fabricate it for
reinforced concrete construction. Rebar products are used primarily in two
sectors of the construction industry: building projects such as institutional
buildings, retail sites, commercial offices, apartments, condominiums, hotels,
manufacturing facilities and sports stadiums; and infrastructure projects such
as highways, bridges, utilities and water and waste treatment facilities.
ROD
Rod is coiled wire rod. We produce industrial quality rod products that
are sold to customers in the automotive, agricultural, industrial fastener,
welding, appliance, and construction industries. We sell rod to downstream
manufacturers who further process it by cold drawing it into various shapes,
including twisted or welded configurations such as coat hangers, supermarket
baskets and chain link fences. We sell most of our rod to end users, while the
remaining portion, depending on market conditions, is used in our downstream
operations in the manufacture of wire mesh and collated nails. Other end uses of
wire rod products include the manufacture of fences, fine wire, chain, welding
wire, plating wire, fasteners and springs.
FLAT ROLLED SHEET
Flat rolled sheet is steel that is rolled flat onto coils and used in
the manufacture of outer bodies of automobiles and household appliances.
Gallatin Steel, our 50% joint venture with Dofasco Inc., is our only mill that
produces flat rolled sheet, which is used in the construction, automotive,
appliance, machinery, equipment and packaging industries.
FABRICATED STEEL
Fabricated steel is any steel that is further processed after being
rolled by a mill. As a result of the further processing, fabricated steel
generally receives a higher price in the market than mill finished products. Our
stock rebar is fabricated in our fabricating plants by cutting it to size and
bending it into various shapes to be used in reinforced concrete constructions,
such as bridges, roads and buildings. We also process flats and squares at our
cold drawn plants, and guide rails, super light beams, wire mesh and nails at
other downstream facilities.
BILLETS
Billets are rectangular sections of steel that are semi-finished in a
casting process and cut to various lengths. Billets can be sold to other steel
producers or further finished into steel products and sold to downstream users
or other steel producers. Our melt shops produce billets for conversion to the
finished products listed above, such as rebar, merchant bar, structural shapes
and special sections, in our rolling mills. A small portion of our billet
production is sold in the open market to other steel producers for rolling into
finished products.
MARKETING
Our products are generally sold to steel service centers, fabricators,
or directly to OEMs east of the Mississippi River. Our products are used in a
variety of industries, including the construction, mining, automotive,
commercial, cellular and electrical transmission, metal building manufacturing
and equipment manufacturing
-13-
industry. We also sell fabricated rebar to contractors performing work in both
private (commercial) and public (road, bridge and other construction or
infrastructure) projects.
In our rebar fabrication business, the market areas we cover are those
east of the Mississippi River, with plants located in, or near, most major
cities in the eastern United States. Our long-standing strategy is to have our
production facilities located in close proximity to the job-site we supply.
Normally we are within 200 miles of our customer's job-site, so we can provide
quick response time to satisfy their reinforcing steel needs.
The following table shows information on our customers during 2001 and
2002 on a pro forma basis:
PERCENTAGE SALES BY CUSTOMER
2001 2002
---- ----
Fabricators 43% 41%
Steel service centers 31 35
Wire drawing 17 15
Transportation 7 7
Other 2 2
--- ---
Total 100% 100%
--- ---
In the year ended December 31, 2002, on a pro forma basis, we sold
products to over 1,000 customers. Given the diversity of our products and
markets, no one customer comprises 3% or greater of our consolidated net sales.
Our five largest customers comprised 8% of our total consolidated pro forma net
sales in the year ended December 31, 2002. The following table provides a
percentage breakdown of total net sales by customer location on a pro forma
basis for 2002 and 2001:
PERCENTAGE OF TOTAL NET SALES
2001 2002
------ ------
United States 82.5% 80.3%
Canada 16.9 19.2
Other 0.5 0.5
------ ------
100% 100%
------ ------
In general, sales of mill finished products to U.S. customers are
centrally handled by employees in our Tampa sales office, and sales to Canadian
customers are centrally handled by employees in our Whitby sales office. We also
have sales offices in Perth Amboy, where rod sales are handled, and Selkirk,
where sales of special sections are handled. Our sales representatives take
orders, schedule mill production and manage inventory. As of March 31, 2003, we
had 54 employees dedicated to marketing and sales, 13 of whom were located in
the field, near our customers. Each of our sales representatives has immediate
access to inventory and production schedules at all of our mills, which enables
them to provide customers with "one stop shopping" and to service a customer's
needs from the most convenient and/or cost effective source in the Company.
Metallurgical service representatives at our mills provide technical support to
our sales force but are not considered sales representatives.
In general, sales of our cold drawn, rod and super light beam products
are handled by sales representatives located at our relevant facilities. Our
fabricated rebar and elevator guide rails are generally sold through a bidding
process in which employees at our facilities work closely with each customer to
establish its product requirements, shipping schedule and price.
COMPETITION
COMPETITIVE CONDITIONS
We compete with numerous domestic and foreign steel producers.
Competitors include integrated producers, which produce steel from coke and iron
ore, and minimills, which, like us, produce steel by melting
-14-
scrap metal in electric arc furnaces. Minimills typically enjoy lower costs of
production and higher productivity levels relative to integrated mills through
reduced capital and operating costs, resulting from their streamlined melting
process and smaller, more efficient plant layouts, as well as primarily
non-unionized work forces with lower total employment costs. The minimills'
smaller plant size also permits greater flexibility in their choice of location,
optimizing their access to scrap supply, energy sources and customer base.
Minimill producers have also more quickly adapted to the use of new, more cost
efficient equipment, translating technological advances in the industry into
more effective production processes. Minimills' competitiveness relative to
integrated mills is influenced by the cost of scrap, which represents a
significant production cost for the minimills.
Competition in the steel industry is based on price, quality, and the
ability to meet customers' product specifications and delivery schedules. In
addition, in the case of certain product applications, the steel industry
competes in many markets with producers of other materials such as plastic,
aluminum, cement, glass, wood and composite materials.
The North American steel industry's recent consolidation has led to a
fundamental change in the industry's structure. In the flat-rolled sector, the
emergence from bankruptcy of previously inefficient, high cost steelmaking
assets, under new ownership and without their previously burdensome legacy
costs, is reducing the North American steel industry's cost structure, creating
a more globally competitive industry. In the bar sector, the Nucor acquisition
of Birmingham Steel and the combination of Gerdau North America and Co-Steel
Inc. has provided significant consolidation in that sector and some modest
rationalization.
LOCAL COMPETITION
Our geographic market encompasses Canada and the United States,
predominantly throughout the eastern seaboard and the Midwest. We experience
substantial competition in the sale of each of our products from numerous
competitors in our markets. Rebar, merchant bars, and structural shapes are
commodity steel products for which price is the primary competitive factor. Due
to the high cost of freight relative to the value of steel products, competition
from non-regional producers is somewhat limited. Proximity of product
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 a mill, while merchant bar deliveries are generally concentrated
within a 500 mile radius of a mill. Some products produced by our Selkirk mill,
such as the cutting edges used in earth moving, are more specialized and thus
are shipped greater distances, including overseas. Except in unusual
circumstances, the customer's delivery expense is limited to freight charges
from the nearest competitive mill, and the supplier absorbs any incremental
freight charges.
We believe our principal competitors include Ispat Sidbec Inc., Stelco
Inc. and Ivaco Inc. in Canada and Bayou Steel Corporation, Commercial Metals
Corporation, Marion Steel Company, NorthStar Steel Company, Nucor Corporation,
Roanoke Electric Steel Corporation, Sheffield Steel, and Steel Dynamics Inc. in
the United States. Our Gallatin joint venture competes with numerous other
integrated and minimill steel producers.
Despite the commodity characteristics of the rebar, merchant bar and
structural markets, we believe that we distinguish ourselves from our
competitors due to our large product range, our product quality, our consistent
delivery performance, our capacity to service large orders, and our ability to
fill most orders quickly from inventory. We believe that we produce the largest
range of bar products and shapes east of the Mississippi River. This product
diversity is an important competitive advantage in a market in which our
customers are looking to fulfill all of their requirements from a few key
suppliers.
FOREIGN COMPETITION
We and other North American steel producers have experienced
significant and, we believe in some cases, unfair competition from foreign
finished steel bar producers during the past several years. Due to unfavorable
foreign economic conditions and excess capacity, imports of steel bar products
to the U.S. and Canadian markets reached historically high levels in recent
years, with a corresponding negative impact on domestic prices.
-15-
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 are intended to give the domestic steel industry
an opportunity to strengthen its competitive position through restructuring and
consolidation and decline over the three-year period.
The following table summarizes the duties imposed for certain steel
products:
SECTION 201 IMPORT TARIFFS BY PRODUCT
----------------------------------------------------------------
TYPE YEAR 1 YEAR 2 YEAR 3
-------------------------------- --------------------- --------------------- -------------------
Slab............................ 5.4-min. 5.9-min. 6.4-min.
Short-Ton Quota Short-Ton Quota Short-Ton Quota
With Over-Quota With Over-Quota With Over-Quota
Tariff of 30% Tariff of 24% Tariff of 18%
Finished Flat Products (plate,
hot-rolled sheet, cold-rolled
sheet, coated sheet).......... 30% 24% 18%
Hot-Rolled Bar.................. 30 24 18
Cold-Finished Bar............... 30 24 18
Rebar........................... 15 12 9
----------
Source: Office of The United States Trade Representative, Bloomberg.
There are many products and countries not covered by these tariffs, in
addition to numerous foreign steel manufacturers that have received specific
product exemptions from these tariffs. According to published reports, the
exemptions are now estimated to cover approximately 5.4 million of the original
13.1 million tons of imported steel products that were covered by the tariffs.
The majority of the most recent exemptions were granted to products made by
European Union and Japanese producers. To date, the United States Department of
Commerce has granted 727 exemptions which, according to the AISI, is one reason
the tariffs have not yet effectively reduced steel imports. According to the
AISI, there are some early indications that the President's program is beginning
to work, 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 antidumping cases.
For the first nine months of 2002, steel imports were 23.9 million tons versus
22.1 million tons in the first nine months of 2001, according to the U.S. Census
Bureau. The Bush administration has announced its intention to review the impact
of these tariffs and determine whether they should be ended prior to their
scheduled expiration.
One of our subsidiaries, Gerdau Ameristeel Perth Amboy Inc. (formerly
Co-Steel Raritan), was party to a United States 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 roll producers in seven foreign countries with respect to both
anti-dumping and countervailing duties that range from 4% to 369%. Although
there have been recent increases in rod pricing following the imposition of
these duties, a considerable amount of imported rod continues to enter U.S.
markets.
The Organization for Economic Cooperation and Development ("OECD")
recently initiated a process to address worldwide overcapacity in the steel
industry. Although meetings have been held by the OECD Steel Committee to
discuss methods to reduce this steel surplus, there is no certainty that such
efforts will lead to a satisfactory resolution of this issue. Continuing
overcapacity in the steel industry would adversely affect our ability to compete
and our sales levels.
The tariffs imposed in the United States and any similar actions that
may be taken in Canada may not have a material positive impact on the North
American steel industry and may not reduce the volume or negative
-16-
impact of imports. Global overcapacity, a strong U.S. dollar, the strength of
the North American economy relative to the rest of the world, numerous
exemptions under the tariffs, the short term (three years) duration of the
tariffs, the decline in tariff rates after the first year, and the disparity of
tariff rates across different product lines are all factors that may negate any
benefits of the tariffs.
COMPETITIVE STRENGTHS
We believe the following competitive strengths will enable us to
compete more effectively in our strategic markets.
Geographic and product diversification. Through our network of 11
minimills, we are able to efficiently service our customers over an extended
geographical segment of the North American steel market. We manufacture and
market an extensive range of steel products to meet a wide variety of our
customers' steel and fabricated product requirements. We believe that we provide
one-stop shopping and centralized order management for one of the broadest
ranges of bar products and shapes available throughout the eastern two-thirds of
North America. We believe our extensive manufacturing capacity and comprehensive
range of steel products makes us a supplier of choice in a market in which our
customers are looking to fulfill all of their steel supply chain requirements
from a few key suppliers.
Downstream integration and value added processing. We are one of a few
minimill steel producers with integrated operating bases in North America. Our
minimills are integrated with our 27 downstream steel fabricating and specialty
product facilities. The downstream integration provides a captive market for a
significant portion of our mill production and valuable market information on
the end-use demand for steel products. In the year ended December 31, 2002, 15%
of our net sales was derived from our downstream operations. We believe our
downstream operations also balance some of the cyclicality and volatility of our
base minimill business and allow us to capture additional value-added margins on
the steel produced by our mills.
Ability to generate substantial cost savings. We are on track to
realize approximately $23 million of annual cost savings from the integration of
the operations of Co-Steel and Gerdau North America through freight
rationalization, product scheduling efficiencies, consolidated procurement
activities and economies of scale in administrative and management functions.
Incremental cost savings from operational improvements are anticipated through
the adoption of best operating practices, the coordination of manufacturing
technologies, knowledge, sharing and the fostering of an operating culture
focused on continuous improvement.
Disciplined business system platform for total quality management. We
recognize that our competitive success will be determined by human factors that
are more important than the technological condition of our physical asset base.
Our employees are our most valuable resource and are the key to maintaining our
competitive advantage. Our culture is geared to engaging all of our employees in
a common, disciplined business system focused on total quality management. We
have implemented the Gerdau Ameristeel Business System, in which we have
identified global industry benchmarks for key operational and safety measures.
Strong sponsorship. We have access to the knowledge base of, and
sponsorship from, our parent company, Gerdau S.A., one of the largest long steel
producers in the world with a history of over 100 years in the steel industry.
We expect to continue to benefit from Gerdau's professional management
experience and its expertise in manufacturing steel bar and rod. Gerdau S.A. and
its subsidiaries, including Gerdau Ameristeel (together, the "Gerdau group"),
have global annual capacity of 12.8 million tons of mill-finished steel products
through 22 steelmills, 20 of which are minimills. We benefit from Gerdau S.A.'s
talent, depth and technical support.
Experienced management team. We have an experienced senior leadership
team with in depth knowledge of modern management tools and tactical skills to
implement aggressive cultural change within an organization. Our senior
management has an average of over 26 years of experience in the steel industry
and a proven track record in managing successful acquisitions and creating value
in turnaround opportunities.
-17-
CYCLICAL AND SEASONAL NATURE OF THE BUSINESS
The steel industry is highly cyclical in nature and is affected
significantly by prevailing economic conditions in the major world economies. We
are particularly sensitive to trends in cyclical industries such as the North
American construction, appliance, machinery and equipment, and transportation
industries, which are significant markets for our products. In addition, certain
of our customers have been adversely affected by the continuing North American
and worldwide economic downturn, which has resulted, and may in the future
result, in defaults in the payment of accounts receivable owing to us and
reduced sales levels.
Market conditions for steel products in the North American market have
fluctuated over the years and have been difficult since the third quarter of
2000. Demand for our finished steel products, notably rebar and structural
shapes, will continue to be significantly affected by the relative strength of
the construction sector in North America. Events or conditions having an adverse
effect on the steel industry generally or on our markets in particular would
have a material adverse effect on our financial condition or results of
operations.
All of our minimills produce steel by melting scrap metal in electric
arc furnaces. The prices for scrap vary significantly, and these fluctuations do
not always match fluctuations in the price of our products. For example, scrap
metal prices are relatively higher during the winter months due to the impact of
weather on collection and supply efforts. Realized selling prices for our end
products cannot always be adjusted in the short-term to recover the cost of
increases in scrap metal prices. If scrap prices were to increase significantly
without a commensurate increase in finished steel selling prices, our profit
margins could be materially adversely affected. Future increases in the prices
paid for scrap and other inputs would materially adversely affect our operating
margins and our results of operations.
Most of our operations have long-term electricity supply contracts with
major utilities. The interruptible portion of the contract supplies the majority
of requirements, including the electric arc furnace load. The interruptible
portion represents up to 70% to 90% of the total load and, for the most part, is
based on a spot market price of electricity at the time it is being used. We
therefore have significant exposure to the variances of the electricity spot
market. We do not have long term contracts for natural gas and are therefore
subject to market variables and pricing swings for that energy source that could
materially affect our operating margins and results of operations.
SCRAP, ENERGY AND OTHER RAW MATERIALS
Steel scrap is the primary raw material consumed in steelmaking and
comprises approximately 30% to 45% of our cost of sales, depending on the mill
and product mix. Scrap availability is a major factor in our ability to operate.
Direct reduced iron, hot briquetted iron and pig iron can substitute for a
limited portion of the steel scrap used in electric furnace minimill steel
production. We do not use scrap substitutes in our long-product minimills,
except for the small portion we use for their chemical properties in our rod
facilities and to manufacture certain special sections. Scrap metal is readily
available in the regions where we operate, but prices may become volatile from
time to time due to various factors. Four of our mills are integrated with
recycling operations that supply a portion of their scrap needs. The balance of
our scrap metal requirements are purchased in the open market either directly by
our personnel or by brokers who procure and aggregate scrap as a business.
Electricity and natural gas represented approximately 7.2% and 3.0%,
respectively, of our pro forma cost of sales for the twelve months ended March
31, 2003. Natural gas has been very volatile in the recent past. For example, in
the first quarter of 2003, NYMEX natural gas prices increased from $4.99/mmBtu
to $8.00/mmBtu, an increase of 60%. We spent $13 million and $43 million for our
natural gas requirements in the three months ended March 31, 2003 and the twelve
months ended March 31, 2003, respectively, on a pro forma basis. If prices
remain at current levels or increase further, our profitability will be
adversely affected. Any interruption in the supply of energy, whether scheduled
or unscheduled, could materially adversely affect our sales and earnings.
Although deregulation of both natural gas and wholesale electricity
have afforded opportunities for lower costs resulting from competitive market
forces, prices for both of these energy sources have become more volatile
-18-
in the recent past and may continue to be. Volatility in electric power and
natural gas markets generally reflects extremes in weather conditions or
physical disruptions to the supply system. As such, these sources of volatility
are beyond our immediate control.
Various domestic and foreign firms supply other important raw materials
or operating supplies required for our business, including refractories,
ferroalloys and carbon electrodes. We have historically obtained adequate
quantities of such raw materials and supplies at competitive market prices to
permit efficient mill operations. We are not dependent on any one supplier as a
source for any particular material and believe there are adequate alternative
suppliers available in the marketplace should the need arise to replace an
existing one.
ENVIRONMENTAL AND REGULATORY MATTERS
Our business units are required to comply with an evolving body of
environmental laws and regulations concerning, among other things, emissions
into air, discharges to surface water and groundwater, noise control, the
generation, handling, storage, transportation, and disposal of toxic and
hazardous substances, and the cleanup of contamination. These laws and
regulations vary depending on the location of the facility and can fall within
federal, provincial, state, or municipal jurisdictions.
Our operations generate certain wastes, such as electric arc furnace
dust and other contaminants, that are classified as hazardous and must be
properly controlled and disposed of under applicable environmental laws and
regulations. In the United States and Canada, certain environmental laws and
regulations impose joint and several liability on certain classes of persons for
the costs of investigation and cleanup of contaminated properties regardless of
fault, the legality of the original operation or disposal and the ownership of
the site. Some of our present and former facilities have been in operation for
many years and, over such time, the facilities have used substances and disposed
of wastes (both on-site and off-site) that may require cleanup, for which we
could be liable. Appropriate reserves have been made for the clean-up of sites
of which we have knowledge. However, there is no assurance that the costs of
such cleanups or the cleanup of any potential contamination not yet discovered
will not materially adversely affect us.
Some of our North American operations in the U.S. are responsible for
the remediation of certain sites where EAF dust was generated and/or disposed.
In general, our estimate of remediation costs is based on our review of each
site and the nature of the anticipated remediation activities to be undertaken.
Our process for estimating such remediation costs includes determining for each
site the expected remediation methods, and the estimated cost for each step of
the remediation. In such determinations, we may employ outside consultants and
providers of such remedial services to assist in making such determinations.
Although the ultimate costs associated with the remediation are not known
precisely, we estimated the total remaining costs as at December 31, 2002 to be
approximately $6.3 million (2001 - $2.9 million), with these costs recorded as a
liability at December 31, 2002, approximately $5.1 million of which we expect to
pay within the year ended December 31, 2003. An additional liability of $8.6
million was recorded in 2002 with respect to certain environmental obligations
which were triggered by the change in control of the Company in certain
jurisdictions in which the Company operated. This liability was recorded at the
present value of the estimated future costs of these obligations.
In 2000, our Perth Amboy and Sayreville mills took part in the U.S.
Environmental Protection Agency's (EPA) Steel Minimill Audit Initiative Program.
Both New Jersey minimills conducted a comprehensive, third party, multi-media
environmental audit. The results of this audit were disclosed to the EPA along
with a list of corrective actions, all of which are expected to be completed by
the first half of 2003. None of the identified and disclosed items have
resulted, or will result, in material costs being incurred.
Carbon monoxide emissions at our Perth Amboy mill exceeded permitted
levels on several occasions during 2001 and 2002, and continue to periodically
exceed current permit levels. We are conducting investigations to determine the
cause of these episodes, what steps can be taken to reduce emissions and whether
the Perth Amboy mill's environmental permits require modification. Discussions
with NJDEP to resolve these permit and compliance issues are continuing. Penalty
assessments of approximately $400,000 have been accrued.
-19-
In April 2001, we were notified by 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. We are included in this action because we shipped EAF dust to this
property. The EPA offered a settlement to the named PRPs under which our
allocation was approximately $1.8 million. We object to our inclusion as a PRP
in this site and are pursuing legal alternatives, including the addition to the
allocation of larger third parties which the Company believes were incorrectly
excluded from the original settlement offer. The EPA has filed suit with us
named as a defendant. As the ultimate exposure to us, if any, is uncertain, no
liability has been accrued for this site.
The presence of radioactive materials in the scrap supply presents
significant health and safety risks to steel workers and to the general public.
In addition to the risk to our workers and the public, the cost to clean up the
contaminated material and the loss of revenue resulting from the loss in
production time can be material. Radioactive materials are usually in the form
of: sealed radioactive sources, typically installed in measurement gauges used
in manufacturing operations or in hospital equipment; scrap from decommissioned
nuclear power and U.S. Department of Energy facilities; and imported scrap.
Current regulations for generally licensed devices do not provide for tracking
of individual owners. The lack of accountability makes it easy for licensees to
negligently discard sealed sources in scrap and evade prosecution. In response
to this regulatory gap, we have installed sophisticated radiation detection
systems at all of our minimills to monitor all incoming shipments of scrap. If
we detect radioactive material in the scrap we receive, we incur costs to
dispose of the material and clean up the contamination of our facilities. In
addition, the cost of clean up is even greater if the material is melted in our
mill furnaces. While we have several detection devices at all of our mills,
occasionally a radioactive scrap source may go undetected. For example, in July
2001, a small amount of cesium was received from suppliers among scrap material
and accidentally melted in our Jacksonville mill furnace. Melt shop activities
at our Jacksonville mill were halted for approximately 25 days until
approximately 700 tons of contaminated material had been removed for proper
disposal and equipment had been cleaned. The cost of clean up was approximately
$10.5 million, all but $350 thousand of which was paid for by our insurer. As a
result of this accident, we reviewed our radiation detection systems to reduce
the risk of a similar accident in the future.
We received notice this year of a lawsuit by neighbors of a waste
disposal site in Louisiana that was operated by Safety Kleen, to which wastes
from clean-up activities at the Jacksonville mill were sent during 1999. The
site held permits from the EPA and state authorities, and the amount of material
shipped was relatively small. We have retained counsel but cannot yet evaluate
the merits, if any, of the claim.
No assurance can be given that unforeseen changes, such as new laws or
enforcement policies, or an incident at one of our properties or operations,
will not have a material adverse effect on the business, financial condition, or
results of our operations. Our business units are required to have governmental
permits and approvals. Any of these permits or approvals may be subject to
denial, revocation or modification under various circumstances. Failure to
obtain or comply with the conditions of permits and approvals may adversely
affect our operations and may subject us to penalties. In addition, we may be
required to obtain additional operating permits or governmental approvals and
incur additional costs. There can be no assurance that we will be able to meet
all applicable regulatory requirements. There is no assurance that our
environmental capital expenditures will not materially increase in the future.
Moreover, we may be subject to fines, penalties or other liabilities arising
from actions imposed under environmental legislation or regulations.
EMPLOYEES
We currently employ approximately 5,100 employees. Approximately 3,100
employees work in our minimills, 1,900 work in our downstream and fabricating
facilities and 150 work in our corporate and sales offices. These figures
include 50% of those employed at our joint ventures.
Approximately 1,260 of our employees are represented by the unions
under a number of collective bargaining agreements. The agreements with our mill
employees have different expiration dates beginning February 2004. The
collective agreements for our recycling facilities have different expiration
dates beginning in
-20-
2006. We may be unable to successfully negotiate new collective bargaining
agreements without any labor disruption. For example, in the first quarter of
2001, a three-month labor disruption occurred at our Whitby mill and, in the
second quarter of 2002, a 13-day labor disruption occurred at our Selkirk mill.
In both cases, these disruptions were a result of our collective agreement
negotiations.
FOREIGN OPERATIONS RISK
No material foreign operations risk exists, other than currency
fluctuations. We report our results in U.S. dollars. A portion of the our 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
our reported results. In addition, our Canadian operations compete with U.S.
producers and are less competitive as the Canadian dollar strengthens relative
to the U.S. dollar. To the extent we have borrowings that are denominated in
U.S. dollars, our results of operations are also affected by fluctuations in the
exchange rate.
CREDIT FACILITIES
Our existing credit arrangements were entered into prior to the
combination with Co-Steel Inc. by companies that are currently in our
consolidated group. As part of the combination with Co-Steel Inc., we were
required to agree to maintain "status quo" segregation of Gerdau North America's
U.S. operations, its Canadian operations and Co-Steel Inc.'s operations if the
business combination had not taken place in order to satisfy lenders' lien
rights. Under the status-quo agreement, we have not been able to manage our
treasury functions, including cash management, in the most efficient manner, and
available cash, while adequate under one credit arrangement, has not been
available to offset shortfalls under one of the other credit arrangements.
The Company is in the process of implementing a financing plan
designed to refinance our existing credit facilities and other indebtedness.
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SELECTED CONSOLIDATED FINANCIAL INFORMATION
Our financial results are the results for the Gerdau North America
operations, and include results for the Co-Steel Inc. operations for the period
from October 23, 2002, which represents the period subsequent to the
combination. The selected historical consolidated financial data presented below
as at December 31, 2001 and 2002, and for each of the years in the three-year
period ended December 31, 2002, have been derived from our audited consolidated
financial statements.
Selected Consolidated Financial Information
(US$ in thousands except per share amounts)
Years Ended December 31,
----------------------------------------------------
Annual Results 2000 2001 2002
---------- ----------- ----------
Sales $ 899,683 $ 840,836 $1,036,055
Net earnings (loss) 3,943 (6,066) 11,132
Total Assets 1,074,565 1,061,939 1,571,401
Total Debt 757,492 723,633 519,154
Earnings per share - basic $ 0.03 $ (0.05) $ 0.07
Earnings per share - diluted $ 0.03 $ (0.05) $ 0.07
Quarter Ended
----------------------------------------------------------------------
Quarterly Results Mar. 31, Jun. 30, Sep. 30, Dec. 31,
2002 2002 2002 2002
----------- ----------- ----------- -----------
Sales $ 217,983 $ 245,116 $ 234,523 $ 338,433
Net earnings (loss) 1,275 3,819 2,511 3,527
Earnings per share - basic $ 0.01 $ 0.03 $ 0.02 $ 0.01
Earnings per share - diluted $ 0.01 $ 0.03 $ 0.02 $ 0.01
Quarter Ended
----------------------------------------------------------------------
Quarterly Results Mar. 31, Jun. 30, Sep. 30, Dec. 31,
2001 2001 2001 2001
-------- --------- ----------- -----------
Sales $211,684 $ 226,189 $ 211,529 $ 191,434
Net earnings (loss) 877 (607) 1,153 (7,489)
Earnings per share - basic $ -- $ -- $ 0.01 $ (0.06)
Earnings per share - diluted $ -- $ -- $ 0.01 $ (0.06)
DIVIDENDS
In 2000, Co-Steel Inc. announced that its Board of Directors decided to
eliminate dividends following payment of the December 14, 2000 dividend. The
decision was made to preserve cash during a time of unprecedented turbulence in
North American steel markets. No dividends have been paid since that date. 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., and dividends of $16,640,000 in 2000.
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, 2002 is incorporated
herein by reference.
MARKET FOR SECURITIES
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The common shares of Gerdau Ameristeel are listed on the Toronto Stock
Exchange under the symbol "GNA.TO".
DIRECTORS AND OFFICERS
Gerdau Ameristeel's board of directors 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 names, municipalities of residence,
position with the Company and principal occupations of the directors and
officers of the Company and ownership of securities are as shown below:
YEAR
FIRST
OWNERSHIP PERCENTAGE BECAME A
NAME AND MUNICIPALITY OF RESIDENCE AGE TITLE OF SECURITIES OWNERSHIP DIRECTOR PRINCIPAL OCCUPATION
- ---------------------------------- --- ----- ---------- --------- --------- -----------------
Andre Beaudry........................ 44 Vice President, 22,997 * -- Vice President, Steel
Tampa, Florida, U.S. Steel Product Product Sales
Sales
Phillip E. Casey(3)(7)............... 60 Director, Chief 8,069,091(3) 4.3%(3) 2002 Director, Chief
Tampa, Florida, U.S. Executive Executive Officer and
Officer and President of Gerdau
President Ameristeel
Kenneth W. Harrigan(1)(4)(6)......... 75 Director 1,000 * 1994 Chairman, K.W.
Oakville, Ontario, Canada Harrigan. Consultants
(business consultant)
Joseph J. Heffernan(1)(3)(5)(6)...... 57 Director 5,200 * 1996 Chairman, Rothmans
Toronto, Ontario, Canada Inc. (tobacco
manufacturer)
Jorge Gerdau Johannpeter (2)......... 66 Director and -- -- 2002 Director and Chairman
Porto Alegre, Rio Grande do Sul, Chairman of the of the Board of
Brazil Board of Directors of Gerdau
Directors S.A.
Frederico C. Gerdau Johannpeter(2)... 60 Director -- -- 2002 Vice President of
Porto Alegre, Rio Grande do Sul, Gerdau S.A.
Brazil
Andre Bier Johannpeter(2)(7)......... 40 Director and -- -- 2003 Director and Vice
Toronto, Ontario, Canada Vice President, President, COO Canada
COO Canada of Gerdau Ameristeel
Tom J. Landa......................... 51 Vice President, 203,822 * -- Vice President,
Tampa, Florida, U.S. Finance, Chief Finance, Chief
Financial Financial Officer
Officer and and Secretary
Secretary
J. Spencer Lanthier(1)(4)............ 62 Director 2,043 * 2000 Corporate Director
Toronto, Ontario, Canada
Garry A. Leach....................... 55 Vice President, -- -- -- Vice President,
St. Paul, Manitoba, Canada MRM Special MRM Special
Michael Mueller...................... 56 Vice President, 22,214 * -- Vice President,
Tampa, Florida, U.S. Steel Mill Steel Mill
Operations Operations
Arthur Scace(1)(4)(5)................ 64 Director 15,000 * 2003 Partner, McCarthy
Toronto, Ontario, Canada Tetrault LLP, Law Firm
Dr. Michael D. Sopko(1).............. 64 Director 1,000 * 1997 Corporate Director
Oakville, Ontario, Canada
- ---------------------
(1) Independent director.
(2) The Gerdau family, indirectly, controls Metalurgica Gerdau S.A.
holding, collectively, 71.8% of the voting capital and 23.9% of the
total capital and Metalurgica Gerdau S.A. and its controlled companies
hold 85% of the voting capital of Gerdau, S.A. Gerdau S.A. beneficially
owns approximately 67.3% of Gerdau Ameristeel.
(3) Mr. Phillip Casey owns 2,587,929 common shares directly and the
remaining 5,481,162 common shares held indirectly. Mr. Joseph Heffernan
owns 5,000 common shares and the remaining 200 common shares are held
indirectly.
(4) Member of the Audit Committee.
(5) Member of the Corporate Governance Committee.
(6) Member of Human Resources Committee.
(7) Member of Safety, Health and Environmental Committee.
* Less than one percent
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AUDITORS
Gerdau Ameristeel's auditor is PricewaterhouseCoopers LLP at 101 East
Kennedy Blvd., Suite 1500, Tampa, Florida, 33602.
ADDITIONAL INFORMATION
Information, including directors' and officers' remuneration and
indebtedness, principal holders of the Company's securities, options to purchase
securities and interests of insiders in material transactions where applicable
is contained in the Company's Management Information Circular for the most
recent annual meeting of shareholders, which involved the election of directors.
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.
-24-
SCHEDULE A
Gerdau Nova Scotia Holding Company
Gerdau Ameristeel Cambridge Inc. (Saskatchewan)
Gerdau MRM Holdings Inc. (Canada)
Gerdau Ameristeel MRM Special Sections Inc. (Saskatchewan)
Bradley Steel Processors Inc. (50%) (Manitoba)
SSS/MRM Guide Rail Inc. (50%) (Manitoba)
Canadian Guide Rail Corporation (Manitoba)
GUSAP Partners (Delaware)
3038482 Nova Scotia Company
PASUG LLC (Delaware)
Gerdau USA Inc. (Delaware)
Gerdau Ameristeel US Inc. (Florida)
AmeriSteel Bright Bar, Inc. (80%) (Florida)
Gerdau MRM America Holding Corp. (Delaware)
Porter Bros. Corporation (North Dakota)
MFT Acquisition, Corp. (Delaware)
1062316 Ontario limited
Co-Steel Benefit Plans Inc. (Ontario)
Gerdau Ameristeel Distribution Canada Ltd. (Ontario)
1300554 Ontario Limited
1102590 Ontario Limited
Co-Steel (U.S.) Ltd. (Delaware)
Co-Steel C.S.M. Corp. (Delaware)
Gallatin Steel Company (50%) (Kentucky)
Ghent Industries (Kentucky)
Gallatin Terminal Company (Kentucky)
Gallatin Transit Authority (Kentucky)
Co-Steel Finance Corp. (Delaware)
Gerdau Ameristeel Perth Amboy Inc. (New Jersey)
Raritan River Urban Renewal Corporation (New Jersey)
Gerdau Ameristeel Distribution US Inc. (Delaware)
Gerdau Ameristeel Lake Ontario Inc. (Delaware)
Co-Steel Benefit Plans USA Inc. (Delaware)
Co-Steel USA Holdings, Inc. (Delaware)
Gerdau Ameristeel Sayreville Inc. (Delaware)
N.J.S.C. Investment Co., Inc. (New Jersey)(1)
Dofasco LLC (50%) (Wyoming)
Cansteel Antilles N.V. (Dutch Antilles)
Co-Steel Amsterdam B.V. (Netherlands)(2)
Co-Steel (UK) Limited (United Kingdom)
ASW Holdings PLC (30%) (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. (Brazil)
- ------------------------------------
(1) This company is in the process of being dissolved.
(2) This company is in liquidation.