<PAGE>   1
                                                                      EXHIBIT 13
 
                            SELECTED FINANCIAL DATA
           (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER TON DATA)
 
<TABLE>
<CAPTION>
                         1997       1996       1995       1994       1993
                       --------   --------   --------   --------   --------
<S>                    <C>        <C>        <C>        <C>        <C>
OPERATING STATISTICS
Net sales............  $726,669   $712,657   $665,699   $486,062   $465,181
Gross margin.........    60,691     50,350     71,508     15,514     21,723
Income (loss) from   
  operations.........    38,204     25,729     47,713     (6,791)     1,102
Income (loss) before 
  extraordinary
  item...............    (1,268)    (7,238)    11,604    (16,696)    (8,606)
Net income (loss)....    (1,268)    (7,238)    11,604    (26,230)    (8,606)
Net income (loss)    
  applicable to
  common shares......   (11,608)   (16,327)     3,606    (33,276)   (12,072)
Net income (loss)    
  per common
  share before
  extraordinary
  item...............      (.74)     (1.07)       .24      (1.57)      (.80)
Net income (loss) per
  common share.......      (.74)     (1.07)       .24      (2.20)      (.80)
BALANCE SHEET
  STATISTICS
Cash and cash        
  equivalents........  $     --   $    597   $ 12,808   $     --   $ 64,267
Working capital......    67,063     71,065     33,045     46,797     89,167
Current ratio........      1.66       1.64       1.29       1.49       2.04
Net property, plant  
  and equipment......   458,315    454,523    470,390    453,286    314,590
Total assets.........   646,070    657,386    628,797    606,815    498,384
Long-term debt.......   399,906    388,431    342,033    357,348    224,991
Redeemable preferred 
  stock..............    56,169     55,437     51,031     43,032     35,986
Stockholders'        
  equity.............    82,603     92,827    108,074    103,664    135,775
Long-term debt as a  
  percentage of
  stockholders'
  equity.............       484%       418%       316%       345%       166%
ADDITIONAL STATISTICS
Operating income     
  (loss) per ton
  shipped............  $  17.90   $  12.00   $  24.99   $  (4.63)  $    .73
Capital              
  expenditures.......    47,724     26,378     68,025    164,918     82,534
Depreciation and     
  amortization.......    44,959     44,415     39,308     29,870     23,150
Cash flows from      
  operating
  activities.........    32,070    (19,520)    84,130    (28,018)    64,394
Raw steel production 
  (tons in
  thousands).........     2,460      2,428      2,145      1,890      2,000
Steel products       
  shipped (tons in
  thousands).........     2,135      2,145      1,909      1,467      1,511
</TABLE>
 
                                        4
<PAGE>   2
 
                      SELECTED FINANCIAL DATA -- CONTINUED
 
PRICE RANGE OF COMMON STOCK
 
The following table sets forth, for the periods indicated, the high and low
sales prices for the Class A common stock as reported on the NYSE Composite
Tape.
 
<TABLE>
<S>                                                  <C>        <C>
Fiscal Year Ended September 30, 1996...............      HIGH        LOW
                                                     --------   --------      
  First Quarter ended December 31..................  $      8   $ 6  3/8
  Second Quarter ended March 31....................    8  1/4     5  1/8
  Third Quarter ended June 30......................    7  1/8     5  1/4
  Fourth Quarter ended September 30................    5  1/2     3  1/8
 
Fiscal Year Ended September 30, 1997...............      HIGH        LOW
                                                     --------   --------
  First Quarter ended December 31..................  $ 4  1/2   $ 2  3/4
  Second Quarter ended March 31....................    3  5/8          2
  Third Quarter ended June 30......................    3  1/2     2  1/4
  Fourth Quarter ended September 30................    4  1/4     2  5/8
</TABLE>
 
As of November 28, 1997, the Company had 14,050,515 shares of Class A common
stock outstanding, held by 644 stockholders of record, and 19,151,348 shares of
Class B common stock outstanding, held by five stockholders of record.
 
                                        5
<PAGE>   3
 
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
 
Results of Operations
 
The following table sets forth the percentage relationship of certain cost and
expense items to net sales for the years indicated:
 
<TABLE>
<CAPTION>
                                                 YEAR ENDED SEPTEMBER 30,
                                                 -------------------------
                                                 1997      1996      1995
                                                 -----     -----     -----
<S>                                              <C>       <C>       <C>
Net sales......................................  100.0%    100.0%    100.0%
Cost of sales..................................   91.6      92.9      89.3
                                                 -----     -----     -----
Gross margin...................................    8.4       7.1      10.7
Selling, general and administrative expenses...    3.1       3.5       3.5
                                                 -----     -----     -----
Income from operations.........................    5.3       3.6       7.2
Other income (expense):
  Interest and other income....................    0.0       0.1       0.1
  Interest expense.............................   (5.6)     (5.1)     (4.6)
  Other expense................................     --      (0.2)     (0.4)
                                                 -----     -----     -----
Income (loss) before provision (benefit) for
  income taxes.................................   (0.3)     (1.6)      2.3
Provision (benefit) for income taxes...........   (0.1)     (0.6)      0.6
                                                 -----     -----     -----
Net income (loss)..............................   (0.2)%    (1.0)%     1.7%
                                                 =====     =====     =====
</TABLE>
 
The following table sets forth the sales product mix as a percentage of net
sales for the years indicated:
 
<TABLE>
<CAPTION>
                                                 YEAR ENDED SEPTEMBER 30,
                                                 -------------------------
                                                 1997      1996      1995
                                                 -----     -----     -----
<S>                                              <C>       <C>       <C>
Plate..........................................   45.4%     45.0%     35.1%
Sheet..........................................   30.2      29.7      40.7
Pipe...........................................    9.6       6.6       6.4
Slab...........................................   11.9      15.9      15.0
Non-steel......................................    2.9       2.8       2.8
                                                 -----     -----     -----
                                                 100.0%    100.0%    100.0%
                                                 =====     =====     =====
</TABLE>
 
Fiscal Year Ended September 30, 1997 Compared
With Fiscal Year Ended September 30, 1996
 
Net sales increased 2.0% due to a shift in product mix to higher-priced pipe and
plate products from lower-priced slab products offset in part by a decrease in
shipments of approximately 10,200 tons and a decrease in overall average selling
prices for the year ended September 30, 1997 as compared to the previous fiscal
year. The weighted average sales price (net of transportation costs) per ton of
plate, pipe and slab products decreased by 2.4%, 1.6% and 0.6%, respectively,
while the weighted average sales price of sheet products increased by 3.5% in
the year ended September 30, 1997 compared to the previous fiscal year. The
decrease in plate prices was due to continued pricing pressure from unfairly
traded imports and other market factors. Shipped tonnage of plate and pipe
increased approximately 44,900 tons or 5.4% and 56,300 tons or 50.2%,
respectively, while shipped
 
                                        6
<PAGE>   4
 
tonnage of sheet and slab products decreased approximately 200 tons or 0.03% and
111,200 tons or 23.3%, respectively, between the two periods. During the third
and fourth quarters a shortage of railcars increased costs and caused shipments
to be slightly lower than expected. Although the Company's primary rail carrier
is building additional railcars over the next several months to meet the
Company's needs and is taking other steps to improve its service to the Company,
the shortage is expected to adversely affect future operations until corrected.
Consistent with the Company's strategic objectives, plate shipments have
increased, in part through utilization of outside processors to level and cut
plate from coils. The Company is currently experiencing increased demand for
pipe and is increasing its production of pipe. The Company continues to sell
slabs to maximize production from the continuous caster while efforts to
increase rolling mill throughput continue. The Company is currently in the
process of installing the rolling mill finishing stand upgrades, which are
expected to increase rolling mill throughput and product quality. Upgrades on
three of six finishing stands have been substantially completed. In light of
recent disruptions to operations caused by work on the upgrades, the Company has
elected to extend the schedule for completion of future work over several months
to limit the ongoing impact.
 
In November 1996, the Company, together with another domestic plate producer,
filed anti-dumping petitions with the Department of Commerce and the
International Trade Commission against imports of cut-to-length carbon plate
from the Russian Federation, Ukraine, the People's Republic of China and the
Republic of South Africa (the "Plate Trade Cases"). The petitions alleged large
dumping margins and also set forth the injury to the U.S. industry caused by
dumped imports from the subject countries. The United States Department of
Commerce issued a final affirmative determination of dumping for each country in
October 1997, finding substantial dumping margins on cut-to-length steel plate
imports from those countries. In December 1997, the International Trade
Commission ("ITC") voted unanimously that the United States industry producing
cut-to-length carbon steel plate was injured due to imports of dumped
cut-to-length plate from the People's Republic of China, the Russian Federation,
Ukraine and the Republic of South Africa. The United States has negotiated
suspension agreements that were effective upon the affirmative injury
determination by the ITC in December 1997. Those agreements will limit imports
of cut-to-length carbon steel plate from the four countries to a total of
approximately 440,000 tons per year for the next five years, a reduction of
about two-thirds from 1996 import levels, and provide for an average 10-15%
increase in import prices to remove the injurious impact of the imports. Any
violation or abrogation of the suspension agreements will result in immediate
imposition of the dumping duties found by the Commerce Department. Dumped
imports from countries not covered by the Plate Trade Cases continue to suppress
plate prices. The Company continues to monitor cut-to-length plate imports from
other countries as well as imports of other of its products and may file
additional trade cases in the future.
 
Domestic competition remains intense and imported steel continues to adversely
affect the market. Moreover additional production capacity is being added in the
domestic
 
                                        7
<PAGE>   5
 
plate and sheet markets. The Company sells substantially all of its products in
the spot market at prevailing market prices. The Company believes its percentage
of such sales is significantly higher than that of most of the other domestic
integrated producers. Consequently, the Company may be affected by price
increases or decreases more quickly than many of its competitors. The Company
intends to react to price increases or decreases in the market as required by
competitive conditions.
 
Cost of sales includes raw materials, labor costs, energy costs, depreciation
and other operating and support costs associated with the production process.
The Company's cost of sales, as a percentage of net sales, decreased to 91.6%
for the year ended September 30, 1997 from 92.9% for the previous fiscal year as
a result of an increase in net sales in fiscal year 1997. The overall average
cost of sales per ton shipped increased approximately $3 per ton between the two
periods primarily as a result of the shift in product mix to higher-cost plate
and pipe products from lower-cost slab products as well as an increase in
operating costs. Operating costs increased as a result of increased natural gas
and other fuel costs, increased hot metal costs associated with blast furnace
reline and repairs, production disruptions associated with the rolling mill
finishing stand upgrades, higher wages and benefits and other increased costs.
The increases in costs were partially offset by significant improvements in
production yield and throughput rates. These operating improvements have,
however, regressed late in the year. The Company expects fuel prices to increase
during the winter months.
 
Depreciation costs included in cost of sales increased approximately $1.0
million for the year ended September 30, 1997 compared with the previous fiscal
year. This increase was due to increases in the asset base resulting primarily
from the No. 1 blast furnace reline and repair.
 
Selling, general and administrative expenses for the year ended September 30,
1997 decreased approximately $2.1 million as compared to the previous fiscal
year. These lower expenses resulted primarily from Company efforts to reduce
administrative staff, to decrease outside services and to reduce other costs.
 
Interest expense increased approximately $4.5 million during the year ended
September 30, 1997 as compared to the previous fiscal year, as a result of
significantly lower capitalized interest and higher levels of borrowing. The
higher levels of borrowing resulted, in part, from the termination of the
Company's receivables securitization facility and the termination of the
Company's prepayment arrangement with Mannesmann.
 
In May 1996, the Company terminated its receivables securitization facility in
connection with an amendment to and restatement of the Company's revolving
credit facility. As a result, other expense decreased approximately $1.7 million
for the year ended September 30, 1997, as compared with the previous fiscal
year.
 
                                        8
<PAGE>   6
 
Fiscal Year Ended September 30, 1996 Compared
With Fiscal Year Ended September 30, 1995
 
Net sales increased 7.1% due to increased shipments of approximately 235,600
tons, offset in large part by decreased overall average selling prices for the
year ended September 30, 1996 as compared to the previous fiscal year. The
weighted average sales price (net of transportation costs) per ton of sheet,
plate, pipe and slab products decreased by 8.5%, 2.0%, 0.9% and 11.8%,
respectively, in the year ended September 30, 1996, as compared to the previous
fiscal year. The decrease in prices was due to pricing pressure resulting from
unfairly traded imports and an increase in domestic hot-rolled capacity as well
as other market factors. Shipped tonnage of plate, pipe and slabs increased
approximately 239,300 tons or 40.1%, 11,900 tons or 11.9% and 106,500 tons or
28.8%, respectively, while shipped tonnage of sheet decreased approximately
122,100 tons or 14.5% between the two years. The overall average selling price
realization per ton was favorably affected by a shift in product mix to
higher-priced plate and pipe products from lower-priced sheet products, offset
in part by a shift in product mix to lower-priced slab products. Consistent with
the Company's strategic objectives, plate shipments increased as various
upgrades to plate processing and finishing equipment were integrated into the
production process. The Company sold slabs to maximize production from the
continuous caster while efforts to increase rolling mill throughput continue.
 
The Company's cost of sales, as a percentage of net sales, increased to 92.9%
for the year ended September 30, 1996 from 89.3% for the previous fiscal year
primarily as a result of lower average selling prices, offset in part by lower
average operating costs. The overall average cost of sales per ton shipped
decreased approximately $2 per ton between the years primarily as a result of
lower operating costs, offset in part by a shift in product mix to higher-cost
plate and pipe products from lower-cost sheet products. Operating costs
decreased as a result of improved production yields and throughput rates, offset
in part by higher depreciation expense, the adverse impact of the plant-wide
power outage discussed below, increased raw materials costs, higher wages and
benefits, and other increased costs.
 
A plant-wide power outage caused by unusual weather conditions in late January
1996 had a significant effect on operating results during the fiscal year. The
Company maintains insurance for both property damage and business interruption,
subject to a deductible of $1 million per occurrence. The Company recorded a
portion of the expected loss recovery during the second and third quarters of
the fiscal year.
 
The Company's new plasma-fired cupola ironmaking facility became available for
operation during the year ended September 30, 1996. The cupola is used to
supplement blast furnace iron production during the reline of the Company's
blast furnaces and may also be used during periods requiring supplementary
ironmaking capacity. The facility lease cost of the cupola adds approximately $2
per ton to finished product cost, effective July 1, 1996. The impact of the
cupola facility on
 
                                        9
<PAGE>   7
 
finished product cost is significantly dependent on raw material costs and
consumption rates, particularly with respect to scrap and coke, and the level of
use of the cupola.
 
Depreciation costs included in cost of sales increased approximately $5.1
million for the year ended September 30, 1996 as compared with the previous
fiscal year. This increase was due to increases in the asset base resulting from
capital expenditures.
 
Selling, general and administrative expenses for the year ended September 30,
1996 increased approximately $0.8 million as compared to the previous fiscal
year. These higher expenses resulted primarily from increased outside services.
 
Interest expense increased approximately $5.6 million during the year ended
September 30, 1996, as compared to the previous fiscal year as a result of
significantly lower capitalized interest and higher levels of borrowing. The
higher levels of borrowing resulted from the termination of the Company's
receivables securitization facility discussed below.
 
In May 1996, the Company terminated its receivables securitization facility in
connection with an amendment to and restatement of the Company's revolving
credit facility. Deferred fees of approximately $550,000 associated with
establishing the receivables securitization facility were expensed to other
expense during the year ended September 30, 1996.
 
Liquidity and Capital Resources
 
The Company's liquidity requirements arise from capital expenditures and working
capital requirements, including interest payments. The Company has met these
requirements principally from the sale of equity, the incurrence of long-term
indebtedness, including borrowings under the Company's credit facilities,
equipment lease financing and cash provided by operations.
 
In March 1993, the Company issued in a public offering $135 million principal
amount of 11 1/8% senior notes (the "11 1/8% Senior Notes" and, together with
the 9 1/2% Senior Notes discussed below, the "Senior Notes"). The 11 1/8% Senior
Notes mature in 2001, are unsecured and require interest payments semi-annually
on March 15 and September 15. After March 1998, the 11 1/8% Senior Notes are
redeemable, in whole or in part, at the option of the Company, subject to
certain redemption premiums. A portion of the proceeds from the 11 1/8% Senior
Notes offering was used to repurchase, at par value, approximately $70 million
aggregate principal amount of term debt.
 
In connection with the offering of the 11 1/8% Senior Notes, the Company issued
$40 million of 14% cumulative redeemable exchangeable preferred stock (the
"Redeemable Preferred Stock") at a price of $100 per share and warrants to
purchase an aggregate of 1,132,000 shares of Class A common stock. The
Redeemable Preferred Stock consists of 400,000 shares, no par value, with a
liquidation preference of approximately $151 per share as of September 30, 1997.
Dividends accrue at a rate equal to 14% per annum of the liquidation preference
and, except as provided below, are payable quarterly in cash from funds legally
available
 
                                       10
<PAGE>   8
 
therefor. For dividend periods ending before April 1996, the Company had the
option to add dividends to the liquidation preference in lieu of payment in
cash. Prior to April 1996, the Company elected to add the dividends to the
liquidation preference. The Redeemable Preferred Stock is exchangeable, at the
Company's option, into subordinated debentures of the Company due 2003 (the
"Exchange Debentures"). The Company is obligated to redeem all of the Redeemable
Preferred Stock in March 2003 from funds legally available therefor. The
Company's ability to pay cash dividends on the Redeemable Preferred Stock is
subject to the covenants and tests contained in the indentures governing the
Senior Notes and in the Company's revolving credit facility. Restricted payment
limitations under the Company's Senior Notes precluded payment of the quarterly
preferred stock dividends beginning with the dividend due June 15, 1996. Unpaid
dividends were approximately $14.3 million at September 30, 1997. Unpaid
dividends accumulate until paid and accrue additional dividends at a rate of 14%
per annum. As a result of the Company's inability to pay four full quarterly
dividends, the holders of the Redeemable Preferred Stock elected two directors
on May 30, 1997. The right of such holders to elect directors continues until
the Company has paid all dividends in arrears and has paid the dividends due for
two consecutive quarters thereafter. After March 1998, both the Redeemable
Preferred Stock and/or the Exchange Debentures are redeemable, at the Company's
option, subject to certain redemption premiums. While not affecting net income
(loss), dividends and the accretion required over time to amortize the original
issue discount associated with the Redeemable Preferred Stock will negatively
impact quarterly earnings per share by approximately $.18 per share. The
warrants to purchase the Company's Class A common stock are exercisable at $11
per share, subject to adjustment in certain circumstances, and expire in March
2000.
 
In February 1994, the Company completed a public offering of $190 million
principal amount of 9 1/2% senior notes (the "9 1/2% Senior Notes"). The 9 1/2%
Senior Notes mature in 2004, are unsecured and require interest payments
semi-annually on January 15 and July 15. After January 1999, the 9 1/2% Senior
Notes are redeemable, in whole or in part, at the option of the Company, subject
to certain redemption premiums. A portion of the proceeds from the 9 1/2% Senior
Notes offering was used to repay the Company's remaining outstanding term debt
of approximately $90 million aggregate principal amount and to pay contractual
prepayment premiums of approximately $12.3 million.
 
On May 14, 1996, the Company amended and restated its revolving credit facility
(the "Revolving Credit Facility") with a syndicate of banks led by Citicorp USA,
Inc., as agent. The Revolving Credit Facility is used primarily for the working
capital and capital expenditure needs of the Company. The Revolving Credit
Facility, in the amount of up to $125 million, is secured by the Company's
inventories, accounts receivable, general intangibles, and proceeds thereof, and
expires on May 14, 2000. Interest is payable monthly at the defined base rate
(8.50% at September 30, 1997) plus 1.50% or the defined LIBOR rate (5.69% at
September 30, 1997) plus 2.75%. The Company pays a monthly commitment fee based
on an annual rate of
 
                                       11
<PAGE>   9
 
 .50% of the average unused portion of the borrowing limit under the Revolving
Credit Facility. The amount available to the Company under the Revolving Credit
Facility ranges between 50 to 60 percent, in the aggregate, of eligible
inventories plus 85 percent of eligible accounts receivable. Borrowing
availability under the Revolving Credit Facility is also subject to other
financial tests and covenants. The Company's receivables securitization facility
was terminated in connection with the amendment. As of September 30, 1997, the
Company's eligible inventories and accounts receivable supported access to
$106.0 million under the Revolving Credit Facility. As of September 30, 1997 the
Company had $74.9 million in borrowings and $9.9 million in letters of credit
outstanding under the Revolving Credit Facility, leaving $21.2 million in
additional borrowing availability.
 
The terms of the Revolving Credit Facility and of the Company's Senior Notes
include cross default and other customary provisions. Financial covenants
contained in the Revolving Credit Facility and/or the Senior Notes also include,
among others, a limitation on dividends and distributions on capital stock of
the Company, a tangible net worth requirement, a cash interest coverage
requirement, a cumulative capital expenditure limitation, limitations on the
incurrence of additional indebtedness unless certain financial tests are
satisfied, a limitation on mergers, consolidations and dispositions of assets
and limitations on liens. In the event of a change in control, the Company must
offer to purchase all Senior Notes then outstanding at a premium. Prior to the
amendment and restatement of the Revolving Credit Facility on May 14, 1997, the
Company entered into various amendments modifying or waiving the financial
covenants and tests contained in the revolving credit facility.
 
Besides these financing activities, the Company's major source of liquidity has
been cash provided by operating activities. Net cash provided by operating
activities was $32.1 million for the year ended September 30, 1997, as compared
with net cash used for operating activities of $19.5 million and net cash
provided by operating activities of $84.1 million for the years ended September
30, 1996 and 1995, respectively. The sources of cash provided by operating
activities during the year ended September 30, 1997, included depreciation and
amortization of $45.0 million, a decrease in accounts receivable of $16.4
million and an increase in accrued liabilities of $3.0 million. These sources of
cash flow were offset in part by an increase in inventories of $6.9 million, a
decrease in accounts payable of $13.2 million, a decrease in production
prepayments of $9.8 million when the Company's production prepayment arrangement
with Mannesmann was terminated, a decrease in the net deferred tax liability of
$0.8 million and a net loss of $1.3 million.
 
Capital expenditures were $47.7 million, $26.4 million and $68.0 million for
fiscal years 1997, 1996 and 1995, respectively. Capital expenditures for 1997
were higher than expected due in part to costs associated with the reline and
repairs of the No. 1 and No. 2 blast furnaces and the related stoves. Capital
expenditures for fiscal year 1998 are estimated at approximately $39 million,
which includes completion of the rolling mill finishing stand modernization
project, implementation of new business and financial software and various other
projects designed to reduce costs and
 
                                       12
<PAGE>   10
 
increase product quality and throughput. The Company anticipates that it may
incur significant start-up and transition costs as the remaining rolling mill
finishing stand equipment is installed and implemented. The Company has selected
and started the implementation of SAP software, an enterprise-wide business
system. The Company expects to benefit significantly from such implementation,
including through addressing the year 2000 issue inherent in its legacy systems.
The implementation is currently estimated to cost $8 to $10 million with
portions being implemented during a two year period. Depending on market,
operational, liquidity and other factors, the Company may elect to adjust the
design, timing and budgeted expenditures of its capital plan. In addition, the
Revolving Credit Facility contains certain limitations on capital expenditures.
 
The Company has formed a limited liability company with certain unrelated
parties, which in turn has entered into a cooperative agreement with the United
States Department of Energy ("DOE") for the demonstration of a cokeless
ironmaking facility and associated power generation and air separation
facilities. As of September 30, 1997, the Company had spent (net of DOE
reimbursement) approximately $0.9 million in connection with the project, which
has been included in construction in progress in the accompanying consolidated
financial statements. Expenditures on the project are subject to government cost
sharing arrangements. Completion of the project remains subject to several
contingencies. Under certain circumstances, the Company will be required to
repay some or all of the government cost share funds and expense other funds
included in construction in progress in the event the project is terminated.
 
The Company is required to make substantial interest and dividend payments on
the Senior Notes, its Redeemable Preferred Stock and outstanding balances under
the Revolving Credit Facility. Currently, the Company's annual cash interest
expense is approximately $39.4 million and its annual preferred stock dividends
are approximately $10.4 million.
 
Factors Affecting Future Results
 
This annual report contains a number of forward-looking statements, including,
without limitation, statements contained in this report relating to the
Company's ability to obtain railcars, to increase shipments to the expected
levels, the Company's objective to increase higher-margin plate and pipe product
mix while reducing lower-margin slab sales, the successful implementation of the
rolling mill finishing stands upgrade which is expected to increase production
throughput and product quality, the Company's ability to compete with the
additional production capacity being added in the domestic plate and sheet
markets, the Company's ability to monitor and control the level of unfairly
traded imports and their effect on the domestic market, the expected adequacy of
cash resources including additional borrowing availability and any other
statements contained herein to the effect that the Company or its management
"believes", "expects", "anticipates", "plans" and similar expressions. There are
a number of important factors that could cause actual events or the
 
                                       13
<PAGE>   11
 
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set
forth below.
 
The Company's future operations will be impacted by, among other factors,
pricing, product mix, throughput levels, production efficiencies and railcar
availability. The Company has efforts underway to increase throughput and
production efficiencies and to continue shifting its product mix to
higher-margin products. There can be no assurance that the Company's efforts
will be successful or that sufficient demand will exist to support the Company's
additional throughput capacity. Pricing in future periods is a key variable to
the Company's future operating results that remains subject to significant
uncertainty. Future pricing will be affected by several factors including the
level of imports, future capacity additions, product demand and other market
factors such as the increased domestic plate production capacity currently
coming on line.
 
The short-term and long-term liquidity of the Company also is dependent upon
several other factors, including availability of capital, foreign currency
fluctuations, competitive and market forces, capital expenditures and general
economic conditions. Moreover, the United States steel market is subject to
cyclical fluctuations that may affect the amount of cash internally generated by
the Company and the ability of the Company to obtain external financing.
Although the Company believes that the anticipated cash from future operations
and borrowings under the Revolving Credit Facility will provide sufficient
liquidity for the Company to meet its debt service requirements and to fund
ongoing operations, including required capital expenditures, there can be no
assurance that these or other possible sources will be adequate. Moreover,
because of the Company's current leverage situation, its financial flexibility
is limited. The Company also faces labor negotiations with the expiration of its
union labor agreement on March 31, 1998. The Company is currently unable to
predict the effect such negotiations will have on the Company's operations and
financial condition.
 
Inflation can be expected to have an effect on many of the Company's operating
costs and expenses. Due to worldwide competition in the steel industry, the
Company may not be able to pass through such increased costs to its customers.
 
                                       14
<PAGE>   12
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Geneva Steel Company:
 
We have audited the accompanying consolidated balance sheets of Geneva Steel
Company (a Utah corporation) and subsidiaries as of September 30, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended September 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Geneva Steel Company
and subsidiaries as of September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997 in conformity with generally accepted accounting principles.
 
Arthur Anderson LLP
 
Salt Lake City, Utah
October 29, 1997
(except with respect to the matter discussed in Note 9
as to which the date is December 17, 1997)
 
                                       15
<PAGE>   13
 
                          CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                      SEPTEMBER 30,
                                                 -----------------------
                                                   1997          1996
                                                 ---------     ---------
<S>                                              <C>           <C>
ASSETS
 
Current Assets:
  Cash and cash equivalents....................  $      --     $     597
  Accounts receivable, less allowance for
     doubtful accounts of $4,564 and $4,031,
     respectively..............................     60,163        76,527
  Inventories..................................    100,081        93,139
  Deferred income taxes........................      3,059         7,637
  Prepaid expenses and other...................      5,291         3,160
  Related party receivable.....................        753           250
                                                  --------      --------
 
          Total current assets.................    169,347       181,310
                                                  --------      --------
 
Property, Plant and Equipment:
  Land.........................................      1,990         1,990
  Buildings....................................     16,109        16,109
  Machinery and equipment......................    645,807       600,290
  Mineral property and development costs.......      8,425         8,425
                                                  --------      --------
                                                   672,331       626,814
 
  Less accumulated depreciation................   (214,016)     (172,291)
                                                  --------      --------
 
     Net property, plant and equipment.........    458,315       454,523
                                                  --------      --------
 
Other Assets...................................     18,408        21,553
                                                  --------      --------
                                                 $ 646,070     $ 657,386
                                                  ========      ========
</TABLE>
 
The accompanying notes to consolidated financial statements are an integral part
                            of these balance sheets.
 
                                       16
<PAGE>   14
 
                    CONSOLIDATED BALANCE SHEETS -- CONTINUED
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                        SEPTEMBER 30,
                                                     -------------------
                                                       1997       1996
                                                     --------   --------
<S>                                                  <C>        <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities:
  Accounts payable.................................  $ 46,348   $ 59,575
  Accrued liabilities..............................    23,671     18,353
  Accrued payroll and related taxes................    11,715     10,867
  Accrued dividends payable........................    14,290      4,682
  Production prepayments...........................        --      9,763
  Accrued interest payable.........................     4,559      4,746
  Accrued pension and profit sharing costs.........     1,701      2,259
                                                     --------   --------
 
     Total current liabilities.....................   102,284    110,245
                                                     --------   --------
 
Long-Term Debt.....................................   399,906    388,431
                                                     --------   --------
 
Deferred Income Tax Liabilities....................     5,108     10,446
                                                     --------   --------
 
Commitments and Contingencies (Note 5)
Redeemable Preferred Stock, Series B, no par value;
  400,000 shares authorized, issued and
  outstanding, with a liquidation value of
  $60,443..........................................    56,169     55,437
                                                     --------   --------
 
Stockholders' Equity:
  Preferred stock, no par value; 3,600,000 shares     
     authorized for all series, excluding Series B,
     none issued...................................        --         --
  Common stock-
     Class A, no par value; 60,000,000 shares
       authorized, 14,705,265 shares issued........    87,979     87,979
     Class B, no par value; 50,000,000 shares
       authorized, 19,151,348 shares issued and
       outstanding................................     10,110     10,110
  Warrants to purchase Class A common stock........     5,360      5,360
  Retained earnings (deficit)......................   (11,399)     5,077
  Less 719,042 and 1,194,897 Class A common stock
     treasury shares, respectively, at cost........    (9,447)   (15,699)
                                                     --------   --------
     Total stockholders' equity....................    82,603     92,827
                                                     --------   --------
                                                     $646,070   $657,386
                                                     ========   ========
</TABLE>
 
The accompanying notes to consolidated financial statements are an integral part
                            of these balance sheets.
 
                                       17
<PAGE>   15
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                             YEAR ENDED SEPTEMBER 30,
                                          ------------------------------
                                            1997       1996       1995
                                          --------   --------   --------
<S>                                       <C>        <C>        <C>
Net sales...............................  $726,669   $712,657   $665,699
Cost of sales...........................   665,978    662,307    594,191
                                          --------   --------   --------
  Gross margin..........................    60,691     50,350     71,508
Selling, general and administrative    
  expenses..............................    22,487     24,621     23,795
                                          --------   --------   --------
  Income from operations................    38,204     25,729     47,713
                                          --------   --------   --------
Other income (expense):
  Interest and other income.............       412        552        520
  Interest expense......................   (40,657)   (36,199)   (30,579)
  Other expense.........................        --     (1,749)    (2,386)
                                          --------   --------   --------
                                           (40,245)   (37,396)   (32,445)
                                          --------   --------   --------
Income (loss) before provision (benefit)
  for income taxes......................    (2,041)   (11,667)    15,268
Provision (benefit) for income taxes....      (773)    (4,429)     3,664
                                          --------   --------   --------
Net income (loss).......................    (1,268)    (7,238)    11,604
Less redeemable preferred stock          
  dividends and accretion for original
  issue discount........................    10,340      9,089      7,998
                                          --------   --------   --------
Net income (loss) applicable to common
  shares................................  $(11,608)  $(16,327)  $  3,606
                                          ========   ========   ========
Net income (loss) per common share......  $   (.74)  $  (1.07)  $    .24
                                          ========   ========   ========
Weighted average common shares
  outstanding...........................    15,660     15,309     15,330
                                          ========   ========   ========
</TABLE>
 
The accompanying notes to consolidated financial statements are an integral part
                              of these statements.
 
                                       18
<PAGE>   16
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                   SHARES ISSUED              AMOUNT          WARRANTS
                              -----------------------   ------------------   TO PURCHASE   RETAINED
                                COMMON       COMMON     COMMON     COMMON      COMMON      EARNINGS    TREASURY
                               CLASS A      CLASS B     CLASS A   CLASS B      CLASS A     (DEFICIT)    STOCK      TOTAL
                              ----------   ----------   -------   --------   -----------   ---------   --------   --------
<S>                           <C>          <C>          <C>       <C>        <C>           <C>         <C>        <C>
Balance at September 30,
  1994......................  14,556,431   20,639,688   $87,193   $ 10,896     $ 5,360     $  19,266   $(19,051)  $103,664
  Conversion of Class B
    common stock into Class
    A common stock..........     138,834   (1,388,340)      733       (733)         --            --         --         --
  Issuance of Class A common
    stock to employee
    savings plan............          --           --        --         --          --          (118)       922        804
  Redeemable preferred stock
    dividends...............          --           --        --         --          --        (7,296)        --     (7,296)
  Redeemable preferred stock
    accretion for original
    issue discount..........          --           --        --         --          --          (702)        --       (702)
  Net income................          --           --        --         --          --        11,604         --     11,604
                              ----------   ----------   -------    -------      ------      --------   --------   --------
Balance at September 30,
  1995......................  14,695,265   19,251,348    87,926     10,163       5,360        22,754    (18,129)   108,074
  Conversion of Class B
    common stock into Class
    A common stock..........      10,000     (100,000)       53        (53)         --            --         --         --
  Issuance of Class A common
    stock to employee
    savings plan............          --           --        --         --          --        (1,350)     2,430      1,080
  Redeemable preferred stock
    dividends...............          --           --        --         --          --        (8,372)        --     (8,372)
  Redeemable preferred stock
    accretion for original
    issue discount..........          --           --        --         --          --          (717)        --       (717)
  Net loss..................          --           --        --         --          --        (7,238)        --     (7,238)
                              ----------   ----------   -------    -------      ------      --------   --------   --------
Balance at September 30,
  1996......................  14,705,265   19,151,348    87,979     10,110       5,360         5,077    (15,699)    92,827
  Issuance of Class A common
    stock to employee
    savings plan............          --           --        --         --          --        (4,868)     6,252      1,384
  Redeemable preferred stock
    dividends...............          --           --        --         --          --        (9,608)        --     (9,608)
  Redeemable preferred stock
    accretion for original
    issue discount..........          --           --        --         --          --          (732)        --       (732)
  Net loss..................          --           --        --         --          --        (1,268)        --     (1,268)
                              ----------   ----------   -------    -------      ------      --------   --------   --------
Balance at September 30,
  1997......................  14,705,265   19,151,348   $87,979   $ 10,110     $ 5,360     $ (11,399)  $ (9,447)  $ 82,603
                              ==========   ==========   =======    =======      ======      ========   ========   ========
</TABLE>
 
The accompanying notes to consolidated financial statements are an integral part
                              of these statements.
 
                                       19
<PAGE>   17
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                             (DOLLARS IN THOUSANDS)
 
Increase (Decrease) in Cash and Cash Equivalents
 
<TABLE>
<CAPTION>
                                           YEAR ENDED SEPTEMBER 30,
                                      ----------------------------------
                                        1997         1996         1995
                                      --------     --------     --------
<S>                                   <C>          <C>          <C>
Cash flows from operating
  activities:
  Net income (loss).................  $ (1,268)    $ (7,238)    $ 11,604
  Adjustments to reconcile net
     income (loss) to net cash
     provided by (used for)
     operating activities:
     Depreciation...................    43,048       42,077       37,293
     Amortization of loan fees......     1,911        2,338        2,015
     Deferred income tax provision
       (benefit)....................      (760)      (3,569)       6,378
     (Gain) loss on asset
       disposal.....................       863          (46)          --
     (Increase) decrease in current
       assets --
       Accounts receivable, net.....    16,364      (41,349)      12,729
       Inventories..................    (6,942)      (3,230)      (3,900)
       Prepaid expenses and other...    (2,634)        (749)         177
     Increase (decrease) in current
       liabilities --
       Accounts payable.............   (13,227)      (8,364)      10,918
       Accrued liabilities..........     2,991         (692)       3,572
       Accrued payroll and related
          taxes.....................     2,232        1,279        2,293
       Production prepayments.......    (9,763)        (237)          --
       Accrued interest payable.....      (187)         136           30
       Accrued pension and profit
          sharing costs.............      (558)         124        1,021
                                      --------     --------     --------
Net cash provided by (used for)
  operating activities..............    32,070      (19,520)      84,130
                                      --------     --------     --------
Cash flows from investing
  activities:
  Purchase of property, plant and
     equipment......................   (47,724)     (26,378)     (68,025)
  Proceeds from sale of property,
     plant and equipment............        21          213       15,966
  Change in other assets............     1,238      (11,361)        (889)
                                      --------     --------     --------
Net cash used for investing
  activities........................  $(46,465)    $(37,526)    $(52,948)
                                      --------     --------     --------
</TABLE>
 
                                       20
<PAGE>   18
 
               CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                           YEAR ENDED SEPTEMBER 30,
                                      ----------------------------------
                                        1997         1996         1995
                                      --------     --------     --------
<S>                                   <C>          <C>          <C>
Cash flows from financing
  activities:
  Proceeds from issuance of
     long-term debt.................  $ 51,987     $ 59,752     $     --
  Payments on long-term debt........   (40,513)     (13,354)     (15,315)
  Payments for deferred loan costs
     and other assets...............        (4)      (1,563)      (1,724)
  Change in bank overdraft..........     2,328           --       (1,341)
  Other.............................        --           --            6
                                      --------     --------     --------
Net cash provided by (used for)
  financing activities..............    13,798       44,835      (18,374)
                                      --------     --------     --------
Net increase (decrease) in cash and
  cash equivalents..................      (597)     (12,211)      12,808
Cash and cash equivalents at
  beginning of year.................       597       12,808           --
                                      --------     --------     --------
Cash and cash equivalents at end of
  year..............................  $     --     $    597     $ 12,808
                                      ========     ========     ========
 
Supplemental disclosures of cash
  flow information:
  Cash paid during the year for:
     Interest (net of amount
       capitalized).................  $ 38,934     $ 34,386     $ 28,683
     Income taxes...................        --          367          250
</TABLE>
 
Supplemental schedule of noncash financing activities:
 
     For the years ended September 30, 1996 and 1995, the Company increased the
     redeemable preferred stock liquidation preference by $3,690 and $7,296,
     respectively, in lieu of paying cash dividends. In addition, for the years
     ended September 30, 1997, 1996 and 1995, redeemable preferred stock was
     increased by $732, $717 and $702, respectively, for the accretion required
     over time to amortize the original issue discount on the redeemable
     preferred stock incurred at the time of issuance. As of September 30,1997,
     accrued dividends of $14,290 were unpaid.
 
The accompanying notes to consolidated financial statements are an integral part
                              of these statements.
 
                                       21
<PAGE>   19
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
NATURE OF OPERATIONS
 
The Company's steel mill manufactures steel slabs and hot-rolled sheet, plate
and pipe products for sale to various distributors, steel processors or
end-users primarily in the western and central United States.
 
PRINCIPLES OF CONSOLIDATION
 
The accompanying consolidated financial statements include the accounts of
Geneva Steel Company and its wholly-owned subsidiaries (collectively, the
"Company"). Intercompany balances and transactions have been eliminated in
consolidation.
 
PERVASIVENESS OF ESTIMATES
 
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
 
CASH AND CASH EQUIVALENTS
 
For purposes of the statements of cash flows, the Company considers all highly
liquid income-earning securities with an initial maturity of ninety days or less
to be cash equivalents. Cash equivalents are stated at cost plus accrued
interest, which approximates fair market value. The Company's cash management
system utilizes a revolving credit facility with a syndicate of banks (see Note
2).
 
INVENTORIES
 
Inventories include costs of material, labor and manufacturing overhead.
Inventories are stated at the lower of cost (using a weighted-average method) or
market value. The composition of inventories as of September 30, 1997 and 1996
was as follows (dollars in thousands):
 
<TABLE>
<CAPTION>
                                              1997         1996
                                            --------      -------
        <S>                                 <C>           <C>
        Raw materials....................   $ 26,783      $31,064
        Semi-finished and finished
          goods..........................     65,406       53,604
        Operating materials..............      7,892        8,471
                                            --------      -------
                                            $100,081      $93,139
                                            ========      =======
</TABLE>
 
Operating materials consist primarily of production molds, platforms for the
production molds and furnace lining refractories.
 
                                       22
<PAGE>   20
 
INSURANCE CLAIM RECEIVABLE
 
A plant-wide power outage associated with unusual weather conditions and an
operator error in January 1996 had an effect on operating results during the
fiscal years ended September 30, 1997 and 1996. The Company is continuing to
assess the full financial impact of the outage and has recorded a portion of the
expected loss recovery in the accompanying fiscal year 1997 and 1996
consolidated financial statements. During fiscal years 1997 and 1996, the
Company recorded $12.3 million and $3.7 million, respectively, as an offset to
cost of goods sold in the accompanying consolidated financial statements. As of
September 30, 1997 and 1996, the Company has an insurance claim receivable of
$11.0 million and $12.3 million included in other assets in the accompanying
consolidated financial statements. The Company continues to work with the
insurance Company to resolve this claim and is continuing to pursue legal
remedies available to the Company (see Note 5).
 
PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives as follows:
 
<TABLE>
        <S>                                             <C>
        Buildings....................................   31.5 years
        Machinery and Equipment......................   2-30 years
</TABLE>
 
Interest related to the construction or major rebuild of facilities is
capitalized and amortized over the estimated life of the related asset.
Capitalization of interest ceases when the asset is placed in service. The
Company capitalized approximately $.5 million, $2.1 million and $5.7 million of
interest during the years ended September 30, 1997, 1996 and 1995, respectively.
 
Maintenance and repairs are charged to expense as incurred and costs of
improvements and betterments are capitalized. Upon disposal, related costs and
accumulated depreciation are removed from the accounts and resulting gains or
losses are reflected in income.
 
Major spare parts and back-up facilities for machinery and equipment are
capitalized and included in machinery and equipment in the accompanying
consolidated financial statements. Major spare parts are depreciated using the
straight-line method over the useful lives of the related machinery and
equipment.
 
Costs incurred in connection with the construction or major rebuild of
facilities are capitalized as construction in progress. No depreciation is
recognized on these assets until placed in service. As of September 30, 1997 and
1996, approximately $43.7 million and $39.2 million, respectively, of
construction in progress was included in machinery and equipment in the
accompanying consolidated financial statements.
 
Mineral property and development costs are depleted using the units of
production method based upon estimated recoverable reserves. Accumulated
depletion is included in accumulated depreciation in the accompanying
consolidated financial statements. The Company experienced minimal mining
activity in fiscal year 1997.
 
                                       23
<PAGE>   21
 
OTHER ASSETS
 
Other assets consist primarily of an insurance claim receivable described above
and deferred loan costs incurred in connection with obtaining long-term
financing. The deferred loan costs are being amortized on a straight-line basis
over the term of the applicable financing agreement. Accumulated amortization of
deferred loan costs totaled $6.6 million and $4.7 million at September 30, 1997
and 1996, respectively.
 
PRODUCTION PREPAYMENTS
 
The Company's production prepayment arrangement with a major customer was
terminated in May 1997. The arrangement previously provided for up to $15
million in production prepayments upon entry of new orders. Prepayments are
recorded as a production prepayment liability until the product is shipped, at
which time the sale is recorded. As of September 30, 1996, production
prepayments of $9.8 million are included in the accompanying consolidated
financial statements.
 
REVENUE RECOGNITION
 
Sales are recognized when the product is shipped to the customer. Sales are
reduced by the amount of estimated customer claims. As of September 30, 1997 and
1996, reserves for estimated customer claims of $2.9 million and $2.5 million,
were included in the allowance for doubtful accounts in the accompanying
consolidated financial statements.
 
INCOME TAXES
 
The Company recognizes a liability or asset for the deferred tax consequences of
temporary differences between the tax basis of assets and liabilities and their
reported amounts in the consolidated financial statements that will result in
taxable or deductible amounts in future years when the reported amounts of the
assets and liabilities are recovered or settled.
 
CONCENTRATIONS OF CREDIT RISK
 
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which, when realized, have been within the range
of management's expectations.
 
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
 
The Company accounts for impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which was issued in March 1995. SFAS No. 121 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the book
 
                                       24
<PAGE>   22
 
value of the asset may not be recoverable. The Company evaluates at each balance
sheet date whether events and circumstances have occurred that indicate possible
impairment. In accordance with SFAS No. 121, the Company uses an estimate of the
future undiscounted net cash flows of the related asset or asset grouping over
the remaining life in measuring whether the assets are recoverable. SFAS No. 121
was adopted in fiscal year 1997 and did not have a material impact on the
Company's financial position or results of operations.
 
NET INCOME (LOSS) PER COMMON SHARE
 
Net income (loss) per common share is based upon the weighted average number of
common and common equivalent shares outstanding during the periods presented.
Common equivalent shares consist of warrants and options to purchase Class A
common stock which have a dilutive effect when applying the treasury stock
method. Class B common stock is included in the weighted average number of
common shares outstanding at one share for every ten shares outstanding as the
Class B common stock can be converted into Class A common stock at this same
rate. Also, the Class B common stock is entitled to one-tenth of the dividends
and other distributions paid to Class A common stockholders. The holders of both
classes of common stock are entitled to one vote per share.
 
The net income (loss) for the years ended September 30, 1997, 1996 and 1995 was
adjusted for the redeemable preferred stock dividends and the accretion required
over time to amortize the original issue discount on the redeemable preferred
stock incurred at the time of issuance.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
In February 1997, SFAS No. 128 "Earnings Per Share" was issued. This statement
specifies requirements for computation, presentation and disclosure of earnings
per share ("EPS") for all periods ending after December 15, 1997. Early adoption
is prohibited and upon adoption, all prior period EPS data must be restated.
SFAS No. 128 simplifies the standards for computing EPS and replaces the
presentations of Primary EPS and Fully Diluted EPS with Basic EPS and Diluted
EPS. The Company will adopt SFAS No. 128 in fiscal year 1998 and believes it
will not have a material impact.
 
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued. Under
current reporting requirements, extraordinary and non-recurring gains and losses
are excluded from income from current operations. SFAS No. 130 requires an "all-
inclusive" approach which specifies that all revenues, expenses, gains and
losses recognized during the period be reported in income, regardless of whether
they are considered to be results of operations of the period. The statement is
effective for fiscal years beginning after December 15, 1997.
 
                                       25
<PAGE>   23
 
RECLASSIFICATIONS
 
Certain reclassifications have been made in the prior years' consolidated
financial statements to conform to the current year presentation.
 
2. LONG-TERM DEBT
 
The aggregate amounts of principal maturities of long-term debt as of September
30, 1997 and 1996 consisted of the following (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                     1997          1996
                                                   --------      --------
<S>                                                <C>           <C>
Senior term notes issued publicly, interest
  payable January 15 and July 15 at 9.5%
  principal due January 15, 2004, unsecured.....   $190,000      $190,000
Senior term notes issued publicly, interest
  payable March 15 and September 15 at 11.125%,
  principal due March 15, 2001, unsecured.......    135,000       135,000
Revolving credit facility from a syndicate of
  banks, interest payable monthly at the defined
  base rate (8.50% at September 30, 1997) plus
  1.50% or the defined LIBOR rate (5.69% at
  September 30, 1997) plus 2.75%, due May 14,
  2000 (see discussion below), secured by
  inventories and accounts receivable...........     74,906        63,431
                                                   --------      --------
                                                   $399,906      $388,431
                                                   ========      ========
</TABLE>
 
The aggregate amounts of principal maturities of long-term debt as of September
30, 1997 were as follows (dollars in thousands):
 
<TABLE>
<CAPTION>
                  YEAR ENDING SEPTEMBER 30,
        ---------------------------------------------
        <S>                                             <C>
             1998....................................   $      --
             1999....................................          --
             2000....................................      74,906
             2001....................................     135,000
             2002....................................          --
             Thereafter..............................     190,000
                                                         --------
                                                        $ 399,906
                                                         ========
</TABLE>
 
On May 14, 1996, the Company amended and restated its revolving credit facility
(the "Revolving Credit Facility") with a syndicate of banks led by Citicorp USA,
Inc., as agent, which is used primarily for the working capital and capital
expenditure needs of the Company. The Revolving Credit Facility, in the amount
of up to $125 million is secured by the Company's inventories, accounts
receivable, general intangibles, and proceeds thereof, and expires on May 14,
2000. Interest is payable monthly at the defined base rate (8.50% at September
30, 1997) plus 1.50%, or the defined LIBOR rate (5.69% at September 30, 1997)
plus 2.75%. The Company pays a monthly commitment fee based on an annual rate of
 .50% of the average unused portion of the borrowing limit under the Revolving
Credit Facility. The amount available to the Company under the Revolving Credit
Facility currently ranges between 50 and 60 percent, in the aggregate, of
eligible inventories plus 85 percent of eligible accounts receivable. Borrowing
availability under the Revolving Credit
 
                                       26
<PAGE>   24
 
Facility is also subject to other financial tests and covenants. As of September
30, 1997, the Company's eligible inventories and accounts receivable supported
access to $106.0 million under the Revolving Credit Facility. As of September
30, 1997, the Company had $74.9 million in borrowings and $9.9 million in
letters of credit outstanding under the Revolving Credit Facility, leaving $21.2
million in additional borrowing availability. The Company's receivables
securitization facility was terminated in connection with the amendment. Certain
deferred fees associated with establishing the Company's receivables
securitization facility were expensed during the year ended September 30, 1996.
 
During the year ended September 30, 1995, the Company retired its revolving
credit facility. Deferred loan costs applicable to debt retired were expensed by
the Company and are included in the accompanying consolidated financial
statements.
 
The terms of the Revolving Credit Facility and the Company's $190 million 9 1/2%
Senior Notes issued in January 1994 (the "9 1/2% Senior Notes") and $135 million
11 1/8% Senior Notes issued in March 1993 (the "11 1/8% Senior Notes" and
together with the 9 1/2% Senior Notes the "Senior Notes") include cross default
and other customary provisions. Financial covenants contained in the Revolving
Credit Facility and/or the Senior Notes also include, among others, a limitation
on dividends and distributions on capital stock of the Company, a tangible net
worth requirement, a cash interest coverage requirement, a cumulative capital
expenditure limitation, a limitation on the incurrence of additional
indebtedness unless certain financial tests are satisfied, a limitation on
mergers, consolidations and dispositions of assets and limitations on liens.
Based on such covenants, as of September 30, 1997, the Company was restricted
from payment of cash dividends. In the event of a change in control, the Company
must offer to purchase all Senior Notes then outstanding at a premium. The
Company is in compliance with the covenants and tests contained in the Revolving
Credit Facility and the Senior Notes.
 
The Company estimates that the aggregate fair market value of its debt and
related obligations was approximately $380.9 million as of September 30, 1997.
These estimates were based on quoted market prices or current rates offered for
debt with similar terms and maturities.
 
3. MAJOR CUSTOMER (DISTRIBUTOR) AND INTERNATIONAL SALES
 
During the years ended September 30, 1997, 1996, and 1995, the Company derived
approximately 33%, 31% and 36%, respectively, of its net sales through one
customer, which is a distributor to other companies. International sales during
the years ended September 30, 1997, 1996 and 1995 did not exceed 10%.
 
                                       27
<PAGE>   25
 
4. INCOME TAXES
 
The provision (benefit) for income taxes as of September 30, 1997, 1996 and 1995
consisted of the following (dollars in thousands):
 
<TABLE>
<CAPTION>
                                           1997        1996         1995
                                           -----      -------      -------
<S>                                        <C>        <C>          <C>
Current income tax benefit
  Federal...............................   $ (11)     $  (752)     $(2,375)
  State.................................      (2)        (108)        (339)
                                            ----       ------       ------
                                             (13)        (860)      (2,714)
                                            ----       ------       ------
Deferred income tax provision (benefit)
  Federal...............................    (665)      (3,123)       4,543
  State.................................     (95)        (446)         649
  Change in valuation allowance.........      --           --        1,186
                                            ----       ------       ------
                                            (760)      (3,569)       6,378
                                            ----       ------       ------
Provision (benefit) for income taxes....   $(773)     $(4,429)     $ 3,664
                                            ====       ======       ======
</TABLE>
 
The provision (benefit) for income taxes as a percentage of income (loss) for
the years ended September 30, 1997, 1996 and 1995 differs from the statutory
federal income tax rate due to the following:
 
<TABLE>
<CAPTION>
                                                 1997       1996       1995
                                                 -----      -----      ----
<S>                                              <C>        <C>        <C>
Statutory federal income tax rate.............   (35.0)%    (35.0)%    35.0%
State income taxes, net of federal income tax
  impact......................................    (3.3)      (3.3)      3.3
Change in valuation allowance.................      --         --      (7.8)
Reassessment of deferred liabilities..........      --         --      (8.0)
Other.........................................     0.4        0.3       1.5
                                                 -----      -----      ----
Effective income tax rate.....................   (37.9)%    (38.0)%    24.0%
                                                 =====      =====      ====
</TABLE>
 
The components of the net deferred income tax assets and liabilities as of
September 30, 1997 and 1996 were as follows (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                       SEPTEMBER 30,
                                                   ---------------------
                                                     1997         1996
                                                   --------     --------
<S>                                                <C>          <C>
Deferred income tax assets:
  Net operating loss carryforward................  $ 35,257     $ 26,019
  Inventory costs capitalized....................     5,442        4,604
  Alternative minimum tax credit carryforward....     6,464        6,464
  Accrued vacation...............................     1,847        1,836
  Allowance for doubtful accounts................     1,023        1,248
  General business credits.......................     2,754        2,978
  Other..........................................       328          188
                                                   --------     --------
     Total deferred income tax assets............    53,115       43,337
                                                   --------     --------
Deferred income tax liabilities:
  Accelerated depreciation.......................   (45,237)     (41,323)
  Insurance claim receivable.....................    (4,217)          --
  Mineral property development costs.............    (2,465)      (2,467)
  Operating supplies.............................    (3,245)      (2,356)
                                                   --------     --------
     Total deferred income tax liabilities.......   (55,164)     (46,146)
                                                   --------     --------
          Net deferred income tax liabilities....  $ (2,049)    $ (2,809)
                                                   ========     ========
</TABLE>
 
                                       28
<PAGE>   26
 
As of September 30, 1997, the Company had a net operating loss carryforward and
an alternative minimum tax credit carryforward for tax reporting purposes of
approximately $92.9 million and $6.5 million, respectively. The net operating
loss carryforward begins expiring in 2009.
 
5. COMMITMENTS AND CONTINGENCIES
 
CAPITAL PROJECTS
 
The Company has incurred substantial capital expenditures to modernize its
steelmaking, casting, rolling and finishing facilities, thereby reducing overall
operating costs, broadening the Company's product line, improving product
quality and increasing throughput capacity. The Company spent $47.7 million and
$26.4 million on capital projects during the fiscal years ended September 30,
1997 and 1996, respectively. These expenditures were made primarily in
connection with the Company's ongoing modernization and capital maintenance
efforts. Capital expenditures for fiscal year 1997 were higher than expected due
in part to costs associated with the reline and repair of the No. 1 and No. 2
blast furnaces and the related stoves. Capital expenditures for fiscal year 1998
are estimated at $39 million, which includes completion of the rolling mill
finishing stand modernization project, implementation of new business and
financial software and various other projects designed to reduce costs and
increase product quality and throughput. The Company has selected and started
the implementation of SAP software, an enterprise-wide business system. It's
expected that the Company will benefit significantly from such implementation,
including addressing the year 2000 issue inherent in its legacy systems. The
implementation is estimated to cost $8 to $10 million with portions being
implemented during a two year period. Depending on market, operational,
liquidity and other factors, the Company may elect to adjust the design, timing
and budgeted expenditures of its capital plan.
 
The Company has formed a limited liability company with certain unrelated
parties, which in turn has entered into a cooperative agreement with the United
States Department of Energy ("DOE") for the demonstration of a cokeless
ironmaking facility and associated power generation and air separation
facilities. As of September 30, 1997, the Company had spent (net of DOE
reimbursement) approximately $0.9 million in connection with the project, which
has been included in construction in progress in the accompanying consolidated
financial statements. Expenditures on the project are subject to government cost
sharing arrangements. Completion of the project remains subject to several
contingencies. Under certain circumstances, the Company may be required to repay
some or all of the government cost share funds and expense other funds included
in construction in progress in the event the project is terminated.
 
LEGAL MATTERS
 
On February 25, 1997, the Company filed a complaint in the Fourth Judicial
District Court for Utah County, State of Utah, against Commerce & Industry
Insurance Co.
 
                                       29
<PAGE>   27
 
("C&I"), a New York corporation. A First Amended Complaint was filed and served
on April 9, 1997, alleging that C&I had breached its insurance contract with
Geneva by failing to pay on Geneva's claim for the loss it incurred on January
25 and 26, 1996 when it lost its internal generator. C&I removed the case to the
United States District Court for the District of Utah on May 1, 1997. Upon C&I's
formal request for additional investigation, Geneva stipulated with C&I on June
6, 1997, to stay the litigation until October 31, 1997, to provide C&I
additional time to review documents and interrogate witnesses. That
investigation continued until September, 1997. During early October, Geneva had
several meetings with C&I in an attempt to resolve the case and assess the
strength of the case.
 
On October 15, 1997, C&I provided a formal response to the claim in which it
declined coverage as an excluded peril under the policy, relying on, among other
defenses, an exclusion for "power, heating or cooling failure."
 
Pursuant to the June 1997 stipulation, C&I answered the First Amended Complaint
on October 31, 1997, denying most of the substantive factual allegations in the
First Amended Complaint and asserting as an affirmative defense, among others,
that Geneva's loss was excluded from coverage. On November 24, 1997, Geneva
filed a Second Amended Complaint against C&I, adding claims seeking relief for
breach of contractual implied covenant of good faith and fair dealing, and bad
faith--intentional and outrageous tortious conduct and oppression. C&I's answer
or other response to the Second Amended Complaint must be filed December 26,
1997. Geneva requested the Court to require that discovery be completed within
approximately six months and the trial be held as soon thereafter as the Court's
schedule would allow. C&I requested the Court to allow discovery until June 1,
1999 and require that the case be ready for trial after October 1, 1999. At a
Scheduling Conference, the Court set trial beginning July 2, 1999. The Court has
set May 1, 1998 as a deadline for dispositive motions on initial coverage issues
and required that all discovery be completed by January 15, 1999. The parties
are presently involved in resolving discovery issues and proceeding with
discovery. The Company intends vigorously to pursue its claims.
 
In addition, to the insurance claim described above, the Company is subject to
various legal matters, which it considers normal for its business activities.
Management, after consultation with the Company's legal counsel, believes that
these matters will not have a material impact on the financial condition or
results of operations of the Company.
 
ENVIRONMENTAL MATTERS
 
Compliance with environmental laws and regulations is a significant factor in
the Company's business. The Company is subject to federal, state and local
environmental laws and regulations concerning, among other things, air
emissions, wastewater discharge, and solid and hazardous waste disposal.
 
The Company has incurred substantial capital expenditures for environmental
control facilities, including the Q-BOP furnaces, the wastewater treatment
facility, the ben-
 
                                       30
<PAGE>   28
 
zene mitigation equipment, the coke oven gas desulfurization facility and other
projects. The Company has budgeted a total of approximately $2.3 million for
environmental capital improvements in fiscal years 1998 and 1999. Environmental
legislation and regulations have changed rapidly in recent years and it is
likely that the Company will be subject to increasingly stringent environmental
standards in the future. Although the Company has budgeted for capital
expenditures for environmental matters, it is not possible at this time to
predict the amount of capital expenditures that may ultimately be required to
comply with all environmental laws and regulations.
 
Under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA"), the EPA and the states have authority to impose
liability on waste generators, site owners and operators and others regardless
of fault or the legality of the original disposal activity. Other environmental
laws and regulations may also impose liability on the Company for conditions
existing prior to the Company's acquisition of the steel mill.
 
At the time of the Company's acquisition of the steel mill, the Company and USX
Corporation ("USX") identified certain hazardous and solid waste sites and other
environmental conditions which existed prior to the acquisition. USX has agreed
to indemnify the Company (subject to the sharing arrangements described below)
for any fines, penalties, costs (including costs of clean-up, required studies
and reasonable attorneys' fees), or other liabilities for which the Company
becomes liable due to any environmental condition existing on the Company's real
property as of the acquisition date that is determined to be in violation of any
environmental law, is otherwise required by applicable judicial or
administrative action, or is determined to trigger civil liability (the
"Pre-existing Environmental Liabilities"). The Company has provided a similar
indemnity (but without any similar sharing arrangement) to USX for conditions
that may arise after the acquisition. Although the Company has not completed a
comprehensive analysis of the extent of the Preexisting Environmental
Liabilities, such liabilities could be material.
 
Under the acquisition agreement between the two parties, the Company and USX
agreed to share on an equal basis the first $20 million of costs incurred by
either party to satisfy any government demand for studies, closure, monitoring,
or remediation at specified waste sites or facilities or for other claims under
CERCLA or the Resource Conservation and Recovery Act. The Company is not
obligated to contribute more than $10 million for the clean-up of wastes
generated prior to the acquisition. The Company believes that it has paid the
full $10 million necessary to satisfy its obligations under the cost-sharing
arrangement. USX has advised the Company, however, of its position that a
portion of the amount paid by the Company may not be properly credited against
the Company's obligations. Although the Company believes that USX's position is
without merit, there can be no assurance that this matter will be resolved
without litigation. The Company believes that resolution of this matter will not
likely have a material adverse effect. The Company's ability to obtain
indemnification from USX in the future will depend on factors which may be
beyond the Company's control and may also be subject to dispute.
 
                                       31
<PAGE>   29
 
PURCHASE COMMITMENTS
 
On February 10, 1989, the Company entered into an agreement which was
subsequently amended on July 1, 1997, to purchase interruptible and firm back-up
power through February 28, 2002. For interruptible power, the Company pays an
energy charge adjusted annually to reflect changes in the supplier's average
energy costs and a facilities charge, based on a minimum of 110,000 kilowatts,
adjusted annually to reflect changes in the supplier's per megawatt fixed
transmission investment and expenses.
 
Effective July 12, 1990, the Company entered into an agreement, which was
subsequently amended in April 1992, to purchase 100% of the oxygen, nitrogen and
argon produced at a facility located at the Company's steel mill which is owned
and operated by an independent party. The contract expires in September 2006 and
specifies that the Company will pay a base monthly charge that is adjusted semi-
annually each January 1 and July 1 based upon a percentage of the change in the
PPI.
 
Effective January 1, 1994, the Company entered into a nine-year agreement to
purchase metallurgical coke, which was subsequently amended on April 11, 1996.
The Company has committed to purchase approximately 275,000 and 229,000 net tons
of coke at specified prices in the fourth and fifth contract years,
respectively. The quantity and price for subsequent years will be as agreed by
the parties.
 
Effective September 1, 1994, the Company entered into a five year agreement,
which was amended on July 25, 1997, to purchase taconite pellets. The Company
has commitments to purchase 2,700,000 net tons in each of the fourth and fifth
years of the contract. Prices are adjusted each year based on an index related
to the "Cartier Pellets Price."
 
Effective June 6, 1995, the Company entered into an agreement to purchase 800
tons a day of oxygen from a new plant constructed at the Company's steel mill
which will be owned and operated by an independent party. The new plant was
completed in mid 1997. The Company pays a monthly facility charge which is
adjusted semi-annually each January 1 and July 1 based on an index. The contract
continues through mid 2012.
 
Effective June 10, 1997, the Company entered into an agreement to purchase 100%
of the oxygen, nitrogen and argon produced at a facility that is owned and
operated by an independent party. The contract expires in September 2002 and
specifies that the Company will pay a monthly facility charge that is adjusted
semi-annually each January 1 and July 1 based upon a percentage of the change in
the PPI.
 
During the period from September 1, 1997 through December 1, 1997, the Company
entered into various agreements to purchase in the aggregate, 39,500 MMBtu's per
day of firm natural gas. The agreements expire between August 1998 and October
1998. The Company expects to extend or replace these agreements as they expire.
The price for most of such gas is adjusted monthly based on the index price as
reported by "Inside FERC Gas Market Report."
 
                                       32
<PAGE>   30
 
Effective November 1, 1997, the Company entered into an agreement to purchase
firm natural gas transportation service for 35,000 decatherms per day for
November 1997 through March 1998 and thereafter from the startup of new
facilities being constructed by an independent party for a period of five years.
 
LEASE OBLIGATIONS
 
The Company leases certain facilities and equipment used in its operations.
Management expects that, in the normal course of business, leases that expire
will be renewed or replaced by other leases. The aggregate commitments under
noncancelable operating leases at September 30, 1997, were as follows (dollars
in thousands):
 
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
-------------------------
<S>                           <C>
1998                          $ 9,106
1999                            8,587
2000                            7,615
2001                            7,386
2002                            5,269
Thereafter                     26,582
                              -------
                              $64,545
                              =======
</TABLE>
 
Total rental expense for non-cancelable operating leases was approximately $9.9
million, $6.0 million and $3.9 million for the years ended September 30, 1997,
1996 and 1995, respectively.
 
LETTERS OF CREDIT
 
As of September 30, 1997, the Company had outstanding letters of credit totaling
approximately $9.9 million.
 
6.  REDEEMABLE PREFERRED STOCK
 
In March 1993, the Company issued $40 million of 14% cumulative redeemable
exchangeable preferred stock (the "Redeemable Preferred Stock") and related
warrants to purchase an aggregate of 1,132,000 shares of Class A common stock.
 
The Redeemable Preferred Stock consists of 400,000 shares, no par value, with a
liquidation preference of approximately $151 per share as of September 30, 1997.
Dividends accrue at a rate equal to 14% per annum of the liquidation preference
and, except as provided below, are payable quarterly in cash from funds legally
available therefor. For dividend periods ending before April 1996, the Company
had the option to add dividends to the liquidation preference in lieu of payment
in cash. Prior to April 1996, the Company elected to add the dividends to the
liquidation preference. As of September 30, 1997 and 1996, the liquidation value
of the Redeemable Preferred Stock was $60.4 million. The Redeemable Preferred
Stock is exchangeable, at the Company's option, into subordinated debentures of
the Company due 2003 (the "Exchange Debentures"). The Company is obligated to
redeem all of the Redeemable Preferred Stock in March 2003 from funds legally
 
                                       33
<PAGE>   31
 
available therefor. The Company's ability to pay cash dividends on the
Redeemable Preferred Stock is subject to the covenants and tests contained in
the indentures governing the Senior Notes and in the Revolving Credit Facility.
Restricted payment limitations under the Company's Senior Notes precluded
payment of the quarterly preferred stock dividends beginning with the dividend
due June 15, 1996. Unpaid dividends were approximately $14.3 million at
September 30, 1997. Unpaid dividends accumulate until paid and accrue additional
dividends at a rate of 14% per annum. As a result of the Company's inability to
pay four full quarterly dividends, the holders of the Redeemable Preferred Stock
elected two directors on May 30, 1997. The right of such holders to elect
directors continues until the Company has paid all dividends in arrears and has
paid the dividends due for two consecutive quarters thereafter. After March
1998, both the Redeemable Preferred Stock and/or the Exchange Debentures are
redeemable, at the Company's option, subject to certain redemption premiums. The
warrants to purchase the Company's Class A common stock are exercisable at $11
per share, subject to adjustment in certain circumstances, and expire in March
2000.
 
The Company estimates that the aggregate fair market value of its Redeemable
Preferred Stock was approximately $32 million at September 30, 1997. The Company
estimates that the aggregate fair market value of its warrants to purchase Class
A common stock was approximately $1.1 million at September 30, 1997. The
Company's estimates for the Redeemable Preferred Stock and warrants to purchase
Class A common stock were based on quoted market prices.
 
7. STOCK OPTIONS
 
Effective January 2, 1990, the Company granted options to purchase 330,000
shares of Class A common stock to key employees at an exercise price of $10.91
per share. On March 26, 1997, certain of these stock options were repriced at
$7.75 per share. The stock options became fully exercisable on January 2, 1995.
The stock options remain exercisable until the earlier of 90 days after the
employee's termination of employment or ten years from the date such stock
options were granted.
 
Effective July 20, 1990, the Company's Board of Directors adopted a Key Employee
Plan (the "Employee Plan") which was approved by the Company's stockholders in
January 1991. The Employee Plan provides that incentive and nonstatutory stock
options to purchase Class A common stock and corresponding stock appreciation
rights may be granted. The Employee Plan provides for issuance of up to
1,000,000 shares of Class A common stock, with no more than 750,000 shares of
Class A common stock cumulatively available upon exercise of incentive stock
options.
 
The Employee Plan Committee (the "Committee"), consisting of outside directors,
determines the time or times when each incentive or nonstatutory stock option
vests and becomes exercisable; provided no stock option shall be exercisable
within six months of the date of grant (except in the event of death or
disability) and no incentive stock option shall be exercisable after the
expiration of ten years from the date of grant. The exercise price of incentive
stock options to purchase Class A
 
                                       34
<PAGE>   32
 
common stock shall be at least the fair market value of the Class A common stock
on the date of grant. The exercise price of nonstatutory options to purchase
Class A common stock is determined by the Committee.
 
Effective December 18, 1996, the Company's Board of Directors adopted the Geneva
Steel Company 1996 Incentive Plan (the "Incentive Plan") which was approved by
the Company's shareholders in February 1997. The Incentive Plan provides that
1,500,000 shares of class A common stock will be available for the grant of
options or awards.
 
The Incentive Plan is administered by a committee consisting of at least two
non-employee directors of the company (the "Committee"). The Committee
determines, among other things, the eligible employees, the number of options
granted and the purchase price, terms and conditions of each award, provided
that the term does not exceed ten years. The per share purchase price may not be
less than 80 percent of the fair market value on the date of grant.
 
The Incentive Plan also provides for the non-discretionary grant of options to
each of its non-employee directors ("Director Options"). Each non-employee
director who becomes a director after January 1, 1997 shall be granted a
Director Option of 4,000 shares upon election or appointment. In addition,
annually on the first business day on or after January 1 of each calendar year
that the Incentive Plan is in effect, all non-employee directors who are members
of the Board at that time shall be granted a Director Option of 2,000 shares;
provided, however, that a director shall not be entitled to receive an annual
grant during the year elected or appointed. Director Options will be granted at
a purchase price equal to the fair market value of the shares on the date of
grant. Director Options vest at 40 percent on the second anniversary of the date
of grant and an additional 20 percent on the third, fourth and fifth
anniversaries of the date of grant, provided that the director remains in
service as a director on each date. The Director Options generally have a ten
year term.
 
Stock option activity for the years ended September 30, 1997, 1996 and 1995
consisted of the following:
 
<TABLE>
<CAPTION>
                                                                WEIGHTED
                                               NUMBER OF         AVERAGE
                                                SHARES       PRICE PER SHARE
                                               ---------     ---------------
<S>                                            <C>           <C>
Outstanding at September 30, 1994............    621,400          $8.24
  Granted....................................    129,700           7.75
  Cancelled..................................     (1,200)          7.82
                                               ---------          -----
Outstanding at September 30, 1995............    749,900           8.15
  Granted....................................    173,438           3.80
  Cancelled..................................    (15,825)          7.80
                                               ---------          -----
Outstanding at September 30, 1996............    907,513           7.33
  Granted....................................    810,000           2.25
  Cancelled..................................    (90,850)          4.97
                                               ---------          -----
Outstanding at September 30, 1997............  1,626,663          $4.93
                                               =========          =====
</TABLE>
 
Options to purchase 565,275, 459,320 and 356,920 shares of Class A common stock
were exercisable on September 30, 1997, 1996 and 1995, respectively. As of
 
                                       35
<PAGE>   33
 
September 30, 1997, 999,087 shares of Class A common stock are available for
grant under the plans.
 
The Company applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized for its stock option plans. Had compensation expense
for the Company's stock option plans been determined in accordance with the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net loss and loss per common share would have been increased to the
pro forma amounts indicated below (in thousands, except per share data):
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED
                                                        SEPTEMBER 30,
                                                     -------------------
                                                      1997        1996
                                                     -------     -------
<S>                                                  <C>         <C>
Net loss as reported...............................  $(1,268)    $(7,238)
Net loss pro forma.................................   (1,650)     (7,292)
Net loss per common share as reported..............  $  (.74)    $ (1.07)
Net loss per common share pro forma................     (.77)      (1.07)
</TABLE>
 
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to October 1, 1995, the resulting pro forma compensation expense
may not be representative of that to be expected in future years.
 
The fair value of each option grant has been estimated on the grant date using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 1997 and 1996, in calculating compensation cost: expected stock price
volatility of 60.8% for both years, an average risk free interest rate of
approximately 6.25 percent and expected lives ranging between three years to
seven years for 1997 and seven years for 1996.
 
The weighted average fair value of options granted during fiscal years 1997 and
1996 was $2.25 and $3.80. At September 30, 1997, the 1,626,663 options
outstanding have exercise prices between $2.25 and $10.91 with a weighted
average exercise price of $4.93 and a weighted average remaining contractual
life of 7.1 years. 565,275 of these options are exercisable with a weighted
average exercise price of $8.26.
 
8. EMPLOYEE BENEFIT PLANS
 
UNION SAVINGS AND PENSION PLAN
 
The Company has a savings and pension plan which provides benefits for all
eligible employees covered by the collective bargaining agreement. This plan is
comprised of two qualified plans; (1) a union employee savings 401(k) plan with
a cash or deferred compensation arrangement and matching contributions and (2) a
noncontributory defined contribution pension plan.
 
Participants may direct the investment of funds related to their deferred
compensation in this plan. On March 1, 1996, the Company began to match
participants' contributions to the savings plan in shares of class A common
stock at 25% up to 4%
 
                                       36
<PAGE>   34
 
of their compensation. For the pension plan, the Company contributed 5% of each
participant's compensation to this plan from March 1, 1996 through September 30,
1997 and contributed 4 1/2% of each participant's compensation to this plan from
March 1, 1995 through February 29, 1996. For the period from October 1, 1994
through February 28, 1995 the Company contributed 4% of each participant's
compensation to this plan. Total contributions by the Company for both plans for
the years ended September 30, 1997, 1996 and 1995 were $5.1 million, $4.5
million and $3.5 million, respectively. The participants vest in these
contributions at 20% for each year of service until fully vested after five
years.
 
VOLUNTARY EMPLOYEE BENEFICIARY ASSOCIATION TRUST
 
Effective March 1, 1995, the Company established a voluntary employee
beneficiary association trust ("VEBA Trust") to fund post-retirement medical
benefits for future retirees covered by the collective bargaining agreement.
Company cash contributions to the VEBA Trust are ten cents for each hour of work
performed by employees covered by the collective bargaining agreement. In
addition, union employees provide a contribution to the VEBA Trust based on a
reduction from their performance dividend plan payment. No benefits will be paid
from the VEBA Trust prior to March 31, 1998. Eligibility requirements and
related matters will be determined at a later date.
 
MANAGEMENT EMPLOYEE SAVINGS AND PENSION PLAN
 
The Company has a savings and pension plan which provides benefits for all
eligible employees not covered by the collective bargaining agreement. This plan
is comprised of two qualified plans: (1) a management employee savings 401(k)
plan with a cash or deferred compensation arrangement and discretionary matching
contributions and (2) a noncontributory defined contribution pension plan.
 
Participants may direct the investment of funds related to their deferred
compensation in this plan. The employee savings plan provides for discretionary
matching contributions as determined each plan year by the Company's Board of
Directors. The Board of Directors elected to match participants' contributions
to the employee savings plan in shares of Class A common stock up to 4% of their
compensation during fiscal years 1997, 1996 and 1995. For the pension plan, the
Company contributed 5% of each participant's compensation to this plan from
March 1, 1996 through September 30, 1997 and contributed 4 1/2% of each
participant's compensation to this plan from March 1, 1995 through February 29,
1996. For the period from October 1, 1994 through February 28, 1995, the Company
contributed 4% of each participant's compensation to this plan. During the years
ended September 30, 1997, 1996 and 1995, total contributions by the Company were
$2.2 million, $2.1 million and $2.0 million, respectively. The participants vest
in the Company's contributions at 20% for each year of service until fully
vested after five years.
 
                                       37
<PAGE>   35
 
PROFIT SHARING AND BONUS PROGRAMS
 
The Company has a profit sharing program for full-time union eligible employees.
Participants receive payments based upon operating income reduced by an amount
equal to a portion of the Company's capital expenditures. No profit sharing was
accrued in the years ended September 30, 1997, 1996 and 1995.
 
The Company also has implemented a performance dividend plan designed to reward
employees for increased shipments. As shipments increase above an annualized
rate of 1.5 million tons, compensation under this plan increases. Payments made
under the performance dividend plan are deducted from any profit sharing
obligations to the extent such obligations exceed the performance dividend plan
payments in any given fiscal year. During the years ended September 30, 1997,
1996 and 1995, performance dividend plan expenses were $9.6 million, $9.2
million and $6.4 million, respectively.
 
SUPPLEMENTAL EXECUTIVE PLANS
 
The Company maintains insurance and retirement agreements with certain of the
management employees and executive officers. Pursuant to the insurance
agreements, the Company pays the annual premiums and receives certain policy
proceeds upon the death of the retired management employee or executive officer.
Pursuant to the retirement agreements, the Company provides for the payment of
supplemental benefits to certain management employees and executive officers
upon retirement.
 
9. RELATED PARTY TRANSACTIONS
 
On September 27, 1996, the Company entered into an agreement to loan up to
$500,000 to its Chief Executive Officer. On September 27, 1996, October 4, 1996
and December 23, 1996 the Company loaned $250,000, $210,000 and $40,000,
respectively. On February 13, 1997, the Company authorized an increase in the
loan amount to $700,000 and advanced an additional $200,000. The loan is
evidenced by a promissory note which bears interest at the rate of 8.53% and was
payable at the earlier of September 27, 1997 or demand for repayment by the
Company. On October 17, 1997, the Chief Executive Officer paid $240,000 on the
note and the payment date of the note was extended to April 30, 1998. On
December 17, 1997, the Chief Executive Officer paid an additional $400,000 on
the note. The loan is secured by interests in real and personal property owned
by the Chief Executive Officer and an affiliated entity.
 
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<PAGE>   36
 
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 
A summary of selected quarterly financial information for the years ended
September 30, 1997 and 1996 is as follows (dollars in thousands):
 
<TABLE>
<CAPTION>
     1997 QUARTERS         FIRST        SECOND       THIRD        FOURTH
------------------------  --------     --------     --------     --------
<S>                       <C>          <C>          <C>          <C>
Net sales...............  $169,741     $182,961     $194,089     $179,878
Gross margin............    12,930        7,921       20,732       19,108
Net income (loss).......    (1,410)      (5,504)       3,962        1,684
Net income (loss)
  applicable to common
  shares................    (3,871)      (8,046)       1,337       (1,028)
Net income (loss) per
  common share..........      (.25)        (.52)         .08         (.06)
</TABLE>
 
<TABLE>
<CAPTION>
     1996 QUARTERS         FIRST        SECOND       THIRD        FOURTH
------------------------  --------     --------     --------     --------
<S>                       <C>          <C>          <C>          <C>
Net sales...............  $167,090     $159,131     $183,105     $203,331
Gross margin............    12,202        7,805        9,420       20,923
Net income (loss).......    (1,332)      (4,685)      (4,360)       3,139
Net income (loss)
  applicable to common
  shares................    (3,496)      (6,920)      (6,655)         744
Net income (loss) per
  common share..........      (.23)        (.45)        (.43)         .05
</TABLE>
 
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