<PAGE>   1
                                                                      Exhibit 13


SELECTED FINANCIAL DATA
(Dollars in thousands, except per share and per ton data)

<TABLE>
<CAPTION>
OPERATING STATISTICS                              1998           1997            1996           1995           1994 
                                               ---------      ---------       ---------       --------      ---------
<S>                                            <C>            <C>             <C>             <C>           <C>      
Net sales                                      $ 720,453      $ 726,669       $ 712,657       $665,699      $ 486,062
Gross margin                                      61,321         60,691          50,350         71,508         15,514
Income (loss) from operations                     21,394         38,204          25,729         47,713         (6,791)
Income (loss) before extraordinary item          (18,943)        (1,268)         (7,238)        11,604        (16,696)
Net income (loss)                                (18,943)        (1,268)         (7,238)        11,604        (26,230)
Net income (loss) applicable to
  common shares                                  (30,715)       (11,608)        (16,327)         3,606        (33,276)
Diluted net income (loss) per common share
  before extraordinary item                        (1.90)          (.74)          (1.07)           .24          (1.57)
Diluted net income (loss) per common share         (1.90)          (.74)          (1.07)           .24          (2.20)

BALANCE SHEET STATISTICS
Cash and cash equivalents                      $      --      $      --       $     597       $ 12,808      $      --
Working capital                                 (298,416)        67,063          71,065         33,045         46,797
Current ratio                                        .39           1.66            1.64           1.29           1.49
Net property, plant and equipment                411,174        458,315         454,523        470,390        453,286
Total assets                                     605,165        646,070         657,386        628,797        606,815
Long-term debt                                        --        399,906         388,431        342,033        357,348
Redeemable preferred stock                        56,917         56,169          55,437         51,031         43,032
Stockholders' equity                              53,208         82,603          92,827        108,074        103,664
Long-term debt as a percentage
   of stockholders' equity                            --            484%            418%           316%           345%

ADDITIONAL STATISTICS
Operating income (loss) per ton shipped        $   10.68      $   17.90       $   12.00       $  24.99      $   (4.63)
Capital expenditures (1)                          10,893         47,724          26,378         68,025        164,918
Depreciation and amortization                     44,182         44,959          44,415         39,308         29,870
Cash flows from operating activities              25,847         32,070         (19,520)        84,130        (28,018)
Raw steel production (tons in thousands)           2,390          2,460           2,428          2,145          1,890
Steel products shipped (tons in thousands)         2,003          2,135           2,145          1,909          1,467
</TABLE>

(1)        Capital expenditures for the year ended September 30, 1998 included
           an offset of $12.5 million relating to an insurance claim settlement.
           Absent the offset, capital expenditures were $23.4 million for the
           year ended September 30, 1998.

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>
<CAPTION>
Fiscal Year Ended September 30, 1997                      HIGH            LOW
<S>                                                     <C>            <C>
  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>

<TABLE>
<CAPTION>
Fiscal Year Ended September 30, 1998                      HIGH            LOW
<S>                                                     <C>            <C>
  First Quarter ended December 31                       $ 3 7/8        $ 1 15/16
  Second Quarter ended March 31                           3 11/16        1 15/16
  Third Quarter ended June 30                             4 1/4          2 1/4
  Fourth Quarter ended September 30                       2 5/8          1 3/16
</TABLE>


<PAGE>   2

As of November 30, 1998, the Company had 14,700,478 shares of Class A common
stock outstanding, held by 654 stockholders of record, and 19,151,348 shares of
Class B common stock outstanding, held by five stockholders of record. The Class
B common stock is convertible into Class A common stock at ten shares of Class B
for one share of Class A.



<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,
                                                 --------------------------------
                                                  1998         1997         1996
                                                 ------       ------       ------
<S>                                              <C>          <C>          <C>   
Net sales                                         100.0%       100.0%       100.0%
Cost of sales                                      91.5         91.6         92.9
                                                 ------       ------       ------

Gross margin                                        8.5          8.4          7.1

Selling, general and administrative expenses        3.0          3.1          3.5
Write-down of impaired assets                       2.5           --           --
                                                 ------       ------       ------

Income from operations                              3.0          5.3          3.6

Other income (expense):
    Interest and other income                       0.0          0.0          0.1
    Interest expense                               (5.9)        (5.6)        (5.1)
    Other expense                                    --           --         (0.2)
                                                 ------       ------       ------

Loss before benefit for income taxes               (2.9)        (0.3)        (1.6)
Benefit for income taxes                           (0.3)        (0.1)        (0.6)
                                                 ------       ------       ------

Net loss                                           (2.6)        (0.2)%       (1.0)%
                                                 ======       ======       ======
</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,
                                                 ------------------------------
                                                  1998        1997        1996
                                                 ------      ------      ------
<S>                                              <C>         <C>         <C>  
Plate                                              62.1%       45.4%       45.0%
Sheet                                              18.2        30.2        29.7
Pipe                                               10.5         9.6         6.6
Slab                                                7.0        11.9        15.9
Non-steel                                           2.2         2.9         2.8
                                                 ------      ------      ------

                                                  100.0%      100.0%      100.0%
                                                 ======      ======      ======
</TABLE>


<PAGE>   4

Fiscal Year Ended September 30, 1998 Compared
With Fiscal Year Ended September 30, 1997

Net sales decreased 0.9% due to decreased shipments of approximately 131,500
tons, mostly offset by an increase in overall average selling prices and a net
shift in product mix to higher-priced plate and pipe products from lower-priced
sheet and slab products for the year ended September 30, 1998 as compared to the
previous fiscal year. The weighted average sales price (net of transportation
costs) per ton of plate, pipe, sheet and slab products increased by 0.5%, 2.4%,
1.2% and 2.0%, respectively, in the year ended September 30, 1998 compared to
the previous fiscal year. The increases in prices were due primarily to strong
steel demand through the first three quarters of the 1998 fiscal year as well as
other market factors. Selling prices on all products declined significantly
during the fourth quarter of the 1998 fiscal year primarily as a result of
increased supply from imports as discussed below. Shipped tonnage of plate and
pipe products increased approximately 308,400 tons or 35.0%, and 9,300 tons or
5.5%, respectively, while shipped tonnage of sheet and slab products decreased
approximately 294,400 tons or 40.9%, and 154,800 tons or 42.4%, respectively,
between the two periods. Consistent with the Company's strategic objectives,
plate shipments increased as a result of expanded utilization of outside
processors to level and cut plate from coils, improved operations of the
Company's cut-to-length facilities and strong demand through June 30, 1998.

During the fourth quarter of 1998, order entry, shipments and pricing for all of
the Company's products were adversely affected by, among other things, increased
imports. As a result of the increased supply of imports and other market
conditions, the Company's overall price realization and shipments will continue
to decrease significantly in the first quarter of fiscal year 1999 and are
expected to remain at low levels at least through the second quarter of fiscal
1999 and negatively impact the financial performance of the Company during such
periods. As of November 30, 1998, the Company had estimated total orders on hand
of approximately 74,000 tons compared to approximately 309,000 tons as of
November 30, 1997.

Foreign competition is a significant factor in the steel industry and has
adversely affected product prices in the United States and tonnage sold by
domestic producers. The intensity of foreign competition is substantially driven
by fluctuations in the value of the United States dollar against several other
currencies as well as the strength of the United States economy relative to
foreign economies. In addition, many foreign steel producers are controlled or
subsidized by foreign governments whose decisions concerning production and
exports may be influenced in part by political and social policy considerations
as well as by prevailing market conditions and profit opportunities.

Historically, coiled and flat plate imports have represented approximately 20%
of total U.S. consumption. In the summer of 1998, the steel industry began
experiencing an unprecedented surge in imports. Approximately 40% of recent
domestic plate and hot roll sheet consumption has been supplied by imports.
Imports have similarly increased in each of the Company's other product lines.
The surge in imports from various countries is in part the result of depressed
economies in various regions, which have greatly reduced steel consumption,
causing steel producers to dramatically increase exports to the United States,
one of the few strong markets for steel consumption. The Company, as well as
other domestic steel producers, believes that foreign producers are selling
product into the U.S. market at dumped prices and are adversely affecting
domestic shipments and pricing.

While a previous import surge in 1996 primarily involved only flat plate, the
current surge includes all of the Company's products. As a result, from May 1998
to November 1998, the Company's plate and sheet prices fell by 12.2% and 12.7%,
respectively. Concurrently, the Company has been forced to reduce production by
approximately 50%, resulting in higher costs per ton and production
inefficiencies, as well as a significant decline in operating results and cash
flow. During September 1998 through November 1998, the Company's total shipments
were approximately 302,000 tons as compared to 493,000 tons for the same period
in 1997.

On September 30, 1998, the Company and eleven other domestic steel producers
filed anti-dumping actions against hot- rolled coiled steel imports form Russia,
Japan and Brazil (the "Coiled Products Cases"). The group also filed a subsidy
(countervailing duty) case against Brazil. In mid November 1998, the
International Trade Commission (the "ITC") made a unanimous affirmative
preliminary injury determination. Preliminary dumping margins will be announced
by the Department of Commerce ("DOC") in February 1999, with final margins
announced between May-July 1999. The ITC is expected to make its final injury
determination between July-September 1999. If affirmative, the final
determinations by the ITC and

<PAGE>   5

DOC will result in duties against imported hot-rolled coil products from the
offending countries. Under applicable law, the U.S. Administration may settle
some or all of the cases if the settlement has the effect of removing the injury
or threat of injury caused by the imports. Settlements, called suspension
agreements, typically involve import volume and/or price limitations

The Company and other U.S. producers will participate in these reviews in
support of a five year extension of these orders. The outcome of these reviews
cannot currently be predicted. Imports of hot-rolled coil products from the
subject countries that arrive in the U.S. after mid-November 1998 are at risk
that duties eventually imposed in the Coiled Products Cases could be applied
retroactively to that date. Consequently, the Company expects that such imports
will likely decline. As a result, the Company expects that its production
levels, shipments and pricing of those products will increase as imports decline
and excess inventory levels are reduced. There is, however, no assurance that
the trade cases will be successful, that duties will be imposed, that imports
from countries not named in the Coiled Products Cases will not increase or that
domestic shipments or prices will rise. The Company continues to monitor imports
of all its products and will very likely file additional trade cases or take
other trade action in the future. Existing trade laws and regulations may be
inadequate to prevent the adverse impact of such an unprecedented world
financial crisis; consequently, imports could pose continuing or increasing
problems for the domestic steel industry and the Company.

A five year sunset review of anti-dumping countervailing duty orders against 
the countries on plate will begin November 1999 and should be concluded by the 
end of 2000.

Domestic competition remains intense and imported steel continues to adversely
affect the market. Moreover, additional production capacity is being added in
the domestic market. 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.

On November 2, 1998, the Company signed a new, three-year agreement with
Mannesmann Pipe and Steel ("Mannesmann"). Under the agreement, Mannesmann will
extend its responsibility for the marketing of the Company's steel products to
throughout the continental United States. Mannesmann previously marketed the
Company's products in fifteen midwestern states and to certain customers in the
eastern United States. The Company expects that this new arrangement will
strengthen its domestic sales efforts. The Company's existing sales force will
remain Company employees, but will be directed by Mannesmann. The Company has
also made several other organizational changes designed to improve product
distribution and on-time delivery.

The Mannesmann agreement requires Mannesmann to purchase and pay for the
Company's finished goods inventory as soon as it has been assigned to or
otherwise identified with a particular order. Mannesmann then sells the product
to end customers at the same sales price Mannesmann paid the Company plus a
variable commission. The Company remains responsible for customer credit and
product quality problems. The Company estimates that when fully implemented
successfully, the new arrangement will significantly reduce its working capital
balances and, as a result, improve the Company's liquidity by approximately $17
to $25 million. Although the Company estimates that full implementation of the
Mannesmann agreement will have the foregoing positive net liquidity effect, the
agreement will also reduce inventory and accounts receivable balances otherwise
included in the Company's borrowing base under the Revolving Credit Facility.
Full implementation of the Mannesmann agreement is expected to be completed
during the third quarter of fiscal 1999. There can be no assurance that the
Mannesmann agreement can be fully implemented quickly or that the new sales
approach will be successful.

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, remained relatively
constant at 91.5% for the year ended September 30, 1998 as compared to the
previous fiscal year as a result of an increase in average selling prices per
ton offset by increased product costs per ton. The overall average cost of sales
per ton shipped increased approximately $17 per ton between the two periods,
primarily as a result of a significant shift in product mix to higher-cost plate
and pipe products from lower-cost sheet and slab products and increased
operating costs. Operating costs increased as a result of reduced product
yields, lower overall production volume, increased depreciation expense,
increased wages and benefits and other increased operating costs. These higher
costs were partially offset by increased production throughput rates for most
products and reduced inbound freight rates.

In an effort to reduce labor costs, the Company implemented a voluntary
resignation program and an early retirement option during the fiscal year for
union-eligible employees. In return for voluntary resignations (excluding
retirements), the

<PAGE>   6

program provided each of up to 200 active union-eligible employees that
submitted their resignations on or prior to July 31, 1998 a one-time, lump-sum
payment of $10,000, full vesting in the Company's 401-k and defined contribution
pension plans and two-months of additional medical and dental insurance
benefits. With respect to voluntary retirements, the program provided for a
one-time, lump-sum payment of $10,000 to each of up to 150 active union-eligible
employees who voluntarily retire prior to December 31, 1998. This benefit is in
addition to any other benefits payable under the collective bargaining
agreement. The Company recognized charges in the fourth fiscal quarter of 1998
to reflect the cost of the foregoing programs. Since implementing the programs,
the Company has achieved 209 permanent reductions of union-eligible employees
through the programs and normal attrition. In addition, the Company has laid off
453 union- eligible employees because of reduced production levels. Since
January 1, 1998, the Company has also reduced its non-union workforce by 149
employees through terminations, layoffs and normal attrition. The reductions are
one of several steps being taken by the Company to improve short and long-term
operating results. The Company anticipates further staff and workforce
restructuring as it streamlines business and production processes.

Depreciation costs included in cost of sales decreased approximately $0.7
million for the year ended September 30, 1998 compared with the same period in
the previous fiscal year. This decrease was due to offsets for depreciation
expense previously taken on equipment reimbursed as part of the settlement of an
insurance claim relating to a January 1996 power outage (the "Insurance
Settlement"). This decrease was partially offset by increases in the asset base
as a result of completion of the rolling mill finishing stand upgrades and a
reline and repairs to a blast furnace.

Selling, general and administrative expenses for the year ended September 30,
1998 decreased approximately $0.4 million as compared to the same period in the
previous fiscal year. These lower expenses resulted primarily from selling,
general and administrative offsets of $2.1 million recorded as a result of the
Insurance Settlement and cost savings related to the staff and support personnel
reductions. These lower expenses were offset in part by increased outside
services associated with, among other things, training costs relating to
implementation of enterprise-wide business systems.

Interest expense increased approximately $1.8 million during the year ended
September 30, 1998 as compared to the same period in the previous fiscal year as
a result of higher average levels of borrowing.

For the years ended September 30, 1998 and 1997, the Company recognized a
benefit for income taxes by carrying back the loss against income from a prior
period. For the year ended September 30, 1998, the Company was only able to
carryback a portion of its loss. As of September 30, 1998, the Company has a net
operating loss carryforward for book purposes of approximately $6.1 million.

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 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.
Consistent with the Company's strategic objectives, plate shipments increased,
in part through utilization of outside processors to level and cut plate from
coils. The Company continued to sell slabs to maximize production from the
continuous caster while efforts to increase rolling mill throughput continued.

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


<PAGE>   7

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 negotiated suspension agreements that became effective
upon the affirmative final conclusive determination in November 1997. Those
agreements 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
import price limits intended 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.

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 a 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, although these operating improvements
regressed late in the year.

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 previous 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, 1998, as compared with the previous fiscal
year.

Liquidity and Capital Resources

The Company's liquidity requirements arise from capital expenditures and working
capital requirements, including interest payments. In the past, 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. Since 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

<PAGE>   8

value, with a liquidation preference of approximately $151 per share as of
September 30, 1998. 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. 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 $25.3 million at
September 30, 1998. Based on the Company's current financial situation, the
Company does not expect to pay dividends on the Redeemable Preferred Stock in
the foreseeable future. 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. 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 $.20 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, 1998) plus 1.50% or the defined LIBOR rate (5.00% 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 has generally ranged 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. As of September 30, 1998, the
Company's eligible inventories and accounts receivable supported access to
$117.1 million under the Revolving Credit Facility. As of September 30, 1998,
the Company had $60.8 million in borrowings and $10.8 million in letters of
credit outstanding under the Revolving Credit Facility, leaving $45.5 million in
additional borrowing availability. As a consequence of reduced production and
sales volumes, the Company's inventory and account receivable borrowing base has
declined since September 30, 1998. In addition, borrowings under the Revolving
Credit Facility have been used to fund operating losses and reductions in
accounts payable. Consequently, the Company's borrowing availability under the
Revolving Credit Facility has declined. As of December 18, 1998, borrowing
availability was $21.3 million, with $58.2 million in borrowings and $10.8
million in letters of credit outstanding. As the Mannesmann agreement described
above is fully implemented, it is expected to generate liquidity for the Company
but will also reduce the borrowing base under the Revolving Credit Facility.

As a result of the Company's recent financial performance, the Company recently
sought and received an amendment to the Revolving Credit Facility with respect
to both the tangible net worth and interest coverage covenants, among other
things. The Company will require additional modifications, waivers or
forbearances to those and other terms of the Revolving Credit Facility prior to
January 7, 1999. The Company has held several meetings with the banking group
for the Revolving Credit Facility. The Company anticipates that the banking
group will grant short-term covenant relief either by way of a waiver or a

<PAGE>   9

forbearance with respect to certain potential or actual defaults. The Company
believes that such waiver or forbearance would not be granted if the Company
intended to make the interest payment due January 15, 1999 on the 9 1/2% Senior
Notes, as discussed below. The banking group will, however, continue to closely
monitor the Company's liquidity and may withdraw its waiver or forbearance or
take other action with respect to, among other things, the terms upon which the
Company may borrow or the Company's continued access to borrowings. There can be
no assurance that the Company will receive the waiver or forbearance, that the
banking group will not require other changes in the terms upon which borrowings
under the Revolving Credit Facility are made, or that the banking group will
continue to permit the Company to incur borrowings thereunder, in which event
the Company's operations would be substantially curtailed and its financial
condition materially adversely affected.

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.

Besides the above-described financing activities, the Company's major source of
liquidity over time has been cash provided by operating activities. Net cash
provided by operating activities was $25.8 million for the year ended September
30, 1998, as compared with net cash provided by operating activities of $32.1
million for the year ended September 30, 1997. The sources of cash for operating
activities during the year ended September 30, 1998, included depreciation and
amortization of $44.2 million, a decrease in prepaid expenses of $13.8 million,
an increase in accrued liabilities of $1.6 million and an increase in accrued
interest payable of $0.5 million. These sources of cash were offset in part by
an increase in inventories of $15.1 million, a decrease in accounts payable of
$12.2 million, an increase in accounts receivable of $3.3 million, a net loss
before the write-down of impaired assets of $3.2 million and a decrease in
accrued payroll and related taxes of $0.5 million. Finished goods inventories
have increased as a result of, among other things, use of outside processors and
transloading centers and increased volumes. On August 11, 1998, the Company
settled a lawsuit against Commerce and Industry Insurance Company relating to an
insurance claim arising from a January 1996 power outage. Under the terms of the
settlement, the Company received $24.5 million in September 1998 ($11.0 million
is included above in the decrease in prepaid expenses).

The Company is required to make substantial interest payments on the Senior
Notes. Currently, the Company's annual cash interest expense, including the
Revolving Credit Facility, is approximately $40 million. As a result of reduced
shipments and price realization caused primarily by the recent surge in imports
of the Company's products, the Company's liquidity has declined significantly.
As stated earlier, the Company had approximately $21.3 million in borrowing
availability under its Revolving Credit Facility as of December 18, 1998. In
light of the uncertainties surrounding both near-term market conditions and
continued access to borrowings under the Revolving Credit Facility, the Company
has elected to preserve liquidity by not making the interest payment of
approximately $9.0 million due January 15, 1999 on the Company's 9 1/2% Senior
Notes, which will result in a default under the terms thereof. Such a default,
if not timely cured, gives right to the legal remedies available under the
relevant bond indenture, including the possibility of acceleration. Similarly,
under the terms of the Senior Notes, nonpayment of interest on one of the two
series results in a cross default with respect to the other and may violate
other terms thereof. The Revolving Credit Facility also contains a similar cross
default provision. The Company anticipates that, as a part of the waiver or
forbearance described above, the banking group for the Revolving Credit Facility
will temporarily waive or forbear from acting upon such a cross default. The
Company has retained financial and legal advisors, who are reviewing the
financial alternatives available to the Company, including without limitation a
possible debt restructuring.

On April 17, 1998, the United Steelworkers of America and the Company reached
agreement on a new, three year labor contract. The labor agreement includes
increases in wages, pensions, and other benefits that are expected to increase
the Company's labor costs by an average of slightly more than three percent a
year. As a part of the contract, the parties also agreed upon several
initiatives intended to improve profitability and assist the Company in
restructuring its workforce. The agreement was ratified by the local bargaining
unit in May 1998.

<PAGE>   10

Capital expenditures were $10.9 million, $47.7 million and $26.4 million for
fiscal years 1998, 1997 and 1996, respectively. Capital expenditures for 1998
were lower than expected primarily as a result of the Company reducing certain
capital expenditures in light of market conditions late in the fiscal year.
Capital expenditures for fiscal year 1999 are estimated at approximately $15 to
$20 million, which includes implementation of new business and financial
software and various other projects designed to reduce costs and increase
product quality and throughput. Given current market conditions and the
uncertainties created thereby, the Company is continuing to closely monitor its
capital spending levels. The Company is implementing SAP software, an
enterprise-wide business system. The Company expects to benefit significantly
from such implementation, including addressing the year 2000 issues inherent in
its mainframe legacy systems. The project is currently estimated to cost $8.0 to
$10.0 million ($5.0 million of which has been spent as of September 30, 1998),
with implementation completed in 1999 (see year 2000 discussion below).
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 is a member of a limited liability company which 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, 1998, the Company
had spent (net of DOE reimbursement) approximately $1.2 million in connection
with the project. Expenditures on the project are subject to government cost
sharing arrangements. Completion of the project remains subject to several
contingencies.

Year 2000 Issues

The Company is actively assessing and correcting potential year 2000 information
system issues in the following areas: (i) the Company's information technology
systems; (ii) the Company's non-information technology systems (i.e., machinery,
equipment and devices which utilize built in or embedded technology); and (iii)
third party suppliers and customers. The Company is undertaking its year 2000
review in the following phases: awareness (education and sensitivity to the year
2000 issue), identification (identifying the equipment processes or systems
which are susceptible to the year 2000 issue), assessment (determining the
potential impact of year 2000 on the equipment, processes and systems identified
during the previous phase and assessing the need for testing and remediation),
testing/verification (testing to determine if an item is year 2000 ready or the
degree to which it is deficient), and implementation (carrying out necessary
remedial efforts to address year 2000 readiness, including validation of
upgrades, patches or other year 2000 fixes).

During fiscal year 1997, the Company selected and started the implementation of
SAP software, an enterprise-wide business system. This system affects nearly
every aspect of the Company's operations. During fiscal year 1998, the Company
installed new year 2000 compliant HP computer hardware and SAP modules for
financial accounting, purchasing and accounts payable, raw materials inventory
control and accounts receivable. The Company is performing final integration
testing and validation on various other SAP modules. The human resource and
payroll module is expected to be implemented on January 1, 1999. In early 1999,
the Company will also implement other SAP modules, including sales and
distribution, materials management, production planning, and product costing and
other management information systems. The HP hardware, operating systems and
software installed are year 2000 ready. The Company expects to test these
hardware, operating systems and software applications in early 1999 to confirm
year 2000 readiness. The Company has identified other hardware, operating
systems and software applications used in its process control and other
information systems and is in the process of obtaining year 2000 compliance
information from the providers of such hardware, operating systems and
applications software. The Company expects to work with vendors to test the year
2000 readiness of such hardware, operating systems and software application
systems. The Company is also reviewing and testing internally developed software
applications for the year 2000 issue.

The Company has substantially completed inventorying its non-information
technology systems and is assessing the year 2000 issues to determine
appropriate testing and remediation. The Company anticipates completing the
assessment of its major non-information technology systems and to start any
necessary testing and implementation efforts for business critical
non-information technology systems in the second quarter of calendar 1999.

The Company has significant relationships with various third parties, and the
failure of any of these third paries to achieve year 2000 compliance could have
a material adverse impact on the Company's business, operating results and
financial condition. These third parties include energy and utility suppliers,
financial institutions, material and product suppliers,


<PAGE>   11

transportation providers, and the Company's significant customers. The Company
expects to audit/review each major third-party supplier to confirm their year
2000 readiness. The audit/review process will continue into the first and second
calendar quarters of 1999.

Through September 30, 1998, the Company has incurred approximately $5 million in
costs to improve the Company's information technology systems and for year 2000
readiness efforts. Of this amount, most represents the costs of implementing and
transitioning to new computer hardware and software for its SAP enterprise-wide
business systems. Approximately 90% of these costs have been capitalized.
Training and re-engineering efforts have been expensed. The Company anticipates
incurring an additional $3 to $5 million in connection with the year 2000
readiness efforts. The Company expects to have all year 2000 readiness efforts
completed by September 30, 1999.

The Company is in the process of preparing contingency plans for critical areas
to address year 2000 failures if remedial efforts are not fully successful. The
Company's contingency plans are expected to target the Company's most reasonably
likely worst case scenarios and to include items such as maintaining an
inventory buffer, providing for redundant information technology systems and
establishing alternative third-party logistics. The Company's contingency plans
will be based in part on the results of third-party supplier questionnaires, and
thus are not fully developed at this time. Completion of initial contingency
plans is targeted for the summer of 1999 (which plans will thereafter be revised
from time to time as deemed appropriate).

No assurance can be given that the Company will not be materially adversely
affected by year 2000 issues. The Company may experience material unanticipated
problems and costs caused by undetected errors or defects in its internal
information technology and non-information technology systems. In addition, the
failure of third-parties to timely address their year 2000 issues could have a
material adverse impact on the Company's business, operations and financial
condition. If, for example, third party suppliers become unable to deliver
necessary materials, parts or other supplies, the Company would be unable to
timely manufacture products. Similarly, if shipping and freight carriers were
unable to ship product, the Company would be unable to deliver product to
customers.

The foregoing discussion of the Company's year 2000 readiness includes
forward-looking statements, including estimates of the timeframes and costs for
addressing the known year 2000 issues confronting the Company, and is based on
management's current estimates, which were derived using numerous assumptions.
There can be no assurance that these estimates will be achieved, and actual
events and results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the availability of personnel with required remediation skills, the ability
of the Company to identify and correct or replace all relevant computer code and
the success of third parties with whom the Company does business in addressing
their year 2000 issues.

Factors Affecting Future Results

This report contains a number of forward-looking statements, including, without
limitation, statements contained in this report relating to the Company's
ability to improve and optimize operations as well as ontime delivery and
customer service, the Company's objective to increase higher-margin sales while
reducing lower-margin sales, 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 compete against imports and the effect of
imports and trade cases on the domestic market, the outcome of trade cases, the
Company's expectation that prices and shipments will remain lower at least in
the first and second fiscal quarters of 1999, the potential commercial and
liquidity benefits of the Mannesmann agreement, the successful implementation of
the Mannesmann agreement, the Company's anticipated additional personnel
reductions among the management and union-eligible employees, the Company's
ability to maintain previous personnel reductions, continued access to the
Revolving Credit Facility and obtaining a waiver or forbearance with respect to
certain potential or actual defaults under the Revolving Credit Facility or the
Senior Notes, the future actions of the banking group for the Company's
Revolving Credit Facility, the Company's ability to restrict capital spending,
the effect of SAP implementation, the Company's plan to become year 2000
compliant, the effect of inflation and any other statements contained herein to
the effect that the Company or its management "believes," "expects,"
"anticipates," "plans" or other similar expressions. There are a number of
important factors that could cause actual events or the Company's actual results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth herein.

<PAGE>   12

The Company's future operations will be impacted by, among other factors,
pricing, product mix, throughput levels and production efficiencies. The Company
has efforts underway to improve throughput rates 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 throughput capacity. Pricing and
shipment levels in future periods are key variables to the Company's future
operating results that remain subject to significant uncertainty. These
variables will be affected by several factors including the level of imports,
future capacity additions, product demand and other market factors such as
increased domestic production capacity.

The short-term and long-term liquidity of the Company also is dependent upon
several other factors, including continued access to the Company's Revolving
Credit Facility, reaction to the Company's failure to make the January 15, 1999
interest payment under the 9 1/2% Senior Notes, 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. In
addition, because of the Company's current financial situation and covenant
compliance issues relating to its Revolving Credit Facility and its decision not
to pay the January 15 interest payment under the 9 1/2% Senior Notes, the
Company's financial flexibility is limited. During the months ahead, the Company
will be forced to make difficult decisions regarding, among other things, the
future direction and capital structure of the Company. Many of the foregoing
factors, of which the Company does not have complete control, may materially
affect the performance and financial condition of the Company.

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.


<PAGE>   13

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, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended September 30, 1998.
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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has experienced recurring net
losses applicable to common shares of $30.7 million, $11.6 million and $16.3
million during the years ended September 30, 1998, 1997 and 1996, respectively.
Restricted payment limitations under the Company's Senior Notes preclude payment
of preferred stock dividends. Additionally, as a result of lower shipments and
declining prices resulting from increases of imports into the Company's markets,
the Company may suffer a significant loss applicable to common shares and a
negative cash flow from operations for the year ending September 30, 1999. These
market conditions and their effect on the Company's liquidity may further
restrict the Company's use of cash which may result in the Company not making
interest payments related to its Senior Notes. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are partially described in Note 1. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.




Salt Lake City, Utah
December 4, 1998

<PAGE>   14

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)


<TABLE>
<CAPTION>
                                                                   September 30,
                                                            -------------------------
ASSETS                                                        1998            1997
                                                            ---------       ---------
<S>                                                         <C>             <C>      
Current Assets:
      Cash and cash equivalents                             $      --       $      --
      Accounts receivable, less allowance for doubtful
          accounts of $6,411 and $4,564, respectively          63,430          60,163
      Inventories                                             113,724         100,081
      Deferred income taxes                                     8,118           3,059
      Prepaid expenses and other                                2,964           5,291
      Related party receivable                                    270             753
                                                            ---------       ---------

               Total current assets                           188,506         169,347
                                                            ---------       ---------

Property, Plant and Equipment:
      Land                                                      1,990           1,990
      Buildings                                                16,119          16,109
      Machinery and equipment                                 640,363         645,807
      Mineral property and development costs                    1,000           8,425
                                                            ---------       ---------

                                                              659,472         672,331

      Less accumulated depreciation                          (248,298)       (214,016)
                                                            ---------       ---------


               Net property, plant and equipment              411,174         458,315
                                                            ---------       ---------

Other Assets                                                    5,485          18,408
                                                            ---------       ---------

                                                            $ 605,165       $ 646,070
                                                            =========       =========
</TABLE>



       The accompanying notes to consolidated financial statements are an
                     integral part of these balance sheets.

<PAGE>   15

CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands)


<TABLE>
<CAPTION>
                                                                              September 30,
                                                                        -------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY                                      1998            1997
                                                                        ---------       ---------
<S>                                                                     <C>             <C>      
Current Liabilities:
      Senior notes                                                      $ 325,000       $      --
      Revolving credit facility                                            60,769              --
      Accounts payable                                                     34,117          46,348
      Accrued liabilities                                                  25,005          23,671
      Accrued payroll and related taxes                                     9,454          11,715
      Accrued dividends payable                                            25,315          14,290
      Accrued interest payable                                              5,080           4,559
      Accrued pension and profit sharing costs                              2,182           1,701
                                                                        ---------       ---------


               Total current liabilities                                  486,922         102,284
                                                                        ---------       ---------


Long-Term Debt                                                                 --         399,906
                                                                        ---------       ---------


Deferred Income Tax Liabilities                                             8,118           5,108
                                                                        ---------       ---------


Commitments and Contingencies (Note 6)

Redeemable Preferred Stock, Series B, no par value;
      400,000 shares authorized, issued and outstanding,
      with a liquidation value of $60,443                                  56,917          56,169
                                                                        ---------       ---------


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
      Accumulated deficit                                                 (47,749)        (11,399)
      Less 4,787 and 719,042 Class A common stock treasury shares,
          respectively, at cost                                            (2,492)         (9,447)
                                                                        ---------       ---------

               Total stockholders' equity                                  53,208          82,603
                                                                        ---------       ---------


                                                                        $ 605,165       $ 646,070
                                                                        =========       =========
</TABLE>



       The accompanying notes to consolidated financial statements are an
                     integral part of these balance sheets.

<PAGE>   16

CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                    Year Ended September 30,
                                                            -----------------------------------------
                                                              1998            1997            1996
                                                            ---------       ---------       ---------
<S>                                                         <C>             <C>             <C>      

Net sales                                                   $ 720,453       $ 726,669       $ 712,657
Cost of sales                                                 659,132         665,978         662,307
                                                            ---------       ---------       ---------

      Gross margin                                             61,321          60,691          50,350

Selling, general and administrative expenses                   22,116          22,487          24,621
Write-down of impaired assets                                  17,811              --              --
                                                            ---------       ---------       ---------

      Income from operations                                   21,394          38,204          25,729
                                                            ---------       ---------       ---------

Other income (expense):
      Interest and other income                                   356             412             552
      Interest expense                                        (42,483)        (40,657)        (36,199)
      Other expense                                                --              --          (1,749)
                                                            ---------       ---------       ---------

                                                              (42,127)        (40,245)        (37,396)
                                                            ---------       ---------       ---------

Loss before benefit for income taxes                          (20,733)         (2,041)        (11,667)
Benefit for income taxes                                       (1,790)           (773)         (4,429)
                                                            ---------       ---------       ---------

Net loss                                                      (18,943)         (1,268)         (7,238)

Less redeemable preferred stock dividends and
      accretion for original issue discount                    11,772          10,340           9,089
                                                            ---------       ---------       ---------

Basic and diluted net loss applicable to common shares      $ (30,715)      $ (11,608)      $ (16,327)
                                                            =========       =========       =========

Basic and diluted net loss per common share                 $   (1.90)      $    (.74)      $   (1.07)
                                                            =========       =========       =========

Weighted average common shares outstanding                     16,155          15,660          15,309
                                                            =========       =========       =========
</TABLE>



       The accompanying notes to consolidated financial statements are an
                       integral part of these statements.

<PAGE>   17

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)


<TABLE>
<CAPTION>
                                                      Shares Issued                    Amount
                                               --------------------------      -----------------------
                                                                                                            WARRANTS
                                                                                                           TO PURCHASE    RETAINED
                                                COMMON          COMMON          COMMON        COMMON         COMMON       EARNINGS  
                                                CLASS A         CLASS B         CLASS A       CLASS B        CLASS A      (DEFICIT) 
                                               ----------     -----------      ---------     ---------     ----------     --------- 
<S>                                            <C>            <C>              <C>           <C>           <C>            <C>       
Balance at September 30, 1995                  14,695,265      19,251,348      $  87,926     $  10,163      $   5,360     $  22,754 
      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)
      Redeemable preferred stock dividends             --              --             --            --             --        (8,372)
      Redeemable preferred stock accretion
          for original issue discount                  --              --             --            --             --          (717)
      Net loss                                         --              --             --            --             --        (7,238)
                                               ----------     -----------      ---------     ---------      ---------     --------- 

Balance at September 30, 1996                  14,705,265      19,151,348         87,979        10,110          5,360         5,077 
      Issuance of Class A common stock to
          employee savings plan                        --              --             --            --             --        (4,868)
      Redeemable preferred stock dividends             --              --             --            --             --        (9,608)
      Redeemable preferred stock accretion
          for original issue discount                  --              --             --            --             --          (732)
      Net loss                                         --              --             --            --             --        (1,268)
                                               ----------     -----------      ---------     ---------      ---------     --------- 

Balance at September 30, 1997                  14,705,265      19,151,348         87,979        10,110          5,360       (11,399)
      Issuance of Class A common stock to
          employee savings plan                        --              --             --            --             --        (5,635)
      Redeemable preferred stock dividends             --              --             --            --             --       (11,025)
      Redeemable preferred stock accretion
          for original issue discount                  --              --             --            --             --          (747)
      Net loss                                         --              --             --            --             --       (18,943)
                                               ----------     -----------      ---------     ---------      ---------     --------- 

Balance at September 30, 1998                  14,705,265      19,151,348      $  87,979     $  10,110      $   5,360     $ (47,749)
                                               ==========     ===========      =========     =========      =========     ========= 
</TABLE>


<TABLE>
<CAPTION>
                                                    TREASURY
                                                      STOCK          TOTAL
                                                    ---------      ---------
<S>                                                 <C>            <C>      
Balance at September 30, 1995                       $ (18,129)     $ 108,074
      Conversion of Class B common stock
          into Class A common stock                        --             --
      Issuance of Class A common stock to
          employee savings plan                         2,430          1,080
      Redeemable preferred stock dividends                 --         (8,372)
      Redeemable preferred stock accretion
          for original issue discount                      --           (717)
      Net loss                                             --         (7,238)
                                                    ---------      ---------

Balance at September 30, 1996                         (15,699)        92,827
      Issuance of Class A common stock to
          employee savings plan                         6,252          1,384
      Redeemable preferred stock dividends                 --         (9,608)
      Redeemable preferred stock accretion
          for original issue discount                      --           (732)
      Net loss                                             --         (1,268)
                                                    ---------      ---------

Balance at September 30, 1997                          (9,447)        82,603
      Issuance of Class A common stock to
          employee savings plan                         6,955          1,320
      Redeemable preferred stock dividends                 --        (11,025)
      Redeemable preferred stock accretion
          for original issue discount                      --           (747)
      Net loss                                             --        (18,943)
                                                    ---------      ---------

Balance at September 30, 1998                       $  (2,492)     $  53,208
                                                    =========      =========
</TABLE>



       The accompanying notes to consolidated financial statements are an
                       integral part of these statements.

<PAGE>   18

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)


Increase (Decrease) in Cash and Cash Equivalents

<TABLE>
<CAPTION>
                                                                    Year Ended September 30,
                                                              ------------------------------------
                                                                1998          1997          1996
                                                              --------      --------      --------
<S>                                                           <C>           <C>           <C>      
Cash flows from operating activities:
      Net loss                                                $(18,943)     $ (1,268)     $ (7,238)
      Adjustments to reconcile net loss to net cash
          provided by (used for) operating activities:
          Depreciation                                          42,272        43,048        42,077
          Amortization of loan fees                              1,910         1,911         2,338
          Deferred income tax benefit                           (2,049)         (760)       (3,569)
          (Gain) loss on asset disposal                            (30)          863           (46)
          Write-down of impaired assets                         17,811            --            --
          (Increase) decrease in current assets -
                Accounts receivable, net                        (3,267)       16,364       (41,349)
                Inventories                                    (15,143)       (6,942)       (3,230)
                Prepaid expenses and other                      13,821        (2,634)         (749)
          Increase (decrease) in current liabilities -
                Accounts payable                               (12,231)      (13,227)       (8,364)
                Accrued liabilities                              1,635         2,991          (692)
                Accrued payroll and related taxes                 (941)        2,232         1,279
                Production prepayments                              --        (9,763)         (237)
                Accrued interest payable                           521          (187)          136
                Accrued pension and profit sharing costs           481          (558)          124
                                                              --------      --------      --------

Net cash provided by (used for) operating activities            25,847        32,070       (19,520)
                                                              --------      --------      --------


Cash flows from investing activities:
      Purchase of property, plant and equipment                (10,893)      (47,724)      (26,378)
      Proceeds from sale of property, plant and equipment           34            21           213
      Change in other assets                                        --         1,238       (11,361)
                                                              --------      --------      --------

Net cash used for investing activities                        $(10,859)     $(46,465)     $(37,526)
                                                              --------      --------      --------
</TABLE>



       The accompanying notes to consolidated financial statements are an
                       integral part of these statements.


<PAGE>   19

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)



Increase (Decrease) in Cash and Cash Equivalents

<TABLE>
<CAPTION>
                                                                  Year Ended September 30,
                                                            ------------------------------------
                                                              1998          1997          1996
                                                            --------      --------      --------
<S>                                                         <C>           <C>           <C>     
Cash flows from financing activities:
      Proceeds from issuance of long-term debt              $ 25,649      $ 51,987      $ 59,752
      Payments on long-term debt                             (39,785)      (40,513)      (13,354)
      Payments for deferred loan costs and other assets           --            (4)       (1,563)
      Change in bank overdraft                                  (852)        2,328            --
                                                            --------      --------      --------

Net cash provided by (used for) financing activities         (14,988)       13,798        44,835
                                                            --------      --------      --------


Net decrease in cash and cash equivalents                         --          (597)      (12,211)
Cash and cash equivalents at beginning of year                    --           597        12,808
                                                            --------      --------      --------


Cash and cash equivalents at end of year                    $     --      $     --      $    597
                                                            ========      ========      ========


Supplemental disclosures of cash flow information: 
      Cash paid during the year for:
          Interest (net of amount capitalized)              $ 40,052      $ 38,934      $ 34,386
          Income taxes                                            --            --           367
</TABLE>


Supplemental schedule of noncash financing activities:

      For the year ended September 30, 1996, the Company increased the
      redeemable preferred stock liquidation preference by $3,690 in lieu of
      paying cash dividends. For the years ended September 30, 1998, 1997 and
      1996, redeemable preferred stock was increased by $747, $732 and $717,
      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, 1998, accrued dividends of $25,315
      were unpaid.



       The accompanying notes to consolidated financial statements are an
                       integral part of these statements.


<PAGE>   20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 NATURE OF OPERATIONS AND BUSINESS CONDITIONS

The Company's steel mill manufactures a wide range of coiled and flat plate,
sheet, pipe and slabs for sale to various distributors, steel processors or
end-users primarily in the western and central United States.

The Company has experienced recurring net losses applicable to common shares of
$30.7 million, $11.6 million and $16.3 million during the years ended September
30, 1998, 1997 and 1996, respectively. Restricted payment limitations under the
Company's Senior Notes preclude payment of preferred stock dividends.
Additionally, as a result of lower shipments and declining prices resulting from
increases of imports into the Company's markets, the Company may suffer a
significant net loss applicable to common shares and a negative cash flow from
operations for the year ending September 30, 1999. These market conditions and
their effect on the Company's liquidity may further restrict the Company's use
of cash which may result in the Company not making interest payments related to
its senior notes. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The Company's continued existence is
dependent upon several factors including the Company's ability to return to
normal production and shipment levels.

The Company's near and long-term operating strategies focus on exploiting
existing and potential competitive advantages while eliminating or mitigating
competitive disadvantages. In response to current market conditions and as a
part of its ongoing corporate strategy, the Company is pursuing several
initiatives intended to increase liquidity and better position the Company to
compete under current market conditions. Several completed and ongoing
initiatives are as follows:

Since September 30, 1997, the Company has reduced administrative staff by
approximately 36 percent, operating management by 50 percent, and production
employees by 16 percent. These headcount reductions are expected to
significantly reduce overall operating expense on an annualized basis. The
Company has also placed 460 employees on layoff status. The Company must offer
employment to laid-off employees when production volume increases. Nevertheless,
to the extent these employees do not desire to return, the Company intends to
capture the attrition created thereby to the maximum extent possible. The
Company is also successfully implementing an union-management partnership
designed to reduce costs and increase efficiency.

The Company has and is pursuing aggressive cost cutting programs. As compared to
November 1997, the Company's monthly spending for administrative costs
(including employment costs) in November 1998 declined by $1.1 million, or 22
percent. Similarly, the Company's monthly spending on products and services for
operations has declined significantly. This reduction is, in part, due to lower
production levels. Nevertheless, operations spending generally increases as
production declines. The Company is currently completing installation of an
enterprise-wide business system that it expects will further reduce employment
costs and result in other significant cost savings.

On November 2, 1998, the Company signed a new, three-year agreement with
Mannesmann Pipe and Steel ("Mannesmann"). Under the agreement, Mannesmann will
market the Company's steel products throughout the continental United States.
Mannesmann previously marketed the Company's products in multiple midwestern
states and to certain customers in the eastern United States. The Company's
existing sales force will remain Geneva Steel employees, but will be directed by
Mannesmann. The Company has also made several other organizational changes
designed to improve product distribution and on-time delivery.

The Mannesmann agreement requires Mannesmann to purchase and pay for the
Company's finished inventory as soon as it has been assigned to or otherwise
identified with a particular order. Mannesmann then sells the products to end
customers at the same sales price Mannesmann paid the Company plus a variable
commission. The Company remains responsible for customer credit and product
quality problems. The Company estimates that, when fully implemented, the new
arrangement will significantly reduce its working capital balances and, as a
result, will improve the Company's liquidity by approximately $17 to $25
million.


<PAGE>   21

Current market conditions have forced the Company to operate only one of its
three blast furnaces and to similarly reduce production throughout the mill.
Reduced production levels adversely affect production efficiencies,
significantly increasing product cost per ton. The Company is attempting to
optimize production efficiency at these lower volume levels by, among other
things, reducing shifts, idling certain facilities and altering production
scheduling.

Current market conditions have and are significantly affecting the Company's
operating results and liquidity. During the months ahead, the Company will be
forced to make difficult decisions regarding, among other things, the future
direction and capital structure of the Company. The Company has retained
financial and legal advisors, who are reviewing the financial alternatives
available to the Company, including without limitation a possible debt
restructuring.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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
3).

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, 1998 and 1997
was as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                     1998             1997
                                                   --------         --------
<S>                                                <C>              <C>     

          Raw materials                            $ 29,250         $ 26,783
          Semi-finished and finished goods           78,746           65,406
          Operating materials                         5,728            7,892
                                                   --------         --------

                                                   $113,724         $100,081
                                                   ========         ========
</TABLE>

Operating materials consist primarily of production molds, platforms for the
production molds and furnace lining refractories.

Insurance Claim Receivable

In August 1998, the Company settled its insurance claim related to a January
1996 plant-wide power outage associated with unusual weather conditions and an
operator error. The Company received $24.5 million in September 1998 to resolve
the claim. The Company's carrier under the primary layer of insurance previously
paid the Company $5.0 million in the fall of 1996. During fiscal years 1997 and
1996, the Company recorded $3.7 million and $12.3 million, respectively, as an
offset to cost of goods sold in the accompanying consolidated financial
statements. Upon settlement of the claim, the Company recorded a $2.1 million
offset to selling, general, and administrative expense, a reduction in property,
plant and equipment of approximately $12.5 million and operating cost offsets of
approximately $3.0 million primarily for depreciation expense previously taken
on the reimbursed equipment in the accompanying consolidated financial
statements.

<PAGE>   22

As of September 30, 1997, the Company had an insurance claim receivable of $11.0
million included in other assets in the accompanying consolidated financial
statements.

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:

          Buildings                                        31.5 years
          Machinery and Equipment                          2-30 years

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 $0.3 million, $0.5 million and $2.1 million of
interest during the years ended September 30, 1998, 1997 and 1996, 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, 1998 and
1997, approximately $13.6 million and $43.7 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 wrote-down certain impaired
mineral property development costs during 1998 by approximately $6.6 million
(see discussion below).

Other Assets

Other assets consist primarily of 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 $8.5 million and $6.6
million at September 30, 1998 and 1997, respectively. At September 30, 1997,
other assets also included the insurance claim receivable described above of
approximately $11.0 million.

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, 1998 and
1997, reserves for estimated customer claims of $4.8 million and $2.9 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


<PAGE>   23

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 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. During fiscal year 1998, the Company wrote down approximately $17.8
million of impaired long-lived assets. The write-down included $8.5 million of
in-line scarfing equipment, $6.6 million of mineral property development costs
and 2.7 million of other machinery and equipment. Based on the operating record
of the Company's continuous caster and recent reduced production levels, the
Company believes that sustained use of the in-line scarfing equipment is
unlikely. In addition, the use by the Company of iron-ore pellets purchased from
third parties and recent reduced production levels has caused the Company to
decrease the estimated value to it of the mineral development costs. Based on
the Company's expectation of future undiscounted net cash flow, these assets
have been written-down to their impaired value.

Basic and Diluted Net Income (Loss) Per Common Share

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"). 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 adopted SFAS No. 128 during the quarter ended
December 31, 1997. The adoption of SFAS No. 128 did not result in an adjustment
to the basic net loss per common share for the years ended September 30, 1998,
1997 and 1996, presented in the accompanying consolidated statements of
operations.

Basic net income (loss) per common share is calculated based upon the weighted
average number of common shares outstanding during the periods. Diluted net
income (loss) per common share is calculated based upon the weighted average
number of common shares outstanding plus the assumed exercise of all dilutive
securities using the treasury stock method. For the years ended September 30,
1998, 1997 and 1996, stock options and warrants prior to conversion are not
included in the calculation of diluted net loss per common share because their
inclusion would be antidilutive. For the year ended September 30, 1998,
2,075,322 common stock equivalents were not included in the calculation of
diluted weighted average common shares outstanding because they were
antidilutive. Class B common stock is included in the weighted average number of
common shares outstanding as one share for every ten shares outstanding because
the Class B common stock is convertible to Class A common stock at this same
rate.

The net loss for the years ended September 30, 1998, 1997 and 1996 was adjusted
for 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 June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
the reporting and display of comprehensive income and its components. This
statement 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, and accordingly, the Company will adopt SFAS No. 130 in fiscal year
1999. The Company believes that adoption of SFAS No. 130 will not have a
material impact on its consolidated financial statements

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires that public
enterprises report certain information about operating segments. The statement
specifies disclosure requirements about the products and services of a company,
the geographic areas in which it operates, and its major customers. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997, and
accordingly, the Company will adopt this statement in fiscal year 1999.

<PAGE>   24

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at fair value. The
statement also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. This statement is effective for fiscal years beginning after June 15, 1999,
and is not expected to have a material impact on the Company's consolidated
financial statements.

3 LONG-TERM DEBT

The aggregate amounts of principal maturities of long-term debt as of September
30, 1998 and 1997 consisted of the following (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                                    1998            1997
                                                                                                  --------        --------
<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, 1998, plus
          1.50% or the defined LIBOR rate (5.00% at September 30, 1998) plus
          2.75%, due May 14, 2000 (see discussion below), secured by inventories
          and accounts receivable                                                                   60,769          74,906
                                                                                                  --------        --------


                                                                                                   385,769         399,906
                                                                                                  

      Less current portion of Senior Notes and Revolving Credit Facility                           385,769              --
                                                                                                  --------        --------
                                                                                                 
                                                                                                  $     --        $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. 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, 1998) plus 1.50%, or the defined LIBOR rate (5.00% at
September 30, 1998) 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 has generally ranged between 50 and 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. As of September 30, 1998, the
Company's eligible inventories and accounts receivable supported access to
$117.1 million under the Revolving Credit Facility. As of September 30, 1998,
the Company had $60.8 million in borrowings and $10.8 million in letters of
credit outstanding under the Revolving Credit Facility, leaving $45.5 million in
additional borrowing availability. Certain deferred fees associated with
establishing the Company's receivables securitization facility were expensed
during the year ended September 30, 1996.

As a result of the Company's recent financial performance, the Company recently
sought and received an amendment to the Revolving Credit Facility with respect
to both the tangible net worth and interest coverage covenants, among other
things. The Company will require additional modifications, waivers or
forbearances to those and other terms of the Revolving Credit Facility prior to
January 7, 1999. The Company has held several meetings with the banking group
for the Revolving Credit Facility. The Company anticipates that the banking
group will grant short-term covenant relief either by way of a waiver or a
forbearance with respect to certain potential or actual defaults. The Company
believes that such waiver or forbearance would not be granted under the terms of
the existing agreement if the Company intended to make the interest payment due
January 15, 1999 on the 9 1/2% Senior Notes. The banking group will, however,
continue to closely monitor the Company's liquidity and


<PAGE>   25

may withdraw its waiver or forbearance or take other action with respect to,
among other things, the terms upon which the Company may borrow or the Company's
continued access to borrowings. There can be no assurance that the Company will
receive the waiver or forbearance, that the banking group will not require other
changes in the terms upon which borrowings under the Revolving Credit Facility
are made, or that the banking group will continue to permit the Company to incur
borrowings thereunder, in which event the Company's operations would be
substantially curtailed and its financial condition materially adversely
affected.

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, 1998, 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.

In light of the uncertainties surrounding both near-term market conditions and
continued access to borrowings under the Revolving Credit Facility, the Company
has elected to preserve liquidity by not making the interest payment of
approximately $9.0 million due January 15, 1999 on the Company's 9 1/2% Senior
Notes, which will result in a default under the terms thereof. Such a default,
if not timely cured, gives right to the legal remedies available under the
relevant bond indenture, including the possibility of acceleration. Similarly,
under the terms of the Senior Notes, nonpayment of interest on one of the two
series results in a cross default with respect to the other and may violate
other terms thereof. The Revolving Credit Facility also contains a similar cross
default provision. The Company anticipates that, as a part of the waiver or
forbearance described above, the banking group for the Revolving Credit Facility
will temporarily waive or forbear from acting upon such a cross default.

The Company estimates that the aggregate fair market value of its debt and
related obligations was approximately $137.4 million as of September 30, 1998.
These estimates were based on quoted market prices or current rates offered for
debt with similar terms and maturities.

4 MAJOR CUSTOMER (DISTRIBUTOR) AND INTERNATIONAL SALES

During the years ended September 30, 1998, 1997, and 1996, the Company derived
approximately 33%, 33% and 31%, respectively, of its net sales through one
customer, which is a distributor to other companies. International sales during
the years ended September 30, 1998, 1997 and 1996 did not exceed 10%.