UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION
(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (985) 652-4900

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|

        The aggregate market value and the number of voting shares of the registrant’s common stock outstanding on October 31, 2003 was:

BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)

TABLE OF CONTENTS

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PART I

Item 1. Business

General

        On January 22, 2003, the Company and its subsidiaries, Bayou Steel Corporation (Tennessee) and River Road Realty Corporation, filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. The petition requesting an order for relief was filed in United States Bankruptcy Court, Northern District of Texas (the “Bankruptcy Court”), where the case is now pending before the Honorable Barbara J. Houser, Case No. 03-30816 BJH (the “Petition Date”). As debtors-in-possession under Sections 1107 and 1108 of the Bankruptcy Code, the Company remains in possession of its properties and assets, and management continues to operate the business. The Company intends to continue normal operations and does not currently foresee any interruption in the shipment of product to customers. The Company cannot engage in transactions outside the ordinary course of business without the approval of the Bankruptcy Court. The Company attributed the need to reorganize to market conditions in the U.S. steel industry resulting from significant pressure from imported steel products, low product pricing, and high energy costs. These factors, coupled with the effects of a slow down in the economy, have adversely affected the Company over the past several years.

        Bayou Steel Corporation (the “Company”) produces light structural shapes and merchant bar steel products. The Company owns and operates a steel minimill and a stocking warehouse on the Mississippi River in LaPlace, Louisiana (the “Louisiana Facility”), three additional stocking locations directly accessible to the Louisiana Facility through the Mississippi River waterway system, and a rolling mill with warehousing facility in Harriman, Tennessee (the “Tennessee Facility”) also accessible through the Mississippi River waterway system. The Company produces merchant bar and light structural steel products ranging in size from two to eight inches at the Louisiana Facility and merchant bar products ranging from one-half to four inches at the Tennessee Facility.

        The Louisiana Facility, which was constructed in 1981 at a cost of $243 million, is a minimill consisting of two electric arc furnaces (one of which is used as a back-up), a rolling mill, a climate controlled warehouse facility, and a deep-water dock on the Mississippi River. A “minimill” is a relatively low-cost steel production facility which uses steel scrap rather than iron ore as its basic raw material. In general, minimills recycle scrap using electric arc furnaces, continuous casters, and rolling mills. The Louisiana Facility’s minimill includes two Krupp computer-controlled electric arc furnaces utilizing water-cooled sidewalls and roof, two Voest-Alpine four-strand continuous casters, a computer supervised Italimpianti reheat furnace, and a 15-stand Danieli rolling mill.

        The Tennessee Facility was acquired and restarted by the Company in late 1995 following the purchase of substantially all of the assets of the Tennessee Valley Steel Corporation (the “TVSC”). The rolling mill at the Tennessee Facility includes a computer supervised reheat furnace, a 16-stand rolling mill and automated straightening, and continuous cut-to-length, stacking and bundling equipment.

        The Company purchases scrap in the open market from a large number of steel scrap dealers, and operates an automobile shredder and scrap processing facility to produce some of the scrap used in its operations. At the Louisiana Facility, steel scrap is used to produce finished steel in a variety of merchant bar and light structural products, including angles, flats, channels, standard beams, and wide flange beams. At the Tennessee Facility, billets are rolled to produce merchant bar products, including angles, flats, rounds, and squares, and also has the capability to produce rebar.

        The location of the production and distribution facilities allows the Company to serve customers across a wide geographic area, including its primary markets in the Southeast, the lower Midwest, the Northeast, the Mid-Atlantic and the Appalachian states. The Company sells its products to approximately 420 customers, the majority of which are steel service centers, in the United States, Canada, Mexico, and occasionally overseas.

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Manufacturing Process and Facilities

        Steel scrap is the principal raw material used in the production process. The Company purchases most of its scrap needs on the open market and transports it to the Louisiana Facility by barge, ocean going vessel, rail, and truck, and stores it in a scrap receiving yard. The Company has been able to control the availability and the cost of steel scrap to some degree by producing its own shredded and cut grade scrap through its scrap processing division, Mississippi River Recycling. The division currently supplies approximately 30% of the steel scrap requirement. Steel scrap is melted in an alternating current electric arc furnace which heats the steel scrap to approximately 3000°F. During the melting and refining process, impurities are removed from the molten steel. After the scrap reaches a molten state, it is poured from the furnace into ladles, where final heating takes place in a ladle metallurgical facility and adjustments of alloying elements and carbon are made to obtain the desired chemistry. The ladles of steel are then transported to one of two four-strand continuous casters in which the molten steel is solidified in water-cooled molds. The casters produce long strands of steel that are cut by torch into billets (semi-finished product of specified weights), moved to a cooling bed and marked for identification. After cooling, the billets are transferred to a rolling mill for further processing. Billets in excess of the Louisiana Facility’s rolling mill requirements are shipped to the Tennessee Facility via rail for its rolling mill.

        In the Louisiana Facility’s rolling mill, billets are reheated in a walking beam reheat furnace equipped with a recuperator before being rolled. Once the billets are heated to approximately 2000°F, they are rolled through up to fifteen mill stands which form the billets into the dimensions and sizes of the finished products. The heated finished shapes are placed on a cooling bed and then straightened and cut into either standard 20 or 40-foot lengths or specific customer lengths. The products are then stacked into 2½ to 5-ton bundles, processed (if needed) through an off-line saw, and placed in a climate-controlled warehouse where they are subsequently shipped to the Company’s stocking locations via barge or to customers via truck, rail, or barge.

        In the Tennessee Facility’s rolling mill, billets are reheated in a pusher reheat furnace equipped with a recuperator before being rolled. Once the billets are heated to approximately 2000°F, they are rolled through up to sixteen mill stands which form the billets into the dimensions and sizes of the finished products. The heated finished shapes are placed on a cooling bed and then straightened and cut into either standard 20 or 40-foot lengths or specific customer lengths. The products are then stacked into 2½ ton bundles and placed in a climate-controlled warehouse where they are subsequently shipped to the Company’s stocking locations via barge or to customers via truck or rail.

Products

        The Louisiana Facility is capable of producing a variety of merchant bar and light structural steel products and the Tennessee Facility is capable of producing a wide range of merchant bar products and rebar.

        The Company’s finished products are used for a wide range of commercial and industrial applications, including the construction and maintenance of petrochemical plants, barges and light ships, railcars, trucks and trailers, rack systems, tunnel and mine support products, joists, sign and guardrail posts for highways, power and radio transmission towers, and bridges. Rebar is used in highway and bridge construction, concrete structures such as parking garages, and home construction for driveways, sidewalks, and swimming pools.

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        The Company plans to continue to emphasize the production of light structural shapes and merchant bar products. Shape and merchant bar margins are historically higher than those of rebar.

        The Company’s products are manufactured to various national specifications, such as those set by the American Society for Testing and Materials, or to specific customer specifications which have more stringent quality criteria. In addition, the Company is one of a few minimills that is certified by the American Bureau of Shipping. The Company certifies that its products are tested in accordance with nuclear, state highway, bridge and military specifications and are also certified for state highway and bridge structures. In fiscal 1999, all of the facilities were certified to the International Standards Organization (ISO) management standards 9002 for quality and the Louisiana Facility was certified to ISO 14001 for environment. The Company was again certified to ISO 9001:2000 in December 2003.

Customers and Sales

        The Company has approximately 420 customers in the United States, Canada, and Mexico. The majority of the Company’s finished products (approximately 77% in fiscal 2003) are sold to domestic steel service centers, while the remainder are sold to original equipment manufacturers (approximately 16% in fiscal 2003) and export customers (approximately 7% in fiscal 2003). Steel service centers warehouse steel products from various minimills and integrated mills and sell combinations of products from different mills to their customers. Some steel service centers also provide additional labor-intensive value-added services such as fabricating, cutting or selling steel by the piece rather than by the bundle. Rebar may be selectively produced and sold to customers who are not necessarily part of the existing customer base.

        In fiscal 2003, the Company’s top ten customers accounted for approximately 51% of total sales with each accounting for 3% to 8% of total sales. The Company believes that it is not dependent on any customer and that it could, over time, replace lost sales attributable to any one customer.

        The Company maintains a real-time computer information system, which tracks prices offered by competitors, as well as freight rates from its customers to both the stocking locations and the nearest competitive facilities and an electronic data interchange system that allows the Company to manage several of its customers’ inventory (Vendor Managed Inventories, VMI) needs. The VMI system can utilize the Internet to allow more customers to use this system. This system, which interfaces with a customer’s system, reduces overhead and is intended to increase sales while providing the customer with just-in-time inventory capabilities, thus improving inventory turns. The Company expects to continue to implement this system upon request and believes that the system gives it a competitive advantage.

        Although sales tend to be slower during the winter months due to the impact of winter weather on construction and transportation activities and during the late summer due to planned plant shutdowns of end-users, seasonality has not been a material factor in the Company’s business. As of September 30, 2003 and 2002, backlog of unfilled cancelable orders totaled, $49 million and $61 million, respectively. As of October 31, 2003, backlog totaled $59 million.

        The level of billet sales to third parties is dependent on the Company’s billet requirements and worldwide market condition, which may vary greatly from year to year. In the past three fiscal years, the Company has consumed substantially all of its billet production.

Distribution

The Louisiana Facility, which includes a deep-water dock, is strategically located on the Mississippi River, which the Company believes enhances its competitive posture by reducing overall transportation costs because it can receive steel scrap and ship its product by barge, normally the most economical method of transportation in the steel industry. The Company also believes that the location of its minimill on the Mississippi River and its network of inland waterway warehouses enable it to access markets for its products that would otherwise be uneconomical due to the high freight costs of its products relative to selling price. The Company operates inventory stocking warehouses near Chicago, Tulsa, and Pittsburgh, which complement its operations in Louisiana and Tennessee. These facilities, each of which is equipped with an inland waterway dock, enable the Company to significantly increase its marketing territory by providing storage capacity for finished products in three additional markets and by allowing the Company to meet customer demand far from its Louisiana and Tennessee mills on a timely basis. From these locations, product is primarily distributed by truck. In addition, rail shipments from the Louisiana Facility are made to some customers. The Company opened a trans-ship location in Carson, California in September 2003. The facility stocks popular Louisiana products and focuses on providing same day or next day shipments in the Los Angeles basin. A fee-for-service has been added to published pricing to offset the higher re-stocking costs associated with rail service to the West Coast.

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        The Louisiana Facility’s deep-water dock enables the Company to load vessels or ocean-going barges for overseas shipments, giving the Company low cost access to overseas markets if business conditions warrant. Additionally, the dock enables the Company to access steel scrap from the Caribbean and South and Central America, an important strategic factor. Since the facility is only 35 miles from the Port of New Orleans, smaller quantities of shapes or billets can be shipped overseas on cargo ships from that port. The Company believes it has a freight cost advantage over landlocked domestic competitors in serving the export market.

        The Tennessee Facility provides access to the Appalachian states and the lower Midwest, plus additional access to the upper Midwest, the Southeast and the Mid-Atlantic regions. The Tennessee Facility’s location is accessible by all forms of transportation; the rolling mill is in close proximity to two major interstate highways, is four miles from a barge dock, and is situated on the main line of the Norfolk Southern Railroad.

Competition

        The Company competes in the market for light structural and merchant bar steel products and does not currently compete with minimill flat rolled producers or most domestic integrated steel producers.

        Light Structural Shapes. The Louisiana Facility’s location on the Mississippi River, as well as the three stocking locations and one trans-ship facility in additional regions of the country, provide access to large markets in the Eastern, Midwestern, Southern, and Central portions of the United States. As a result, the Company competes in the light structural shape market with several major domestic minimills in each of these regions. Depending on the region and product, the Company primarily competes with Nucor Corporation’s Bar Mill Group (comprised of Nucor Darlington, Jewett, Norfolk and Plymouth and the former Auburn Steel and the former Birmingham Steel in Seattle, Kankakee, Jackson and Birmingham), and Gerdau Ameristeel (comprised of Ameristeel, the former Birmingham-Cartersville, Manitoba Rolling Mill, Courtice and LASCO), and Commercial Metals Corporation (comprised of SMI Steel South Carolina, SMI Steel Alabama and SMI Steel Texas). Certain of these competitors have significantly greater financial resources than the Company.

        Merchant Bar Shapes. The Tennessee Facility’s location accessible to the Mississippi River waterway system, as well as the Company’s stocking locations in three additional regions of the country, provide access to large markets in the Appalachian states, and the Eastern, Midwestern, upper Midwestern, Mid-Atlantic, and Central portions of the United States. Merchant bar competitors in the regions are Gerdau Ameristeel, Commercial Metals Corporation, Nucor Corporation, Roanoke Electric, North Star Steel and Marion Steel. Steel Dynamics is forecasted to begin production of SBQ products in their Pittsboro, Indiana mill in early 2004, followed by MBQ bar and light structural sizes in the second quarter that will compete with both Louisiana and Tennessee products.

        Rebar. The Tennessee Facility may produce rebar in varying quantities depending on economic and market trends. The Tennessee Facility’s main competitor for rebar is Gerdau Ameristeel Corporation in Knoxville, Tennessee. Gerdau Ameristeel, however, fabricates a large portion of its rebar in competition with independent fabricators who would be the target customers of the Tennessee Facility. Independent fabricators opting not to buy from a competitor may create a niche. Other competitors include SMI/Cayce Steel and Nucor Corporation.

        Foreign steel producers historically have not competed significantly with the Company in the domestic market for merchant bar and light structural shape sales due to higher freight costs relative to end product prices. However, starting in fiscal 2000, the Company experienced significant competition from foreign producers adversely impacting both price and shipment volumes. The market pressures that commenced with an oversupply due to imports have had an adverse impact on the Company’s financial position.

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Raw Materials

        The Company’s major raw material is steel scrap, which is generated principally from industrial, automotive, demolition, railroad, and other sources, is primarily purchased directly in the open market through a large number of steel scrap dealers. The Company is able to efficiently transport steel scrap from suppliers throughout the inland waterway system and through the Gulf of Mexico, permitting it to take advantage of steel scrap purchasing opportunities far from its minimill, and to protect itself from supply imbalances that develop from time to time in specific local markets. In addition, unlike many other minimills, the Company, through its own scrap purchasing staff, buys scrap primarily from scrap dealers and contractors rather than through brokers. The Company believes that its enhanced knowledge of scrap market conditions gained by being directly involved in scrap procurement on a daily basis, coupled with management’s extensive experience in metals recycling markets, gives the Company the ability to minimize the cost of its highest cost component. The Company does not currently depend upon any single supplier for its scrap. No single vendor supplies more than 10% of the Company’s scrap needs. The Company, on average, maintains a 10 to 20-day inventory of steel scrap.

        The Company has a program of buying directly from local steel scrap dealers for cash. Through this program, the Company has procured approximately 26% of its steel scrap at prices lower than those of large steel scrap dealers. The Company also maintains an automobile shredder and scrap processing facility at a site adjacent to the Louisiana Facility to produce shredded steel scrap and cut grades, two of several types used by the Company. The scrap processing division began operating the automobile shredder in late fiscal 1995 and commenced scrap processing in late fiscal 1998. During fiscal 2003, approximately 30% of the total steel scrap requirements were met by this operation. The Company plans, and the operation has the capacity to produce a greater quantity of steel scrap; however, low scrap prices in recent years limited the availability of raw material to process.

        The cost of steel scrap is subject to market forces, including demand by other steel producers. The cost of steel scrap and the availability of raw material for its scrap processing operations can vary significantly, and finished product prices generally cannot be adjusted in the short-term to recover large increases in steel scrap costs. Over longer periods of time, however, finished product prices and steel scrap prices have trended in the same direction.

        The long-term demand for steel scrap and its importance to both the domestic and foreign steel industries is expected to increase as steel makers continue to expand scrap-based electric arc furnace capacity. This increase in demand will put upward pressure on scrap prices as the export of scrap increases and the availability of domestic prompt industrial scrap is diminished as more metal working industries move offshore. For the foreseeable future, however, the Company believes that supplies of steel scrap will continue to be available in sufficient quantities at competitive prices. In addition, a number of technologies exist for the processing of iron ore into forms which may be substituted for steel scrap in electric arc furnace-based steel making. Such forms include direct-reduced iron, iron carbide, and hot-briquetted iron. While such forms may not be cost competitive with steel scrap at present, a sustained increase in the price of steel scrap could result in increased implementation of these alternative technologies.

        The Tennessee Facility purchases billets on the open market to supply part of its billet requirements. Due to operating in a reduced mode in fiscal 2002 and 2003, the Tennessee Facility purchased only small quantities on the open market. The future plans for fiscal 2004 and forward are to purchase substantial quantities of billets for the Tennessee Facility on the open market. In the past the Company has not experienced any shortages or significant delays in delivery of these materials. However, the Company has not been able to obtain billets in the last few months. The Company is hopeful that an adequate supply of raw materials will continue to be available to supplement internally supplied billets. The Company does expect that availability will be tighter in the future as compared to the past. If billets are not available, it could impact the Company’s ability to meet future plans.

Energy

        The Company’s manufacturing process at the Louisiana Facility consumes large volumes of electrical energy and natural gas. The Company purchases its electrical service needs from a local utility pursuant to a contract originally executed in 1980 and extended in 1995 for a six year period. The contract is automatically extended on a rolling six month basis until either party notifies the other of its intent to change. Under the present contract, the Company receives discounted peak power rates in return for the utility’s right to periodically curtail service during periods of peak demand. These curtailments are generally limited to a few hours and, in prior years, have had a negligible impact on operations; however, the Louisiana Facility experienced an unusual number and duration of power curtailments in fiscal 1998 and 1999 due to generating and transmission failures at the local utility.

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        The Louisiana Facility’s contract with the local utility contains a fuel adjustment clause which allows the utility company to pass on to its customers any increases in price paid for the various fuels used in generating electrical power and other increases in operating costs. This fuel adjustment applies to all of the utility’s consumers. The Company experienced high fuel cost adjustments throughout most of fiscal 2003 and continuing today due to the high cost of natural gas used by the utility in generating electrical power. The Company believes that its electrical energy rates at the Louisiana Facility during this period have not been competitive in the domestic minimill steel industry. To a lesser extent, the Louisiana Facility consumes quantities of natural gas via two separate pipelines serving the facility. The Company generally purchases natural gas on a month-to-month basis from a variety of suppliers. In the latter part of fiscal 2000 and throughout most of fiscal 2001, the cost of natural gas increased dramatically, and in fiscal 2001 and continuing today, the Company entered into commitments to purchase a certain portion of its future natural gas requirements over a period of less than twelve months. Historically, the Louisiana Facility has been adequately supplied with electricity and natural gas and does not anticipate any significant curtailments in its operations resulting from energy shortages. However, volatility in the cost of power and natural gas can have a significant impact on the results of operations and financial position of the Company.

        The Tennessee Facility’s manufacturing process consumes both electricity and natural gas. The Tennessee Facility purchases its electricity from a local utility. Historically, the local utility has had one of the lowest power rates in the country, however, in fiscal 1999, 2000, and 2001 the Company experienced higher power costs under its power contract. In May 2003, the Company negotiated a new ten year contract at a favorable rate with the local utility. The Harriman, Tennessee area is served by only one gas pipeline. Natural gas cost increased significantly at the end of fiscal 2000 and throughout most of fiscal 2001. Currently, the Tennessee Facility does not have a direct interconnect with this pipeline so all gas for the plant must be purchased through a Local Distribution Company (“LDC”). Thus, the Company must pay the wellhead price plus transportation charges and the LDC mark up. The Company believes this premium adds approximately $1 per ton to the Tennessee Facility’s cost structure. (This is not an uncommon arrangement throughout the industry.)

Environmental Matters

        Like others in the industry, the Company’s minimill is required to control the emission of dust from its electric arc furnaces, which contains, among other contaminants, lead, cadmium, and chromium, which are considered hazardous. The Company is subject to various Federal, state and local laws and regulations, including, among others, the Clean Air Act, the 1990 Amendments, the Resource Conservation and Recovery Act, the Clean Water Act and the Louisiana Environmental Quality Act, and the regulations promulgated in connection therewith, concerning the discharge of contaminants that may be emitted into the environment including into the air, and discharged into the waterways, and the disposal of solid and/or hazardous waste such as electric arc furnace dust. The Company has a full-time manager who is responsible for monitoring the Company’s procedures for compliance with such rules and regulations. The Company does not anticipate any substantial increase in its costs for environmental compliance or that such costs will have a material adverse effect on the Company’s competitive position, operations or financial condition. In the event of a release or discharge of a hazardous substance to certain environmental media, the Company could be responsible for the costs of remediating the contamination caused by such a release or discharge.

        The Company plans to close two storm water retention ponds at the Louisiana Facility. The Company has conducted an analysis of the sediments of these ponds consistent with the sampling plan approved by the Louisiana Department of Environmental Quality (the “LDEQ”). Pursuant to the sampling plan, analysis in support of a petition for clean closure of the units has been submitted. The analysis concludes that pond sample results for indicator parameters are not significantly different from background samples and additional closure efforts are not necessary. In addition, a relevant LDEQ guidance which was promulgated since the submission of the sampling plan provides screening standards for the evaluation of the significance of reported concentrations of various contaminants in environmental media. The Risk Evaluation/Corrective Action Program (“RECAP”) was promulgated in December 1998. The pond sediment concentrations were below the relevant screening standards. Based on the data analysis and the recently promulgated RECAP, the Company believes that even if LDEQ requires some additional risk assessment, focused remediation, or both, the costs will not be material.

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        The Resource Conservation and Recovery Act regulates, among other plant operations, the management of emission dust from electric arc furnaces. The Company currently collects the dust resulting from its melting operation through an emissions control system and recycles it through an approved high temperature metals recovery firm. The dust management costs were approximately $1.1 million in each of fiscal 2003, 2002, and 2001.

        TVSC, the prior owners of the Tennessee Facility, entered into a Consent Agreement and Order (“the TVSC Consent Order”) with the Tennessee Department of Environment and Conservation under its voluntary clean-up program. The Company, in acquiring the assets of TVSC, entered into a Consent Agreement and Order (“the Bayou Steel Consent Order”) with the Tennessee Department of Environment and Conservation, which is supplemental to the previous TVSC Consent Order and does not affect the continuing validity of the TVSC Consent Order. The ultimate remedy and clean-up goals will be dictated by the results of human health and ecological risk assessment which are components of a required, structured investigative, remedial, and assessment process. As of September 30, 2003, investigative, remedial, and risk assessment activities have resulted in cumulative expenditures of approximately $1.4 million with an estimated $0.5 million remaining to complete the remediation.

        In fiscal 1999, the Louisiana Facility became certified to the ISO 14001 management standard. The ISO 14001 standard for environmental management is a voluntary management system whereby companies undergo rigorous independent audits to meet some of the world’s strictest standards. The Company was the first United States minimill to receive the ISO 14001 certification.

        The Company believes it is in compliance, in all material respects, with applicable environmental requirements and that the cost of such continuing compliance is not expected to have a material adverse effect on the Company’s competitive position, operations or financial condition, or cause a material increase in currently anticipated capital expenditures. As of September 30, 2003 and 2002, loss contingencies have been accrued for certain environmental matters and the Company believes that this amount is not material. It is reasonably possible that the Company’s recorded estimates of its obligations may change in the near term.

        The Company’s future expenditures for installation of environmental control facilities are difficult to predict. Environmental legislation, regulations, and related administrative policies are continuously modified. Environmental issues are also subject to differing interpretations by the regulated community, the regulating authorities, and the courts. Consequently, it is difficult to forecast expenditures needed to comply with future regulations. Therefore, at this time, the Company cannot estimate those costs associated with compliance and the effect of the upcoming regulations will have on the Company’s competitive position, operations, or financial condition. In fiscal 2003, the Company had minimal capital spending on environmental programs and expects to have minimal spending again in fiscal 2004. There can be no assurance that material environmental liabilities will not be incurred in the future or that future compliance with environmental laws (whether those currently in effect or enacted in the future) will not require additional expenditures or require changes to current operations, any of which could have a material adverse effect on the Company’s results of operations and financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Safety and Health Matters

        The Company is subject to various regulations and standards promulgated under the Occupational Safety and Health Act. These regulations and standards are administered by OSHA, and constitute minimum requirements for employee protection and health. It is the Company’s policy to meet or exceed these minimum requirements in all of the Company’s safety and health policies, programs, and procedures.

        The Company knows of no material safety or health issues.

Employees

        As of September 30, 2003, the Company had 466 employees, 113 of whom were salaried office, supervisory and sales personnel, and 353 were hourly employees. Approximately 343 are covered by labor contracts. The Company believes its relations with employees to be good.

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Item 2. Properties

        The Company’s principal operating properties are listed in the table below. The Company believes that its properties and warehouse facilities are suitable and adequate to meet its needs. In order to improve customer service beyond current levels or to distribute additional capacity, improvements and/or additional warehouse space would be needed.

Item 3. Legal Proceedings

        The Company is not involved in any pending legal proceedings which involve claims for damages exceeding 10% of its current assets. The Company is not a party to any material pending litigation which, if decided adversely, would have a significant impact on the business, income, assets, or operation of the Company, and the Company is not aware of any material threatened litigation which might involve the Company. See also “—Environmental Matters” and “—Safety and Health Matters,” included elsewhere herein and the Footnotes to the Company’s Consolidated Financial Statements included in its 2003 Annual Report.

Item 4. Submission of Matters to a Vote of Security Holders

        No matters were submitted to a vote of security holders during the fourth quarter of fiscal year ended September 30, 2003.

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PART II

Item 5. Market for Registrant’s Class A Common Stock and Related Stockholder Matters

Market Information and Stock Price

        The Class A Common Stock of the Company was traded on the American Stock Exchange (AMEX) under the symbol BYX. The stock had been trading since July 27, 1988. When the Company filed for bankruptcy on January 22, 2003, AMEX halted trading of the Class A Common Stock. Subsequently, AMEX delisted the Company. The Class A Common Stock is now listed on the Pink Sheets under the symbol BAYUA. The approximate number of stockholders of record on October 31, 2003 was 313. In addition, there are approximately 1,950 shareholders whose stock is held in street name. The closing price per share on October 31, 2003 was $0.012. The following tables set forth the high and low sales prices for the periods indicated.

        There is no public trading market for the Class B Common Stock and the Class C Common Stock. In its Disclosure Statement and Plan of Reorganization, filed with the Bankruptcy Court on November 24, 2003, the Company indicated that all common stock would be canceled upon the Court’s confirmation of the proposed Plan of Reorganization.

Dividends

        The Company has filed for bankruptcy on January 22, 2003 and is unable to pay dividends.

Item 6. Selected Financial Data

        Set forth below is selected consolidated financial information for the Company.

SELECTED FINANCIAL INFORMATION
(dollars in thousands except per share data)

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

NATURE OF OPERATIONS, CURRENT INDUSTRY CONDITIONS, AND LIQUIDITY MATTERS

        Bayou Steel Corporation (the “Company”) is a leading producer of light structural shapes and merchant bar steel products. The Company owns and operates a steel minimill and a stocking warehouse on the Mississippi River in LaPlace, Louisiana (the “Louisiana Facility”), three additional stocking locations directly accessible to the Louisiana Facility through the Mississippi River waterway system, and a rolling mill with warehousing facility in Harriman, Tennessee (the “Tennessee Facility”) also accessible through the Mississippi River waterway system. The Company produces merchant bar and light structural steel products ranging in size from two to eight inches at the Louisiana Facility and merchant bar products ranging from one-half to four inches at the Tennessee Facility. The Company’s products are used for a wide range of commercial and industrial applications, including the construction and maintenance of petrochemical plants, barges and light ships, railcars, trucks and trailers, rack systems, tunnel and mine support products, joists, sign and guardrail posts for highways, power and radio transmission towers, and bridges.

        Steel service centers, the Company’s primary customer base, warehouse steel products from various minimills and integrated mills and sell combinations of products from different mills to their customers. Some steel service centers also provide additional labor-intensive value-added services such as fabricating, cutting or selling steel by the piece rather than by the bundle.

        During the past several years, the domestic steel market has experienced significant downward economic pressure largely due to declines in market prices and shipments that initially were influenced by high volumes of foreign steel imported into the United States at prices which challenged the domestic industry’s ability to viably compete. More recently, the industry has been negatively affected by the weakened United States economy in general following a period of significantly higher costs of production due to increased electricity, natural gas, and oxygen cost experienced in 2000 and into 2001 and again in 2003. These forces have led to negative operating economics for certain domestic producers. As a result, many steel manufacturers have curtailed production and/or ceased operations, and a number of steel industry producers have sought protection under the United States Bankruptcy Code.

        As a result of these conditions, the Company has experienced sharp declines in shipment volumes and operating margins resulting in negative cash flow from operations and the generation of significant net losses over the past four years. Such conditions have significantly deteriorated the Company’s liquidity and constrained its ability to meet certain obligations under its debt agreements. As of December 16, 2002, the Company was in default of its $120 million of First Mortgage Notes and, due to cross default provisions, its $50 million line of credit agreement.

        On January 22, 2003, the Company and its subsidiaries Bayou Steel Corporation (Tennessee), and River Road Realty Corporation, filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. The petition requesting an order for relief was filed in United States Bankruptcy Court, Northern District of Texas (the “Bankruptcy Court”), where the case is now pending before the Honorable Barbara J. Houser, Case No. 03-30816 BJH (the “Petition Date”). As debtors-in-possession under Sections 1107 and 1108 of the Bankruptcy Code, the Company remains in possession of its properties and assets, and management continues to operate the business. The Company intends to continue normal operations and does not currently foresee any interruption in the shipment of product to customers in the near term. The Company cannot engage in transactions outside the ordinary course of business without the approval of the Bankruptcy Court. The Company attributed the need to reorganize to market conditions in the U.S. steel industry resulting from significant pressure from imported steel products, low product pricing, and high energy costs. These factors, together with the effects of a slow down in the economy, have adversely affected the Company over the past several years.

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        The goal of the Chapter 11 filing is to maximize recovery by creditors and shareholders by preserving the Company as a viable entity with going concern value. The protection afforded by the Chapter 11 filing will permit the Company to preserve cash and restructure its debt. The confirmation of a plan of reorganization is the Company’s primary objective. The Company filed a plan of reorganization with the Bankruptcy Court on November 24, 2003. The plan of reorganization sets forth the proposed means of treating claims, including liabilities subject to compromise. The plan of reorganization proposes cancellation of equity interests as a result of issuance of new equity securities to creditors. The confirmation of any plan of reorganization will require acceptance by all classes of claimants as required under the Bankruptcy Code and approval of the Bankruptcy Court. Under the Bankruptcy Code, post-petition liabilities and pre-petition liabilities subject to compromise must be satisfied before shareholders can receive any distribution. As a consequence, the plan of reorganization proposes cancellation of equity interests as a result of issuance of new equity securities to creditors.

        The accompanying audited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Such financial statements have been prepared on the basis that the Company will continue as a going concern and do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company’s recurring losses, negative cash flow from operations, and the Chapter 11 case raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, (i) the Company’s ability to comply with the Debtor-In-Possession Financing Agreement (” DIP Agreement”), (ii) confirmation of a plan of reorganization under the Bankruptcy Code, (iii) the Company’s ability to achieve profitable operations after such confirmation, and (iv) the Company’s ability to generate sufficient cash from operations to meet its obligations. The consolidated financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Critical Accounting Policies and Estimates

        The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. These estimates and assumptions provide a basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and these differences may be material.

        The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Inventories

        Inventories are stated at the lower of cost or market value. The cost of product inventories is determined using the last-in, first-out method (LIFO). Inventory is adjusted for estimated obsolescence or unmarketable inventory. The amount of this reduction is equal to the LIFO cost of inventory less the market value. Estimated market value is based on assumptions about future demand and market conditions. In fiscal 2003 operating supplies inventory was written down by $2.2 million for obsolescence and unmarketable inventory.

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Long-lived Assets

        The depreciable lives of property, plant and equipment are estimated and are reviewed for impairment if events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Although the Company believes it has appropriately addressed asset impairment by reducing the carrying values of certain assets to their estimated recoverable amounts, actual results could be different and the results of operations in future periods could reflect gains or losses on those assets.

        As of September 30, 2003, the underlying criteria associated with the Company’s long-term asset impairment analysis was based upon the assumption that the Company will continue to sustain its operations for the near term and beyond. Should the Company be unable to continue as a going concern, future adjustments to the carrying value of property, plant and equipment may be required. Should the Company’s plan of reorganization be confirmed by the Bankruptcy Court, and become effective, the Company would adopt fresh-start accounting as required by SOP 90-7. The reorganization value of the entity would be allocated to the Company assets in conformity with the procedures specified by APB Opinion 16, as amended by SFAS 141. Depending on the reorganization value, the carrying value of property, plant and equipment may be further adjusted.

Plant Turnaround Cost

        The Company currently utilizes the accrue in advance method of accounting for periodic planned major maintenance activities (plant turnaround cost). As is typical in the industry, certain major maintenance items require the shutdown of an entire facility or a significant portion thereof to perform periodic overhauls and refurbishment activities necessary to sustain long-term production. The Company accrues a liability for the estimated amount of these planned shutdowns.

        In June 2001, the American Institute of Certified Public Accountants (AICPA) issued an exposure draft of a proposed Statement of Position (SOP), “Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment.” This proposed SOP would change, among other things, the method by which companies would account for normal, recurring or periodic repairs and maintenance costs (i.e. plant turnaround costs) related to “in service” fixed assets. It would require that these types of expenses be recognized when incurred rather than recognizing expense for these costs while the asset is productive. The proposed SOP is expected to be presented to the FASB for clearance in the first quarter of 2004 and would be applicable for fiscal years beginning after December 15, 2004. If adopted in its present form, the portion of this SOP relating to planned major maintenance activities would require us to expense periodic scheduled maintenance cost on our plant facilities as incurred (currently accrued in advance leading up to such scheduled maintenance periods), and accrued costs at the date of adoption would be reversed and reported as the cumulative effect of a change in accounting principle.

Revenue Recognition

        The Company recognizes revenue when it has a purchase order from a customer with a fixed price, the title and risk of loss transfer to the buyer, and collectibility is reasonably assured which is generally upon shipment. Substantially all of the Company’s sales are made on open account. The Company accrues rebates on shipments when incurred. Historically, there have been very few sales returns and adjustments that impact the ultimate collection of revenues, therefore no provisions are made when the sale is recognized.

Allowance for Doubtful Accounts

        The Company evaluates the collectibility of its accounts receivable based on a combination of factors. In cases where management is aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, a specific allowance is recorded against amounts due that reduces the net recognized receivable to the amount reasonably believed to collectible. For all other customers, the Company maintains a reserve that considers the total receivables outstanding, historical collection rates, and economic trends.

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Environmental Costs

        The Company operates in an industry that inherently possess environmental risks. To manage these risks, the Company employs both its own environmental staff and outside consultants. The Company estimates future costs for known environmental remediation requirements and accrues for them on an undiscounted basis when it is probable that the Company has incurred a liability and the related costs can be reasonably estimated. The regulatory and government management of these projects is extremely complex, which is one of the primary factors that make it difficult to assess the cost of potential and future remediation of potential sites. Adjustments to the liabilities are made when additional information becomes available that affects the estimated costs to remediate.

Income Taxes

        The Company follows SFAS No. 109, “Accounting for Income Taxes.” This statement requires the use of the liability method of computing deferred income taxes. Under this method, deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The assessment of the realization of deferred tax assets, particularly those related to tax operating loss carryforwards, involves the use of management’s judgment to determine whether it is more likely than not that the Company will realize such tax benefits in the future. As of September 30, 2003, a full valuation allowance was provided recognizing no future benefits of associated with the Company’s net deferred tax assets.

RESULTS OF OPERATIONS

        The Company reported a loss from operations of $30.4 million in fiscal 2003 compared to $21.5 million in the prior year. Four major factors account for the $8.9 million unfavorable change. First, in fiscal 2003, the cost to convert scrap metal, the raw material, into a finished product increased $2.8 million, primarily due to a $5.8 million increase in fuel prices. Second, reorganization expenses related to the bankruptcy in the amount of $5.2 million were incurred in fiscal 2003. No such expenses were incurred in fiscal 2002. Third, the Company recorded a non-cash asset impairment charge of $8.0 million in fiscal 2003, reducing the carrying value of its Tennessee Facility, compared to a similar charge of $6.6 million in fiscal 2002. Fourth, in fiscal 2003, the Company wrote down its stores inventory by $2.2 million. Partially offsetting these four factors was an $5.4 million improvement in metal margin ( the difference between the cost of yielded raw material steel scrap and the selling price of the finished product) and a special tax credit of $3.2 million recorded in fiscal 2002.

        In fiscal 2002, the Company reported a loss from operations of $21.5 million compared to $23.3 million in the prior fiscal year. The $1.8 million net improvement is the result of reductions in operating cost which were almost entirely offset by several items. First, the metal margin (the difference between the cost of yielded raw material steel scrap and the selling price of the finished product) decreased operating margins by $8.2 million. Second, the Company recorded a non-cash asset impairment charge of $6.6 million reducing the carrying value of its Tennessee Facility. These two negative changes almost entirely offset the Company’s improvements of $16.6 million, primarily in cost reductions.

        The following table sets forth shipment, sales, and metal margin data:

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Sales

        Net sales in fiscal 2003 increased 6% over fiscal 2002 which is the result of a 10% increase in average selling price on a 3% decrease in shipments. The decrease in shipments is attributable to the recessionary domestic economic conditions and some customers’ concerns about the financial condition of the Company since filing bankruptcy. The Company experienced a higher average selling price as a result of several price increases in the third and fourth quarters of fiscal 2003. Escalating fuel and scrap prices have been the driving forces behind recent market increases for steel products.

        Market conditions have recently improved. Shipments in the fourth fiscal quarter were over 26% higher than the average of the prior three quarters. The fourth quarter shipments were the highest in eleven prior quarters. Subsequent to year end, there were two additional price increases and an announced price increase effective January 15, 2004.

        Net sales in fiscal 2002 increased marginally over fiscal 2001 on a 3% increase in shipments and a similar decrease in the average selling price.

        In the first fiscal quarter of 2002, the International Trade Commission (“ITC”) issued a ruling that steel imports since 1998 have injured the United States steel industry in certain product ranges representing approximately one-third of the Company’s product line. The President took action based on the ITC’s ruling imposing tariffs on such imports in the second fiscal quarter of 2002. In November 2003 the World Trade Organization (WTO) ruled that the tariffs are illegal. The President subsequently announced the elimination or curtailment of these tariffs. Although the tariffs brought some relief from imports, the Company believes that a weaker U.S. dollar, stronger Asian economy, and higher shipping costs are more significant factors affecting imports in its product line.

Cost of Sales

        Cost of sales exceeded sales in fiscal 2003 by $9.9 million, or 7% compared to $8.2 million or 6% in fiscal 2002. In fiscal 2002, this was caused by an abnormally low average selling price. In fiscal 2003, even though average selling price improved, higher prices for scrap and fuel and a higher fixed cost per ton as a result of decreased production resulted in a gross margin loss.

        Cost of sales exceeded sales in fiscal 2002 by $8.2 million which was $8.2 million less than fiscal 2001 due to a reduction in conversion cost (the cost to convert steel scrap into billets and billets into finished products) and other cost control programs initiated by the Company.

        Raw Material. Steel scrap is the principal raw material used in the melting operations at the Louisiana Facility and is a significant component of the semi-finished product, billets, which are used by both rolling mills. During fiscal 2003, steel scrap cost increased $16 per ton or 17% compared to fiscal 2002. Scrap cost increased sharply during the first two quarters of fiscal 2003 as a result of an exceptionally strong export market and a domestic market affected by steel producers increasing their scrap inventories. In the fourth fiscal quarter and continuing today, scrap prices again moved upward. These price increases appear to be due to increased domestic demand as steel producers begin operating at higher levels of capacity utilization. Generally, and over periods of time, the average selling price of finished products trends with scrap prices.

        The Company has controlled the availability and the cost of steel scrap to some degree by producing its own shredded and cut grade scrap through its scrap processing division. Mississippi River Recycling (“MRR”) supplied approximately 30% of the Company’s steel scrap requirements in each of fiscal 2003, 2002, and 2001. The Company plans, and the MRR has the capacity, to produce a greater quantity of steel scrap.

        AAF. Another raw material is additives, alloys, and fluxes (“AAF”). AAF costs increased by $3 per ton over the prior year due to the prices of certain AAF materials being higher in fiscal 2003.

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        Conversion Cost. Conversion cost includes labor, energy, maintenance material, and supplies used to convert raw material into finished product. Conversion cost per ton at the Louisiana Facility increased only slightly in fiscal 2003 despite a $5.5 million increase in electricity, gas, and oxygen prices. With constant fuel prices, the per unit conversion cost would have decreased 6% in fiscal 2003 compared to the prior year. Conversion cost per ton decreased 11% in fiscal 2002 compared to the prior year, primarily due to a decrease in the cost of fuels. At the Tennessee Facility, conversion cost per ton decreased 11 % in fiscal 2003 and 8% in fiscal 2002 compared to the respective prior years. These reductions were largely driven by cost reduction initiatives.

        In efforts to stabilize natural gas cost, the Company entered into certain forward commitments to purchase a portion of its future natural gas requirements. As of September 30, 2003, the Company has entered into forward price commitments for approximately 55% of the natural gas it expects to utilize in its production over the next six months. Although the Company intends to fulfill its commitments under the agreements, a trading market does exist for such commitments.

Selling, General and Administrative Expenses

        Selling, general and administrative expenses increased $597,000 in fiscal 2003 and decreased $184,000 in fiscal 2002 compared to the respective prior years. The increase in fiscal 2003 is due primarily to an increase in the cost of certain insurance policy renewals. The reductions in 2002 is primarily due to reductions in workforce.

Reorganization Expenses

        Reorganization expenses are expenses incurred by the Company as a result of its decision to restructure its debt prior to Petition Date and to reorganize under Chapter 11 of the Bankruptcy Code. The following summarizes the reorganization expenses incurred by the Company during the fiscal year ended September 30, 2003 of which $948,819 were incurred prior to the Petition Date.

Interest Income and Expense

        In fiscal 2003, interest income decreased to zero as a result of a reduction in cash available for investment. Interest expense decreased $7.3 million in fiscal 2003 compared to 2002. The Company discontinued accruing interest on the $120 million of First Mortgage Notes (the “Notes”) since this liability is subject to compromise in Chapter 11 proceedings. The total interest on pre-petition Notes that was not charged to earnings for the period from January 23, 2003 to September 30, 2003 was approximately $7.8 million. Interest expense on the Company’s line of credit increased in 2003 due to additional borrowings.

Impairment Loss on Long-lived assets

        During fiscal 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS 144”) which requires, among other things, that companies recognize impairment losses on long-lived assets. SFAS 144 supersedes previous accounting standards which contained similar provisions. SFAS 144 states that an impairment is a condition that exists when the carrying amount of a long-lived asset or asset group exceeds its fair value and therefore is not recoverable. This condition is deemed to exist if the carrying amount of the asset or asset group exceeds the sum of the undiscounted cash flow expected to be derived from the use and eventual disposition of the asset or asset group.

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        As a result of recent operating losses, projections of future operating performance, and continued negative market trends, the Company believed that the application of the criteria established by SFAS 144 required recognition of impairment losses on the asset group comprising its Tennessee rolling mill, which losses were recorded in the third quarter of fiscal 2002 and the second quarter of fiscal 2003. In determining the fair value of the Tennessee rolling mill, the Company employed the present value technique of discounting, at a risk free rate, multiple cash flow scenarios that reflect a range of possible outcomes from the utilization and ultimate disposal of the Tennessee rolling mill. The various scenarios made assumptions about key drivers of cash flow, such as metal margin, shipments, capital expenditures, production levels, and distribution cost. Each scenario was then assigned a probability weighting representing management’s judgment of the probability of achieving each cash flow stream. Based on such judgment and assumptions underlying the calculation, the Company has reduced the carrying value of the assets comprising its Tennessee rolling mill by $8.0 million in its second quarter of fiscal 2003. The Company also reduced the carrying value of these assets by $6.6 million in fiscal 2002. The value was generally influenced by a longer time frame in which margins improved toward historical levels. The Company’s ability to achieve certain liquidity levels included in the various cash flow scenarios may result in actions that may again change the carrying value.

        As of September 30, 2003, the underlying criteria associated with the Company’s long-term asset impairment analysis was based upon the assumption that the Company will continue to sustain its operations for the near term and beyond. Should the Company be unable to continue as a going concern, future adjustments to the carrying value of property, plant and equipment may be required. Should the Company’s plan of reorganization be confirmed by the Bankruptcy Court, and become effective, the Company would adopt fresh-start accounting as required by SOP 90-7. The reorganization value of the entity would be allocated to the Company assets in conformity with the procedures specified by APB Opinion 16, and as amended by SFAS No. 141. Depending on the reorganization value, the carrying value of property, plant and equipment may be further adjusted which could be substantial.

Provision for Income Taxes

        As of September 30, 2003, for tax purposes, the Company had net operating loss carryforwards (“NOLs”) of approximately $175 million available to utilize against future regular taxable income. The NOLs will expire in varying amounts through fiscal 2023. Should there be a reorganization during the bankruptcy proceedings, there could be a change of control within the meaning of the Internal Revenue Code Section 382 which would have the effect of limiting the use of the NOLs in the future significantly.

        The realization of a net deferred tax asset is dependent in part upon generation of sufficient future taxable income. The Company periodically assesses the carrying value of this asset taking into consideration many factors including changing market conditions, historical trend information, and modeling expected future financial performance. Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” (“SFAS 109”) requires, among other things, that the Company determine whether it is “more likely than not” that it will realize such benefits and that all negative and positive evidence be considered (with more weight given to evidence that is “objective and verifiable”) in making the determination. SFAS 109 further indicates that objective negative evidence, such as cumulative losses in recent years, losses expected in early future years, and a history of potential tax benefits expiring unused, is difficult to overcome.

        After taking into consideration recent operating losses, and the continued negative market conditions and after giving more weight to factors, such as these that are objective and verifiable, the Company determined in the third quarter of fiscal 2002 that the realization of its previously recorded net deferred tax asset no longer met the more likely than not criteria established by SFAS 109. Accordingly, the Company recorded an additional valuation allowance of $7.7 million in the third quarter of fiscal 2002 fully reserving any future benefits that might be derived from its NOLs as of June 30, 2002.

        As a result of the bankruptcy and the Company’s continued operating losses, as of September 30, 2003, the Company has fully reserved for any future benefit that might be derived as a result of the fiscal 2003 operating results.

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Net Loss

        Net loss for fiscal year 2003 decreased by $6.1 million compared to the prior year as a result of several factors. First, during fiscal 2002 the Company provided an additional $7.7 million non-cash asset valuation allowance against its net deferred tax asset. Second, net interest expense decreased $7.3 million as the Company discontinued accruing interest on the mortgage notes since this liability is subject to compromise in Chapter 11 proceedings. This was partially offset by the reorganization expenses incurred in 2003, the larger gross margin loss, and the net additional asset impairment loss.

        In fiscal 2002, the net loss increased by $6.5 million compared to the prior year primarily due to a metal margin decrease of $16 per ton, and non-cash adjustments of $7.7 million and $6.6 million related to a deferred tax allowance and an asset impairment adjustment, respectively.

LIQUIDITY AND CAPITAL RESOURCES

        On February 28, 2003, the Bankruptcy Court approved the Debtor-In-Possession Financing Agreement (“DIP Agreement”) between the Company and the existing lenders on its credit facility. The Company retired its pre-petition secured credit facility in the amount of $18.6 million. In connection with this transaction, the Company wrote off $392,330 of deferred financing costs related to its old credit facility as a reorganization expense and capitalized $497,480 in deferred financing cost on the DIP Agreement as other assets. The DIP Agreement, which is a $45 million credit facility and has a twelve month term, is secured by inventory, receivables, and certain fixed assets previously unencumbered by other debt agreements, bears interest at prime plus 1% or LIBOR plus 3%. Based on the borrowing base criteria, as defined, approximately $10.9 million is available as of September 30, 2003 after considering the required minimum liquidity reserve of $12 million. The DIP Agreement required, among other things, the Company to meet certain cash operating performance measures based on the Company’s weekly budget for a 13 week period ending which ended April 26, 2003. The Company was in compliance throughout the period. There are no other financial performance covenants. The maximum amount outstanding under the pre-petition secured credit facility and the DIP Agreement during fiscal 2003 was $22.7 million. The average borrowings were $17.8 million and the weighted average interest rate was 4.88%. The Company has $18.2 million in excess availability and cash and $20.9 million in borrowings as of December 12, 2003. The DIP Agreement expires February 17, 2004. The Company is in the process of seeking a new lending agreement, with either the existing or new lenders, in anticipation of emerging from bankruptcy. The Company believes that such post bankruptcy lending agreement will be obtained.

        Operating Cash Flow. For the fiscal year ended September 30, 2003, net cash used in operations excluding reorganization expenses was $4.2 million, due largely to the net loss generated during the period. During the same period of the prior year, the Company used $6.2 million in operations for similar reasons. During fiscal 2003 inventories decreased $5.8 million in order to reduce inventory levels commensurate with both shipment and production levels along with aggressive working capital management. Accounts payable increased $2.4 million due to post-petition payment terms being given by many of the Company’s suppliers. During fiscal 2003, receivables increased $4.5 million primarily due to the significant increase in shipments in the fourth fiscal quarter and the significant increase in average selling price during fiscal 2003.

        Excluding reorganization expenses and changes in working capital, the Company reached cash flow breakeven from operations in the third and fourth quarters of fiscal 2003. The Company’s liquidity position remains its highest priority. The Company is hoping to continue to achieve cash flow breakeven in fiscal 2004. This is predicated on many assumptions, including maintaining current price realizations and stabilization in the scrap prices and moderation of the recent fuel prices.

        Capital Expenditures. Capital expenditures totaled $1.4 million, $1.4 million, and $8.8 million in fiscal 2003, 2002, and 2001, respectively. The activity in fiscals 2003 and 2002 was confined to required facility maintenance projects while in the prior years capital spending was greater as the Company completed several significant capital programs. Given current conditions and the condition of the facilities, capital programs over the next twelve months will continue to be directed towards maintenance programs requiring approximately $3.2 million. As of September 30, 2003, there were no significant commitments remaining to complete authorized projects under construction.

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Commitments and Contingencies

        Future commitments and contractual obligations include the following:

        Pre-petition liabilities subject to compromise approximating $138.3 million has been excluded from the above section due to the uncertainty as to when the amounts maybe paid.

Recent Accounting Pronouncements

        In December 2002, SFAS no. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123” was issued by the FASB and amends SFAS 123 “Accounting for Stock-Based Compensation.” SFAS 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation and amends the disclosure provisions of SFAS 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. The Company has not adopted any of the alternative methods of transition and continues to apply APB Opinion No. 25.

        In January 2003, the FASB issued FIN 46 “Consolidation of Variable Interest Entities,” which clarifies the application of Accounting Research Bulletin (ARB) No. 51 “Consolidated Financial Statements” to certain entities (called variable interest entities) in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The disclosure requirements of this Interpretation are effective for all financial statements issued after January 31, 2003. The consolidation requirements apply to all variable interest entities created after January 31, 2003. In addition, public companies must apply the consolidation requirements to variable interest entities that existed prior to February 1, 2003 and remain in existence as of the beginning of annual or interim periods beginning after December 15, 2003. FIN 46 did not have any impact on the Company’s consolidated financial statements upon adoption.

        In June 2001, the FASB issued FAS 143, “Accounting for Asset Retirement Obligations”, which is effective for fiscal years beginning after June 15, 2002. FAS 143 requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost should be capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. The Company does not have any asset retirement obligations, thus the adoption of FAS 143 had no impact on the Company.

OTHER COMMENTS

Forward-Looking Information, Inflation and Other

        This document contains various “forward-looking” statements which represent the Company’s expectation or belief concerning future events. The Company cautions that a number of important factors could, individually or in the aggregate, cause actual results to differ materially from those included in the forward-looking statements. These include but are not limited to statements relating to future actions, prospective products, future dealings with the noteholders or senior credit lenders, future performance or results of current and anticipated new products, sales efforts, availability of raw materials, expenses such as fuel and scrap cost, the outcome of contingencies, the cost of environmental compliance and financial results. From time to time, the Company also may provide oral or written forward-looking statements in other materials released to the public. Any or all of the forward-looking statements in this report and in any other public statements may turn out to be wrong, and can be affected by inaccurate assumptions by known or unknown risks and uncertainties. Many factors mentioned in the discussion above will be important in determining future results. Consequently, no forward-looking statements can be guaranteed. Actual future results may vary materially. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are advised, however, to consult any further disclosures on related subjects in the Company’s other reports to the Securities and Exchange Commission.

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        The Company is subject to increases in the cost of energy, supplies, salaries and benefits, additives, alloys, and steel scrap due to inflation. Finished goods prices are influenced by supply, which varies with steel mill capacity and utilization, import levels, and market demand.

        There are various claims and legal proceedings arising in the ordinary course of business pending against or involving the Company wherein monetary damages are sought. It is management’s opinion that the Company’s liability, if any, under such claims or proceedings, with exception to the events discussed in “Liquidity and Capital Resources,” would not materially affect its financial position.

        The Company provides the following cautionary discussion of risks, uncertainties, and possibly inaccurate assumptions relevant to our businesses. These are factors that could cause actual results to differ materially from expected and historical results. Other factors besides those listed here could also adversely affect future operating results. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.

Environmental Matters

        The Company is subject to various federal, state, and local laws and regulations. See Footnote 10 to the Company’s Consolidated Financial Statements and the “Business-Environmental Matters” contained in the Company’s Annual Report on Form 10-K.

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Item 7A. Quantitative and Qualitative Disclosure About Market Risk

        The Company is exposed to certain market risks that are inherent in financial instruments arising from transactions that are entered into in the normal course of business. The Company does not enter into derivative financial instrument transactions to manage or reduce market risk, except for its forward commitments to purchase a portion of its natural gas requirements, or for speculative purposes. The forward gas purchase commitments provide a fixed purchase price whereby the Company purchases gas at a rate that could differ from spot rates during the period of purchase. The revolving credit facility has a variable interest rate which reduces the potential exposure of interest rate risk from a cash flow perspective.

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Item 8. Financial Statements and Supplementary Data

BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
Consolidated Balance Sheets

ASSETS

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

21

BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
Consolidated Statements of Operations

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

22

BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
Consolidated Statements of Cash Flows

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

23

BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
Consolidated Statements of Changes in Equity (Deficit)

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

24

BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
September 30, 2003

        Bayou Steel Corporation (the “Company”) owns and operates a steel minimill and a stocking warehouse on the Mississippi River in LaPlace, Louisiana (the “Louisiana Facility”), three additional stocking locations accessible to the Louisiana Facility through the Mississippi River waterway system, and a rolling mill with warehousing facility in Harriman, Tennessee (the “Tennessee Facility”). The Company produces light structural steel and merchant bar products for distribution to steel service centers and original equipment manufacturers/fabricators located throughout the United States, with export shipments of approximately 7% to Canada and Mexico.

        During the past several years, the domestic steel market has experienced significant downward economic pressure largely due to declines in market prices and shipments that initially were influenced by high volumes of foreign steel imported into the United States at prices which challenged the domestic industry’s ability to viably compete. More recently, the industry has been negatively affected by the weakened United States economy in general following a period of significantly higher costs of production due to increased electricity and natural gas cost experienced in 2000 and into 2001 and again in 2003. These forces have led to negative operating economics for certain domestic producers. As a result, many steel manufacturers have curtailed production and/or ceased operations, and a number of steel industry producers have sought protection under the United States Bankruptcy Code.

        As a result of these conditions, the Company has experienced sharp declines in shipment volumes and operating margins resulting in negative cash flow from operations and the generation of significant net losses over the past four years. Such conditions have significantly deteriorated the Company’s liquidity and constrained its ability to meet certain obligations under its debt agreements. As of December 16, 2002, the Company was in default of its $120 million of First Mortgage Notes and, due to cross default provisions, its $50 million line of credit agreement.

        On January 22, 2003, the Company and its subsidiaries, Bayou Steel Corporation (Tennessee) and River Road Realty Corporation, filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. The petition requesting an order for relief was filed in United States Bankruptcy Court, Northern District of Texas (the “Bankruptcy Court”), where the case is now pending before the Honorable Barbara J. Houser, Case No. 03-30816 BJH (the “Petition Date”). As debtors-in-possession under Sections 1107 and 1108 of the Bankruptcy Code, the Company remains in possession of its properties and assets, and management continues to operate the business. The Company intends to continue normal operations and does not currently foresee any interruption in the shipment of product to customers. The Company cannot engage in transactions outside the ordinary course of business without the approval of the Bankruptcy Court. The Company attributed the need to reorganize to market conditions in the U.S. steel industry resulting from significant pressure from imported steel products, low product pricing, and high energy costs. These factors, coupled with the effects of a slow down in the United States economy, have adversely affected the Company over the past several years.

Principles of Consolidation

        The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Bayou Steel Corporation (Tennessee) and River Road Realty Corporation, after elimination of all significant intercompany accounts and transactions.

25

BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements — (Continued)
September 30, 2003

Basis of Presentation

        The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Such financial statements have been prepared on the basis that the Company will continue as a going concern and do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company’s recurring losses, negative cash flow from operations, and the Chapter 11 case raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, (i) the Company’s ability to comply with the Debtor-In-Possession Financing Agreement (“DIP Agreement”) (see footnote 10), (ii) confirmation of a plan of reorganization under the Bankruptcy Code filed on November 24, 2003, (iii) the Company’s ability to achieve profitable operations after such confirmation, and (iv) the Company’s ability to generate sufficient cash from operations to meet its obligations. The consolidated financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

        The financial statements are prepared in accordance with the American Institute of Certified Public Accountant’s (the “AICPA”) Statement of Position (SOP) 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. SOP 90-7 requires the Company to, among other things, (1) identify transactions that are directly associated with the bankruptcy proceedings from those events that occur during the normal course of business and (2) identify pre-petition liabilities subject to compromise from those that are not subject to compromise or are post petition liabilities (see Note 7). All liabilities arising before January 22, 2003 are subject to compromise. In addition, in accordance with the Bankruptcy Code, the Company discontinued accruing interest on the 9.5% first mortgage notes (the “Notes”) as of the Petition Date as this debt is subject to compromise. The debtor-in-possession financing (“DIP Financing”) is a post-petition liability and, therefore, not subject to compromise. The financial statements do not reflect the effect of any changes in the Company’s capital structure as a result of an approved plan of reorganization or adjustments to the carrying value of assets or liability amounts that may be necessary as a result of actions by the Bankruptcy Court. Upon confirmation of a plan of reorganization by the Bankruptcy Court, the Company would adopt “Fresh Start Reporting” as required by the AICPA’s SOP 90-7 on the effective date of the reorganization. The Company would then allocate the reorganization value to its assets and liabilities in relation to their fair value. Accordingly, the carrying values of assets and liabilities on the effective date of reorganization most likely would differ materially than the amounts shown as of September 30, 2003.

Inventories

        Inventories are carried at the lower of cost or market. Inventory cost for steel scrap, billets, and finished product is determined on the last-in, first-out (LIFO) method and for operating supplies on the average cost method.

Property, Plant and Equipment

        Property, plant and equipment acquired as part of the acquisition of the Louisiana Facility in 1986 and the Tennessee Facility in 1995 has been recorded based on the respective fair values at the dates of purchase. As discussed in Note 6, the carrying value of the Tennessee Facility was adjusted for asset impairment losses in 2003 and 2002. Betterments and improvements are capitalized at cost; repairs and maintenance are expensed as incurred. Interest during construction of significant additions is capitalized. Depreciation is provided on the units-of-production method for machinery and equipment and on the straight-line method for buildings over an estimated useful life of 30 years.

26

BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements — (Continued)
September 30, 2003

Plant Turnaround Cost

        The Company currently utilizes the accrue in advance method of accounting for periodic planned major maintenance activities (plant turnaround cost). As is typical in the industry, certain major maintenance items require the shutdown of an entire facility or a significant portion thereof to perform periodic overhauls and refurbishment activities necessary to sustain long-term production. The Company accrues a liability for the estimated amount of these planned shutdowns. As of September 30, 2003 and 2002, $1.8 million and $2.9 million, respectively, is included in accrued liabilities in the accompanying consolidated balance sheets related to planned future plant turnaround cost (see Recent Accounting Pronouncements).

Income Taxes

        Income taxes have been provided using the liability method in accordance with the Financial Accounting Standards Board’s Statement No. 109, Accounting for Income Taxes.

Contingencies

        The Company accounts for all contingencies, including the potential environmental liabilities discussed in Note 13, in accordance with the provisions of Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” which, among other provisions, requires the Company to accrue for estimated loss contingencies if: (a) it is probable that a liability has been incurred, and (b) the amount can be reasonably estimated.

Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Credit Risk

        The Company extends credit to its customers primarily on 30 day terms. The Company believes that its credit risk exposure is minimal due to the ongoing review of its customers’ financial condition, its sizeable customer base, and the geographical dispersion of its customer base. Historically, credit losses have not been significant. At September 30, 2003 and 2002, the Company maintained an allowance for doubtful receivables of approximately $832,000 and $534,000, respectively.

        As a result of the adverse market influences on the domestic steel industry, some of the Company’s customers have experienced financial and liquidity issues. The Company maintains a program for periodic assessment of the risk of loss that could result from extending credit to its customers. Continued weakness in the steel market may force certain customers to extend, modify, or otherwise alter their credit terms with the Company which could increase the risk of credit losses in the future.

Revenue Recognition

        The Company recognizes revenue when it has a purchase order from a customer with a fixed price, the title and risk of loss transfer to the buyer, and collectibility is reasonably assured which is generally upon shipment. Substantially all of the Company’s sales are made on open account. The Company accrues rebates on shipments when incurred. Historically, there have been very few sales returns and adjustments that impact the ultimate collection of revenues, therefore no provisions are made when the sale is recognized.

27

BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements — (Continued)
September 30, 2003

Recent Accounting Pronouncements

        In December 2002, SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123” was issued by the FASB and amends SFAS 123 “Accounting for Stock-Based Compensation.” SFAS 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation and amends the disclosure provisions of SFAS 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. The Company has not adopted any of the alternative methods of transition and continues to apply APB Opinion No. 25 for purposes of expense recognition.

        In January 2003, the FASB issued FIN 46 “Consolidation of Variable Interest Entities,” which clarifies the application of Accounting Research Bulletin (ARB) No. 51 “Consolidated Financial Statements” to certain entities (called variable interest entities) in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46, effective for the Company January 31, 2003, did not have any impact on the Company’s consolidated financial statements upon adoption.

        In June 2001, the FASB issued FAS 143, “Accounting for Asset Retirement Obligations”, which is effective for fiscal years beginning after June 15, 2002. FAS 143 requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost should be capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. The Company does not have any asset retirement obligations as defined, thus the adoption of FAS 143 had no impact on the Company.

        In June 2001, the American Institute of Certified Public Accountants (AICPA) issued an exposure draft of a proposed Statement of Position (SOP), “Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment.” This proposed SOP would change, among other things, the method by which companies would account for normal, recurring or periodic repairs and maintenance costs (i.e. plant turnaround costs) related to “in service” fixed assets. It would require that these types of expenses be recognized when incurred rather than recognizing expense for these costs while the asset is productive. The proposed SOP is expected to be presented to the FASB for clearance in the first quarter of 2004 and would be applicable for fiscal years beginning after December 15, 2004. If adopted in its present form, the portion of this SOP relating to planned major maintenance activities would require us to expense periodic scheduled maintenance cost on our plant facilities as incurred (currently accrued in advance leading up to such scheduled maintenance periods), and accrued costs at the date of adoption would be reversed and reported as the cumulative effect of a change in accounting principle.

        Under Chapter 11 proceedings, actions by creditors to collect claims in existence at the filing date (“prepetition”) are stayed (“deferred”), absent specific Bankruptcy Court authorization to pay such claims, while the Company continues to manage the business as a debtor-in-possession. The rights of and ultimate payments by the Company to prepetition creditors and to equity investors may be substantially altered. That could result in claims being liquidated in the Chapter 11 proceedings at less (possibly substantially) than 100% of their face value and the equity interests of the Company’s stockholders being diluted or canceled. The Company’s prepetition creditors and stockholders will each have votes in the plan of reorganization. The Company filed a plan for reorganization with the Bankruptcy Court on November 24, 2003. This plan, if approved, would liquidate unsecured trade claims at 9% to 10% of their face value, issue new secured debt for the secured debt claims, cancel existing equity, and issue new equity to the remaining undersecured claims. For the fiscal year 2003, the Company incurred approximately $5.2 million in professional fees and other expenses classified as reorganization expenses related to restructuring efforts on debt defaults that preceded the Petition Date and the bankruptcy proceedings.

28

BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements — (Continued)
September 30, 2003

        It is not possible to predict the length of time the Company will operate under the protection of Chapter 11, or the outcome of the Chapter 11 proceedings in general, whether the Company will continue to operate under its current organizational structure, or the effect of the proceedings on the business of the Company or on the interests of the various creditors and security holders.

        At September 30, 2003 and 2002, first-in, first-out inventories were $43.4 million and $47.0 million, respectively. As of fiscal 2001, the Company recorded $3.9 million in lower of LIFO cost or market reserves. During fiscal 2003 and 2002, $0.1 million and $1.6 million of such reserves were credited to cost of goods sold in the accompanying statement of operations as a result of the liquidation of certain LIFO inventory layers associated with such previously established reserves. As of September 30, 2003 and 2002, $2.2 million and $2.3 million, respectively, are included as reductions of finished product inventories related to such remaining reserves.

        In the fourth quarter of fiscal 2003, operating supplies inventory was written down $2.2 million for obsolescence and unmarketable inventory.

        Reorganization expenses are expenses incurred by the Company as a result of its decision to restructure its debt prior to Petition Date and to reorganize under Chapter 11 of the Bankruptcy Code. The following summarizes the reorganization expenses incurred by the Company during the fiscal year ended September 30, 2003 of which $948,819 were incurred prior to the Petition Date.

29

BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements — (Continued)
September 30, 2003

        During fiscal 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS 144”) which requires, among other things, that companies recognize impairment losses on long-lived assets. SFAS 144 supersedes previous accounting standards which contained similar provisions. SFAS 144 states that an impairment is a condition that exists when the carrying amount of a long-lived asset or asset group exceeds its fair value and therefore is not recoverable. This condition is deemed to exist if the carrying amount of the asset or asset group exceeds the sum of the undiscounted cash flow expected to be derived from the use and eventual disposition of the asset or asset group.

        As a result of continued operating losses, projections of future operating performance, and continued negative market trends, the Company believed that the application of the criteria established by SFAS 144 required recognition of impairment losses on the asset group comprising its Tennessee rolling mill, which losses were recorded in the third quarter of fiscal 2002 and the second quarter of fiscal 2003. In determining the fair value of the Tennessee rolling mill, the Company employed the present value technique of discounting, at a risk free rate, multiple cash flow scenarios that reflect a range of possible outcomes from the utilization and ultimate disposal of the Tennessee rolling mill. The various scenarios made assumptions about key drivers of cash flow, such as metal margin, shipments, capital expenditures, production levels, and distribution cost. Each scenario was then assigned a probability weighting representing management’s judgment of the probability of achieving each cash flow stream. Based on such judgment and assumptions underlying the calculation, the Company has reduced the carrying value of the assets comprising its Tennessee rolling mill by $8.0 million in its second quarter of fiscal 2003. The Company also reduced the carrying value of these assets by $6.6 million in fiscal 2002. The value was generally influenced by a longer time frame in which margins improved toward historical levels. The Company’s ability to achieve certain liquidity levels included in the various cash flow scenarios may result in actions that may again change the carrying value.

        As of September 30, 2003, the underlying criteria associated with the Company’s long-term asset impairment analysis was based upon the assumption that the Company will continue to sustain its operations for the near term and beyond. Should the Company be unable to continue as a going concern, future adjustments to the carrying value of property, plant and equipment may be required. Should the Company’s plan of reorganization be confirmed by the Bankruptcy Court, and become effective, the Company would adopt fresh-start accounting as required by SOP 90-7. The reorganization value of the entity would be allocated to the Company assets in conformity with the procedures specified by APB Opinion 16, and as amended by SFAS No. 141. Depending on the reorganization value, the carrying value of property, plant and equipment may be further adjusted which could be substantial.

        Capital expenditures totaled $1.4 million, $1.4 million, and $8.8 million in fiscal 2003, 2002, and 2001, respectively. As of September 30, 2003, there were no significant costs remaining to complete authorized projects under construction. Depreciation expense for the years ended September 30, 2003, 2002, and 2001 was $8,467,174, $8,758,469, and $8,416,574, respectively.

        The principal categories of claims classified as liabilities subject to compromise under reorganization proceedings are identified below. All amounts below may be subject to future adjustment depending on Bankruptcy Court action and further developments with respect to disputed claims or other events, including reconciliation of claims filed with the Bankruptcy Court to amounts recorded in the accompanying consolidated financial statements. Under a confirmed plan of reorganization, all pre-petition claims subject to compromise may be paid and discharged at amounts substantially less than their allowed amounts. These liabilities have been reclassified as noncurrent because of the automatic stay provision of the Chapter 11 proceeding and it is unknown when settlement of such obligations will occur.

30

BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements — (Continued)
September 30, 2003

        On a consolidated basis, recorded pre-petition liabilities subject to compromise under Chapter 11 proceedings, consisted of the following:

        As a result of the bankruptcy filing, principal and interest payments may not be made on pre-petition undersecured debt without Bankruptcy Court approval or until a plan of reorganization defining the repayment terms has been confirmed. The total interest on the pre-petition undersecured first mortgage notes (See footnote 9) that was not charged to earnings for the period from January 23, 2003 to September 30, 2003, was approximately $7.8 million. Such interest is not being accrued as the Bankruptcy Code generally disallows the payment of interest that accrues post-petition with respect to pre-petition unsecured or undersecured claims.

        Other assets consist of financing costs associated with the issuance of long-term debt and the DIP Agreement (see footnotes 9 and 10) which through September 30, 2003 have been amortized over the terms of the respective agreements. During fiscal 2003, the Company retired its pre-petition secured credit facility in the amount of $18.6 million. In connection with this transaction, the Company wrote off $392,330 of deferred financing costs related to its old credit facility as a reorganization expense and capitalized $497,480 in deferred financing cost on the DIP Agreement as other assets. Amortization of other assets was $649,000, $407,000, and $406,000 for the years ended September 30, 2003, 2002, and 2001, respectively. Other assets are reflected in the accompanying consolidated balance sheets net of accumulated amortization of $2,100,000 and $1,614,000 at September 30, 2003 and 2002, respectively. Pending the results of the Company’s bankruptcy reorganization proceedings, certain adjustments to the presentation and carrying values of the Company’s other assets will likely be required in future periods.

        The Notes, which have a stated face value of $120 million are senior obligations of the Company, secured by a first priority lien, subject to certain exceptions, on existing real property, plant and equipment, and most additions or improvements thereto at the Louisiana Facility. The indenture under which the Notes are issued (the “Indenture”) contains covenants which restrict the Company’s ability to incur additional indebtedness (excluding borrowings under the line of credit agreement discussed in Note 10), make certain levels of dividend payments, or place liens on the assets acquired with such indebtedness.

        The Notes, which bear interest at the stated rate of 9.5% per annum (9.65% effective rate), are due 2008 with semi-annual interest payments due May 15 and November 15 of each year. On and after May 15, 2003, the Company may, at its option, redeem the Notes, in whole or in part, initially at 104.75% of the principal amount, plus accrued interest to the date of redemption, declining ratably to par on May 15, 2006.

        The Notes are presented in the accompanying consolidated balance sheets, net of the original issue discount of $1,142,400, which is being amortized over the life of the Notes using the straight-line method which does not materially differ from the interest method. As of September 30, 2002, the Notes, net of the unamortized original issue discount of $644,187 is reported in the accompanying consolidated balance sheets as a current liability due to the default on the Notes. As of September 30, 2003, the Notes, net of the unamortized original issue discount of $529,947, is reported in the accompanying consolidated balance sheets as a non-current liability and the Company continues to carry the unamortized debt issue cost of $1.5 million as a non-current asset. The principal and accrued interest up to the Petition Date are included in pre-petition liabilities subject to compromise. Pending the results of the Company’s bankruptcy reorganization proceedings, certain adjustments to the presentation and carrying values of the Company’s debt and related discounts and/or issue costs will likely be required in future periods. The fair value of the Notes on September 30, 2002 was approximately $63 million; the fair value on September 2003 was uncertain.

31

BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements — (Continued)
September 30, 2003

        On February 28, 2003, the Bankruptcy Court approved the DIP Agreement between the Company and the existing lenders on its credit facility. The Company retired its pre-petition secured credit facility in the amount of $18.6 million. The DIP Agreement, which is a $45 million credit facility and has a twelve month term, is secured by inventory, receivables, and certain fixed assets previously unencumbered by other debt agreements, bears interest at prime plus 1% or LIBOR plus 3%. Based on the borrowing base criteria, as defined, approximately $22.9 million is available as of September 30, 2003; however, the Company is required to maintain a minimum liquidity reserve of $12 million. This minimum effectively reduces additional availability for borrowings to $10.9 million. The DIP Agreement required, among other things, the Company to meet certain cash operating performance measures based on the Company’s weekly budget for a 13 week period ending which ended April 26, 2003. The Company was in compliance throughout the period. There are no other financial performance covenants.

        As of September 30 , 2003, the Company had an outstanding balance of $18.3 million under the DIP Agreement and $7.7 million under the pre-petition secured credit facility as of September 30, 2002. Outstanding letters of credit under the DIP Agreement approximated $0.7 million at September 30, 2003. The maximum amount outstanding under the pre-petition secured credit facility and the DIP Agreement as of September 30, 2003 was $22.7 million. The average borrowings were $17.8 million and the weighted average interest rate was 4.88%. The Company has $18.2 million in excess availability and cash and $20.9 million in borrowings as of December 12, 2003.

        As of September 30, 2003, for tax purposes, the Company had net operating loss carryforwards (“NOLs”) of approximately $175 million available to utilize against future regular taxable income. The NOLs will expire in varying amounts through fiscal 2023. Should there be a reorganization during the bankruptcy proceedings, there could be a change of control within the meaning of the Internal Revenue Code Section 382 which would have the effect of limiting the use of the NOLs in the future significantly. In addition, even without a change of control, should there be a reorganization which results in the forgiveness of debt (as defined for tax purposes) the Company’s available NOL’s would be reduced to the extent of such levels of debt considered to be forgiven.

        The realization of a net deferred tax asset is dependent in part upon generation of sufficient future taxable income. The Company periodically assesses the carrying value of this asset taking into consideration many factors including changing market conditions, historical trend information, and modeling expected future financial performance. Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” (“SFAS 109”) requires, among other things, that the Company determine whether it is “more likely than not” that it will realize such benefits and that all negative and positive evidence be considered (with more weight given to evidence that is “objective and verifiable”) in making the determination. SFAS 109 further indicates that objective negative evidence, such as cumulative losses in recent years, losses expected in early future years, and a history of potential tax benefits expiring unused, is difficult to overcome.

32

BAYOU STEEL CORPORATION
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements — (Continued)
September 30, 2003

        After taking into consideration recent operating losses, and the continued negative market conditions and after giving more weight to factors, such as these that are objective and verifiable, the Company determined in the third quarter of fiscal 2002 that the realization of its previously recorded net deferred tax asset no longer met the more likely than not criteria established by SFAS 109. Accordingly, the Company recorded an additional valuation allowance of $7.7 million in the third quarter of fiscal 2002 fully reserving any future benefits that might be derived from its NOLs as of September 30, 2002.

        Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of September 30 are as follows:

        The provision for income tax differs from expected tax expense computed by applying the federal corporate rate. A reconciliation of such differences for the years ended September 30 follows: