Seattle Steel Products was founded shordly after World War II by Leonard Freeman. Prior io the war, Freeman had owned a small steel foundry in Pittsburgh. Pennsylvania. The business was hit particularly hard by the Great Depression of the 1930s, driving it into bankruptey. In 1940, Freeman moved his family west and went to work as a mill foreman for American Steel Corporation in Seattle. Washington. After the war ended, Freeman decided that he again wanted to nun his own business. Thus, Seattle Stecl Products was founded in 1946. With the memory of his last disastrous business experience still etched clearly in his mind. Freeman vowed that his new firm would be operated so as to minimize vulnerability to general business downturns. Freeman's management style, and his dedication to making the business prosper. proved to be suecessful, as the firm has enjoyed relatively rapid growth for over four decades. Moreover, it has maintained a consistently strong financial position. In late 1992, Freeman, still very energetic at the age of 85 , retired from active participation in the day-to-day operations, but retained the position of Chairman of the Board. Steve Freeman. Leonard's grandson, was simultaneously appointed as the new Chief Executive Officer. Steve Freeman was well prepared for his new position. He graduated with high honors from Cornell University, obtaining a degree in materials engineering. Afterwards, he spent 10 years in various sales and technical positions with Seattle Steel. His one weakness is in the financial area, where he has had no experience or training. Steve Freeman spent the first several weeks in his new job trying to obtain a better feel for the accounting and financial side of the business. One area of concern is the firm's heavy reliance on equity financing. Seattle Steel uses short-term debt to finance its temporary working capital requirements, but it does not use any permanent debt capital. Other firms in the steel industry generally have between 25 and 35 percent of their long-term capitalization in debt. Steve Freeman wonders if this difference should continue, and what affect a movement toward a greater use of debt would have on the company's earnings and stock price. As part of the process of familiarizing himself with the operations of the firm, Steve Freeman had extensive meetings with the managers of each of the firm's major functional departments. From Doug Howser, the financial vice president, Freeman learned that the firm was projecting earnings before interest and taxes of $3.0 million for 1993. Since Seattle Steel will have essentially zero interest expense in 1993, this figure would also be the firm's earnings before taxes for 1993. Howser also reported that the firm's federal-plus-state income tax rate for 1993, and the foreseoable future, should be 40 percent
