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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.
For the fiscal year ended August 31, 1998 Commission File Number 0-22496
SCHNITZER STEEL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0341923
- --------------------------------------- ---------------------------------------
(State of Incorporation) I.R.S. Employer Identification No.)
3200 N.W. Yeon Ave., P.O. Box 10047
Portland, OR 97296-0047
- --------------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 224-9900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $1 par value
----------------------------------
(Title of 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 reports), 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 the 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 September 30, 1998 was:
Shares Outstanding Held By Market Value
Title of Each Class ----------------------------- Held By
of Common Stock Affiliates Non-Affiliates Non-Affiliates
- --------------------- ---------- -------------- --------------
Class A, $1 par value 171,600 5,370,926 $80,563,890
Class B, $1 par value 4,430,328 0 N/A
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders are incorporated herein by reference in Part III.
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
TABLE OF CONTENTS
PART ITEM PAGE
I 1. BUSINESS.......................................................3
Overview.......................................................3
Acquisition of Proler International Corp.......................3
Business Strategy..............................................4
Scrap Operations...............................................5
Joint Ventures.................................................9
Steel Operations..............................................10
Environmental Matters.........................................13
Employees.....................................................16
2. PROPERTIES....................................................16
3. LEGAL PROCEEDINGS.............................................17
4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.........................................17
4(a). EXECUTIVE OFFICERS OF THE REGISTRANT..........................17
II 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS.................................19
6. SELECTED FINANCIAL DATA.......................................20
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................21
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................28
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE......................50
III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT..................................................50
11. EXECUTIVE COMPENSATION........................................50
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.......................................50
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................50
IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.........................................51
2
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
Overview
- --------
Schnitzer Steel Industries, Inc. (the Company) collects, processes and recycles
steel scrap and manufactures finished steel products by operating one of the
largest steel scrap recycling businesses in the United States and a
technologically advanced steel mini-mill. As a result of its vertically
integrated business, the Company is able to transform auto bodies and other
scrap into finished steel products. The Company believes that its scrap and
steel facilities are cost competitive in its markets.
The Company's Scrap Operations have collection and processing facilities in
Portland, Eugene, White City, Grants Pass and Bend, Oregon, Oakland, Sacramento
and Fresno, California, Tacoma and Pasco, Washington and Anchorage, Alaska.
Additionally, as a result of its acquisition of Proler International Corp.,
effective November 29, 1996, through joint ventures, the Company participates in
the management of an additional 28 scrap collection and processing facilities,
including export terminals in Los Angeles, California, Everett, Massachusetts,
Portland, Maine, Providence, Rhode Island and Jersey City, New Jersey. The
Company believes that Scrap Operations has a strong competitive position in its
markets due to significant economies of scale, low cost scrap processing and
loading methods, and deep water terminal facilities which provide efficient and
flexible access to both domestic and foreign steel producers.
The Company's Steel Operations are conducted by Cascade Steel Rolling Mills,
Inc., a wholly owned subsidiary acquired in 1984. Steel Operations produces
steel reinforcing bar (rebar), coiled rebar, wire rod, merchant bar, fence
posts, specialty sections and grape stakes. The Company believes that Steel
Operations has a strong competitive position in its market due to its captive
source of steel scrap, efficient production processes, state-of-the-art
technology, well-located shipping and transportation facilities, and proximity
to California and other major western markets.
Acquisition of Proler International Corp.
- -----------------------------------------
On November 29, 1996, PIC Acquisition Corp. (PIC), a wholly owned subsidiary of
the Company, acquired approximately 86% of the outstanding shares of Proler
International Corp. (Proler) for $9 cash per share pursuant to a tender offer
for all of the outstanding shares of common stock of Proler. Subsequent to
November 30, 1996, PIC purchased additional shares, increasing its ownership to
approximately 94% of the outstanding shares. On December 6, 1996, the Company
completed the merger of PIC with Proler and, as a result, Proler became a wholly
owned subsidiary of the Company. As a result of the merger, all remaining
outstanding shares of Proler common stock were converted into the right to
receive the same $9 per share in cash paid in the tender offer. The aggregate
purchase price for Proler was $42.5 million.
Through its joint ventures, Proler supplies ferrous scrap to domestic mills and
exports ferrous scrap to foreign markets from scrap collection, processing and
deep water facilities in Los Angeles, California, Providence, Rhode Island,
Everett, Massachusetts, Portland, Maine, and Jersey City, New Jersey and 23
other scrap recycling yards.
The acquisition of Proler was accounted for as a purchase and Proler's results
of operations have been included in the Company's financial statements since
November 29, 1996.
3
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
Business Strategy
- -----------------
The Company's business strategy emphasizes continued growth of the ferrous scrap
business through additive acquisitions and joint ventures, and maintaining its
status as a low-cost producer of both steel scrap and finished steel products
through investments in state-of-the-art manufacturing facilities and increased
production efficiencies.
The Company considers itself, first and foremost, a ferrous scrap company, with
historically over 65% of its operating income, before corporate expenses and
eliminations, derived from Scrap Operations. Scrap Operations is one of the
leading processors in each of the markets in which it operates. Future capital
expenditures will focus largely on increasing the Company's position as one of
the premier scrap processors in the country.
Until the recent turmoil in the scrap market caused by the Asian financial
crisis, the Company was able to react to changing steel scrap market conditions
by adjusting the price it pays for unprocessed scrap. The Company enters into
scrap sales contracts by selling forward 45 to 90 days and purchases unprocessed
scrap on a daily basis. The typical scrap supplier is a relatively small, local
business or manufacturer who sells scrap in limited quantities. The typical
supplier generally does not have the ability to inventory material and therefore
lacks the market leverage to influence prices. By knowing the price for which
the processed material will be sold and the costs involved in processing the
scrap, the Company is generally able to take advantage of this differential in
timing between purchases and sales and negotiate prices with suppliers that
secure profitable transactions. The Asian financial crisis caused scrap selling
prices to drop faster than the Company was able to drop purchase prices for
unprocessed scrap. When the scrap markets stabilize, the Company believes that
it will be able to regain much of the margins it has lost as a result of the
Asian financial crisis.
It is the Company's intent to only make acquisitions that will be immediately
additive to the Company's earnings.
The Company has developed a multi-part strategy which includes the following
elements:
Expand Scrap Recycling Operations. The Company will continue to seek out
expansion opportunities for its Scrap Operations within both its existing
markets and elsewhere in the United States. The Company has focused on and will
continue to emphasize increasing its sources of ferrous scrap through its
existing network and through selective acquisitions or through joint ventures
with scrap processors and scrap suppliers. During fiscal 1998, the Company and
one its joint venture partners increased their East Coast market position
through the buyout of a third joint venture partner and the completion of two
other strategic joint venture acquisitions. In November 1996, the Company
acquired Proler. Proler's scrap metal joint ventures process approximately 2.5
million long tons of ferrous scrap per year. The Company's purchase of
Manufacturing Management, Inc. (MMI), another scrap processor, in March 1995
added approximately 500,000 long tons per year to the Company's ferrous scrap
volume. In December 1993, the Company acquired four scrap collection and
processing facilities in central and southern Oregon. To facilitate increased
purchasing of bundled scrap available in its California market area, the Company
installed a pre-shredder at its Oakland facility in 1993 to break apart bundles
for further processing into a higher-margin, more marketable shredded product. A
Fresno, California scrap facility was acquired in 1989 to increase the Company's
access to scrap in the central valley of California. The Company has also made a
series of investments in other joint ventures which increase the Company's
sources of scrap supply. The Company's most significant joint venture, in this
regard, operates self-service used auto parts yards, primarily in California.
The Company's Oakland facility receives car bodies from this joint venture for
processing and sale as shredded scrap metal.
Invest in State-of-the-Art Processing and Manufacturing. The Company's objective
is to be a low cost producer of both steel scrap and finished steel products in
order to maximize the operating margin for both operations. To meet this
objective, the Company has focused on and will continue to emphasize the
efficient purchasing and processing of scrap. Additionally, the Company has made
significant investments in state-of-the art equipment to ensure that its
operations have cost effective technology to produce high quality products and
to maximize economies of scale. The Company continues to invest in equipment to
improve the efficiency and
4
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
capabilities of its Scrap Operations. During fiscal years 1992 through 1998, the
Company spent $40.7 million on capital improvements related to Scrap Operations.
During this same time, the Company made capital expenditures of $90.4 million to
improve Steel Operations' steelmaking facility and to increase its production
capacity. In May 1991, the Company installed a new melt shop comprised of a
technologically advanced electric arc furnace and five-strand continuous caster.
The installation of new in-line straightening, stacking and bundling equipment
at its first rolling mill (Rolling Mill #1) was completed in August 1994. This
equipment improves merchant bar product quality, lowers processing costs, and
has permitted the Company to expand its higher margin merchant bar product line.
The Company is investing in technology to improve its key operating systems.
The Company has contracted to purchase and install a state-of-the-art automobile
shredder at its Tacoma facility capable of shredding over 2,000 tons per day.
This shredder will replace two existing aged shredders that on a combined basis
are capable of only 1,000 tons per day. The new shredder will reduce operating
costs, improve product quality and allow the Tacoma scrap operations to shred
material that was previously sold as lower grades. Additionally, the dock and
bulkhead at the Tacoma facility will be rebuilt. It is anticipated that the new
shredder and rebuilt dock and bulkhead will be installed and operational in the
second quarter of fiscal 1999.
Increase Finished Steel Production and Product Flexibility. In February 1996, a
second rolling mill (Rolling Mill #2) was completed, increasing Steel
Operations' production capacity by 500,000 tons per year. Additionally, in
February 1997, the Company completed the installation of a rod block at Rolling
Mill #2. The rod block has allowed the Company to enhance its product mix
through the production of coiled rebar and wire rod. In addition, the ability of
the new bar mill to produce existing cut-to-length rebar products permits the
Company to increase its production of higher-margin merchant bar products at
Rolling Mill #1 and also increases the Company's flexibility to adjust its
product mix among rebar, merchant bar and wire rod products to respond to
relative demand and price conditions among these products and to maximize
profits. Rolling Mill #2 expands the Company's rolling capacity, based on
anticipated product mix, to about 700,000 tons annually to more closely match
the capacity of the melt shop. The Company does not expect to expand Steel
Operations through significant capital additions in the foreseeable future.
Capture Benefits of Integration. The Company has historically sought to capture
the potential benefits of business integration whenever possible. The Company
believes it enjoys a competitive advantage over non-vertically integrated
mini-mill steel producers as a result of its extensive scrap operations. Scrap
Operations ensures Steel Operations will receive a predictable, high quality
supply of scrap in an optimal mix of scrap grades for efficient melting. In its
Steel Operations, the Company's new wire rod and bar mill is expected to
continue to upgrade the Company's finished steel production and product mix
capturing additional margin.
Complete Additive Acquisitions. The Asian financial crisis has caused
significant dislocations in the scrap industry and to a much lesser extent the
steel industry. It is the Company's belief that as a result of these
dislocations, potential acquisitions in the scrap and steel industries may again
become available at attractive prices. With a strong balance sheet, cash flows
and available borrowing capacity, the Company is in a position to complete an
acquisition should one fitting the Company's long-term strategic plans become
available. The Company will only complete an acquisition if it is immediately
additive to earnings.
Scrap Operations
- ----------------
The Company is one of the largest scrap processors in the United States, with
eleven wholly owned scrap collection and processing facilities. The Company
buys, processes and sells ferrous scrap to foreign and other domestic steel
producers or their representatives and to Steel Operations. Scrap Operations
also purchases ferrous scrap from other scrap processors for shipment directly
to Steel Operations without further processing by Scrap Operations.
5
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
Due to the large capital investment required for scrap processing equipment and
the scarcity of potential scrap yard sites that are properly zoned and have
access to waterways, highways and railroads, the scrap metal industry is
characterized by a relatively small number of large, regionally dominant scrap
processors. These large processors collect raw scrap from a variety of scrap
sources, including smaller scrap recyclers and dealers, and then sort, clean and
cut it into sizes and grades suitable for use by steel manufacturers.
The Company's Portland, Oakland, and Tacoma scrap operations are located at deep
water terminal facilities operated by the Company and also have rail and highway
access. As a result, the Company believes it is strategically located, both for
scrap collection from suppliers and for distribution of processed scrap to west
coast and foreign steel producers. The Company also operates collection and
processing facilities in Eugene, Bend, White City and Grants Pass, Oregon,
Sacramento and Fresno, California, Pasco, Washington and Anchorage, Alaska. The
Sacramento and Fresno facilities are smaller feeder yards which collect and
process scrap for transfer to the Oakland facility or to Steel Operations. The
Eugene, White City, Grants Pass, Bend, Pasco and Anchorage facilities are
similar feeder yards, but their production is transferred to the Portland or
Tacoma facilities or to Steel Operations.
Customers and Marketing. The following table sets forth information about the
amount of ferrous scrap sold by the Company's Scrap Operations to certain groups
of customers during the last five fiscal years:
============================================================================================================================
Year Ended August 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ ------------------
Sales Vol./1 Sales Vol./1 Sales Vol./1 Sales Vol./1 Sales Vol./1
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Ferrous Scrap
Customers: (dollar amounts in millions)
- ----------------------------------------------------------------------------------------------------------------------------
Asian Steel
Producers and
Representatives $ 90.4 720 $ 111.1 853 $ 131.8 858 $ 125.9 680 $ 75.9 461
- ------------------------ -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Steel Operations:
Supplied by
Company Scrap
Facilities 44.5 382 43.7 362 44.1 358 44.3 338 36.8 304
Purchased from
Others for Direct
Shipment/2 10.4 98 14.1 132 9.9 92 10.4 91 17.5 139
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total
Steel Operations 54.9 480 57.8 494 54.0 450 54.7 429 54.3 443
- ------------------------ -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Other US Steel
Producers 30 235 23.3 171 30.1 171 25.2 145 16.1 87
- ------------------------ -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 175.3 1,435 $ 192.2 1,518 $ 215.9 1,479 $ 205.8 1,254 $ 146.3 991
============================================================================================================================
/1 In thousands of long tons (2,240 pounds).
/2 Consists of prepared scrap that is not processed by Scrap Operations.
The Company sells scrap to foreign and other domestic steel producers or their
representatives and to Steel Operations. The Company has developed long-standing
relationships with Asian and U.S. steel producers. Asian scrap customers are
located principally in China, India, Japan, Korea and Taiwan. To serve these
customers more effectively, the Company operates a wholly-owned subsidiary, SSI
International Far East Ltd., in Seoul, South Korea. Additionally, the Company
uses representatives in Tokyo, Japan. The Company believes these representatives
not only enhance the Company's service to its Asian customers, but also provide
a valuable local presence and source of information in these markets. In fiscal
1998, one customer accounted for approximately 23% and Scrap Operations' five
largest customers
6
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
accounted for 61% of scrap sales to unaffiliated customers. However, the
Company's scrap customers vary from year to year due to demand, relative
currency values and other factors. All scrap sales are denominated in U.S.
dollars and substantially all scrap shipments to foreign customers are supported
by letters of credit.
While ferrous scrap prices have on average increased historically, such prices
are subject to market cycles. Prices for foreign scrap shipments are generally
established through a competitive bidding process. The Company generally
negotiates domestic prices based on export price levels. Foreign scrap sales
contracts typically provide for shipment 45 to 90 days after the price, which,
in most cases, includes freight, is determined. The Company attempts to respond
to changing export price levels by adjusting its purchase prices at its scrap
yards to maintain its operating margin dollars per ton. However, the Company's
ability to fully maintain its operating margin per ton through periods of
rapidly declining prices can be limited by the impact of lower purchase prices
on the volume of scrap flowing to the Company from marginal scrap sellers.
Accordingly, the Company believes it benefits from rising scrap prices which
provide the Company greater flexibility to maintain or widen both margins and
scrap flow into its scrap yards.
Sources of Scrap. The most common forms of raw scrap purchased by the Company
are wrecked automobiles, railroad cars, railroad tracks, machinery, and
demolition scrap from buildings and other obsolete structures. Scrap is acquired
from drive-in sellers at posted prices at the Company's eleven scrap yards, from
drop boxes at over 1,000 industrial sites and through negotiated purchases from
railroads and other large suppliers. The Company purchases scrap from a large
number of suppliers, including railroads, industrial manufacturers, automobile
salvage yards, scrap dealers and individuals. Scrap yards situated nearest to
scrap sellers and major transportation routes have a competitive advantage
because of the significance of freight charges relative to the value of scrap.
The Company's Portland yard benefits from northwestern rail, highway and water
transportation routes allowing it to attract sellers from Oregon, Washington,
Idaho, Montana, Utah, Nevada and Northern California. The Eugene, Grants Pass,
White City and Bend yards are smaller facilities that serve as collection points
from central and southern Oregon. The Oakland yard gives the Company sourcing
capability in the San Francisco Bay area, the fifth largest metropolitan region
in the country. The Sacramento and Fresno yards are smaller facilities that
serve as collection points for scrap from the central valley of California and
Western Nevada. The Company's Tacoma yard collects scrap from Seattle and the
entire Puget Sound area as well as from throughout Washington, Montana, Idaho,
Alaska, and Western Canada. No single supplier accounted for more than 5% of the
scrap purchased by the Company during the last fiscal year.
Scrap Processing. The Company processes raw scrap by cleaning, sorting, shearing
and shredding it into metal pieces of a size, density and purity required by
customers for introduction into their melting furnaces. Smaller, denser pieces
of scrap are more valuable because they melt more easily and more completely
fill a furnace charge bucket. Over 80% of the ferrous scrap collected by the
Company's scrap facilities requires processing before sale.
Six of the Company's eleven scrap facilities operate large capacity
guillotine-style shears for cutting large pieces of ferrous scrap into smaller,
more valuable pieces. At Portland, Eugene, Tacoma and Oakland, the Company also
has large scissor shears mounted on cranes that move about the yards and cut
bulky pieces of scrap into sizes that can be further processed by the guillotine
shears. These mobile shears are capable of reducing a railroad boxcar to useable
scrap in approximately 30 minutes.
The Portland and Oakland facilities each operate a large auto shredder capable
of processing up to 1,500 tons of scrap per day. The Tacoma facility has two
aged auto shredders with combined capacity to process up to 1,000 tons of scrap
per day that are being replaced with a state-of-the-art shredder capable of
shredding over 2,000 tons per day. These shredders reduce automobile bodies and
other light gauge sheet metal into fist-size pieces of shredded scrap. The
shredded material is then carried by conveyor under magnetized drums which
attract the ferrous scrap and separate it from the nonferrous metals and other
material (fluff) found in the shredded material, resulting in a relatively pure
and clean shredded steel product. The nonferrous metal and fluff then pass
through a separator that removes the fluff. In Oakland, the nonferrous scrap is
further processed using a sink float method to separate aluminum from other
metals based on the differences in their specific gravities. The remaining
nonferrous metals are either hand sorted and graded before being sold or sold
unsorted.
7
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
A pre-shredder at the Oakland facility is used to break apart compacted bundles
of light gauge ferrous scrap purchased from other scrap processors and dealers.
The unbundled scrap is further processed through the shredder.
Deep Water Terminal Facilities. The Company delivers processed scrap to foreign
steel producers by ship. The Company achieves cost efficiencies by operating
deep water terminal facilities at the Portland, Tacoma and Oakland scrap
operations. As a result, the Company is generally not subject to berthing delays
often experienced by users of unaffiliated terminal facilities. The Portland
dock has three operating berths for ships and two tie-up berths, and is equipped
with three 60-ton cranes and one 30-ton crane for loading and unloading heavy
materials and a bulk loading conveyor capable of loading up to 700 tons of
shredded scrap per hour directly into a ship's hold. The Oakland dock also has a
berth serviced by a bulk loading conveyor for loading shredded scrap as well as
a concrete wharf with a 40-ton container crane. Upon completion of the new dock
and bulkhead, the Tacoma marine terminal will be serviced by a 200-ton whirly
crane and one 40-ton crane.
The deep water terminal facilities are used extensively for loading scrap
shipments to the Company's foreign customers. The Portland terminal and, to a
lesser extent, the Oakland and Tacoma terminals also sell docking, loading and
warehousing services to unrelated parties.
Ocean freight costs are a significant element of the cost of scrap delivered to
foreign customers. The Company believes it benefits from the experience and
market knowledge of the shipping businesses it is affiliated with in arranging
ocean transportation. To limit its exposure to fluctuations in ocean shipping
rates and to assure the availability of appropriate vessels, in 1993 the Company
entered into a five-year time charter of a vessel from Trans-Pacific Shipping
Co. (TPS), an affiliated company. The agreement, which expired in June 1998,
guaranteed the ship owner a residual market value of $2.5 million at the end of
the time charter. Upon expiration of the time charter, the Company paid the
guaranteed residual and entered into an additional 5 year time charter, at the
end of which the Company will own the vessel. The Company entered into two
additional seven-year time charters for other vessels in May 1995.
Competition. The Company competes both with respect to the purchase of scrap
from scrap sources and the sale of processed scrap to metal producers.
Competition for scrap purchased in the Company's markets comes from one large
scrap processor, LMC Metals, a division of Simsmetal USA Corporation,
headquartered in Richmond, California, one large scrap broker, David J. Joseph
Company, which purchases scrap throughout the region for delivery to steel
producers, as well as from smaller scrap yards and dealers, and steel producers
such as Oregon Steel Mills, Inc. and Birmingham Steel Corporation (Salmon Bay
Steel) who buy scrap directly. The predominant competitive factors impacting the
Company's scrap sales and its ability to obtain raw scrap are price, including
shipping costs, availability, reliability of service and product quality.
The Company competes with a number of U.S. and foreign scrap processors for
export sales to the Company's customers. Price, including shipping costs, and
availability are the most important competitive factors, but reliability and
quality are also important. The Company believes that its size and locations
allow it to compete effectively with other U.S. and foreign scrap processors.
Seasonality. The Company makes a number of large ferrous scrap shipments to
foreign steel producers each year. The Company's control over timing of scrap
shipments is limited by customers' requirements, shipping schedules and other
factors. Variations in the number of foreign scrap shipments from quarter to
quarter results in fluctuations in quarterly revenues and earnings.
Backlog. At August 31, 1998, the Company's Scrap Operations had a backlog of
firm orders of $6.8 million, as compared to $31.2 million at August 31, 1997 All
of the backlog at August 31, 1998 is related to export shipments and is expected
to be shipped during 1998.
8
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
Joint Ventures
- --------------
The Company has invested in certain joint ventures which process and sell scrap
to third parties and other joint ventures that supply scrap to the Company's
operations.
I. Joint Venture Scrap Processors
In November 1996 the Company acquired Proler. Proler owns interests in five
joint ventures that are engaged in buying, processing, and selling primarily
ferrous metals. These joint ventures process and sell approximately 2.5 million
long tons of ferrous scrap per year. Through these joint ventures, the Company
participates in the management of 28 scrap collection and processing facilities,
including export terminals in Los Angeles, California, Everett, Massachusetts,
Portland, Maine, Providence, Rhode Island and Jersey City, New Jersey and 23
feeder yards. At the feeder yards scrap metal is collected, processed and then
transported to one of the joint venture's export terminals for subsequent sale
or sold directly to domestic purchasers.
During fiscal 1998, the Company and one of its joint venture partners increased
their East Coast market position through the buyout of a third joint venture
partner and the completion of two other strategic joint venture acquisitions.
The Company and its joint venture partners continue to seek expansion
opportunities in both their existing markets and elsewhere in the United States.
Scrap Processing and Supply. The joint ventures predominantly produce shredded
scrap and other grades of ferrous scrap, primarily heavy melting and premium
grades. The joint ventures process scrap by shredding, sorting, baling, shearing
or cutting the scrap into pieces suitable for melting. Processed scrap is either
inventoried for later shipment or shipped directly by rail, truck, ship or barge
to foreign or domestic steel mills.
Deep Water Terminal Facilities. Through its joint ventures, the Company
participates in the management of export terminals in Los Angeles, California,
Everett, Massachusetts, Portland, Maine, Providence, Rhode Island and Jersey
City, New Jersey. The joint ventures deliver by ship processed scrap to steel
producers throughout the world. As a result of owning or leasing these
facilities, the joint ventures are not subject to berthing delays often
experienced by users of unaffiliated terminal facilities.
Competition. The predominant competitive factors which impact the joint
ventures' ability to obtain scrap as a raw material and scrap sales are price,
including shipping costs, availability, reliability of service and product
quality.
II. Joint Venture Suppliers of Scrap
The Company is a 50% partner in a joint venture which operates thirteen
self-service used auto parts yards in central California and the Bay Area, one
yard in Texas, one yard in Reno, Nevada, one yard in Salt Lake City, Utah and
one yard in Summit, Illinois. Customers purchase parts that they remove
themselves from wrecked automobiles purchased by the joint venture and displayed
in its yards. The Company then has a right of first refusal to purchase the
picked over car bodies for shredding at the Oakland scrap operation. The joint
venture opened or acquired four yards in fiscal 1993, three yards in fiscal
1995, one yard in fiscal 1996, and two yards in fiscal 1997, and intends to
continue to open or acquire new yards as appropriate sites are identified.
During fiscal 1998, the Company purchased substantially all the car bodies
generated in California by this joint venture.
The Company is also a 50% partner in a joint venture operating out of Richmond,
California which is an industrial plant demolition contractor. The joint venture
dismantles industrial plants, performs environmental remediation, resells any
machinery or pieces of steel that are salvaged from the plants in a usable form,
and sells other recovered metals as scrap, primarily to the Company. During
fiscal 1998, the Company purchased substantially all of the ferrous scrap
generated by this joint venture.
9
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
During fiscal 1998, the Company purchased 203,000 long tons of ferrous scrap
from its joint ventures, on terms negotiated at arms-length between the Company
and the other partners to the joint ventures.
Steel Operations
- ----------------
The Company's Steel Operations are conducted by its subsidiary, Cascade Steel
Rolling Mills, Inc., located in McMinnville, Oregon (approximately 45 miles
southwest of Portland). Steel Operations' mini-mill was established in 1968 and
acquired by the Company in 1984.
Products and Marketing. Steel Operations produces rebar, merchant bar, wire rod,
coiled rebar and specialty products such as studded fence posts, grape stakes
and special sections. Sales of these products during the last five fiscal years
were as follows:
================================================================================================================================
Year Ended August 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- ------------------ ------------------- -------------------
Sales Vol./1 Sales Vol./1 Sales Vol./1 Sales Vol./1 Sales Vol./1
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(dollar amounts in millions)
- --------------------------------------------------------------------------------------------------------------------------------
Rebar $ 101.9 325 $ 104.9 341 $ 98.7 321 $ 78.3 255 $ 85.9 310
- -------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Merchant bar 46.2 123 43.1 117 35.5 95 34.4 87 41.7 113
- -------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Wire rod 11.3 37 4.6 15
- -------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Coiled rebar 6.0 18 1.7 5
- -------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Specialty products 22.0 50 28.1 68 25.8 60 23.5 56 18.0 47
- -------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 187.4/2 553 $ 182.4/2 546 $ 160.0 476 $ 136.2/2 398 $ 145.6/2 470
================================================================================================================================
/1 In thousands of short tons (2,000 pounds).
/2 Does not include billet sales of $4.0 million in 1998, $1.3 million in
1997, $5.2 million in 1995 and $9.0 million in 1994.
Rebar is steel rod used to increase the tensile strength of poured concrete.
Merchant bar consists of round, flat, angle and square steel bars used by
fabricators or manufacturers to produce a wide variety of products, including
gratings, steel floor and roof joints, safety walkways, ornamental furniture,
stair railings and farm equipment. Wire rod is steel wire used by fabricators to
produce a variety of products such as chain link fencing, nails, wire and stucco
netting. Coiled rebar is rebar delivered on coils rather than in flat lengths, a
method preferred by some fabricators. Specialty products include fence posts and
other finished products. The Company's fence posts are designed to support
barbed wire and are sold primarily to the agricultural industry. The addition of
in-line straightening, stacking and bundling equipment to Rolling Mill #1 in
fiscal 1995 allowed the Company to expand its higher-margin merchant bar product
lines.
The Company's installation of a rod block and finishing equipment at Rolling
Mill #2 for the rolling of wire rod and coiled rebar was completed in February
1997. Demand for wire rod and coiled rebar on the West Coast has traditionally
been filled by suppliers outside of the region (both domestic and foreign),
creating what the Company believes to be an attractive opportunity to capture
market share and enhance profitability. The addition of the new bar mill, with
its ability to produce Steel Operations' existing cut-to-length rebar products,
has permitted the Company to
10
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
increase it's production of higher-margin merchant bar products at Rolling Mill
#1 and also increased the Company's flexibility to adjust its product mix among
rebar, merchant bar and wire rod products to respond to relative demand and
price conditions among those products. The Company expects Steel Operations'
total volume to continue to increase due to greater efficiencies to be gained at
Rolling Mill #2.
Steel Operations sells directly from its plant in McMinnville, Oregon and from
its distribution centers located in Union City, California (San Francisco area)
and El Monte, California (Los Angeles area). The two California distribution
centers facilitate sales by holding a ready inventory of products close to major
customers for just-in-time delivery. Due to zoning changes, the Company will be
closing the Union City distribution center by April 1999 and is evaluating
whether to replace it with a third party warehouse which would provide storage
and fulfillment. Steel Operations communicates regularly with major customers to
determine their anticipated needs and plans its rolling mill production schedule
accordingly. Steel Operations also produces and inventories a mix of products
forecasted to meet the needs of other customers. Shipments to customers are made
by common carrier, either truck or rail.
During the year ended August 31, 1998, Steel Operations sold its steel products
to approximately 500 customers primarily located in the 10 western states. In
that period, approximately 39% of Steel Operations' sales were made to customers
in California. Steel Operations' customers are principally steel service
centers, construction industry subcontractors, steel fabricators, and major farm
and wood product suppliers.
One customer accounted for 8.6% of Steel Operations' revenues in fiscal 1998.
Steel Operations' 10 largest customers accounted for approximately 43% of its
revenues during fiscal 1998.
Scrap Supply. The Company believes it operates the only mini-mill in the United
States which has the ability to obtain its entire scrap requirement from its own
affiliated scrap operations. The demand for steel scrap has intensified with the
increase in the number and capacity of steel producers both in the U.S. and
overseas. There have at times been regional shortages of steel scrap with some
mills being forced to pay higher prices for scrap shipped from other regions or
to temporarily curtail operations. The Company's Scrap Operations currently
supplies Steel Operations both with steel scrap that it has processed and with
steel scrap that it has purchased from third-party processors. See "Scrap
Operations." Scrap Operations is also able to deliver to Steel Operations an
optimal mix of scrap grades to achieve maximum efficiency in its melting
operations.
Energy Supply. Electricity and natural gas represented approximately 5% and 2%
respectively, of Steel Operations' cost of goods sold in the year ended August
31, 1998.
Steel Operations purchases hydroelectric power from McMinnville Water & Light
Company (McMinnville), a municipal utility that acquires its power from the
Bonneville Power Administration (BPA). Steel Operations is McMinnville's largest
customer. McMinnville obtains power at the lowest cost available from BPA and
then resells it to Steel Operations at its cost plus a fixed charge per kilowatt
hour and a 3% city surcharge. In fiscal 1998, Steel Operations paid an average
of $.03 per kilowatt hour used. The favored rate McMinnville obtains from BPA is
for firm power; therefore, Steel Operations is not forced to sacrifice the
reliability of its power supply for a lower interruptible power rate as is the
case with certain other mini-mills. The contract with McMinnville expires June
30, 2001.
Steel Operations purchases natural gas for use in the reheat furnaces from
Panenergy Gas Services of Salt Lake City, Utah, pursuant to a contract that
obligates Steel Operations to purchase minimum amounts of gas at a fixed rate or
pay a demand charge. The contract expires on October 31, 2004. All natural gas
used by Steel Operations must be transmitted by a single pipeline owned by
Northwest Natural Gas Company (Northwest) that also serves local residential
customers of Northwest. To protect against interruptions in gas supply, Steel
Operations maintains stand-by propane gas storage tanks which hold enough gas to
operate one of the rolling mills for at least three days without refilling.
11
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
Manufacturing Operations and Equipment. Steel Operations' melt shop includes a
96-ton capacity electric arc furnace and a five-strand continuous billet caster,
installation of which was completed in May 1991. The melt shop is highly
computerized and automated. The 96-ton capacity of the furnace accommodates
larger, less expensive grades of scrap, resulting in scrap cost savings. Energy
savings result in part from efficiencies of the larger furnace, but also as a
result of post-combustion equipment added to the furnace in 1995. This
technology injects oxygen into the furnace during melting operations which
creates energy by combusting carbon monoxide. The melt shop also has enhanced
steel chemistry refining capabilities, permitting the Company to produce higher
margin products using special alloy quality grades of steel not currently
produced by other mills on the West Coast, including the steel grades required
for wire rod.
During the fiscal years ended August 31, 1996, 1997 and 1998 the melt shop
produced 493,000, 586,000 and 611,000 tons of billets, respectively. The melt
shop operates 24 hours a day, seven days a week, except for one six-to-ten hour
period each week in which it is shut down for maintenance. In 1996 Steel
Operations constrained melt shop production through additional shutdown days to
limit the increase in billet inventory. Production was not constrained in 1997
or 1998. The Company continues to anticipate that the melt shop will produce
over 700,000 tons of billets per year when it is operating at capacity.
Billets produced by the melt shop are reheated in one of two natural gas-fueled
reheating furnaces and then drawn red-hot through one of two rolling mills.
Rolling Mill #1, a technologically advanced 17-stand mill, was completed in July
1986. The mill is computerized, allowing for efficient synchronized operations
of the rolls and related equipment. The computer controls facilitate the
reconfiguration of the rolls to produce different products, thus reducing costly
downtime. The computer controls include a self-diagnostic system that detects
and identifies electronic and mechanical malfunctions in Rolling Mill #1. In
1994, Steel Operations completed the installation of in-line straightening,
stacking and bundling equipment on the end of Rolling Mill #1. The addition of
this equipment has permitted Steel Operations to improve the quality of its
products and to produce its merchant bar products more efficiently by automating
the straightening and bundling function. It has also permitted the Company to
expand its higher-margin merchant bar product line.
Rolling Mill #2, a technologically advanced 18-stand mill, was completed in
February 1996. The mill is computerized, allowing for efficient synchronized
operations of the rolls and related equipment. The computer controls facilitate
the reconfiguration of the rolls to produce different products, thus reducing
costly downtime. The computer controls include a self-diagnostic system that
detects and identifies electronic and mechanical malfunctions in the mill. Steel
Operations installed a rod block at Rolling Mill #2 which was completed in
February 1997. The rod block allows the Company to enhance its product mix
through the production of coiled rebar and wire rod. In addition, the ability of
Rolling Mill #2 to produce Steel Operations' existing cut-to-length rebar
products permits the Company to increase its production of higher-margin
merchant bar products at Rolling Mill #1 and also increases the Company's
flexibility to adjust its product mix among rebar, merchant bar and wire rod
products to respond to relative demand and price conditions among other
products. Rolling Mill #2 is expected to expand the Company's rolling capacity,
based on anticipated product mix, to about 700,000 tons annually to more closely
match the potential output of the melt shop at full capacity.
Steel Operations' melt shop and rolling mills are each shut down for one week
twice each year for comprehensive maintenance (in addition to normal weekly
maintenance performed throughout the year). During these periods, substantially
all of the equipment in the mills are dismantled, inspected and overhauled.
Transportation. The Company makes extensive use of rail transportation for
shipment of Steel Operations' products to its distribution centers and customers
in California and for the shipment of scrap to Steel Operations from the
Company's scrap yards and other scrap processors in Southern Oregon and
California. As a result, the Company believes it is one of the largest customers
of Union Pacific Corporation and the largest customer for northbound freight.
The Company believes this position enables the Company to obtain favorable rates
which permit Steel Operations to compete with mills that are closer to
California markets.
12
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
Competition. Steel Operations competes predominantly with the following Western
U.S. steel producers for sales of rebar and merchant bar: Birmingham Steel
Corporation in Seattle, Washington; NUCOR Corporation in Plymouth, Utah; Tamco
in Los Angeles, California; North Star Steel Company in Kingman, Arizona; and
Chaparral Steel Company in Midlothian, Texas. Steel Operations also competes for
sales of wire rod with the aforementioned North Star Steel Company mini-mill and
an Oregon Steel Mill, Inc. plant located in Pueblo, Colorado, along with other
domestic and foreign producers. Other domestic mills generally do not compete in
the Company's market area because of transportation costs. The principal
competitive factors in Steel Operations' market are price (including freight
cost), availability, quality and service. Certain of Steel Operations'
competitors have substantially greater financial resources than the Company.
U.S. steel manufacturers have historically faced competition from foreign steel
producers. The Company experienced some competition from Mexican steel mills in
the Southern California market during fiscal 1996 and 1997. While the Company
has experienced little foreign competition in recent years, there are
indications that imported steel may have an adverse effect on the steel market
in the near future.
Seasonality. Steel Operations' revenues can fluctuate significantly between
quarters due to factors such as the seasonal slowdown in the construction
industry and other industries it serves. In the past, Steel Operations has
generally experienced its lowest sales during the second quarter of the fiscal
year. The Company expects this pattern to continue in the future.
Backlog. Steel Operations generally ships products within days after the receipt
of purchase orders. Accordingly, Steel Operations does not normally have any
material backlog of firm orders.
Environmental Matters
- ---------------------
Compliance with environmental laws and regulations is a significant factor in
the Company's business. The Company is subject to local, state, federal, and
supranational environmental laws and regulations concerning, among other
matters, solid waste disposal, air emissions, waste water disposal, dredging,
and employee health. Environmental legislation and regulations have changed
rapidly in recent years and it is likely that the Company will be subject to
even more stringent environmental standards in the future.
MMI
During 1994, in conjunction with the Company's due diligence investigation of
MMI, a third-party consultant was hired to estimate the cost to cure both
current and future environmental liabilities. Based on the consultant's report,
MMI recorded in 1994 a reserve for the estimated cost to cure environmental
liabilities. This reserve was carried over to the Company's financial statements
and at August 31, 1998 aggregated $20.2 million.
General Metals of Tacoma (GMT), MMI's subsidiary, owns and operates a scrap
facility located on the Hylebos Waterway, a part of Commencement Bay, which is
the subject of an ongoing environmental investigation and remediation project by
the U.S. Environmental Protection Agency (EPA) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA). GMT and well
over 60 other parties were named potentially responsible parties (PRP's) for the
investigation and cleanup of contaminated sediment along the Hylebos Waterway.
GMT and five other PRP's voluntarily have entered into an Administrative Order
on Consent with the EPA to fund a pre-remedial study of sediment contamination
and remediation alternatives. GMT's share of the study, which is now expected to
be completed in late 1999, is approximately $2 million. GMT may also be named in
a claim for potential natural resource damages in Commencement Bay currently
under assessment by certain government agencies and others acting as natural
resource trustees.
13
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
In 1998, GMT entered into an Administrative Order on Consent with EPA pursuant
to which GMT agreed to replace its bulkhead and wharf with a steel sheet
pile/cement dock, including capping for inter-tidal sediments, to address
potential concerns about contaminated sediments being addressed in the Hylebos
Superfund matter.
In 1990, MMI entered into a Consent Decree with the Washington Department of
Ecology which required MMI to pave the entire Tacoma scrap facility and install
a stormwater collection and treatment system. The stormwater system has been
installed and final paving was completed during fiscal 1996. On an ongoing
basis, MMI is required to monitor the groundwater quarterly and maintain the
paving.
MMI is also a named PRP at two third-party sites at which it allegedly disposed
of transformers. At one site, MMI entered into a settlement under which it
agreed to pay $825,000 towards remediation of the site. Remediation of the site
has been performed and it is now subject to a five year monitoring program. The
other site has not yet been subject to significant remedial investigation. MMI
has been named as a PRP at several other sites for which it has reached de
minimis settlements. In addition to the matters discussed above, the Company's
environmental reserve includes amounts for potential future cleanup of other
sites at which MMI has conducted business or has allegedly disposed of other
materials.
Proler
In 1996, prior to the Company's acquisition of Proler, Proler recorded a
liability for the probable costs to remediate its wholly owned properties based
upon a consultant's estimates. The Company carried over the aggregate reserve to
its financial statements upon acquiring Proler and $8.1 million remained
outstanding on August 31, 1998. Also, Proler's joint ventures recorded
additional liabilities of $4.1 million for the probable costs to remediate their
properties based on the consultant's estimates.
Between 1982 and 1987, MRI Corporation (MRI), a wholly owned subsidiary of
Proler, operated a tin can shredding and detinning facility in Tampa, Florida.
In 1989 and 1992, the EPA conducted a preliminary site investigation of this
property and, in December 1996, added the site to the "National Priorities
List". MRI and Proler, along with several other parties, have been named as PRPs
for the site by the EPA. Additionally, Proler and/or this subsidiary have been
named or identified as PRPs at several other sites. Proler included the probable
costs associated with these sites in the aforementioned reserve.
Proler leased lands from Kennecott in Copperton, Utah between 1966 and 1992 for
a detinning plant operation, which supplied iron precipitate to the mines.
Environmental site clean-up activities in 1997 and to date during 1998 totaled
$300,000 for Proler, with an estimated $200,000 of remaining cleanup to be done.
The amount of remaining work and the parties responsible for such work to reach
final closure on the site are currently in negotiation.
As part of the Proler acquisition, the Company became a fifty-percent owner of
Hugo Neu-Proler Company (HNP). HNP has agreed, as part of its 1996 lease renewal
with the Port of Los Angeles, to be responsible for a multi-year, phased
remedial clean-up project involving certain environmental conditions on its
scrap processing facility at its Terminal Island site in Los Angeles, California
by the year 2001. Remediation will include limited excavation and treatment of
contaminated soils, paving, installation of a stormwater management system,
construction of a noise barrier and perimeter wall around the facility, and
groundwater monitoring. The probable costs to remediate this property are
included in the aforementioned reserve.
Additionally, other Proler joint venture sites with potential environmental
clean-up issues have been identified. The estimated potential clean-up costs
associated with these sites have also been included in the aforementioned
reserve.
14
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
Scrap Operations
After the shredding of automobile bodies and the separation of ferrous and
salable nonferrous metals, the remaining auto shredder residue ("fluff") must be
disposed. State and federal standards prescribe fluff sampling protocols which
require representative samples of fluff to be analyzed to determine if they are
likely to leach heavy metals, PCBs or other hazardous substances in excess of
acceptable levels. Fluff from the Company's scrap operations in Oakland and
Tacoma undergo an in-line chemical stabilization treatment before being sent to
a landfill. Fluff generated at all of the Company's facilities meets all
currently applicable contaminate leachate standards.
The fluff from the Company's sites is beneficially used as an alternative daily
landfill cover. The California Department of Toxic Substances Control ("DTSC")
has expressed reservations, which the Company is contesting, concerning whether
the procedures employed by the Company with respect to Oakland's fluff are
adequate under California law. The Company has implemented certain changes to
its procedures to accommodate concerns raised by the DTSC and does not believe
that the changes that have been made or any additional changes required by the
DTSC will result in any significant additional expense to the Company, although
there is no assurance that this will be the case.
Steel Operations
The Company's steel mini-mill generates electric arc furnace (EAF) dust, which
is classified as a hazardous waste by the EPA because of its zinc and lead
content. Currently, a majority of the Company's EAF dust is shipped to a firm in
the United States that applies a treatment which delists the EAF dust as
hazardous so it can be disposed of as a non-hazardous, solid waste. The
remaining volume of the Company's EAF dust is exported, pursuant to an annually
renewable export license, to a secondary smelter in Mexico that recycles EAF
dust to produce commercial grade zinc and lead.
Steel Operations' mini-mill operating permit under Title V of the Clean Air Act
Amendment (CAA) of 1990, which governs certain air quality standards, was issued
in 1998 and expires in April 2003. The mini-mill is currently authorized to melt
up to 900,000 tons of scrap per year and produce finished steel products
totaling 450,000 tons for Rolling Mill #1 and 525,000 tons for Rolling Mill #2.
As the mini-mill's production grows beyond current levels, Steel Operations
anticipates that it will need to enhance its existing facilities to properly
control increased emissions in order to remain in compliance with the operating
permit. Steel Operations is currently evaluating alternative methods for
controlling the growth in emissions. Any capital expenditures necessary to
address this issue will not have a material adverse effect on Steel Operations.
It is not possible to predict the total size of all capital expenditures or the
amount of any increases in operating costs or other expenses that may be
incurred by the Company or its subsidiaries to comply with environmental
requirements applicable to the Company, its subsidiaries and their operations,
or whether all such cost increases can be passed on to customers through product
price increases. Moreover, environmental legislation has been enacted, and may
in the future be enacted, to create liability for past actions that were lawful
at the time taken but which have been found to affect the environment and to
increase public rights of action for environmental conditions and activities. As
is the case with steel producers and scrap processors in general, if damage to
persons or the environment has been caused, or is in the future caused, by the
Company's hazardous materials activities or by hazardous substances now or
hereafter located at the Company's facilities, the Company may be fined and/or
held liable for such damage and, in addition, may be required to remedy the
condition. Thus, there can be no assurance that potential liabilities,
expenditures, fines and penalties associated with environmental laws and
regulations will not be imposed on the Company in the future or that such
liabilities, expenditures, fines or penalties will not have a material adverse
effect on the Company.
15
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
The Company has, in the past, been found not to be in compliance with certain
environmental laws and regulations and has incurred liabilities, expenditures,
fines and penalties associated with such violations. The Company's objective is
to maintain compliance. Efforts are ongoing to be responsive to environmental
regulations.
The Company believes that it is in material compliance with currently applicable
environmental regulations as discussed above and, except as discussed above,
does not anticipate any substantial capital expenditures for new environmental
control facilities during fiscal 1999 or 2000.
Employees
- ---------
As of August 31, 1998, the Company had 1,062 full-time employees, consisting of
417 employees at the Company's Scrap Operations, 572 employees at Steel
Operations, and 73 corporate administrative employees. Of these employees, 682
are covered by collective bargaining agreements with twelve unions. Steel
Operations' contract with the United Steelworkers of America covers 432 of these
employees and expires on February 1, 2000. The Company believes that its labor
relations generally are good.
ITEM 2. PROPERTIES
The Company's Portland Scrap Operations, Portland deep water terminal
facilities, and the related buildings and improvements are located on an
approximately 120-acre industrial site owned by Schnitzer Investment Corp.
(SIC), a related party, and leased to the Company under a long-term lease. See
Part III, Item 13 "Certain Relationships and Related Transactions."
Approximately 17 acres are occupied by the deep water terminal facilities, and
the balance is used by Scrap Operations.
The Sacramento scrap operations are located on a 7-acre site, most of which is
leased from SIC under a long-term lease. See Part III, Item 13 "Certain
Relationships and Related Transactions." The Pasco and Anchorage operations are
located on sites leased from third parties.
The following scrap operations are all located on sites owned by the Company or
subsidiaries:
LOCATION ACREAGE OWNED AT SITE
-------- ---------------------
Oakland 33
Tacoma 26
Fresno 17
Eugene 11
Grants Pass 5
White City 4
Bend 3
Steel Operations' steel mill and administrative offices are located on an
83-acre site owned by Steel Operations in McMinnville, Oregon. Steel Operations
also owns its 87,000 sq. ft. distribution center in El Monte, California and its
46,000 sq. ft. distribution center in Union City, California.
The equipment and facilities on each of the foregoing sites are described in
more detail in the descriptions of each of the Company's businesses. Due to
rezoning, Steel Operations has chosen to close its Union City, California
distribution center by April 1999. Should the Company determine that the
operations performed at Union City are essential, it will contract with a third
party warehouse to provide storage and fulfillment. The Company believes its
present facilities are adequate for operating needs for the foreseeable future.
16
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
The Company's principal executive offices are located at 3200 NW Yeon Avenue in
Portland, Oregon in 20,000 sq. ft. of space leased from SIC under two long-term
leases. See Part III, Item 13 "Certain Relationships and Related Transactions."
ITEM 3. LEGAL PROCEEDINGS
Except as described above under Part I, Item 1 "Business -- Environmental
Matters", the Company is not a party to any material pending legal proceedings.
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 the fiscal year ended August 31, 1998.
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Office
- ---- --- ------
Leonard Schnitzer 73 Chairman of the Board and Chief Executive
Officer
Robert W. Philip 51 President
Kenneth M. Novack 52 Executive Vice President
Gary Schnitzer 56 Executive Vice President - California Scrap
Operations
Barry A. Rosen 53 Vice President - Finance and Treasurer
Kurt C. Zetzsche 59 President of Steel Operations
Edgar C. Shanks 50 Vice President - Taxation
James W. Cruckshank 43 Controller and Assistant Treasurer
Dori Schnitzer 44 Secretary
Leonard Schnitzer has been the Chief Executive Officer of the Company since
August 1973, and became Chairman of the Board in March 1991.
Robert W. Philip has been President of the Company since March 1991. He had
been a Vice President of the Company since 1984 with responsibility for the
Company's Metra Steel distribution division from 1984 to the time of its sale in
July 1990. Mr. Philip is Leonard Schnitzer's son-in-law.
17
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
Kenneth M. Novack is Executive Vice President of the Company and President
of Schnitzer Investment Corp. and certain other Schnitzer Group companies. From
1975 to 1980, he worked for the Company as Vice President and then Executive
Vice President. Mr. Novack was also President of Schnitzer Investment Corp. from
1978 to 1980. From 1981 until April 1991, he was a partner in the law firm of
Ball, Janik & Novack. Mr. Novack is the son-in-law of Gilbert Schnitzer, a
brother of Leonard Schnitzer.
Gary Schnitzer has been Executive Vice President in charge of the Company's
California scrap operations since 1980. Gary Schnitzer is the son of Gilbert
Schnitzer.
Barry A. Rosen has been Vice President-Finance and Treasurer of the Company
since 1982.
Kurt C. Zetzsche joined the Company in February 1993 as President of Steel
Operations. Mr. Zetzsche has been in the steel production business since 1966.
From 1990 to February 1993, he was President of Tennessee Valley Steel, a
mini-mill steel producer. From 1976 to 1989, he was President of Knoxville Iron
Co., also a mini-mill steel producer.
Edgar C. Shanks joined the Company in September 1991 as Vice
President-Taxation. From 1970 to 1991, he was a CPA with Price Waterhouse LLP
and was a partner there from 1982 to 1991.
James W. Cruckshank has been the Controller of the Company since May 1987.
Except for a brief period in 1986, he has been employed by the Company in
various accounting positions since 1984. From 1978 to 1984, he was a CPA with
Price Waterhouse LLP.
Dori Schnitzer has been the Secretary of the Company since June 1987. She
also served as corporate counsel of the Company from October 1987 to May 1991
when she became Vice President of Lasco Shipping Co. Ms. Schnitzer is a daughter
of Morris Schnitzer, a deceased brother of Leonard Schnitzer.
18
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is traded on the Nasdaq National Market tier
of the Nasdaq Stock Market under the symbol SCHN. The approximate number of
shareholders of record on September 30, 1998 was 100. The stock has been trading
since November 16, 1993. The following table sets forth the high and low prices
reported at the close of trading on the Nasdaq Stock Market and the dividends
paid per share for the periods indicated.
===============================================================================
Fiscal Year 1998
----------------------------------------------------
DIVIDENDS
HIGH PRICE LOW PRICE PER SHARE
- ------------------------- ---------------- ---------------- ----------------
First Quarter $37.63 $27.38 $.05
- ------------------------- ---------------- ---------------- ----------------
Second Quarter 30.00 22.63 .05
- ------------------------- ---------------- ---------------- ----------------
Third Quarter 27.13 24.06 .05
- ------------------------- ---------------- ---------------- ----------------
Fourth Quarter 26.25 15.00 .05
===============================================================================
===============================================================================
Fiscal Year 1997
----------------------------------------------------
DIVIDENDS
HIGH PRICE LOW PRICE PER SHARE
- ------------------------- ---------------- ---------------- ----------------
First Quarter $29.25 $24.75 $.05
- ------------------------- ---------------- ---------------- ----------------
Second Quarter 29.25 25.25 .05
- ------------------------- ---------------- ---------------- ----------------
Third Quarter 31.00 22.25 .05
- ------------------------- ---------------- ---------------- ----------------
Fourth Quarter 34.00 25.00 .05
===============================================================================
19
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
ITEM 6. SELECTED FINANCIAL DATA
Year Ended August 31,
1998 1997(1) 1996 1995(2) 1994
-------- -------- -------- -------- --------
(In millions, except per share, per ton and shipment data)
INCOME STATEMENT DATA:
Revenues $ 353.1 $ 361.7 $ 339.3 $ 330.7 $ 261.7
Cost of goods sold and other
operating expenses 311.2 314.8 290.8 284.5 234.3
Selling and administrative 22.5 21.2 18.9 16.2 13.2
Income from joint ventures 4.1 6.9 3.3 2.5 2.4
-------- -------- -------- -------- --------
Income from operations 23.5 32.6 32.9 32.5 16.6
Interest expense (6.8) (5.0) (3.8) (2.4) (1.0)
Other income (expense) (1.5) 4.6 1.7 3.9 0.9
-------- -------- -------- -------- --------
Income before income taxes 15.2 32.2 30.8 34.0 16.5
Income tax provision (5.8) (11.0) (10.0) (11.8) (5.8)
-------- -------- -------- -------- --------
Net income $ 9.4 $ 21.2 $ 20.8 $ 22.2 $ 10.7
======== ======== ======== ======== ========
Basic earnings per share $ 0.94 $ 2.06 $ 2.25 $ 2.83 $ 1.47
======== ======== ======== ======== ========
Diluted Earnings per share $ 0.93 $ 2.05 $ 2.24 $ 2.82 $ 1.47
======== ======== ======== ======== ========
Dividends per common share $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.15
======== ======== ======== ======== ========
OTHER DATA:
Shipments (in thousands of tons)(3):
Ferrous scrap 1,435 1,518 1,479 1,254 991
Finished steel products(4) 553 546 476 398 470
Average selling price per ton:
Ferrous scrap $ 122 $ 127 $ 146 $ 154 $ 148
Finished steel products(4) 339 334 336 342 310
Depreciation and amortization $ 18.7 $ 18.3 $ 14.0 $ 11.6 $ 9.3
Capital expenditures 14.2 15.5 44.6 31.1 21.1
Year Ended August 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In millions)
BALANCE SHEET DATA:
Working capital $ 111.1 $ 104.9 $ 92.4 $ 56.8 $ 48.2
Total assets 471.3 428.0 337.5 280.3 164.1
Short-term debt 0.2 0.4 0.2 0.2 1.9
Long-term debt 140.2 92.9 44.5 64.7 2.8
Shareholders' equity 241.4 239.1 223.8 136.0 115.3
(1) Includes the results of operations of Proler from November 29, 1996 through
August 31, 1997. See Note 12 to the Consolidated Financial Statements.
(2) Includes the results of operations of MMI from March 17, 1995, the date of
acquisition, through August 31, 1995.
(3) Tons for ferrous scrap are long tons (2,240 pounds) and for finished steel
products are short tons (2,000 pounds).
(4) Does not include billet sales of $4.0 million in 1998, $1.3 million in
1997, $5.2 million in 1995 and $9.0 million in 1994.
20
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The results of operations of the Company depend in large part upon demand and
prices for scrap metals in world markets and steel products on the U.S. West
Coast. Increasing steel demand and prices have led to improved profitability
during the period of fiscal 1995 through fiscal 1997. Primarily due to the Asian
financial crisis, fiscal 1998 results for Scrap Operations were negatively
impacted.
The Company's income from joint ventures for the year ended August 31, 1997 was
significantly higher than in prior years due to the acquisition of Proler,
effective November 29, 1996. In March 1995, the Company acquired all of the
outstanding stock of MMI. MMI's results of operations have been included in the
Company's financial statements since March 17, 1995 and have had a significant
impact on the Company's scrap related revenue and income since then.
The following tables set forth information regarding the breakdown of revenues
between the Company's Scrap Operations and Steel Operations, and the breakdown
of income from operations between Scrap Operations, Steel Operations and Joint
Ventures. Additional financial information relating to business segments is
contained in Note 10 of the Notes to Consolidated Financial Statements.
Revenues
Year Ended August 31,
-------------------------------------------------------
(In millions)
1998 1997 (1) 1996 1995 (2) 1994
------- ------- ------- ------- -------
Scrap Operations:
Ferrous $ 175.3 $ 192.2 $ 215.9 $ 205.8 $ 146.4
Nonferrous (3) 27.3 27.7 10.7 32.2 11.4
Other 15.3 16.5 6.8 6.1 4.0
------- ------- ------- ------- -------
Scrap Total 217.9 236.4 233.4 244.1 161.8
Sales to Steel Operations (4) (56.2) (58.4) (54.1) (54.9) (54.7)
------- ------- ------- ------- -------
Sales to Unaffiliated Customers 161.7 178.0 179.3 189.2 107.1
Steel Operations 191.4 183.7 160.0 141.5 154.6
------- ------- ------- ------- -------
Total $ 353.1 $ 361.7 $ 339.3 $ 330.7 $ 261.7
======= ======= ======= ======= =======
21
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
Income from Operations
Year Ended August 31,
-------------------------------------------------------
(In millions)
1998 1997 (1) 1996 1995 (2) 1994
------- ------- ------- ------- -------
Scrap Operations $ 16.5 $ 27.4 $ 29.6 $ 26.3 $ 12.3
Steel Operations 9.8 5.5 6.3 9.3 6.5
Joint Ventures 4.1 6.9 3.3 2.5 2.4
Corporate Expense and Eliminations (5) (6.9) (7.2) (6.3) (5.6) (4.6)
------- ------- ------- ------- -------
Income from Operations $ 23.5 $ 32.6 $ 32.9 $ 32.5 $ 16.6
======= ======= ======= ======= =======
(1) Includes the results of operations of Proler from November 29, 1996, the
date of acquisition, through August 31, 1997.
(2) Includes the results of operations of MMI from March 17, 1995, the date of
acquisition, through August 31, 1995.
(3) In July 1995, the Company sold certain of its Portland nonferrous
operations including a nonferrous business acquired in the MMI transaction,
which resulted in a decline in nonferrous revenues for fiscal 1996.
(4) Ferrous scrap sales from Scrap Operations to Steel Operations are made at a
negotiated market rate per ton.
(5) Corporate expense and eliminations consist primarily of unallocated
corporate expense for services that benefit both Scrap Operations and Steel
Operations. Because of this unallocated expense, the income from operations
of each segment does not reflect the income from operations the segment
would have as a stand-alone business.
Fiscal 1998 Compared to Fiscal 1997
Revenues for Scrap Operations decreased, while revenues for Steel Operations
increased, resulting in a net decrease in the Company's revenues of $8.6 million
to $353.1 million for fiscal 1998 compared to $361.7 million for fiscal 1997.
The Company achieved record shipments of finished steel products and produced
record tons of billets in fiscal 1998.
Scrap Operations generated revenues of $217.9 million, before intercompany
eliminations, compared with $236.4 million in fiscal 1997, representing a
decrease of $18.5 million (8%). Ferrous revenues decreased $17.0 million (9%) as
the result of a 5% decrease in ferrous tons shipped at lower average selling
prices. Sales to the Company's Steel Operations were down slightly. Scrap
Operations made 25 ferrous scrap export shipments totaling 720,000 tons in
fiscal 1998, compared with 30 shipments totaling 853,000 tons in fiscal 1997,
while domestic third-party tonnage increased 37% to 235,000 tons. The average
selling price for ferrous scrap declined $5 per ton to $122 with the largest
decline occurring in export prices during the second half of 1998.
Steel Operations' revenues increased $7.7 million (4%) to $191.4 million. Higher
volumes sold, coupled with an increase in selling prices, contributed to the
increase. Average steel selling prices increased $5 per ton to $339, while
finished steel tons shipped increased 6,600 tons to 553,000 tons. During fiscal
1998, the Company also sold 16,900 tons of billets, compared with 5,600 tons
during 1997.
Cost of Goods Sold. Overall, cost of goods sold decreased $3.6 million (1%) to
$311.2 million and increased as a percentage of revenue from 87% in fiscal 1997
to 88% in fiscal 1998. Gross profit decreased $5.1 million (11%) to $41.9
million.
22
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
Scrap Operations' cost of goods sold decreased $8.8 million (4%) to $189.1
million as the result of a 5% decrease in ferrous tonnage shipped. Cost of sales
per ferrous ton shipped remained unchanged from 1997 to 1998. The average
selling price of ferrous scrap also declined, resulting in a decrease in Scrap
Operations' gross profit of $9.6 million.
Cost of goods sold for Steel Operations increased $2.7 million (2%) to $178.1
million as the result of increased tonnage shipped. Cost of sales per ton
decreased $4 as the result of lower scrap prices and increased plant
efficiencies. This decrease, coupled with a $5 per ton increase in the average
selling price for finished steel and a 1% increase in tonnage shipped, resulted
in a $4.8 million (58%) increase in overall gross profit and a 53% increase in
gross profit per ton for finished steel.
Selling and Administrative Expenses. Selling and administrative expenses
increased $1.3 million (6%) in fiscal 1998 compared to fiscal 1997 primarily as
the result of overhead added due to the Proler acquisition in November 1996.
Income from Joint Ventures. The Company's joint ventures generated $408.6
million of revenues for fiscal 1998 compared with $352.5 million for fiscal
1997. The Joint Ventures in the Scrap Processing Business shipped 2.2 million
tons and 2.5 million tons for the same periods, respectively. This decrease was
primarily a result of the Asian financial crisis. Income from joint ventures for
fiscal 1998 decreased $2.8 million to $4.1 million compared with fiscal 1997.
This decrease resulted from operating losses due to the Asian financial crisis
as well as a $.4 million charge to income for closure of redundant plant
facilities and a $3.1 million charge to state inventory at the lower of cost or
market. This was offset by a $2.0 million favorable inventory adjustment
recorded as a result of physical inventories. The tons shipped for fiscal 1997
in the discussion above include activity which occurred prior to the Company's
acquisition of Proler.
Interest Expense. Interest expense for fiscal 1998 increased $1.8 million
because of additional debt required to support joint venture operations and
capital expenditures. Average borrowings for fiscal 1998 were $97.6 million
compared with $96.1 million for 1997. The average interest rate for fiscal 1998
was 5.8% compared with 5.7% for fiscal 1997.
Gain (Loss) on Sale of Fixed Assets. Results for fiscal 1998 include a $2.2
million charge to reflect the estimated loss which the Company expects to
realize upon the sale of its Tacoma shredders, which are being replaced with a
state-of-the-art automobile shredder.
Other Income. Other Income decreased $3.6 million during the year ended August
31, 1998 compared with the prior year. Fiscal 1997 included a $3 million gain on
settlement of an interest rate agreement which it had entered into for the sole
purpose of locking in the interest rate on a planned private placement of debt,
which the Company subsequently decided against pursuing.
Income tax provision. The effective tax rate for fiscal 1998 increased to 38%
from 34% in fiscal 1997 as a result of lower benefits from the Company's foreign
sales corporation and a reduced benefit from state tax credits.
Fiscal 1997 Compared to Fiscal 1996
Revenues for both scrap and steel increased, resulting in an overall increase in
the Company's revenues of $22.4 million to $361.7 million for fiscal 1997
compared with fiscal 1996. The Company achieved record shipments of both scrap
and finished steel products in fiscal 1997, compared to previous years.
23
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
Scrap Operations generated revenues of $236.4 million, before intercompany
eliminations, during fiscal 1997 compared with $233.4 million in fiscal 1996,
representing an increase of $3.0 million (1%). Ferrous revenues declined,
however, despite a 39,000 ton (3%) increase in shipments, due to softer selling
prices for scrap. Sales to the Company's Steel Operations increased by 43,000
tons (10%) to 494,000 tons. Although the total number of scrap export shipments
were the same as the prior year, foreign scrap tonnage declined slightly, while
domestic third party sales tonnage remained relatively the same as the prior
year. Average ferrous scrap revenues per ton for the first three quarters of
fiscal 1997 were lower than for the same period in the prior year, resulting in
a lower average selling price for the year of $127 per ton compared with $146
for fiscal 1996. The Company believes that, due to a temporary build-up in scrap
inventories by scrap processors and steel mills caused by a slackening in
demand, the average prices for ferrous scrap on the world market declined during
this period. The average selling price during the fourth quarter of fiscal 1997
was higher than for the same period in the prior year. The increase in other
sales reflects the acquisition of Proler in November 1996.
Steel Operations' revenues increased $23.7 million (15%) to $183.7 million.
Higher volumes sold, offset by lower average selling prices, contributed to the
increase. The Company experienced increased tonnage sales in all product
categories, due in part to the addition of a new rolling mill in February 1996.
Average finished steel selling prices, excluding billets, declined from $336 to
$334 per ton, reflecting lower prices for all categories of the Company's
primary finished steel products. The expansion of steel-making capacity by the
Company's competitors and an influx of finished steel shipments from Mexico into
Southern California through the third quarter of fiscal 1997 were predominantly
responsible for a decline in average selling prices in the market on the U.S.
West Coast. The mix of products sold also changed during fiscal 1997, impacting
the average selling prices. With the addition of a new rod block on the
Company's newest rolling mill in February 1997, Steel Operations began producing
wire rod and coiled reinforcing bar (rebar) products. Sales of these products
during fiscal 1997 aggregated 20,400 tons. During fiscal 1997, the Company also
sold 5,600 tons of billets. No billets were sold in fiscal 1996.
Cost of Goods Sold. Overall, cost of goods sold increased $24.0 million (8%) to
$314.8 million and increased as a percentage of revenues from 86% in fiscal 1996
to 87% in fiscal 1997. Gross profit declined $1.7 million (3%) to $46.9 million.
Scrap Operations' cost of goods sold increased $4.0 (2%) million to $197.9
million due to increased tonnage sold. The average cost of goods sold per ton of
ferrous scrap declined as the Company managed purchase prices at the scale while
selling prices were declining. However, the average selling price of ferrous
scrap declined more quickly than the cost of goods sold per ton, resulting in an
overall decline in Scrap Operations' gross profit of $1.1 million, despite the
increase in tons sold.
Cost of goods sold for Steel Operations increased $24.4 million (16%) to $175.4
million due predominantly to higher tonnage sales. Cost of goods sold as a
percentage of revenues increased from 94% to 95% due to the decline in the
average selling price. The Company recognized higher depreciation expense in
fiscal 1997 compared with fiscal 1996, due to the addition of its new rod mill
in February 1996 and rod block in February 1997, increasing cost of goods sold
per ton. However, production efficiencies and, in some cases, lower production
costs positively impacted cost of goods sold. As a result, the average cost of
sales per ton of finished steel products remained virtually unchanged. Steel
Operations' gross profit declined $.7 million because of the lower average
selling prices, partially offset by the increase in finished steel shipments.
Selling and Administrative Expenses. Selling and administrative expenses
increased $2.3 million (12%) in fiscal 1997 compared with fiscal 1996
predominantly as a result of increases to accommodate corporate growth and the
Proler acquisition.
Income from Joint Ventures. Income from joint ventures for fiscal 1997 increased
$3.6 million due to the Proler acquisition in November 1996. Aggregate income
for the Company's other joint ventures declined slightly as large projects which
were in process in fiscal 1996 were completed that year.
24
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
Interest Expense. Interest expense for fiscal 1997 increased by $1.2 million
(32%) because of additional debt incurred to finance the acquisition of Proler.
Average borrowings for fiscal 1997 were $96.1 million compared with $72.2
million for fiscal 1996. The average interest rate for fiscal 1997 was 5.7% and
for fiscal 1996 was 5.9%.
Other Income. Other income increased $2.9 million during the year ended August
31, 1997 compared with the prior fiscal year. During fiscal 1997, the Company
recognized a gain of approximately $3 million upon settlement of an interest
rate agreement. The Company initially entered into the agreement for the sole
purpose of locking in the interest rate on a planned private placement of debt,
which the Company subsequently decided against pursuing. The Company has not and
does not intend to enter into speculative hedge arrangements.
Year 2000. The following discussion is provided in response to the Securities
and Exchange Commission's Interpretation of Disclosure of Year 2000 Issues and
Consequences by Public Companies, Investment Advisors, Investment Companies, and
Municipal Securities Issuers.
In response to Year 2000 compliance issues, the Company has developed a
systematic approach that consists of the following three phases: (1)
identification and assessment to identify potential Year 2000 issues, (2)
modification or replacement of equipment and software, (3) final testing to
ensure that all systems are Year 2000 compliant after modifications are
installed.
The Company has divided its Year 2000 issues into the following categories: (a)
physical hardware and related operating systems at the Corporate Data Processing
Facility, (b) business and financial reporting systems at all locations, (c)
personal computers and peripheral equipment at all locations, (d) facility and
support systems (including communication devices and safety systems) at all
locations, (e) manufacturing systems at Cascade Steel Rolling Mills.
The Company has completed the identification and assessment phase for the
Corporate Data Processing Facility, the business and financial reporting systems
at all locations, the personal computers and peripheral equipment at all
locations, and the facility and support systems at a majority of its locations.
The Company currently expects that all Phase 1 activities will be complete by
March 1, 1999.
The Company has completed the modification of equipment at the Corporate Data
Processing Facility, the business and financial reporting systems at all
locations, personal computers at all locations, and expects the remainder of
Phase 2 activities to be complete no later than May 31, 1999, except for Steel
Operations which is expected to be complete no later than November 30, 1999.
The Company expects to complete Phase 3 activities by no later than May 31,
1999, except for Steel Operations which is expected to be complete no later than
November 30, 1999.
Management estimates that the costs for correction of the Year 2000 issues,
including any software and hardware upgrades (but excluding replacements that
would have occurred even without the Year 2000 issue), and the cost of personnel
allocated to this project should not exceed $1,000,000, of which $500,000 is
expected to be capital expenditures. Approximately $100,000 has been spent to
date. The year 2000 upgrades are being funded through normal operating funds and
are expected to account for less than 5% of the Company's Information
Technology, maintenance and manufacturing capital budgets. There can be no
assurance that the costs and timeframes above will not change as the Company
continues its assessments.
The Year 2000 project is a priority project for the Company's IT and Engineering
departments. No significant IT or engineering projects are being deferred as a
result of the Company's Year 2000 efforts.
25
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
The Company is also in the process of assessing the Year 2000 readiness of its
"key" vendors using questionnaires and letters. In the event a critical vendor
is found to be non-compliant, the Company will develop contingency plans to
address the issue.
As the Company is not dependent on any significant customer, and given the
nature of the scrap business, no Year 2000 assessment of customers is
anticipated.
At the present time, the Company has not expended the resources to develop a
contingency plan with respect to year 2000 compliance as the Company believes it
will be Year 2000 ready.
Liquidity and Capital Resources
For the year ended August 31, 1998, cash generated by operations was $13.3
million compared to $23.1 million for the same period last year. The decrease in
cash generated this year is predominantly due to a decrease in net income and an
increase in inventories, off-set by a decrease in accounts receivable.
Capital expenditures and payments for purchase of interest in joint ventures
totaled $31.3 million, $58.5 million and $44.6 million for fiscal years 1998,
1997, and 1996, respectively. Expenditures for fiscal 1997 included the
acquisition of Proler for $42.5 million and remaining payments for the new wire
rod block completed in February 1997. During fiscal 1996, the Company incurred
significant capital outlays related to construction of a new rod and bar mill
which was placed into service in February 1996. The Company expects to spend
approximately $18 million on capital improvements during fiscal 1999.
As part of its acquisitions of Proler and MMI, the Company assumed environmental
liabilities aggregating $28.3 million as of August 31, 1998. The Company expects
to require significant future cash outlays as it incurs the actual costs
relating to the remediation of such environmental liabilities.
In June 1997, the company completed a renegotiation of its unsecured revolving
credit agreement whereby it increased the facility to $200 million and extended
the maturity of the facility to June 2002. During fiscal 1998, the maturity of
the facility was extended to June 2003. As of August 31, 1998, the Company also
had additional lines of credit available of $75 million, $55 million of which
was uncommitted. In the aggregate, the Company had borrowings outstanding under
these lines of $130.1 million. The increase in borrowings outstanding under the
lines since August 31, 1997 is predominantly due to additional borrowings to
support joint venture operations and capital expenditures.
Pursuant to a stock repurchase program announced by the Company in May 1994 and
amended in April 1998, the Company is authorized to repurchase up to 1.6 million
shares of its stock when the market price of the Company's stock is not
reflective of management's opinion of an appropriate valuation of the stock.
Management believes that repurchasing shares under these conditions enhances
shareholder value. As of August 31, 1998, a total of 448,300 shares had been
purchased under this program. During fiscal 1998, the Company repurchased
196,000 shares of its stock for a total of $5.1 million.
The Company believes that the current cash balance, internally generated funds
and existing credit facilities will provide adequate financing for capital
expenditures, working capital, joint ventures, stock repurchases and debt
service requirements for the next year. In the longer term, the company may seek
to finance business expansion with additional borrowing arrangements or
additional equity financing.
26
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
Forward Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, all
of which are subject to risks and uncertainties. One can identify these forward
looking statements through the use of words such as "expect," "believe," and
other words which convey a similar meaning. One can also identify these
statements as they do not relate strictly to historical or current facts. They
are likely to address the Company's business strategy, financial projections and
results and other global factors affecting the Company's financial prospects. An
example of this is the current financial crisis facing certain Asian countries
and Year 2000 compliance matters. Other factors that could cause actual results
to differ materially are the following: supply and demand conditions; the
Company's ability to mitigate the effects of the Asian situation and foreign
fiscal policies on its profitability; railroad service difficulties; competitive
factors and pricing pressures from national steel companies; imports of foreign
steel; availability of scrap supply; fluctuations in scrap prices and
seasonality of results. One should understand that it is not possible to predict
or identify all factors that could cause actual results to differ from the
Company's forward looking statements. Consequently, the reader should not
consider any such list to be a complete statement of all potential risks or
uncertainties. Further, the Company does not assume any obligation to update any
forward looking statement.
27
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Schedule
Page
Report of Independent Accountants........................................29
Consolidated Balance Sheet - August 31, 1998 and 1997....................30
Consolidated Statement of Operations - Years ended
August 31, 1998, 1997, and 1996......................................31
Consolidated Statement of Shareholders' Equity - Years ended
August 31, 1998, 1997, and 1996......................................32
Consolidated Statement of Cash Flows - Years ended
August 31, 1998, 1997, and 1996......................................33
Notes to Consolidated Financial Statements...............................34
All other schedules and exhibits are omitted, as the information is not
applicable or is not required.
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Schnitzer Steel Industries, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Schnitzer
Steel Industries, Inc. and its subsidiaries at August 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended August 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
October 6, 1998
29
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
August 31,
----------------------------
1998 1997
----------- -----------
ASSETS
CURRENT ASSETS:
Cash $ 3,800 $ 3,106
Accounts receivable, less allowance for
doubtful accounts of $645 and $524 26,161 31,010
Accounts receivable from related parties 3,428 1,215
Inventories (Note 2) 103,136 95,154
Deferred income taxes (Note 6) 5,723 10,737
Prepaid expenses and other 8,020 3,168
----------- -----------
TOTAL CURRENT ASSETS 150,268 144,390
----------- -----------
NET PROPERTY, PLANT & EQUIPMENT (Note 3) 142,582 151,136
----------- -----------
OTHER ASSETS:
Investment in joint venture partnerships (Note 11) 103,494 91,979
Advances to (from) joint venture partnerships (Note 11) 23,957 (10,229)
Goodwill 41,017 42,230
Intangibles and other 10,022 8,480
----------- -----------
$ 471,340 $ 427,986
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 4) $ 168 $ 361
Accounts payable 19,056 19,456
Accrued payroll liabilities 5,603 5,158
Current portion of environmental liabilities (Note 5) 5,552 5,787
Other accrued liabilities 8,781 8,730
----------- -----------
TOTAL CURRENT LIABILITIES 39,160 39,492
----------- -----------
DEFERRED INCOME TAXES (Note 6) 24,619 28,409
----------- -----------
LONG-TERM DEBT LESS CURRENT PORTION (Note 4) 140,236 92,881
----------- -----------
ENVIRONMENTAL LIABILITIES,
NET OF CURRENT PORTION (Note 5) 22,749 24,530
----------- -----------
OTHER LONG-TERM LIABILITIES (Note 8) 3,140 3,613
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 7)
SHAREHOLDERS' EQUITY:
Preferred stock--20,000 shares authorized, none issued
Class A common stock--75,000 shares $1 par value
authorized, 5,555 and 5,737 shares issued and outstanding 5,555 5,737
Class B common stock--25,000 shares $1 par value
authorized, 4,431 and 4,445 shares issued and outstanding 4,431 4,445
Additional paid-in capital 105,124 109,994
Retained earnings 126,326 118,885
----------- -----------
241,436 239,061
----------- -----------
$ 471,340 $ 427,986
=========== ===========
The accompanying notes are an integral part of this statement.
30
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
Year Ended August 31,
-----------------------------------------------------
1998 1997 1996
------------- ------------- -------------
REVENUES $ 353,093 $ 361,753 $ 339,352
------------- ------------- -------------
COSTS AND EXPENSES:
Cost of goods sold and
other operating expenses 311,185 314,785 290,841
Selling and administrative 22,538 21,238 18,860
------------- ------------- -------------
333,723 336,023 309,701
------------- ------------- -------------
INCOME FROM JOINT VENTURES (Note 11) 4,115 6,876 3,291
------------- ------------- -------------
INCOME FROM OPERATIONS 23,485 32,606 32,942
OTHER INCOME (EXPENSE):
Interest expense (6,813) (5,026) (3,814)
(Loss) gain on sale of assets (2,224) 203 209
Other income (Note 4) 791 4,388 1,452
------------- ------------- -------------
(8,246) (435) (2,153)
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 15,239 32,171 30,789
Income tax provision (Note 6) (5,791) (10,946) (10,006)
------------- ------------- -------------
NET INCOME $ 9,448 $ 21,225 $ 20,783
============= ============= =============
BASIC EARNINGS PER SHARE $ 0.94 $ 2.06 $ 2.25
============= ============= =============
DILUTED EARNINGS PER SHARE $ 0.93 $ 2.05 $ 2.24
============= ============= =============
The accompanying notes are an integral part of this statement.
31
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
Class A Class B
Common Stock Common Stock Additional
-------------------- -------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
-------- ---------- -------- ---------- ----------- ----------- ----------
BALANCE AT 8/31/95 3,128 $ 3,128 4,761 $ 4,761 $ 47,322 $ 80,762 $ 135,973
Class A common stock issued 2,500 2,500 67,350 69,850
Class B common stock converted
to Class A common stock 186 186 (186) (186)
Class A common stock repurchased (41) (41) (925) (966)
Net income 20,783 20,783
Dividends paid (1,827) (1,827)
-------- ---------- -------- ---------- ----------- ----------- ----------
BALANCE AT 8/31/96 5,773 $ 5,773 4,575 $ 4,575 $ 113,747 $ 99,718 $ 223,813
Class B common stock converted
to Class A common stock 130 130 (130) (130)
Class A common stock repurchased (166) (166) (3,753) (3,919)
Net income 21,225 21,225
Dividends paid (2,058) (2,058)
-------- ---------- -------- ---------- ----------- ----------- ----------
BALANCE AT 8/31/97 5,737 $ 5,737 4,445 $ 4,445 $ 109,994 $ 118,885 $ 239,061
Class B common stock converted
to Class A common stock 14 14 (14) (14)
Class A common stock repurchased (196) (196) (4,870) (5,066)
Net income 9,448 9,448
Dividends paid (2,007) (2,007)
-------- ---------- -------- ---------- ----------- ----------- ----------
BALANCE AT 8/31/98 5,555 $ 5,555 4,431 $ 4,431 $ 105,124 $ 126,326 $ 241,436
======== ========== ======== ========== =========== =========== ==========
The accompanying notes are an integral part of this statement.
32
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended August 31,
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
OPERATIONS:
Net income $ 9,448 $ 21,225 $ 20,783
Noncash items included in income:
Depreciation and amortization 18,714 18,265 13,994
Deferred income taxes 1,224 (2,211) 3,517
Equity in earnings of joint ventures (4,115) (6,876) (3,291)
Loss (gain) on disposal of assets 2,224 (180) (209)
Cash provided (used) by assets and liabilities:
Accounts receivable 2,636 (5,345) (6,564)
Inventories (7,982) (2,267) (18,893)
Prepaid expenses and other (4,852) 2,414 (2,299)
Accounts payable (400) (3,929) (2,719)
Accrued payroll and other liabilities 496 4,507 (4,031)
Environmental liabilities (2,016) (2,420)
Other assets and liabilities (2,030) (49) (6,127)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY OPERATIONS 13,347 23,134 (5,839)
------------ ------------ ------------
INVESTMENTS:
Payment for purchase of Proler (Note 12) (42,456)
Capital expenditures (14,205) (15,486) (44,589)
Advances (to) from joint ventures (34,198) 14,392 (324)
Investments in joint ventures (17,104) (550)
Distributions from joint ventures 9,679 1,442 2,370
Capitalization of losses on assets held for sale (1,689)
Proceeds from sale of assets 3,086 4,887 1,839
------------ ------------ ------------
NET CASH USED BY INVESTMENTS (52,742) (39,460) (40,704)
------------ ------------ ------------
FINANCING:
Proceeds from sale of Class A common stock 69,850
Repurchase of Class A common stock (5,066) (3,919) (966)
Dividends declared and paid (2,007) (2,058) (1,827)
Increase in long-term debt 47,500 48,600
Reduction in long-term debt (338) (25,087) (20,216)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING 40,089 17,536 46,841
------------ ------------ ------------
NET INCREASE IN CASH 694 1,210 298
CASH AT BEGINNING OF YEAR 3,106 1,896 1,598
------------ ------------ ------------
CASH AT END OF YEAR $ 3,800 $ 3,106 $ 1,896
============ ============ ============
The accompanying notes are an integral part of this statement.
33
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 1 - Nature of Business and Summary of Significant Accounting Policies:
Nature of Business
Schnitzer Steel Industries, Inc. (the Company) operates a scrap metal processing
and recycling business and a mini-mill steel production business in Alaska,
Washington, Oregon and California. Additionally, through joint ventures, the
Company participates in the management of additional scrap collection and
processing facilities in Arizona, California, Connecticut, Idaho, Maine,
Massachusetts, Nevada, New Hampshire, New Jersey, New York, and Rhode Island.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. The Company, through subsidiaries, holds a 50%
interest in ten joint ventures operating in the Western and Eastern United
States and a 30% interest in one joint venture in Rhode Island, which are
accounted for using the equity method. All intercompany transactions and
balances have been eliminated.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
LIFO (last-in, first-out) and average cost methods.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Major renewals and
improvements are capitalized. Expenditures for maintenance and repairs are
charged to operations as incurred.
Depreciation is determined principally using the straight-line method over
estimated useful lives of 20 to 40 years for buildings and 3 to 10 years for
equipment. Leasehold improvements are amortized over the estimated useful lives
of the property or the remaining lease term, whichever is less. When assets are
retired or sold, the related cost and accumulated depreciation are removed from
the accounts and resulting gains or losses are included in other income.
Goodwill
Goodwill is being amortized on a straight-line basis over 40 years. At August
31, 1998 and 1997, accumulated amortization aggregated $4,943 and $3,670,
respectively. Goodwill is periodically reviewed by the Company for impairments
where the fair value may be less than the carrying value.
Common Stock Voting Rights
Each share of Class A common stock is entitled to one vote and each share of
Class B common stock is entitled to ten votes.
34
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 1 - Nature of Business and Summary of Significant Accounting Policies
(Continued):
Earnings Per Share
The Company has adopted SFAS No. 128 "Earnings Per Share", which specifies the
computation, presentation and disclosure requirements for earnings per share
("EPS"). SFAS 128 replaces the presentation of primary and fully diluted EPS
with basic and diluted EPS. Basic EPS is computed based upon the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The following represents a reconciliation from basic EPS to diluted EPS.
Twelve Months ended August 31, 1998
--------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
--------- ----------- ----------
Basic EPS $ 9,448 10,048 $ 0.94
Options 69 ==========
--------- ---------
Diluted EPS $ 9,448 10,117 $ 0.93
========= ========= ==========
Twelve Months ended August 31, 1997
--------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
--------- ----------- ----------
Basic EPS $ 21,225 10,305 $ 2.06
Options 72 ==========
--------- ---------
Diluted EPS $ 21,225 10,377 $ 2.05
========= ========= ==========
Twelve Months ended August 31, 1996
--------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
--------- ----------- ----------
Basic EPS $ 20,783 9,238 $ 2.25
Options 58 ==========
--------- ---------
Diluted EPS $ 20,783 9,296 $ 2.24
========= ========= ==========
Options with an exercise price greater than the average market price were not
included in the computation of diluted earnings per share. These options totaled
98 in 1998.
Interest and Income Taxes Paid
The Company paid $6,535, $5,093 and $5,016 in interest during fiscal years 1998,
1997 and 1996, respectively. For the same periods, the Company paid $7,440,
$7,283 and $10,703 in income taxes.
Fair Value of Financial Instruments
Cash, receivables and current liabilities are reflected in the consolidated
financial statements at fair value because of the short-term maturity of these
instruments. The fair value of long-term debt is deemed to be the same as that
reflected in the consolidated financial statements given the variable interest
rates on the significant credit facilities. There are no quoted prices for the
Company's investments in joint ventures accounted for on the equity method. A
reasonable estimate of fair value could not be made without incurring excessive
costs.
35
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Use of Estimates in Financial Statement Preparation
The preparation of financial statements in accordance with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications of prior year balances have been made for consistent
presentation with the current year.
Note 2 - Inventories:
Inventories consist of the following:
August 31,
----------------------------
1998 1997
---------- ----------
Scrap metals $ 28,952 $ 26,897
Work in process 13,192 24,358
Finished goods 44,276 28,109
Supplies 16,716 15,790
---------- ----------
$ 103,136 $ 95,154
========== ==========
Scrap metal inventories are valued at LIFO; the remainder are at average cost.
The cost of scrap metal inventories exceeded the stated LIFO value by $5,811 and
$8,039 at August 31, 1998 and 1997, respectively.
The production and accounting process utilized by the Company to record scrap
inventory quantities relies on significant estimates which can be affected by
weight imprecisions, moisture and other factors.
Note 3 - Property, Plant and Equipment:
Property, plant and equipment consist of the following:
August 31,
----------------------------
1998 1997
---------- ----------
Land and improvements $ 33,034 $ 32,580
Buildings and leasehold improvements 15,835 15,757
Machinery and equipment 216,649 212,380
Construction in progress 3,918 4,846
---------- ----------
269,436 265,563
Less accumulated depreciation (126,854) (114,427)
---------- ----------
$ 142,582 $ 151,136
========== ==========
Capitalized interest costs associated with construction were $292 in fiscal year
1997.
36
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 4 - Long-Term Debt:
Long-term debt consists of the following:
August 31,
----------------------------
1998 1997
---------- ----------
Bank unsecured revolving credit facility, $200,000 maximum $ 130,100 $ 82,600
Tax-exempt economic development revenue bonds due
January 2022, interest payable monthy at variable rate
(3.5% at August 31, 1998), secured by a letter of credit 7,700 7,700
State of Oregon loan for energy conservation equipment,
secured by equipment, 7.89% fixed-rate interest, principal
and interest installments payable monthly through June 2011 2,096 2,188
Other 508 754
---------- ----------
Total long-term debt 140,404 93,242
Less portion due within one year 168 361
---------- ----------
Long-term debt less current portion $ 140,236 $ 92,881
========== ==========
At August 31, 1998, the Company had a $200,000 unsecured revolving credit
facility with its banks. Individual advances outstanding under the line bear
interest at floating rates. As of August 31, 1998, such rates averaged 5.8%.
Interest is payable upon maturity of each advance under the line. The facility
matures in June 2003, at which time all principal amounts outstanding are due.
In addition to the above facility, the Company has additional unsecured lines of
credit totaling $75,000, of which $20,000 is committed.
The committed bank credit facilities and other borrowings contain financial
covenants, including covenants related to net worth, interest coverage and
leverage.
Payments on long-term debt during the next five fiscal years are as follows:
1999 $ 168
2000 192
2001 205
2002 220
2003 130,333
Thereafter 9,286
-----------
$ 140,404
===========
37
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 4 - Long-Term Debt (Continued):
In February 1998, the Company entered into interest rate swap agreements with
two of its banks for the purpose of managing its exposure to adverse movements
in interest rates and fixing the cost of various debt instruments. The Company
does not use financial instruments for trading purposes, and is not a party to
leveraged derivatives. Pursuant to the swap agreements, the Company exchanged
its floating rate interest obligations of $50,000 notional principal amount for
a fixed interest obligation of 5.55% for three years. The differential paid or
received on interest rate agreements is recognized as an adjustment to interest
expense.
In February 1997, the Company entered into an interest rate agreement for the
sole purpose of locking in the interest rate on a planned private placement of
debt. The Company subsequently decided against pursuing the private placement in
April 1997 and, thus, recognized the deferred gain on the agreement of
approximately $3 million. This amount is included in other income in the
accompanying statement of operations for the year ended August 31, 1997.
On June 15, 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133).
FAS 133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999. FAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Management of the Company
anticipates that, due to its limited use of derivative instruments, the adoption
of FAS 133 will not have a significant effect on the Company's results of
operations or its financial position.
Note 5 - Environmental Liabilities:
In conjunction with the due diligence proceedings for the Company's acquisition
of Manufacturing Management, Inc. (MMI) in March 1995, an independent
third-party consultant was hired to estimate the costs to cure both current and
future potential environmental liabilities. The cumulative provision for the
total costs specified in the consultant's report was included in MMI's statement
of operations prior to its acquisition by the Company. This reserve was carried
over to the Company's balance sheet and at August 31, 1998 aggregated $20.2
million.
General Metals of Tacoma (GMT), a subsidiary of MMI, owns and operates a scrap
facility located on the Hylebos Waterway, a part of Commencement Bay, which is
the subject of an ongoing environmental investigation and remediation project by
the U.S. Environmental Protection Agency (EPA) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA). GMT and well
over 60 other parties were named potentially responsible parties (PRP) for the
investigation and clean up of contaminated sediment along the Hylebos Waterway.
GMT and five other PRPs voluntarily have entered into an Administrative Order on
Consent with the EPA to fund a pre-remedial study of sediment contamination and
remediation alternatives. GMT's share of the study, which is now expected to be
completed in late 1999, is approximately $2 million. Any further potential
liabilities, if any, cannot be estimated at this time.
In 1996, prior to the Company's acquisition of Proler (see Note 12), an
independent third-party consultant was engaged to estimate the costs to cure
present and future environmental liabilities related to Proler's wholly owned
and joint venture properties. Proler recorded a liability of $8.6 million for
the probable costs to remediate its wholly owned properties based upon the
consultant's estimates, increasing its environmental reserve to $9.8 million.
The Company carried over the aggregate reserve to its financial statements upon
acquiring Proler and $8.1 million remained outstanding on August 31, 1998. Also,
Proler's joint ventures recorded additional liabilities of $4.1 million for the
probable costs to remediate their properties, based upon the consultant's
estimates, in 1996 prior to the Company's acquisition of Proler.
38
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 5 - Environmental Liabilities (Continued):
Between 1982 and 1987, MRI Corporation (MRI), a wholly owned subsidiary of
Proler, operated a tin can shredding and detinning facility in Tampa, Florida.
In 1989 and 1992, the EPA conducted preliminary site investigations of this
property and, in December 1996, added the site to the "National Priorities
List". MRI and Proler, along with several other parties have been named as PRPs
for the site by the EPA. Additionally, Proler and this subsidiary have been
named or identified as PRPs at several other sites. Proler included the probable
costs associated with this site in the aforementioned reserve.
As part of the Proler acquisition, the Company became a fifty-percent owner of
Hugo Neu-Proler Company (HNP). HNP has agreed, as part of its 1996 lease renewal
with the Port of Los Angeles, to be responsible for a multi-year, phased
remedial clean-up project involving certain environmental conditions on its
scrap processing facility at its Terminal Island site in Los Angeles, California
by the year 2001. Remediation will include limited excavation and treatment of
contaminated soils, paving, installation of a stormwater management system,
construction of a noise barrier and perimeter wall around the facility, and
groundwater monitoring. The probable costs to remediate this property are
included in the aforementioned reserve.
Note 6 - Income Taxes:
The provision for income taxes is as follows:
August 31,
---------------------------------------------
1998 1997 1996
---------- ---------- ---------
Current:
Federal $ 3,075 $ 5,361 $ 7,235
State 858 786 721
Deferred:
Federal 1,633 4,199 1,678
State 225 600 372
---------- ---------- ---------
$ 5,791 $ 10,946 $ 10,006
========== ========== =========
39
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 6 - Income Taxes (Continued):
Deferred tax assets and liabilities are as follows:
August 31,
-------------------------------
1998 1997
---------- ---------
AMT carryforward $ 1,031
Segment held for sale (853) $ 3,707
Inventory valuation methods 2,810 3,380
Employee benefit accruals 2,777 3,137
State income tax and other (42) 513
---------- ---------
Net current deferred tax assets $ 5,723 $ 10,737
========== =========
Accelerated depreciation
and basis differences $ 36,688 $ 40,798
Environmental liabilities (11,274) (11,891)
Net operating loss carryforwards (10,856) (10,856)
Other (795) (498)
---------- ----------
13,763 17,553
Deferred tax asset valuation allowance 10,856 10,856
---------- ----------
Net non-current deferred tax liabilities $ 24,619 $ 28,409
========== ==========
Upon the acquisition of Proler, the Company acquired net operating loss
carryforwards of approximately $31,019 which expire in the years 2007 through
2012, and minimum tax credits carryforwards of $742, all of which arose in
Proler's pre-acquisition years. Under federal income tax rules, utilization of
the Company's acquired net operating loss carryforwards and acquired minimum tax
credits from Proler is limited to future earnings of Proler and are further
limited to approximately $2,395 per year. No benefit for the net operating loss
carryforwards or the acquired minimum tax credits has been recognized in the
financial statements.
The reasons for the difference between the effective income tax rate and the
statutory federal income tax rate are as follows:
August 31,
---------------------------------------------
1998 1997 1996
---------- ---------- ---------
Federal statutory rate 35% 35% 35%
Foreign sales corporation (3) (5) (5)
State taxes, net of credit 5 3 2
Other 1 1 1
---------- ---------- ---------
38% 34% 33%
========== ========== =========
40
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 7 - Related Party Transactions:
Certain shareholders of the Company own significant interest in, or are related
to owners of, the entities discussed below. As such, these entities are
considered related parties for financial reporting purposes.
Transactions Affecting Cost of Goods Sold and Other Operating Expenses
The Company charters several vessels from related companies to transport scrap
metal to foreign markets. Charges incurred for these charters were $6,726,
$9,296 and $7,943 for 1998, 1997 and 1996, respectively. In 1993, the Company
signed a five-year time-charter agreement for one vessel which expired in June
1998. The agreement guaranteed the ship owner a residual market value of $2,500
at the end of the time-charter. Upon expiration of the time charter, the Company
paid the guaranteed residual and entered into an additional five year time
charter. The Company has accounted for the transaction as a capital lease, as
ownership of the vessel is transferred at expiration of the time-charter. The
Company entered into two additional seven-year time charters in May 1995 for
other vessels. In August 1996, these two time charters were re-negotiated due to
the condition of the vessels and lower charter rates experienced in the shipping
industry resulting in a $769 refund of time-charter expenses related to the
first three fiscal quarters of 1996. This refund was recorded in the fourth
quarter of 1996.
The Company purchased scrap metals from its joint venture operations totaling
$15,825, $13,856 and $8,513 in 1998, 1997 and 1996, respectively.
The Company leases certain land and buildings from a related real estate company
under operating leases. The following table summarizes the lease terms, annual
rents and future minimum rents:
Lease Current
Location: Expirations Annual Rent
-------- ----------- -----------
Scrap Operations:
Portland facility and marine terminal 2063 $1,056
Sacramento facility 2003 80
Administrative offices 2002 - 2006 254
Minimum Sublease Net Minimum
Rents Income Rents
------- -------- -----------
1999 1,390 (38) 1,352
2000 1,390 (38) 1,352
2001 1,390 (38) 1,352
2002 1,313 1,313
2003 1,236 1,236
Thereafter 63,811
The rent expense was $1,330, $1,351 and $1,274 for 1998, 1997 and 1996,
respectively.
The rents for Scrap Operations will be adjusted in 1999 based upon changes in
the Consumer and the Producer Price Indices. Beginning in 2003 and every 15
years thereafter, the rent will be adjusted to then market rates.
41
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 7 - Related Party Transactions (Continued):
Transactions Affecting Selling and Administrative Expenses
The Company performs some administrative services and provides operation and
maintenance of management information systems for certain related parties. These
services are charged to the related parties based upon cost plus a 15% margin
for overhead and profit. These administrative charges totaled $1,223, $1,046 and
$816 in 1998, 1997 and 1996, respectively.
Transactions Affecting Other Income (Expense)
The vessels discussed above are periodically sub-chartered to third parties. In
this case, a related shipping agency company acts as the Company's agent in the
collection of income and payment of expenses related to sub-charter activities.
For the years ended August 31, 1998 and 1997, charges incurred for these
sub-charters aggregated $3,151 and $871, offset by income of $3,099 and $747,
respectively. Charges incurred for these sub-charters totaled $3,135 in fiscal
1996, net of a $163 refund recorded in the fourth quarter, resulting from the
re-negotiation of time-charter contracts previously discussed above. These
charges were offset by income of $3,157.
Included in other assets are $3,340 and $1,180 notes receivable from joint
venture partners at August 31, 1998 and 1997, respectively. Interest income from
both these notes and advances to joint venture partnerships totaled $944, $580,
and $309 for fiscal years 1998, 1997 and 1996, respectively.
In February 1996, the Company sold a parcel of land to a related real estate
company. The Company received $585,000, recognizing no gain or loss on the
transaction.
Transactions Affecting Property, Plant & Equipment
From time to time, the law firm of Ball Janik LLP, of which director Robert S.
Ball is a partner, provides legal services to the Company. Mr. Ball is a
director, significant shareholder and the secretary of Electrical Construction
Company (ECC), an electrical contractor, which has provided electrical
construction services on the Company's new rolling mill. The Company paid ECC
$7,301 in 1996. No payments to ECC were made in fiscal 1997 and 1998.
42
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 8 - Employee Benefits:
In accordance with union agreements, the Company contributed to union pension
plans $2,065, $2,164 and $1,782, in 1998, 1997 and 1996, respectively. These are
multi-employer plans and, consequently, the Company is unable to determine its
relative portion of or estimate its future liability under the plans.
The Company has several defined contribution plans covering nonunion employees.
The pension cost related to these plans totaled $1,060, $1,028 and $1,268 for
1998, 1997 and 1996, respectively.
For some nonunion employees, the Company also maintains a defined benefit
pension plan. The Company has funded the maximum contribution deductible for
federal income tax purposes. The following table sets forth the change in
benefit obligation, change in plan assets and funded status at August 31, 1998
and 1997 in accordance with SFAS 132.
August 31,
---------------------
1998 1997
-------- --------
Change in benefit obligation:
Benefit obligation at beginning of year $ 4,086 $ 3,546
Service cost 634 529
Interest cost 307 258
Actuarial loss 443 85
Acquisition (1)
Benefits paid (278) (331)
-------- --------
Benefit obligation at end of year $ 5,192 $ 4,086
======== ========
Change in plan assets:
Fair value of plan assets at beginning of year $ 4,162 $ 3,350
Actual return on plan assets (336) 1,143
Employer contribution 331
Benefits paid (278) (331)
-------- --------
Fair value of plan assets at end of year $ 3,879 $ 4,162
======== ========
Funded status:
Plan assets greater than or (less) than
benefit obligation $ (1,314) $ 76
Unrecognized actuarial loss (gain) 748 (395)
Unrecognized prior service cost 67 71
-------- --------
Accrued benefit cost $ (499) $ (248)
======== ========
Assumptions used each year in determining the defined benefit net pension cost
are:
August 31,
---------------------------------------------
1998 1997 1996
---------- ---------- ---------
Weighted average discount rate 7.0% 7.5% 7.5%
Expected rate of investment return 9.0% 9.0% 9.0%
Expected rate of compensation increase 4.0% 4.5% 4.5%
43
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 8 - Employee Benefits (Continued):
August 31,
-------------------------------------------
1998 1997 1996
-------- -------- -------
Components of net periodic pension benefit cost:
Service cost $ 634 $ 529 $ 367
Interest cost 307 257 219
Expected return on plan assets (363) (299) (248)
Amortization of past service cost 4 4 4
Recognized actuarial loss 1
-------- -------- -------
Net periodic pension benefit cost $ 583 $ 491 $ 342
======== ======== =======
During 1991, the Company adopted a nonqualified supplemental retirement plan for
certain executives. A restricted trust fund has been established and invested in
life insurance policies which can be used for plan benefits, but which are
subject to claims of general creditors. The trust fund and deferred compensation
expense are classified as other assets. The status of this plan is summarized as
follows:
August 31,
-------------------------------------------
1998 1997 1996
-------- -------- -------
Restricted trust fund $ 989 $ 684 $ 459
Deferred compensation expense 238 490 545
Long-term pension liability 1,195 1,343 1,249
Pension cost 105 149 136
Note 9 - Stock Incentive Plan:
In September 1993, the Company adopted a Stock Incentive Plan for employees,
consultants and directors of the Company. The plan covers 1,200,000 shares of
Class A common stock. All options have a ten-year term and become exercisable
for 20% of the shares covered by the option on each of the first five
anniversaries of the grant.
The Company records stock-based compensation under the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related Interpretations. An alternative method of accounting exists
under Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) which requires the use of option valuation
models. Under APB 25, because the exercise price of the Company's employee stock
options equaled the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
44
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 9 - Stock Incentive Plan (Continued):
Pro forma information for fiscal years 1998 and 1997 regarding net income and
earnings per share is required by SFAS 123 and has been determined as if the
Company had accounted for its employee stock options under the fair value method
of that Statement. The fair value for these awards was estimated at the date of
grant using the Black-Scholes option pricing model with the following
assumptions:
August 31,
-------------------------------------------
1998 1997 1996
-------- -------- -------
Risk-free interest rate 5.5% 6.6% 6.6%
Dividend yield .01% .01% .01%
Weighted average expected life of options 7.5 Years 7.5 Years 7.5 Years
Volatility .42 .43 .46
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods. The effects on
results of operations and earnings per share is not expected to be indicative of
the effects on results of operations or earnings per share in future years. The
Company's pro forma information follows:
August 31,
-------------------------------------------
1998 1997 1996
-------- -------- -------
Pro forma net income $ 8,975 $ 20,945 $ 20,736
Pro forma earnings per share $ 0.89 $ 2.02 $ 2.23
A summary of the Company's stock option activity and related information for the
years ended August 31 is as follows:
1998 1997 1996
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- --------- --------- --------- --------- ---------
Outstanding-beginning of year 430 $ 22.33 295 $ 21.10 181 $ 19.11
Options granted 98 $ 24.25 137 $ 25.00 114 $ 24.25
Options canceled (5) $ 24.55 (2) $ 24.25
--------- --------- ---------
Outstanding - end of year 523 $ 22.67 430 $ 22.33 295 $ 21.10
========= ========= =========
Exercisable at end of year 199 $ 20.96 115 $ 19.99 56 $ 18.85
========= ========= =========
Weighted-average fair value of
options granted during year $ 13.33 $ 14.11 $ 14.37
========= ========= =========
Exercise prices for options outstanding as of August 31, 1998 ranged from $18 to
$25. The weighted-average remaining contractual life of those options is 7.8
years.
45
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 10 - Segment Information:
The Company operates in two industry segments: scrap metal processing and
recycling, and mini-mill steel production. The business segments operate in
Alaska, Washington, Oregon, and California.
Intersegment sales, which are primarily from the Scrap Operations to the Steel
Operations, are transferred at a negotiated market rate per ton and are
eliminated in consolidation. Segment income from operations does not include
general corporate expenses or income taxes.
The Scrap Operations segment sells to foreign customers, primarily in Asia,
resulting in export sales of $109,646, $117,861 and $137,701 in 1998, 1997 and
1996, respectively. In 1996, sales to one customer accounted for 12% of
consolidated revenues.
August 31,
----------------------------------------------------
1998 1997 1996
---------- ---------- ----------
Net revenues:
Scrap operations $ 217,915 $ 236,392 $ 233,484
Steel operations 191,346 183,740 160,019
Intersegment sales (56,168) (58,379) (54,151)
---------- ---------- ----------
$ 353,093 $ 361,753 $ 339,352
========== ========== ==========
Income from operations:
Scrap operations $ 16,473 $ 27,399 $ 29,587
Steel operations 9,838 5,493 6,303
Income from joint ventures 4,115 6,876 3,291
Corporate (6,941) (7,162) (6,239)
---------- ---------- ----------
$ 23,485 $ 32,606 $ 32,942
========== ========== ==========
Total assets:
Scrap operations $ 241,507 $ 208,266 $ 133,324
Steel operations 184,916 194,649 191,823
Corporate 44,917 25,071 12,342
---------- ---------- ----------
$ 471,340 $ 427,986 $ 337,489
========== ========== ==========
Depreciation and amortization expense:
Scrap operations $ 8,190 $ 7,573 $ 6,891
Steel operations 10,292 10,464 6,907
Corporate 232 228 196
---------- ---------- ----------
$ 18,714 $ 18,265 $ 13,994
========== ========== ==========
Capital expenditures:
Scrap operations $ 12,481 $ 6,295 $ 7,695
Steel operations 1,517 8,834 36,323
Corporate 207 357 571
---------- ---------- ----------
$ 14,205 $ 15,486 $ 44,589
========== ========== ==========
46
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 11 - Summarized Financial Information of Joint Ventures:
A summary of combined operations of joint ventures in which the Company is a
partner is as follows:
Year Ended August 31,
-------------------------------
1998 1997
---------- ----------
Current assets $ 145,958 $ 78,711
Noncurrent assets 109,309 66,482
---------- ----------
$ 255,267 $ 145,193
========== ==========
Current liabilities $ 69,998 $ 39,231
Noncurrent liabilities 15,197 6,146
Minority interest 1,509
Partners' equity 170,072 98,307
---------- ----------
$ 255,267 $ 145,193
========== ==========
August 31,
----------------------------------------------------
1998 1997 1996
---------- ---------- ----------
Revenues $ 408,557 $ 352,515 $ 43,883
========== ========== ==========
Income from operations $ 6,309 $ 14,399 $ 7,691
========== ========== ==========
Net income before taxes $ 8,080 $ 14,156 $ 6,636
========== ========== ==========
The Company performs some administrative services and provides operation and
maintenance of management information systems to some of these joint ventures.
These administrative charges totaled $241, $214 and $184 in 1998, 1997 and 1996,
respectively.
Advances from and to joint venture partnerships from the Company are included in
noncurrent assets and liabilities above. Certain advances bear interest at the
prime rate less one percent. Although these advances are collectible on demand,
management does not intend to request payment in the foreseeable future.
47
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 12 - Acquisition of Proler International Corp.:
On November 29, 1996, PIC Acquisition Corp. (PIC), a wholly owned subsidiary of
the Company, acquired 4,079,000 shares of common stock of Proler, representing
approximately 86% of the outstanding shares of Proler, for $9 cash per share
pursuant to a tender offer for all of the outstanding shares of common stock of
Proler. Subsequent to November 30, 1996, PIC purchased an additional 342,600
shares, thereby increasing its ownership to approximately 94% of the outstanding
Proler shares. On December 6, 1996, the Company completed the merger of PIC with
Proler and, as a result, Proler became a wholly-owned subsidiary of the Company.
As a result of the merger, all remaining outstanding shares of Proler common
stock were converted into the right to receive the same $9 per share in cash
paid in the tender offer. The Company borrowed funds to pay for the Proler
shares under its existing credit facilities.
The Company has accounted for this acquisition using the purchase method.
Accordingly, the purchase price has been allocated to the assets acquired and
the liabilities assumed based on their fair values as of the effective date of
the acquisition.
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and Proler as though the acquisition had
occurred at the beginning of the periods shown.
For the Year Ended
August 31,
----------------------------
1997 1996
---------- ----------
(in thousands)
Revenues $ 364,899 $ 353,096
========== ==========
Net income $ 14,606 $ 11,650
========== ==========
Diluted earnings per share $ 1.41 $ 1.25
========== ==========
During the year ended August 31, 1997, Proler recorded a provision for
environmental liabilities of $8.6 million.
These pro forma results have been prepared for comparative purposes only and
include certain adjustments to give effect for the acquisition, together with
related income tax effects. They do not purport to be indicative of the results
of operations which actually would have resulted had the combination been in
effect at the beginning of the periods presented or of future results of
operations of the consolidated entities.
In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ 100,685
Cash paid for the stock 42,456
---------
Liabilities assumed $ 58,229
=========
48
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 13 - Disposal of Lathrop, California Facility:
In May 1998, the Company disposed of a tin scrap processing facility in Lathrop,
California. The facility was acquired as part of the Proler acquisition (Note
12). The sale resulted in a gain of $1.1 million, of which $.8 million was
recorded as a reduction in cost of goods sold and $.3 million as a gain on sale
of assets.
Note 14 - Quarterly Financial Data (Unaudited):
Fiscal Year 1998
-------------------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
Net revenues $ 105,403 $ 81,895 $ 80,918 $ 84,877
Income from operations 10,562 6,802 5,519 602
Net income 6,289 3,777 2,569 (3,187)
Diluted earnings per share .61 .37 .26 (.32)
Fiscal Year 1997
-------------------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
Net revenues $ 82,700 $ 76,599 $ 89,297 $ 113,157
Income from operations 4,553 2,767 10,899 14,387
Net income 2,781 1,378 8,424 8,642
Diluted earnings per share .27 .13 .81 .84
49
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is included under "Election of Directors" in the
Company's Proxy Statement for its 1999 Annual Meeting of Shareholders and is
incorporated herein by reference. Information with respect to executive officers
of the Company is included under Item 4(a) of Part I of this Report. Information
required by Item 405 of Regulation S-K is included under "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for
its 1999 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under "Executive Compensation"
and "Compensation Committee Interlocks and Insider Participation" in the
Company's Proxy Statement for its 1999 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners and
management is included under "Voting Securities and Principal Shareholders" in
the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under "Certain Transactions"
in the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders and
is incorporated herein by reference.
50
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following financial statements are filed as part of this report:
See Index to Consolidated Financial Statements and Schedule on page
28 of this Report.
2. All schedules are omitted as the information is either not applicable
or is not required.
3. Exhibits:
2.1 Agreement and Plan of Merger dated September 15, 1996 between
the Registrant and Proler International Corp. Incorporated by
reference to Exhibit (c) (1) to Registrants' Schedule 14D-1
filed September 20, 1996.
3.1 1993 Restated Articles of Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1, Registration No. 33-69352
(the Form S-1).
3.2 Restated Bylaws of the Registrant. Filed as Exhibit 3.2 to
Registrant's Form 10-Q for the quarter ended May 31, 1998, and
incorporated herein by reference.
9.1 Schnitzer Steel Industries, Inc. Voting Trust and Buy-Sell
Agreement dated March 31, 1991. Incorporated by reference to
Exhibit 9.1 to the Form S-1.
9.2 First Amendment to Voting Trust and Buy-Sell Agreement dated
July 15, 1991. Incorporated by reference to Exhibit 9.2 to the
Form S-1.
9.3 Second Amendment to Voting Trust and Buy-Sell Agreement dated
November 30, 1996. Filed as Exhibit 9.3 to Registrant's Form
10-K for the fiscal year ended August 31, 1997 and
incorporated herein by reference.
10.1 Lease Agreement dated September 1, 1988 between Schnitzer
Investment Corp. and the Registrant, as amended, relating to
the Corporate Headquarters. Incorporated by reference to
Exhibit 10.1 to the Form S-1.
10.2 Second Amendment of Lease dated October 18, 1995 between
Schnitzer Investment Corp. and the Registrant, relating to the
Corporate Headquarters. Filed as Exhibit 10.5 to Registrant's
Form 10-Q for the quarterly period ended November 30, 1995,
and incorporated herein by reference.
10.3 Second Extension of Lease dated May 28, 1996 between Schnitzer
Investment Corp. and the Registrant, relating to the Corporate
Headquarters. Filed as Exhibit 10.1 to the Registrant's Form
10-Q for the quarterly period ended May 31, 1996, and
incorporated herein by reference.
10.4 Lease Agreement dated March 24, 1980 between Schnitzer
Investment Corp. and the Registrant, as amended, relating to
the Corporate Headquarters. Incorporated by reference to
Exhibit 10.2 to the Form S-1.
51
10.5 Third Amendment of Lease dated May 29, 1996 between Schnitzer
Investment Corp. and the Registrant, relating to the Corporate
Headquarters. Filed as Exhibit 10.2 to the Registrant's Form
10-Q for the quarterly period ended May 31, 1996, and
incorporated herein by reference.
10.6 Fourth Amendment of Lease dated March 31, 1997 between
Schnitzer Investment Corp. and the Registrant, relating to the
Corporate Headquarters. Filed as Exhibit 10.6 to Registrant's
Form 10-K for the fiscal year ended August 31, 1997 and
incorporated herein by reference.
10.7 Lease Agreement dated March 1, 1995 between Schnitzer
Investment Corp. and the Registrant, relating to the Corporate
Headquarters. Filed as Exhibit 10.3 to Registrants Form 10-Q
for the quarterly period ended November 30, 1995, and
incorporated herein by reference.
10.8 Amendment of lease dated March 31, 1997 between Schnitzer
Investment Corp. and the Registrant relating to the Corporate
Headquarters. Filed as Exhibit 10.8 to Registrant's Form 10-K
for the fiscal year ended August 31, 1997 and incorporated
herein by reference.
10.9 Lease Agreement dated April 20, 1995 between Schnitzer
Investment Corp. and the Registrant, relating to the Corporate
Headquarters. Filed as Exhibit 10.4 to Registrant's Form 10-Q
for the quarterly period ended November 30, 1995, and
incorporated herein by reference.
10.10 Lease Agreement dated February 18, 1997 between Schnitzer
Investment Corp and the Registrant relating to the Corporate
Headquarters. Filed as Exhibit 10.10 to Registrant's Form 10-K
for the fiscal year ended August 31, 1997 and incorporated
herein by reference.
10.11 Lease Agreement dated September 1, 1988 between Schnitzer
Investment Corp. and the Registrant, as amended, relating to
the Portland scrap operations. Incorporated by reference to
Exhibit 10.3 to the Form S-1.
10.12 Second Amendment to Lease dated October 28, 1994 between
Schnitzer Investment Corp. and the Registrant, relating to
Portland scrap operations. Filed as Exhibit 10.1 to
Registrant's Form 10-Q for the quarterly period ended November
30, 1995, and incorporated herein by reference.
10.13 Lease Agreement dated September 1, 1988 between Schnitzer
Investment Corp. and the Registrant, as amended, relating to
the Sacramento scrap operation. Incorporated by reference to
Exhibit 10.4 to the Form S-1.
10.14 Amendment of lease dated February 8, 1995 between Schnitzer
Investment Corp. and the Registrant, relating to the
Sacramento scrap operations. Filed as Exhibit 10.2 to
Registrant's Form 10-Q for the quarterly period ended November
30, 1995, and incorporated herein by reference.
10.15 Second Amended Shared Services Agreement dated September 13,
1993 between the Registrant and certain entities controlled by
shareholders of the Registrant. Incorporated by reference to
Exhibit 10.5 to the Form S-1.
10.16 Amendment dated September 1, 1994 to Second Amended Shared
Services Agreement between the Registrant and certain entities
controlled by shareholders of the Registrant. Filed as Exhibit
10.6 to Registrant's Form 10-K for the fiscal year ended
August 31, 1995, and incorporated herein by reference.
10.17 Uniform Time Charter dated June 22, 1998 between the
Registrant and Trans-Pacific Shipping Co.
52
10.18 Uniform Time Charter dated May 9, 1995 between the Registrant
and Trans-Pacific Shipping Co. Filed as Exhibit 10.10 to
Registrant's Form 10-K for the fiscal year ended August 31,
1995, and incorporated herein by reference.
10.19 Addendum No. 4 to M/V Jade Pacific Uniform Time Charter
Agreement dated October 31, 1997 between the Registrant and
Trans-Pacific Shipping Co. Filed as Exhibit 10.2 to
Registrant's Form 10-Q for the quarter ended November 30,
1997, and incorporated by reference.
10.20 Uniform Time Charter dated May 9, 1995 between the Registrant
and Trans-Pacific Shipping Co. Filed as Exhibit 10.11 to
Registrant's Form 10-K for the fiscal year ended August 31,
1995, and incorporated herein by reference.
10.21 Addendum No. 4 to M/V Jade Orient Uniform Time Charter
Agreement dated October 31, 1997 between the Registrant and
Trans-Pacific Shipping Co. Filed as Exhibit 10.1 to
Registrant's Form 10-Q for the quarter ended November 30,
1997, and incorporated by reference.
*10.22 1993 Stock Incentive Plan of the Registrant. Filed as Exhibit
10.22 to Registrant's Form 10-K for the fiscal year ended
August 31, 1997 and incorporated herein by reference.
*10.23 Supplemental Executive Retirement Bonus Plan of the
Registrant. Incorporated by reference to Exhibit 10.8 to the
Form S-1.
*10.24 Assistant Secretary's Certificate dated November 25, 1995
amending the Supplemental Executive Retirement Bonus Plan of
the Registrant. Filed as Exhibit 10.6 to Registrant's Form
10-Q for the quarterly period ended November 30, 1995, and
incorporated herein by reference.
*10.25 Deferred Bonus Agreement between the Company and an executive
officer. Filed as Exhibit 10.3 to Registrant's Form 10-Q for
the quarterly period ended May 31, 1996, and incorporated
herein by reference.
10.26 Vessel Purchase and Sale Agreement dated June 22, 1998 between
the Registrant and Trans-Pacific Shipping Co.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Powers of Attorney
*Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed by the Registrant during
the fourth quarter of the fiscal year ended August 31, 1998.
53
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SCHNITZER STEEL INDUSTRIES, INC.
Dated: November 24, 1998 By: /s/ BARRY A. ROSEN
--------------------- -------------------------------------
Barry A. Rosen
Vice President --
Finance and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant on
November 24, 1998 in the capacities indicated.
Signature Title
- --------- -----
Principal Executive Officer:
*LEONARD SCHNITZER Chairman of the Board,
- ---------------------------------- Chief Executive Officer and Director
Leonard Schnitzer
Principal Financial Officer:
/s/ BARRY A. ROSEN Vice President -
- ---------------------------------- Finance and Treasurer
Barry A. Rosen
Principal Accounting Officer:
*JAMES W. CRUCKSHANK Controller and Assistant
- ---------------------------------- Treasurer
James W. Cruckshank
54
Directors:
*CAROL S. LEWIS Director
- ----------------------------------
Carol S. Lewis
*SCOTT LEWIS Director
- ----------------------------------
Scott Lewis
*KENNETH M. NOVACK Director
- ----------------------------------
Kenneth M. Novack
*ROBERT W. PHILIP Director
- ----------------------------------
Robert W. Philip
*JEAN S. REYNOLDS Director
- ----------------------------------
Jean S. Reynolds
*DORI SCHNITZER Director
- ----------------------------------
Dori Schnitzer
*GARY SCHNITZER Director
- ----------------------------------
Gary Schnitzer
*ROBERT S. BALL Director
- ----------------------------------
Robert S. Ball
*WILLIAM S. FURMAN Director
- ----------------------------------
William S. Furman
*RALPH R. SHAW Director
- ----------------------------------
Ralph R. Shaw
*By: /s/ BARRY A. ROSEN
----------------------------------
Attorney-in-fact, Barry A. Rosen
55
SCHNITZER STEEL INDUSTRIES, INC.
INDEX TO EXHIBITS
2.1 Agreement and Plan of Merger dated September 15, 1996
between the Registrant and Proler International Corp.
Incorporated by reference to Exhibit (c) (1) to Registrant's
Schedule 14D-1 filed September 20, 1996.
3.1 1993 Restated Articles of Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1, Registration No.
33-69352 (the Form S-1).
3.2 Restated Bylaws of the Registrant. Filed as Exhibit 3.2 to
Registrant's Form 10-Q for the quarter ended May 31, 1998,
and incorporated herein by reference.
9.1 Schnitzer Steel Industries, Inc. Voting Trust and Buy-Sell
Agreement dated March 31, 1991. Incorporated by reference to
Exhibit 9.1 to the Form S-1.
9.2 First Amendment to Voting Trust and Buy-Sell Agreement dated
July 15, 1991. Incorporated by reference to Exhibit 9.2 to
the Form S-1.
9.3 Second Amendment to Voting Trust and Buy-Sell Agreement
dated November 30, 1996. Filed as Exhibit 9.3 to
Registrant's Form 10-K for the fiscal year ended August 31,
1997 and incorporated herein by reference.
10.1 Lease Agreement dated September 1, 1988 between Schnitzer
Investment Corp. and the Registrant, as amended, relating to
the Corporate Headquarters. Incorporated by reference to
Exhibit 10.1 to the Form S-1.
10.2 Second Amendment of Lease dated October 18, 1995 between
Schnitzer Investment Corp. and the Registrant, relating to
the Corporate Headquarters. Filed as Exhibit 10.5 to
Registrant's Form 10-Q for the quarterly period ended
November 30, 1995, and incorporated herein by reference.
10.3 Second Extension of Lease dated May 28, 1996 between
Schnitzer Investment Corp. and the Registrant, relating to
the Corporate Headquarters. Filed as Exhibit 10.1 to the
Registrant's Form 10-Q for the quarterly period ended May
31, 1996, and incorporated herein by reference.
10.4 Lease Agreement dated March 24, 1980 between Schnitzer
Investment Corp. and the Registrant, as amended, relating to
the Corporate
56
Headquarters. Incorporated by reference to Exhibit 10.2 to
the Form S-1.
10.5 Third Amendment of Lease dated May 29, 1996 between
Schnitzer Investment Corp. and the Registrant, relating to
the Corporate Headquarters. Filed as Exhibit 10.2 to the
Registrant's Form 10-Q for the quarterly period ended May
31, 1996, and incorporated herein by reference.
10.6 Fourth Amendment of Lease dated March 31, 1997 between
Schnitzer Investment Corp. and the Registrant, relating to
the Corporate Headquarters. Filed as Exhibit 10.6 to
Registrant's Form 10-K for the fiscal year ended August 31,
1997 and incorporated herein by reference.
10.7 Lease Agreement dated March 1, 1995 between Schnitzer
Investment Corp. and the Registrant, relating to the
Corporate Headquarters. Filed as Exhibit 10.3 to Registrants
Form 10-Q for the quarterly period ended November 30, 1995,
and incorporated herein by reference.
10.8 Amendment of lease dated March 31, 1997 between Schnitzer
Investment Corp. and the Registrant relating to the
Corporate Headquarters. Filed as Exhibit 10.8 to
Registrant's Form 10-K for the fiscal year ended August 31,
1997 and incorporated herein by reference.
10.9 Lease Agreement dated April 20, 1995 between Schnitzer
Investment Corp. and the Registrant, relating to the
Corporate Headquarters. Filed as Exhibit 10.4 to
Registrant's Form 10-Q for the quarterly period ended
November 30, 1995, and incorporated herein by reference.
10.10 Lease Agreement dated February 18, 1997 between Schnitzer
Investment Corp. and the Registrant relating to the
Corporate Headquarters. Filed as Exhibit 10.10 to
Registrant's Form 10-K for the fiscal year ended August 31,
1997 and incorporated herein by reference.
10.11 Lease Agreement dated September 1, 1988 between Schnitzer
Investment Corp. and the Registrant, as amended, relating to
the Portland scrap operations. Incorporated by reference to
Exhibit 10.3 to the Form S-1.
10.12 Second Amendment to Lease dated October 28, 1994 between
Schnitzer Investment Corp. and the Registrant, relating to
Portland scrap operations. Filed as Exhibit 10.1 to
Registrant's Form 10-Q for the quarterly period ended
November 30, 1995, and incorporated herein by reference.
10.13 Lease Agreement dated September 1, 1988 between Schnitzer
Investment Corp. and the Registrant, as amended, relating to
the Sacramento scrap operation. Incorporated by reference to
Exhibit 10.4 to the Form S-1.
10.14 Amendment of lease dated February 8, 1995 between Schnitzer
Investment Corp. and the Registrant, relating to the
Sacramento scrap operations. Filed as Exhibit 10.2 to
Registrant's Form 10-Q for the
57
quarterly period ended November 30, 1995, and incorporated
herein by reference.
10.15 Second Amended Shared Services Agreement dated September 13,
1993 between the Registrant and certain entities controlled
by shareholders of the Registrant. Incorporated by reference
to Exhibit 10.5 to the Form S-1.
10.16 Amendment dated September 1, 1994 to Second Amended Shared
Services Agreement between the Registrant and certain
entities controlled by shareholders of the Registrant. Filed
as Exhibit 10.6 to Registrant's Form 10-K for the fiscal
year ended August 31, 1995, and incorporated herein by
reference.
10.17 Uniform Time Charter dated June 22, 1998 between the
Registrant and Trans-Pacific Shipping Co.
10.18 Uniform Time Charter dated May 9, 1995 between the
Registrant and Trans-Pacific Shipping Co. Filed as Exhibit
10.10 to Registrant's Form 10-K for the fiscal year ended
August 31, 1995, and incorporated herein by reference.
10.19 Addendum No. 4 to M/V Jade Pacific Uniform Time Charter
Agreement dated October 31, 1997 between the Registrant and
Trans-Pacific Shipping Co. Filed as Exhibit 10.2 to
Registrant's Form 10-Q for the quarter ended November 30,
1997, and incorporated herein by reference.
10.20 Uniform Time Charter dated May 9, 1995 between the
Registrant and Trans-Pacific Shipping Co. Filed as Exhibit
10.11 to Registrant's Form 10-K for the fiscal year ended
August 31, 1995, and incorporated herein by reference.
10.21 Addendum No. 4 to M/V Jade Orient Uniform Time Charter
Agreement dated October 31, 1997 between the Registrant and
Trans-Pacific Shipping Co. Filed as Exhibit 10.1 to
Registrant's Form 10-Q for the quarter ended November 30,
1997, and incorporated herein by reference.
*10.22 1993 Stock Incentive Plan of the Registrant. Filed as
Exhibit 10.22 to Registrant's Form 10-K for the fiscal year
ended August 31, 1997 and incorporated herein by reference.
*10.23 Supplemental Executive Retirement Bonus Plan of the
Registrant. Incorporated by reference to Exhibit 10.8 to the
Form S-1.
*10.24 Assistant Secretary's Certificate dated November 25, 1995
amending the Supplemental Executive Retirement Bonus Plan of
the Registrant. Filed as Exhibit 10.6 to Registrant's Form
10-Q for the quarterly period ended November 30, 1995, and
incorporated herein by reference.
58
*10.25 Deferred Bonus Agreement between the Company and an
executive officer. Filed as Exhibit 10.3 to Registrant's
Form 10-Q for the quarterly period ended May 31, 1996, and
incorporated herein by reference.
10.26 Vessel Purchase and Sale Agreement dated June 22, 1998
between the Registrant and Trans-Pacific Shipping Co.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Powers of Attorney.
59