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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, 2000 Commission File Number 0-22496
SCHNITZER STEEL INDUSTRIES, INC.
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(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
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(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
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(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, 2000 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 280,036 5,108,490 $ 72,795,983
Class B, $1 par value 4,311,828 0 N/A
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2001 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
Business Strategy...........................................4
Metals Recycling Business...................................6
Joint Ventures..............................................9
Steel Manufacturing Business...............................11
Environmental Matters......................................14
Employees..................................................17
2. PROPERTIES.....................................................18
3. LEGAL PROCEEDINGS..............................................18
4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS........................................18
4(a). EXECUTIVE OFFICERS OF THE REGISTRANT...........................19
II 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS................................21
6. SELECTED FINANCIAL DATA........................................22
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................23
7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK..........................................29
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................30
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.....................55
III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.................................................55
11. EXECUTIVE COMPENSATION.........................................55
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT......................................55
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................55
IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K........................................56
2
PART I
ITEM 1. BUSINESS
OVERVIEW
Schnitzer Steel Industries, Inc. (the Company) collects, processes and
recycles metals (the Metals Recycling Business) by operating one of the
largest metals recycling businesses in the United States. The Company also
manufactures finished steel products at its technologically advanced steel
mini-mill (the Steel Manufacturing Business). As a result of its vertically
integrated business, the Company is able to transform auto bodies and other
unprocessed metals into finished steel products. The Company believes that
its Metals Recycling and Steel Manufacturing Businesses are cost competitive
in their markets.
The Company's Metals Recycling Business and its joint ventures in the metals
recycling business have major collection and processing facilities in the
following locations:
METALS RECYCLING OPERATIONS
Metals Recycling Business Joint Venture Operations
- ------------------------- ------------------------
Location Location
- ------------------- -------------------
Portland, OR Jersey City, NJ
Oakland, CA Long Island, NY
Tacoma, WA and Anchorage, AK Los Angeles, CA
Sacramento, CA and Reno, NV Everett, MA
Southern Oregon Providence, RI
Fresno, CA Other - East Coast
The Metals Recycling Business's yards sold 1.5 million ferrous tons and the
Joint Venture Operations sold 2.8 million ferrous tons in fiscal 2000.
Additionally, through joint ventures, the Company participates in the
management of an additional 28 smaller metals recycling collection and
processing facilities on the East Coast as well as other joint venture yards
in the Western United States. The Company believes that the Metals Recycling
Business has a strong competitive position in its markets due to significant
economies of scale, low cost metals processing and handling methods,
strategic locations, and deep water terminal facilities which provide
efficient and flexible access to both domestic and foreign steel producers.
The Company's Steel Manufacturing Business is conducted by its wholly owned
subsidiary, Cascade Steel Rolling Mills, Inc. The Steel Manufacturing Business
produces steel reinforcing bar (rebar), wire rod, merchant bar, coiled rebar,
fence posts, specialty sections and grape stakes. The Company believes that the
Steel Manufacturing Business has a strong competitive position in its market due
to its readily available source of recycled metals, efficient production
processes, state-of-the-art technology, well-located shipping and transportation
facilities, and proximity to California and other major western markets.
3
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
BUSINESS STRATEGY
The Company's business strategy emphasizes continued growth of the ferrous
recycled metals business through additive acquisitions and joint ventures, and
maintaining its status as a low-cost producer of both recycled metal and
finished steel products through investments in state-of-the-art manufacturing
equipment and increased production efficiencies.
The Company considers itself, first and foremost, a ferrous metals recycling
company, with historically over 60% of its operating income, before corporate
expenses and eliminations, derived from the Metals Recycling Business. The
Metals Recycling Business 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 recycled metals
processors in the country.
The Company enters into sales contracts by selling forward 45 to 90 days and
purchases unprocessed metals on a daily basis. The typical supplier is a
relatively small, local business or manufacturer who sells unprocessed metals in
limited quantities. The typical supplier generally does not have the ability to
inventory material in significant quantities, 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 metals, 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. However, the Asian financial crisis that occurred
during fiscal 1998 and 1999 caused recycled metals selling prices to drop faster
than the Company was able to decrease purchase prices for unprocessed metals.
Also, in order to ensure an adequate inflow of unprocessed metals, the Company
had to maintain certain purchase price levels. As the recycled metals markets
stabilized, the Company was able to regain a portion of the margins it had lost
as a result of the Asian financial crisis. Although the Asian economies have
generally improved from the crisis levels, the Company continues to operate in a
very competitive market. During the last twelve to eighteen months, the Company
has seen unusually high volumes of ferrous recycled metals come from the former
Soviet Union, primarily from the Ukraine and other Black Sea countries.
The Company has developed a multi-part growth strategy which includes the
following elements:
EXPAND METALS RECYCLING OPERATIONS. The Company will continue to seek expansion
opportunities for its Metals Recycling Business within both its existing markets
and elsewhere in North America. The Company has focused on and will continue to
emphasize increasing its sources of unprocessed ferrous metals through its
existing network and through selective acquisitions or through joint ventures
with metals processors and suppliers. Recent examples include:
- 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 International Corp.
(Proler). Proler's joint ventures process approximately 2.8 million
long tons of ferrous metals per year;
- In March 1995, the Company purchased Manufacturing Management, Inc.
(MMI), another metals processor which added approximately 500,000 long
tons per year to the Company's ferrous recycled metals volume;
- In December 1993, the Company acquired four metals collection and
processing facilities in central and southern Oregon.
The Company has also made a series of investments in other joint ventures which
increase the Company's sources of unprocessed metals supply. The Company's most
significant joint venture, in this regard, operates self-service used auto parts
yards, primarily in California. This joint venture operates under the name of
Pick-N-Pull Auto Dismantlers (Pick-N-Pull). The Company's Oakland facility
receives car bodies from Pick-N-Pull for processing and sale as shredded
recycled metal.
4
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
COMPLETE ADDITIVE ACQUISITIONS. The Company intends to complete acquisitions it
projects to be additive to earnings and cash flows. Over the past several years,
particularly before the Asian financial crisis created uncertainty in the
recycled metals industry, several companies in the metals recycling business
acquired other recycled metals companies at prices which the Company believes
were unjustifiably high. The Asian financial crisis has since caused significant
dislocations in the recycled metals industry and to a much lesser extent the
steel industry. It is the Company's belief that, as a result of these
dislocations, some of these acquired companies may again become available at
attractive prices. With a strong balance sheet, cash flows and available
borrowing capacity, the Company believes it is in a position to complete an
acquisition should one fitting the Company's long-term strategic plans become
available and if a reasonable price can be attained.
INVEST IN STATE-OF-THE-ART PROCESSING AND MANUFACTURING. The Company's objective
is to be a low cost producer of both recycled metals 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 metals. 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 capabilities of its businesses. During the last five
years the Company has spent $97.0 million on capital improvements.
During fiscal 2000, the Company completed the installation of a state-of-the-art
automobile shredder, capable of shredding over 2,000 tons per day, at its Tacoma
facility. This shredder replaced two existing aged shredders that on a combined
basis were capable of producing only 1,000 tons per day. The new shredder is
expected to reduce operating costs and has improved product quality; as well it
has allowed the Tacoma metals recycling facility to shred material that was
previously sold as lower grades. Additionally, the dock and bulkhead at the
Tacoma facility were rebuilt during fiscal 1999 to more efficiently handle the
increased shredder capacity, the exporting of metals and receipt of bulk
unprocessed metals from Alaska.
INCREASE FINISHED STEEL PRODUCTION AND PRODUCT FLEXIBILITY. In February 1996, a
second rolling mill (Rolling Mill #2) was completed, increasing the Steel
Manufacturing Business' production capacity. 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 and diversify 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. The Company does not expect to expand the Steel
Manufacturing Business 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 metals recycling
operation. The Metals Recycling Business ensures the Steel Manufacturing
Business will receive a predictable, high quality supply of recycled metals in
an optimal mix of grades for efficient melting. Likewise, the Steel
Manufacturing Business ensures a steady market for a portion of the Metals
Recycling Business' production. In the Steel Manufacturing Business, the
Company's wire rod and bar mill has upgraded and continues to upgrade the
Company's finished steel production and product mix.
The Company leverages a portion of shared administrative services with certain
of its joint venture partners and related companies which reduces the cost of
these services to the Company. These relationships also provide the Company with
expertise related to real estate and ocean shipping management.
5
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
METALS RECYCLING BUSINESS
The Company is one of the largest metals processors in the United States, with
twelve wholly owned metals collection and processing facilities. The Company
buys, processes and sells ferrous metals to foreign and domestic steel producers
or their representatives and to the Steel Manufacturing Business. The Metals
Recycling Business also purchases ferrous metal from other recycled metals
processors for shipment directly to the Steel Manufacturing Business without
further processing by the Metals Recycling Business. To a lesser extent, the
Company also buys, processes and sells nonferrous metals to both the domestic
and export markets. A significant portion of the nonferrous volume comes as a
by-product of the automobile shredding process.
Due to the large capital investment required for metals recycling equipment and
the scarcity of potential yard sites that are properly zoned and have access to
waterways, highways and railroads, the recycled metals industry is characterized
by a relatively small number of large, regionally dominant metals processors.
These large processors collect raw metals from a variety of sources, including
smaller metal 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 metals recycling facilities are
located at deep water terminal facilities owned and operated by the Company and
also have rail and highway access. As a result, the Company believes it is
strategically located, both for collection of unprocessed metals from suppliers
and for distribution of processed recycled metals to west coast and foreign
steel producers. Additionally, because the Company operates the terminal
facilities, it is not subject to berthing delays often experienced by users of
unaffiliated terminals. The Company's loading costs are believed to be lower
than they would be if the Company were to utilize third party terminal
facilities.
CUSTOMERS AND MARKETING. The following table sets forth information about the
amount of ferrous recycled metals sold by the Company's Metals Recycling
Business to certain groups of customers during the last five fiscal years:
Year Ended August 31,
--------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- -------------- ---------------- --------------- ---------------
Sales Vol.(1) Sales Vol.(1) Sales Vol.(1) Sales Vol.(1) Sales Vol.(1)
----- ------- ----- ------- ----- ------- ----- ------- ----- -------
(dollar amounts in millions)
Asian Steel Producers
and Representatives $ 70.4 761 $ 39.5 491 $ 90.4 720 $111.1 853 $131.8 858
Steel Manufacturing Business:
Supplied by Company Facilities 39.0 411 38.0 447 44.5 382 43.7 362 44.1 358
Purchased from Others
for Direct Shipment(2) 7.2 87 6.2 92 10.4 98 14.1 132 9.9 92
------ ------ ------ ------ ------ ------ ------ ------ ------ -----
46.2 498 44.2 539 54.9 480 57.8 494 54.0 450
Other US Steel Producers 25.2 247 18.0 194 30.0 235 23.3 171 30.1 171
------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Total $141.8 1,506 $101.7 1,224 $175.3 1,435 $192.2 1,518 $215.9 1,479
====== ====== ====== ====== ====== ====== ====== ====== ====== =====
1 In thousands of long tons (2,240 pounds).
2 Consists of recycled metal that is not processed by the Metals
Recycling Business.
The Company sells recycled metals to foreign and other domestic steel producers
or their representatives and to the Steel Manufacturing Business. The Company
has developed long-standing relationships with Asian and U.S. steel producers.
The Company's Asian recycled metals customers are located principally in China,
Thailand, Japan, South 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 to provide market data. 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. The Metals Recycling Business' five largest
6
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
customers accounted for 45% of recycled metals sales to unaffiliated customers.
However, the Company's recycled metals customers vary from year to year due to
demand, relative currency values and other factors. All recycled metals sales
are denominated in U.S. dollars and substantially all significant recycled
metals shipments to foreign customers are supported by letters of credit.
Historically, ferrous recycled metals prices have on average increased over
time; such prices, however, are subject to market cycles. Prices for foreign
recycled metals shipments are generally established through a competitive
bidding process. The Company generally negotiates domestic prices based on
export price levels. Foreign recycled metals sales contracts typically provide
for shipment within 45 to 90 days after the price is agreed to, which, in most
cases, includes freight. Over the last year there have been a number of attempts
to use e-commerce via the Internet for the sale of recycled metals. To date none
of these efforts have had a meaningful impact on the business. The Company
attempts to respond to changing export price levels by adjusting its purchase
prices at its metals recycling 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 recycled metals flowing to the Company
from marginal unprocessed metal suppliers. Accordingly, the Company believes it
benefits from rising recycled metals prices, which provide the Company greater
flexibility to maintain or widen both margins and unprocessed metals flow into
its yards.
SOURCES OF UNPROCESSED METALS. The most common forms of raw metals purchased by
the Company are wrecked automobiles, railroad cars, railroad tracks, machinery,
and demolition metal from buildings and other obsolete structures. The metals
are acquired from drive-in sellers at posted prices at the Company's twelve
metals recycling yards, from drop boxes at over 1,000 industrial sites and
through negotiated purchases from railroads and other large suppliers. The
Company purchases unprocessed metals from a large number of suppliers, including
railroads, industrial manufacturers, automobile salvage yards, metals dealers
and individuals. Metals recycling yards situated nearest to unprocessed metals
sellers and major transportation routes have a competitive advantage because of
the significance of freight charges relative to the value of metals. 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. These yards primarily use trucks and railroads
to transport their products. The Oakland yard gives the Company sourcing
capability in the San Francisco Bay area, the fifth largest metropolitan region
in the country. The Sacramento, Fresno, and Reno yards are smaller facilities
that serve as collection points for unprocessed metals from the central valley
of California and Western Nevada and are served by rail and trucks. The
Company's Tacoma yard, along with its Anchorage, Alaska yard collects
unprocessed metals from Seattle and the entire Puget Sound area as well as from
throughout Washington, Montana, Idaho, Alaska, and Western Canada. Product is
shipped and received via rail, truck and water (e.g. ship or barge). No single
supplier accounted for more than 5% of the unprocessed metals purchased by the
Company during the last fiscal year.
METALS RECYCLING. The Company processes raw metal 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 recycled metals are more valuable because they melt more easily than larger
pieces and more completely fill a steel mill's furnace charge bucket. Over 80%
of the ferrous metals collected by the Company's metals recycling facilities
requires processing before sale.
Seven of the Company's twelve wholly owned metals recycling facilities operate
large capacity guillotine-style shears for cutting large pieces of ferrous metal
into smaller, more saleable pieces. At eight of the facilities, the Company also
has large scissor shears mounted on cranes that move about the yards and cut
bulky pieces of metal into sizes that can be further processed by the guillotine
shears. These mobile shears are capable of reducing a railroad boxcar to useable
recycled metal in approximately 30 minutes.
7
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
The Portland and Oakland facilities each operate a large auto shredder
capable of processing up to 1,500 tons of metal per day. In fiscal 2000, the
Tacoma facility completed the installation of 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 recycled metal. The shredded material is then carried by conveyor
under magnetized drums, which attract the ferrous recycled metal 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 metals are 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. During
fiscal 2000, the Portland yard installed a new indoor nonferrous sorting
line, which allows for greater recovery of high value nonferrous products.
The new shredder at the Tacoma facility has significantly expanded the
processing capacity at that site. Additionally, this new shredder is designed
to provide a denser product which can be more efficiently used by steel mills
and to handle materials which, in the past, could not have been shredded.
During fiscal 2001, the Company will spend $1.0 million upgrading its Tacoma
nonferrous sorting capabilities to increase the capacity and improve the
nonferrous recovery from the automobile shredding process.
DEEP WATER TERMINAL FACILITIES. The Company delivers recycled metals to
foreign steel producers by ship. The Company achieves cost efficiencies by
operating deep water terminal facilities at its Portland, Tacoma and Oakland
facilities. As a result, the Company is generally not subject to berthing
delays often experienced by users of unaffiliated terminal facilities. The
Oakland dock also has a berth serviced by a bulk loading conveyor for loading
shredded metal as well as a concrete wharf with a 40-ton container crane. The
Tacoma marine terminal is serviced by a 250-ton gantry crane and one 40-ton
crane. A new dock and bulkhead were completed at the Tacoma yard during
fiscal 1999. 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 recycled metals per hour
directly into a ship's hold.
The Oakland and Tacoma terminals are used extensively for loading metals
shipments to the Company's foreign customers. The Portland terminal primarily
and, to a lesser extent, the Oakland and Tacoma terminals also sell docking,
loading and warehousing services to unrelated parties.
COMPETITION. The Company competes for both the purchase of unprocessed metals
from suppliers and the sale of processed recycled metals to finished steel
producers. Competition for unprocessed metals purchased in the Metals
Recycling Business' markets comes primarily from larger, well financed
competitors like LMC Metals, a division of Simsmetal USA Corporation,
headquartered in Richmond, California, and those who buy product on the
behalf of mills such as recycled metals broker, David J. Joseph Company.
Other competitors include smaller metals yards and dealers, and steel
producers such as Oregon Steel Mills, Inc., Nucor Corporation and Birmingham
Steel Corporation (Salmon Bay Steel) who buy recycled metals directly. The
Company also competes with smaller, regional shredder operators and dealers
who can impact prices and volumes of certain commodities in smaller
geographic areas. The predominant competitive factors impacting the Company's
recycled metals sales and its ability to obtain unprocessed metals are price,
including shipping costs, availability, reliability of service and product
quality.
The Company competes with a number of U.S. and foreign recycled metals
processors for export sales. Price, including shipping costs, and
availability are the most important competitive factors, but reliability and
quality are also important. During the last year, the Company has experienced
increasing competition from countries that were part of the former Soviet
Union. The quality of their product is generally good and their pricing is
generally aggressive, as they tend to operate for the generation of cash flow
versus focusing on traditional income and return on investment theory.
However, these countries often lack the infrastructure needed to guarantee
time of delivery. The Company believes that its size and locations allow it
to compete effectively with other U.S. and foreign metals recyclers.
8
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
SEASONALITY. The Company makes a number of large ferrous metals shipments to
foreign steel producers each year. The Company's control over the timing of
shipments is limited by customers' requirements, shipping schedules and other
factors. Variations in the number of shipments from quarter to quarter result
in fluctuations in quarterly revenues, earnings, and inventory levels.
BACKLOG. On August 31, 2000, the Company's Metals Recycling Business had a
backlog of firm orders of $18.4 million, as compared to $14.9 million on
August 31, 1999. All of the backlog on August 31, 2000 was related to export
shipments.
JOINT VENTURES
The Company has invested in certain joint ventures which process and sell
recycled metals to third parties and other joint ventures that supply
unprocessed metals to the Company's operations and other metals buyers. The
Hugo Neu joint ventures recognized revenues of $437.7 million in fiscal 2000
and $295.1 million in fiscal 1999. The Pick-N-Pull joint venture recognized
revenues of $34.9 million in fiscal 2000 and $29.7 million in fiscal 1999.
Other joint ventures recognized revenues of $29.6 million in fiscal 2000 and
$24.8 million in fiscal 1999.
I. JOINT VENTURES IN THE METALS RECYCLING BUSINESS
The Company owns interests in five joint ventures that are engaged in buying,
processing, and selling primarily ferrous metal. The Company is a 50% partner
in four of these joint ventures and is a 30% partner in a smaller joint
venture located in Rhode Island. These joint ventures process and sell
approximately 2.8 million long tons of ferrous metals per year. Through these
joint ventures, the Company participates in the management of 28 metals
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 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. The Company also owns a 50% interest in three smaller joint
ventures in the Western United States.
METALS PROCESSING AND SUPPLY. The joint ventures predominantly produce
shredded recycled metal and other grades of ferrous recycled metal, primarily
heavy melting and premium grades. The joint ventures process metals by
shredding, sorting, baling, shearing or cutting the metals into pieces
suitable for melting. Processed metals are 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 recycled
metals 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.
It is anticipated that during fiscal 2001, the export terminal in New Jersey
will begin a dredging project on a private channel adjacent to the terminal
as well as a small portion of the Hudson River. The project is expected to
provide the Company's New Jersey joint venture with numerous benefits that
include increasing the depth of water in the private channel, which will
allow export ships to be loaded entirely alongside the export yard.
Currently, export ships can only load a portion of their cargoes alongside
the yard due to the channel's depth and the balance of the cargo has to be
loaded by shuttling barges between the export yard and the ship anchored in
the bay. The elimination of the shuttle system and the related "double
handling" is expected to significantly reduce loading costs at this yard.
It is anticipated that a significant portion of the dredging costs will be
financed by a low interest, long-term bond partially supported by local
governmental agencies.
9
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
COMPETITION. The predominant competitive factors which impact the joint
ventures' ability to obtain unprocessed metals as a raw material and recycled
metals sales are price, including shipping costs, availability, reliability
of service and product quality. See Competition in the Metals Recycling
Business section of this report.
II. JOINT VENTURE SUPPLIERS OF METALS
The Company is a 50% partner in a joint venture, which operates sixteen
self-service used auto parts yards in central California and the Bay Area,
two yards in Texas, and one yard each in Nevada, Utah, Illinois, and Indiana.
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, at
prices that approximate market, for shredding at the Oakland metals recycling
operation. During fiscal 2000, 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, primarily to
the Company. During fiscal 2000, the Company purchased substantially all of
the ferrous metals generated by this joint venture.
The Company purchased 236,400 and 195,700 long tons of ferrous metals from
its joint ventures in fiscal 2000 and 1999, respectively. Terms are
negotiated at arms-length between the Company and the other partners to the
joint ventures.
10
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
STEEL MANUFACTURING BUSINESS
The Company's Steel Manufacturing Business is conducted by its wholly owned
subsidiary, Cascade Steel Rolling Mills, Inc., located in McMinnville, Oregon
(approximately 45 miles southwest of Portland). The Steel Manufacturing
Business' mini-mill was established in 1968 and acquired by the Company in
1984.
PRODUCTS AND MARKETING. The Steel Manufacturing Business 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,
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- ---------------- ---------------- --------------- ----------------
Sales Vol.(1) Sales Vol.(1) Sales Vol.(1) Sales Vol.(1) Sales Vol.(1)
----- ------- ----- ------- ----- ------- ----- ------- ----- -------
(dollar amounts in millions)
Rebar $ 86.5 308 $ 98.3 340 $101.9 325 $104.9 341 $ 98.7 321
Merchant bar 38.8 117 37.4 113 46.2 123 43.1 117 35.5 95
Wire rod 47.0 186 13.9 59 11.3 37 4.6 15
Coiled rebar 8.3 28 6.9 22 6.0 18 1.7 5
Specialty products 11.8 27 16.2 37 22.0 50 28.1 68 25.8 60
------- --- ----- --- ------ --- ------ --- ------ ---
Total $192.4 666 $172.7 571 $187.4(2) 553 $182.4(2) 546 $160.0 476
======= === ===== === ====== === ====== === ====== ===
(1) In thousands of short tons (2,000 pounds).
(2) Does not include billet sales of $4.0 million in 1998 and $1.3 million
in 1997.
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 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 the Steel Manufacturing
Business' existing cut-to-length rebar products, has permitted the Company to
increase its 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. In the summer of 2001, the
Company will begin the installation of a static var compensator which, when
completed by the end of calendar 2001, will provide a more uniform electric
power supply for the steel manufacturing process. This enhancement is
expected to increase efficiency and production in the billet making process
which will allow the Steel Manufacturing Business to take advantage of the
greater efficiencies gained at Rolling Mill #2.
11
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
The Steel Manufacturing Business sells directly from its plant in
McMinnville, Oregon and from its distribution centers located in El Monte
(Los Angeles area), and Stockton, California. The distribution centers
facilitate sales by holding a ready inventory of products close to major
customers for just-in-time delivery. The Steel Manufacturing Business
communicates regularly with major customers to determine their anticipated
needs and plans its rolling mill production schedule accordingly. The Steel
Manufacturing Business 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 fiscal 2000, the Steel Manufacturing Business sold its steel products
to approximately 500 customers primarily located in the 10 western states. In
that period, approximately 45% of the Steel Manufacturing Business' sales
were made to customers in California. The Steel Manufacturing Business'
customers are principally steel service centers, construction industry
subcontractors, steel fabricators, and major farm and wood product suppliers.
The Steel Manufacturing Business' 10 largest customers accounted for
approximately 56% of its revenues during fiscal 2000. A single customer,
Davis Wire Corp., accounted for 15% of the Company's consolidated revenues.
RECYCLED METALS SUPPLY. The Company believes it operates the only mini-mill
in the United States which has the ability to obtain its entire recycled
metals requirement from its own affiliated metals recycling operations. The
demand for steel recycled metals 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 recycled metals with some mills
being forced to pay higher prices for recycled metals shipped from other
regions or to temporarily curtail operations. The Company's Metals Recycling
Business currently supplies the Steel Manufacturing Business both with
recycled metals that it has processed and with recycled metals that it has
purchased from third-party processors. See "Metals Recycling Business". The
Metals Recycling Business is also able to deliver to the Steel Manufacturing
Business an optimal mix of recycled metal grades to achieve maximum
efficiency in its melting operations.
ENERGY SUPPLY. Electricity and natural gas represented approximately 6% and
2%, respectively, of the Steel Manufacturing Business' cost of goods sold in
the year ended August 31, 2000.
The Steel Manufacturing Business purchases hydroelectric power from
McMinnville Water & Light Company (McMinnville), a municipal utility, and is
McMinnville's largest customer. McMinnville obtains power from the Bonneville
Power Administration (BPA) at the lowest cost available from BPA and then
resells it to the Steel Manufacturing Business at its cost plus a fixed
charge per kilowatt hour and a 3% city surcharge. In fiscal 2000, the Steel
Manufacturing Business paid an average of $.03 per kilowatt hour used. The
favored rate McMinnville obtains from BPA is for firm power; therefore, the
Steel Manufacturing Business 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. Rates are anticipated to increase 7% on the future contract.
The Steel Manufacturing Business purchases natural gas for use in the reheat
furnaces from IGI Resources of Boise, Idaho, pursuant to a contract that
obligates the business to purchase minimum amounts of gas at a fixed rate or
pay a demand charge. The contract expires on October 31, 2002. Rates for
fiscal 2001 will increase approximately 30% compared with fiscal 2000. All
natural gas used by the Steel Manufacturing Business 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, the Steel Manufacturing Business maintains
stand-by propane gas storage tanks, which have the capacity to hold enough
gas to operate one of the rolling mills for at least three days without
refilling.
12
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
MANUFACTURING OPERATIONS AND EQUIPMENT. The Steel Manufacturing Business'
melt shop includes a 100-ton capacity electric-arc furnace and a five-strand
continuous billet caster. The melt shop is highly computerized and automated.
The 100-ton capacity of the furnace accommodates larger, less expensive
grades of scrap, resulting in recycled metals 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 mill 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 fiscal 2000, 1999 and 1998, the melt shop produced 631,000, 628,000
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. With the addition of the previously
mentioned static var compensator, the Company anticipates 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 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, the Steel Manufacturing Business 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 the Steel Manufacturing
Business 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 Steel Manufacturing Business 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. The Steel Manufacturing Business completed the
installation of a rod block at Rolling Mill #2 in February 1997. The rod
block allows the Steel Manufacturing Business to enhance its product mix
through the production of coiled rebar and wire rod. In addition, the ability
of Rolling Mill #2 to produce the Steel Manufacturing Business' existing
cut-to-length rebar products permits it to increase its production of
higher-margin merchant bar products at Rolling Mill #1 and also increases its
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. The Company continues to expect that Rolling Mill #2 will expand the
Steel Manufacturing Business' rolling capacity, based on anticipated product
mix, to about 700,000 tons annually.
The Steel Manufacturing Business' 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 a significant amount of the equipment in the mills is dismantled,
inspected and overhauled.
TRANSPORTATION. The Steel Manufacturing Business makes extensive use of rail
transportation for shipment of its products to its distribution center and
customers in California and for the shipment of recycled metals to the mill
both from the Metals Recycling Business' yards and other metal recyclers 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 permits the Steel Manufacturing
Business to compete with mills that are closer to California markets.
13
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
COMPETITION. The Steel Manufacturing Business 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. The Steel
Manufacturing Business also competes for sales of wire rod with the
aforementioned North Star Steel Company mini-mill and an Oregon Steel Mills,
Inc. plant located in Pueblo, Colorado, along with other domestic and foreign
producers. Other domestic mills generally do not compete in the Steel
Manufacturing Business' market area because of transportation costs. The
principal competitive factors in the Steel Manufacturing Business' market are
price (including freight cost), availability, quality and service. Certain of
the Steel Manufacturing Business' competitors have substantially greater
financial resources than the Steel Manufacturing Business. U.S. steel
manufacturers have historically faced competition from foreign steel
producers. During fiscal 2000, the Steel Manufacturing Business experienced
significant competition from low-priced steel products imported by these
Asian companies, which was a direct result of the Asian financial crisis. The
competition from low-priced steel products from Asian countries is
anticipated to continue into fiscal 2001. The Steel Manufacturing Business
also experienced some competition from Mexican steel mills in the Southern
California market during fiscal 1996 and 1997.
SEASONALITY. The Steel Manufacturing Business' revenues can fluctuate
significantly between quarters due to factors such as the seasonal slowdown
in the construction industry, which occurs from the late fall through early
spring, and in other industries it serves. In the past, the Steel
Manufacturing Business 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. The Steel Manufacturing Business generally ships products within
days after the receipt of purchase orders. Backlogs are seasonal and would be
larger in fiscal quarters three and four.
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.
Federal and state environmental regulatory agencies have been investigating
potential contamination to a portion of the Willamette River in Portland,
Oregon referred to as the Portland Harbor. The Oregon Department of
Environmental Quality (DEQ) has requested operating history and other
information from numerous persons and entities which own or conduct
operations on properties adjacent to or upland from the Portland Harbor. The
DEQ has contacted Schnitzer Investment Corp. (SIC), from whom the Company
leases its metals recycling and deep water terminal facility in Portland,
Oregon, and requested that SIC perform a voluntary remedial investigation of
that property. The DEQ has indicated that it believes that activities
conducted on that property may currently be contributing, or may have in the
past contributed, to the contamination of the Willamette River. SIC has
agreed to perform an investigation of the property. The Company is obligated
under its lease with SIC to bear all costs relating to the investigation and
remediation of the property. While the cost of the investigation is not
expected to be material, no estimate has been made as to the cost of
remediation, if any.
14
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
MANUFACTURING MANAGEMENT, INC.
In conjunction with the due diligence proceedings for the Company's
acquisition of Manufacturing Management, Inc. (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 certain environmental liabilities. This
reserve was carried over to the Company's financial statements and at August
31, 2000 aggregated $17.9 million.
General Metals of Tacoma, Inc. (GMT), MMI's wholly owned subsidiary, owns and
operates a recycled metals 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's cost, which is in final stages of
EPA review, 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.
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 at the Hylebos
Superfund site. The Company completed the replacement of the bulkhead and
wharf in 1999.
In 1990, MMI entered into a Consent Decree with the Washington Department of
Ecology which required MMI to pave the entire Tacoma recycled metals 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 completed 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 agreed to 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, based upon a consusltant's estimates, for the probable costs to
remediate its properties. The Company carried over the aggregate reserve to
its financial statements upon acquiring Proler, and $5.5 million remained
outstanding on August 31, 2000. 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 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 a 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.
15
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
Proler leased lands from Kennecott in Copperton, Utah between 1966 and 1992
for a detinning plant operation. Expenditures for environmental site clean-up
activities at this location from fiscal 1997 through fiscal 2000 totaled $1.2
million for Proler. The site cleanup is now complete.
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 conduct a multi-year, phased remedial
clean-up project involving certain environmental conditions on its metals
recycling facility at its Terminal Island site in Los Angeles, California, to
be completed 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.
Metals Recycling LLC (Metals) is a scrap metals processing business with
locations in Rhode Island and Massachusetts. The members of Metals are one of
the Company's Proler joint ventures and Metals Recycling, Inc. On June 9,
1999, the Rhode Island Department of Environmental Management (DEM) issued a
Notice of Violation (NOV) against Metals, alleging Metals had violated
federal and state regulations relating to the storage, management, and
transportation of hazardous waste. DEM imposed an administrative penalty of
$718,000. Metals has filed an answer to the NOV in which it denied the
allegations and requested an adjudicatory hearing. In July 1999, the DEM
issued a NOV to Rhode Island Resource Recovery Corporation (RIRRC), which
included a civil penalty of $308,000, relating to the alleged disposal of
hazardous waste by Metals at a landfill operated by RIRRC. Metals and RIRRC
have denied the DEM's allegations. RIRRC has requested an adjudicatory
hearing. Pursuant to an Alternative Coverage Disposal Agreement between RIRRC
and Metals, Metals has agreed to defend and indemnify RIRRC with regard to
the NOV.
In late January of 1999, federal and state officials searched Metal's
Johnston, Rhode Island and Worcester, Massachusetts facilities. Metals has
been advised that the search was part of a state criminal investigation into
possible violations of state and federal hazardous waste programs and a Rhode
Island statute that prohibits the disposal of out-of-state solid waste at the
landfill operated by RIRRC. A grand jury has been empanelled to consider the
allegations. No proceedings have been commenced against Metals or its
officers. The Company believes Metals has substantial defenses to the alleged
violations.
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.
METALS RECYCLING BUSINESS
After the shredding of automobile bodies and the separation of ferrous and
salable nonferrous metals, the remaining auto shredder residue ("fluff") must
be managed. 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 metals recycling
operations in Oakland and Tacoma undergo an in-line chemical stabilization
treatment prior to its beneficial use as an alternative daily landfill cover.
16
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
STEEL MANUFACTURING BUSINESS
Cascade Steel Rolling Mills, Inc.'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 EAF dust is shipped
to a firm in the United States that applies a treatment which allows the EAF
dust to be delisted 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.
The Steel Manufacturing Business' mini-mill operating permit under Title V of
the Clean Air Act Amendment of 1990, which governs certain air quality
standards, was issued in 1998 and expires in April 2003. The mini-mill is
currently permitted to melt up to 900,000 tons of recycled metals 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, the Steel
Manufacturing Business has anticipated that it would need to enhance its
existing facilities to properly control increased emissions in order to remain
in compliance with the operating permit. To meet that need, the Steel
Manufacturing Business is currently installing an additional baghouse that is
expected to control the emissions' growth. The installation will be completed
in the Spring of 2001, at a cost of $0.6 million.
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 recycled
metals 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.
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 2001 or 2002.
EMPLOYEES
As of August 31, 2000, the Company had 1,112 full-time employees, consisting
of 446 employees at the Company's Metals Recycling Business, 597 employees at
the Steel Manufacturing Business, and 69 corporate administrative employees.
Of these employees, 720 are covered by collective bargaining agreements with
twelve unions. The Steel Manufacturing Business' contract with the United
Steelworkers of America covers 452 of these employees and expires on April 1,
2005. The Company believes that its labor relations generally are good.
17
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
ITEM 2. PROPERTIES
The Company's Portland metals recycling facility, 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 the Metals Recycling Business.
The Sacramento recycled metals 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, Anchorage and
Reno operations are located on sites leased from third parties.
The following metals recycling operations are all located on sites owned by the
Company or subsidiaries:
LOCATION ACREAGE OWNED AT SITE
-------- ---------------------
Oakland, CA 33
Tacoma, WA 26
Fresno, CA 17
Eugene, OR 11
Grants Pass, OR 5
White City, OR 4
Bend, OR 3
The Steel Manufacturing Business' steel mill and administrative offices are
located on an 83-acre site owned by the Steel Manufacturing Business in
McMinnville, Oregon. The Steel Manufacturing Business also owns its 87,000 sq.
ft. distribution center in El Monte, 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. The
Company believes its present facilities are adequate for operating needs for
the foreseeable future.
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 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, 2000.
18
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Office
- ---- --- ------
Leonard Schnitzer 76 Chairman of the Board and Chief Executive Officer
Robert W. Philip 53 President
Kenneth M. Novack 54 Executive Vice President
Gary Schnitzer 58 Executive Vice President - California Metals Recycling Business
Barry A. Rosen 55 Vice President - Finance and Treasurer
Kurt C. Zetzsche 61 President of Steel Manufacturing Business
Terry L. Glucoft 52 Vice President - Domestic Trading
Kelly E. Lang 39 Vice President - Corporate Controller
Edgar C. Shanks 52 Vice President - Taxation
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.
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 metals recycling operations since 1980. Gary Schnitzer is
the son of Gilbert Schnitzer.
BARRY A. ROSEN has been Vice President-Finance, Treasurer, and Chief
Financial Officer of the Company since 1982.
KURT C. ZETZSCHE joined the Company in February 1993 as President of
the Steel Manufacturing Business. 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.
TERRY L. GLUCOFT joined the Company in February 1985 and has held a
number of management positions within the Metals Recycling Business, the latest
of which is Vice President of Domestic Trading where he overseas the Northwest
recycled metals operations. Prior to joining Schnitzer Steel, Mr. Glucoft was
employed by Judson Steel Company, a steel mini-mill in California from 1979 to
1985.
19
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
KELLY E. LANG joined the Company in September 1999 as Vice
President-Corporate Controller. From 1996 to September 1999 he was employed by
Tektronix Inc. in various financial capacities, the last of which was Vice
President, Finance for Tektronix Inc.'s Color Printing and Imaging Division.
From 1994 to 1996, he was Treasurer of Crown Pacific Partners, LP. Mr. Lang was
also a CPA with Price Waterhouse LLP.
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.
20
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, 2000 was 96. 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 2000
-----------------------------------------------------------------
High Price Low Price Dividends Per Share
---------- --------- -------------------
First Quarter $ 19.88 $ 13.25 $ .05
Second Quarter 20.56 14.13 .05
Third Quarter 19.06 13.81 .05
Fourth Quarter 18.13 14.00 .05
Fiscal Year 1999
-----------------------------------------------------------------
High Price Low Price Dividends Per Share
---------- --------- -------------------
First Quarter $ 18.75 $ 11.13 $ .05
Second Quarter 18.50 13.00 .05
Third Quarter 17.38 9.00 .05
Fourth Quarter 23.00 14.75 .05
21
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
ITEM 6. SELECTED FINANCIAL DATA
Year Ended August 31,
-------------------------------------------------------------------
2000 1999 (4) 1998 (4) 1997 (4) (1) 1996 (4)
---- ---- ---- ---- ----
(In millions, except per share, per ton and shipment data)
INCOME STATEMENT DATA:
Revenues $333.8 $265.0 $353.1 $361.7 $339.3
Cost of goods sold and other
operating expenses (296.6) (240.9) (311.8) (313.4) (291.5)
Selling and administrative (26.5) (23.7) (24.1) (22.8) (20.5)
Income from joint ventures 4.5 3.5 4.1 6.9 3.3
------- ------- ------ ------ -------
Income from operations 15.2 3.9 21.3 32.4 30.6
Interest expense (7.4) (7.0) (6.8) (5.0) (3.8)
Other income (expense) 3.2 4.5 (1.5) 4.6 1.7
------ ------ ------- ------ -------
Income before income taxes 11.0 1.4 13.0 32.0 28.5
Income tax provision ( 0.6) ( 0.8) ( 4.9) (10.9) (9.1)
------- -------- ------- ------- ------
Net income $ 10.4 $ 0.6 $ 8.1 $ 21.1 $ 19.4
======= ======== ======= ======= =======
Basic earnings per share $ 1.07 $ 0.06 $ 0.81 $ 2.05 $ 2.10
======= ======= ====== ======= =======
Diluted earnings per share $ 1.06 $ 0.06 $ 0.80 $ 2.04 $ 2.09
======= ======= ====== ======= =======
Dividends per common share $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20
======= ======= ====== ======= =======
OTHER DATA:
Shipments (in thousands)(2):
Ferrous recycled metal (tons) 1,506 1,224 1,435 1,518 1,479
Nonferrous (pounds) 96,207 74,497 69,061 64,473 60,889
Finished steel products (tons)(3) 666 571 553 546 476
Average selling price:
Ferrous recycled metal (per ton)(2) $ 95 $ 83 $ 122 $ 127 $ 146
Nonferrous (per pound) 0.40 0.35 0.40 0.43 0.42
Finished steel products (per ton)(3) 289 303 339 334 336
Depreciation and amortization $ 18.4 $ 17.7 $ 18.7 $ 18.3 $ 14.0
Capital expenditures 10.7 12.0 14.2 15.5 44.6
August 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In millions)
BALANCE SHEET DATA:
Working capital $ 79.9 $ 93.4 $114.6 $109.7 $ 97.3
Total assets 426.3 446.4 474.8 432.8 342.4
Short-term debt 0.2 0.4 0.2 0.4 0.2
Long-term debt 93.1 119.8 140.2 92.9 44.5
Shareholders' equity 248.4 240.3 244.9 243.9 228.7
22
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
(1) Includes the results of operations of Proler International Corp. from
November 29, 1996 through August 31, 1997.
(2) Tons for ferrous recycled metals are long tons (2,240 pounds) and for
finished steel products are short tons (2,000 pounds).
(3) Does not include billet sales of $4.0 million in 1998 and $1.3 million
in 1997.
(4) In the first quarter of fiscal 2000, the Company changed its method of
accounting for recycled metals inventories from Last-In, First-Out
(LIFO) to First-In, First-Out (FIFO). See Note 2 to the consolidated
financial statements. The effect of the accounting change on net
income as previously reported is as follows (in millions, except per
share amounts):
Fiscal
---------------------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
EFFECT ON:
Net income $ (2.8) $ (1.3) $ (0.1) $ (1.3)
Basic earnings per share $ (0.28) $ (0.13) $ (0.01) $ (0.14)
Diluted earnings per share $ (0.28) $ (0.13) $ (0.01) $ (0.13)
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 recycled metals in world markets and steel products on the U.S.
West Coast. For example, increasing steel demand and prices led to improved
profitability during the period of fiscal 1995 through fiscal 1997. However,
primarily due to the Asian financial crisis, which severely curtailed demand
and decreased prices, fiscal 1998 and 1999 results for the Metals Recycling
Business were negatively impacted. During fiscal 2000, the Company saw demand
for recycled metal rise, but unusually large supply became available in
certain of the countries that were part of the former Soviet Union, which
held prices down. In addition domestic demand for finished steel products was
strong, but lower cost imports, primarily from Asia, caused average prices to
generally decline.
The following tables set forth information regarding the breakdown of revenues
between the Company's Metals Recycling Business and Steel Manufacturing
Business, and the breakdown of income from operations between the Metals
Recycling Business, the Steel Manufacturing Business 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)
2000 1999 1998
---- ---- ----
Metals Recycling Business:
Ferrous $141.8 $101.7 $175.3
Nonferrous 38.8 26.0 27.3
Other 7.8 9.4 15.3
------ ------ ------
Recycled metals total 188.4 137.1 217.9
Sales to the Steel Manufacturing Business(1) (47.0) (44.8) (56.2)
------ ------ ------
Sales to Unaffiliated Customers 141.4 92.3 161.7
Steel Manufacturing Business 192.4 172.7 191.4
------ ------ ------
Total $333.8 $265.0 $353.1
====== ====== ======
23
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
Income (Loss) from Operations
Year Ended August 31,
-----------------------------
(In millions)
2000 1999 1998
---- ----- ----
Metals Recycling Business $ 12.9 $ (0.1) $ 14.3
Steel Manufacturing Business 7.2 6.6 9.8
Joint Ventures in the Metals Recycling Business 2.2 1.4 0.8
Joint Venture Suppliers of Metals 2.3 2.1 3.3
Corporate Expense (2) (8.4) (7.0) (6.8)
Intercompany Eliminations (1.0) 0.9 (0.1)
------ ------ ------
Income from Operations $ 15.2 $ 3.9 $ 21.3
====== ====== ======
(1) Ferrous recycled metal sales from the Metals Recycling Business to the
Steel Manufacturing Business are made at a negotiated rate per ton that is
intended to approximate market.
(2) Corporate expense consists primarily of unallocated corporate expense for
services that benefit both the Metals Recycling Business and the Steel
Manufacturing Business. 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 2000 COMPARED TO FISCAL 1999
REVENUES. Revenues for both the Metals Recycling Business and the Steel
Manufacturing Business increased resulting in an overall improvement in
consolidated revenues of $68.8 million to $333.8 million for fiscal 2000
compared with fiscal 1999. The strengthening Asian economies had a particularly
positive impact on volume and prices for the Metals Recycling Business in fiscal
2000.
The Metals Recycling Business generated revenues of $188.4 million, before
intercompany eliminations, an increase of $51.3 million (37%). Ferrous revenues
increased $40.1 million (39%) to $141.8 million as a result of both higher
volumes and higher average selling prices, both of which were primarily caused
by the rebounding Asian economies. Ferrous volumes increased 282,000 tons (23%)
while the average selling price of ferrous recycled metal increased $12 per ton
(14%) to $95 per ton. The Metals Recycling Business made export shipments
aggregating 761,000 tons during fiscal 2000 compared with export shipments
totaling 491,000 tons during the prior year. Domestic third-party tonnage
increased by 27% to 247,000 tons. Sales to the Company's Steel Business
decreased by 8% to 498,000 tons. Nonferrous revenues increased $12.8 million
(49%) to $38.8 million due to higher volumes and higher average selling prices.
Increased exports and a strong domestic market were primarily responsible for
the nonferrous improvements, as well as the Metals Recycling Business' ability
to produce more nonferrous products. Nonferrous volumes increased 21.7 million
pounds (29%) and the average selling price increased $0.05 per pound (14%).
The Steel Manufacturing Business recognized revenues for fiscal 2000 of $192.4
million, an increase of 11% from revenues recognized in the prior year. Although
the volume of finished steel products sold increased, the average selling price
per ton declined. Sales of finished steel products increased 17% to 666,000 tons
as strong demand enabled the Company to substantially increase production and
sales of wire rod products. However, the average selling price declined $14 per
ton (5%) to $289 per ton. The decline in average selling prices is primarily
attributable to the dumping of lower priced steel products by Asian companies on
the West Coast. The decline in the average selling price is also partially due
to a change in product mix. During fiscal 2000, the Steel Manufacturing Business
shipped proportionately more lower-priced products (principally wire rod) than
in the prior year.
24
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
COST OF GOODS SOLD. Consolidated cost of goods sold increased $55.7 million
(23%) to $296.6 million and decreased as a percentage of revenues to 89%,
compared with 91% in fiscal 1999. Gross profit increased by $13.1 million (54%)
to $37.2 million.
The Metals Recycling Business' cost of goods sold increased $37.1 million to
$161.0 million before intercompany eliminations. Cost of sales per ferrous ton
increased due to increased foreign demand for processed metal that directly
impacted the demand for and cost of unprocessed metals. The increase in the cost
of unprocessed metal was more than offset by the increase in the average selling
price increasing gross profit $5.0 million compared with the previous fiscal
year. Income from operations for fiscal 2000 increased $13.0 million compared
with fiscal 1999, primarily due to the stronger Asian economies.
Cost of goods sold for the Steel Manufacturing Business increased $19.0 million
(12%). Cost of sales per ton, excluding billets, declined by $13 per ton
primarily due to increased production that spread the allocation of fixed costs
over more tons. Lower average selling prices more than offset this decline in
operating costs per ton, but increased sales volume resulted in a gross profit
of $10.7 million which was $0.7 million higher than in fiscal 1999.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased $2.8 million to $26.5 million. Of this increase, $1.6 million was due
to annual salary merit increases and additional bonus accruals based on
significant improvement in results during fiscal 2000. Fiscal 2000 expenses
also included $0.4 million in write-offs of uncollectible debts.
INCOME FROM JOINT VENTURES. The Company's joint ventures' revenues and results
of operations were as follows (in thousands):
Year Ended August 31,
---------------------
2000 1999
---- ----
Total revenues from external customers recognized by:
Joint Ventures in the Metals Recycling Business $449,783 $303,014
Joint Venture Suppliers of Metals 52,444 46,575
-------- --------
$502,227 $349,589
======== ========
Income from joint ventures recognized by the Company:
Joint Ventures in the Metals Recycling Business $ 2,219 $ 1,380
Joint Venture Suppliers of Metals 2,288 2,070
-------- --------
$ 4,507 $ 3,450
======== ========
The Joint Ventures in the Metals Recycling Business predominantly sell recycled
ferrous metal. The increase in revenues recognized by these joint ventures is
attributable to higher ferrous selling prices and an increase in tonnage
shipped. Also, fiscal 2000 revenues include a full year's results of a joint
venture organized in the third quarter of fiscal 1999. Shipments of ferrous
metal processed by the joint ventures increased to 2.8 million tons for the year
ended August 31, 2000 from 2.5 million tons in the prior year. The average
selling price of ferrous recycled metal increased during that period to $108 per
ton from $87 per ton, predominantly due to strengthening Asian and other foreign
economies.
In fiscal 2000, the Company's equity in income from Joint Ventures in the Metals
Recycling Business was adversely affected by $1.1 million to reflect the
Company's share of LIFO inventory adjustments. In comparison, the results for
fiscal 1999 benefited from $3.3 million of LIFO and other inventory adjustments.
The Company's equity in income from the Joint Ventures in the Metals Recycling
Business for fiscal 1999 included the Company's $1.4 million share of a gain
recognized by one of the joint ventures from the sale of property.
25
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
Both revenues and income from the Joint Venture Suppliers of Metal increased
from fiscal 1999 to fiscal 2000 primarily due to higher ferrous selling prices.
INTEREST EXPENSE. Interest expense increased $0.4 million due to increased
average borrowings and higher average interest rates. Average borrowings of
$107.4 million in fiscal 2000 exceeded average borrowings in fiscal 1999 of
$104.3 million. The average interest rate for fiscal 2000 was 6.3% compared with
5.4% for fiscal 1999.
GAIN (LOSS) ON SALE OF ASSETS. In fiscal 2000, the Company and its outside board
members approved the sale of a ship leased by the Company from a related party
to export recycled metal. The sale resulted in a $1.0 million loss. Fiscal 1999
results included the Steel Manufacturing Business' sale of its Union City,
California mill depot, resulting in a gain of $1.2 million.
OTHER INCOME. Other income increased $1.3 million. During fiscal 2000, the
Company received a $0.7 million settlement as a result of antitrust litigation
related to graphite electrodes pricing. In fiscal 1999, the Company received
$1.0 million related to the same antitrust settlement. Also, the Company
recognized additional interest income during fiscal 2000 of $1.9 million,
related to advances to joint ventures, and $0.9 million of investment income on
assets related to the supplemental executive retirement plan due to strong
domestic financial markets. See Note 8.
INCOME TAX PROVISION. The Company's effective income tax rate decreased to 6% in
fiscal 2000 from 55% in fiscal 1999. The decrease was primarily due to lower
taxable income caused by utilization of $8.6 million of net operating loss
carryforwards (NOLs) that were acquired as part of the 1996 acquisition of
Proler.
By acquiring Proler in 1996, the Company succeeded to $31.0 million of NOLs
incurred in Proler's pre- acquisition years. Federal income tax law limits the
amount of Proler pre-acquisition NOLs that can be used by the Company to $2.4
million per year. However, to the extent the respective annual limit exceeds
taxable income for a taxable year, the unused excess may be carried over and
used in subsequent taxable years. Previous federal tax rules limited the use of
the Proler NOLs to offset taxable income only from the acquired Proler entities.
The new rules now allow the Company to use the Proler NOLs to offset taxable
income from all sources.
During fiscal 2000, federal income tax law changes were enacted that allow the
Company somewhat greater flexibility in utilizing the Proler NOLs. These changes
allowed the Company to utilize the annual limit of $2.4 million for fiscal 2000
as well as an additional $6.2 million of excess limit amounts from prior years.
Subject to these annual utilization limits, the remaining $22.4 million of
Proler NOLs may be used in future years until they expire at various amounts in
fiscal 2007 through 2012.
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES. Revenues for both the Metals Recycling Business and the Steel
Manufacturing Business decreased resulting in an overall decline in consolidated
revenues of $88.1 to $265.0 million for fiscal 1999 compared with $353.1 million
for fiscal 1998. The Asian financial crisis which began during fiscal 1998
continued to impact the results of both operations in fiscal 1999.
The Metals Recycling Business generated revenues of $137.1 million, before
intercompany eliminations, a decrease of $80.8 million (37%). Ferrous
revenues declined $73.6 million (42%) to $101.7 million as a result of both
lower volumes and lower average selling prices, both of which were primarily
caused by the financial crisis in Asia. Ferrous volumes declined 211,000 tons
(15%) while the average selling price of ferrous recycled metal declined $39
per ton (32%) to $83 per ton. The Metals Recycling Business made export
shipments, aggregating 491,000 tons, during fiscal 1999 compared with export
shipments totaling 720,000 tons during the prior year. Domestic third-party
tonnage declined by 17% to 194,000 tons. Sales to the Company's Steel
Business increased by 12% to 539,000 tons.
26
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
The Steel Manufacturing Business recognized revenues for fiscal 1999 of $172.7
million, a decrease of 10% from revenues recognized in the prior year. Although
the volume of finished steel products sold increased, the average selling price
per ton declined. Sales of finished steel products increased 3% to 571,000 tons.
However, the average selling price declined $36 per ton (11%) to $303 per ton.
The Company feels that the decline in average selling prices was attributable to
the dumping of lower priced steel products by Asian companies on the West Coast.
The decline in the average selling price was also partially due to a change in
product mix. During fiscal 1999, the Steel Manufacturing Business shipped
proportionately more lower-priced products than in the prior year.
COST OF GOODS SOLD. Consolidated cost of goods sold declined $71.0 million (23%)
to $240.9 million and increased as a percentage of revenues from 88% in fiscal
1998 to 91% in fiscal 1999. Gross profit declined by $17.0 million (41%) to
$24.2 million.
The Metals Recycling Business' cost of goods sold decreased $66.0 million to
$123.8 million before intercompany eliminations. Cost of sales per ferrous ton
declined, as the Company lowered the purchase price of recycled metals at the
scale in response to declining selling prices. However, because the average
selling prices declined at a higher rate than the price of unprepared metal,
gross profit for the Metals Recycling Business declined $14.8 million.
The Metals Recycling Business' cost of goods sold for the year ended August 31,
1999 was lowered by a $1.9 million reversal of environmental reserves. An
independent consultant was engaged to review the Company's environmental issues
and to determine its potential liabilities. Based upon the completion of certain
projects at less than anticipated costs, certain previously established reserves
were eliminated.
Cost of goods sold for the Steel Manufacturing Business declined $15.3 million
(9%) despite higher volumes sold during fiscal 1999. Cost of sales per ton,
excluding billets, declined by $30 per ton primarily due to lower recycled
metals prices. The impact of lower average selling prices more than offset this
decline in operating costs per ton, however, resulting in a gross profit of
$10.0 million which was $3.3 million lower than in fiscal 1998.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
declined $0.4 million to $23.7 million as the Company endeavored to contain
overhead costs.
INCOME FROM JOINT VENTURES. The Company's joint ventures' revenues and results
of operations were as follows (in thousands):
Year Ended August 31,
---------------------
1999 1998
---- ----
Total revenues from external customers recognized by:
Joint Ventures in the Metals Recycling Business $ 303,014 $ 332,580
Joint Venture Suppliers of Metals 46,575 51,391
----------- ----------
$ 349,589 $ 383,971
=========== ==========
Income from joint ventures recognized by the Company:
Joint Ventures in the Metals Recycling Business $ 1,380 $ 823
Joint Venture Suppliers of Metals 2,070 3,292
----------- ----------
$ 3,450 $ 4,115
=========== ==========
27
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
The Joint Ventures in the Metals Recycling Business predominantly sell recycled
ferrous metal. The decrease in revenues recognized by these joint ventures is
attributable to lower ferrous selling prices, the impact of which was partially
offset by an increase in tonnage shipped. Shipments of ferrous metal processed
by the joint ventures increased to 2.5 million tons for the year ended
August 31, 1999 from 2.3 million tons in the prior year. The increase in
ferrous recycled metal was partially due to the fact that one of the joint
ventures was organized during fiscal 1998 and, thus, fiscal 1998's results only
reflect a portion of a year's sales. The average selling price of ferrous
recycled metal declined during that period to $87 per ton from $117 per ton,
predominantly due to the Asian financial crisis and a weaker domestic market
which reduced demand in those countries that traditionally purchase a large
share of the worldwide supply.
The Company's equity in income from the Joint Ventures in the Metals Recycling
Business for fiscal 1999 included the Company's $1.4 million share of a gain
recognized by one of the joint ventures from the sale of property. Additionally,
the results for fiscal 1999 also benefited from $3.3 million of LIFO and other
inventory adjustments, compared with $2.2 million for the prior year.
Both revenues and income from the Joint Venture Suppliers of Metal declined from
fiscal 1998 to fiscal 1999 primarily due to severe weather conditions in
California during the first part of fiscal 1999 which impacted demand and, thus,
results of the Company's Pick-N-Pull joint venture. Additionally, prices
received for the auto bodies by this joint venture were lower than in the prior
year due to weakness in the recycled metals markets.
INTEREST EXPENSE. Interest expense increased $0.2 million due to increased
average borrowings, the effect of which was partially offset by lower average
interest rates. Average borrowings of $104.3 million in fiscal 1999 exceeded
average borrowings in fiscal 1998 of $97.6 million. The average interest rate
for fiscal 1999 was 5.4% compared with 5.8% for fiscal 1998.
GAIN (LOSS) ON SALE OF ASSETS. During fiscal 1999, the Steel Manufacturing
Business sold its Union City, California mill depot, resulting in a gain of $1.2
million. Fiscal 1998 results included a $2.2 million charge which reflected the
estimated loss the Company expected to realize upon the sale of its older Tacoma
shredders.
OTHER INCOME. Other income increased $2.3 million. During fiscal 1999, the
Company received a $1 million settlement as a result of antitrust litigation
related to graphite electrodes pricing. Also, the Company recognized additional
interest income during fiscal 1999 of $.6 million.
INCOME TAX PROVISION. The Company's effective tax rate increased to 55% in
fiscal 1999 from 38% in fiscal 1998. The increase was predominantly due to the
lower taxable income relative to the amount of non-deductible goodwill
amortization.
LIQUIDITY AND CAPITAL RESOURCES.
For fiscal 2000, cash generated by operations was $35.4 million, which was
comparable to $36.8 million for the same period last year. The increase in cash
provided by growth in net income was largely offset by the impact of higher
accounts receivable resulting from greater export demand as well as from the
timing of larger export shipments and the related collection of the receivable.
Capital expenditures totaled $10.7 million, $12.0 million, and $14.2 million for
fiscal years 2000, 1999, and 1998, respectively.
As part of its acquisitions of Proler and MMI, the Company assumed environmental
liabilities aggregating $23.4 million as of August 31, 2000. The Company expects
significant future cash outlays as it incurs the actual costs relating to the
remediation of such environmental liabilities.
28
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
The Company has an unsecured revolving credit agreement of $200 million. During
fiscal 1998, the maturity of the facility was extended to June 2003. As of
August 31, 2000, the Company also had additional lines of credit available of
$50 million, which were uncommitted. In the aggregate, the Company had
borrowings outstanding under these lines of $83.3 million as of August 31, 2000.
The Company's debt agreements have certain restrictive covenants. As of August
31, 2000, the Company was in compliance with such covenants.
Pursuant to a stock repurchase program, the Company is authorized to repurchase
up to 1.75 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 and helps the Company manage its targeted capital
structure. As of August 31, 2000, a total of 735,800 shares had been purchased
under this program. During fiscal 2000, the Company repurchased 27,200 shares of
its stock for a total of $0.4 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.
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. Moreover, the Company may
from time to time issue other forward looking statements. One can generally
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 global factors affecting the Company's
financial prospects. Examples of 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 lower cost imports; fiscal policy in both the
U.S. and abroad; competitive factors and pricing pressures from national steel
companies; supply and availability of unprocessed metals; fluctuations in
recycled metals prices; seasonality of results; and assumptions surrounding the
tax provision such as the timing and use of tax credits, utilization of net
operating loss carryforwards and the general profitability of the Company's
operations. 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.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company periodically uses derivative financial instruments to limit exposure
to changes in interest rates. Because such derivative instruments are used
solely as hedges and not for speculative trading purposes, they do not represent
incremental risk to the Company. For further discussion of derivative financial
instruments, refer to "FAIR VALUE OF FINANCIAL INSTRUMENTS" in Note 1 and Note 4
to the Consolidated Financial Statements included in Item 8.
As discussed in "Note 4 - Long-Term Debt" to the Consolidated Financial
Statements included in Item 8, the Company was committed to interest rate swaps
on a revolving credit facility at August 31, 2000. If market rates would have
averaged 10 percent higher than actual levels in either fiscal 2000 or fiscal
1999, the effect on the Company's interest expense and net income, after
considering the effects of the interest rate swaps, would not have been
material.
29
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE
----
Report of Independent Accountants...................................................................31
Consolidated Balance Sheet - August 31, 2000 and 1999...............................................32
Consolidated Statement of Operations - Years ended
August 31, 2000, 1999, and 1998................................................................33
Consolidated Statement of Shareholders' Equity - Years ended
August 31, 2000, 1999, and 1998................................................................34
Consolidated Statement of Cash Flows - Years ended
August 31, 2000, 1999, and 1998................................................................35
Notes to Consolidated Financial Statements..........................................................36
Schedule II - Valuation and Qualifying Accounts.....................................................53
Report of Independent Accountants on Financial Statement Schedule...................................54
All other schedules and exhibits are omitted, as the information is not
applicable or is not required.
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Schnitzer Steel Industries, Inc.
In our opinion, the accompanying consolidated balance sheets 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, 2000 and 1999, and the results of their operations and their cash flows
for each of the three years in the period ended August 31, 2000, in
conformity with accounting principles generally accepted in the United
States of America. 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 auditing standards generally accepted in the
United States of America, 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 our opinion.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for inventory.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
September 29, 2000
31
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
August 31,
------------------------------------
2000 1999
--------------- --------------
(As adjusted)
(Note 2)
ASSETS
Current assets:
Cash $ 2,407 $ 6,174
Accounts receivable, less allowance for
doubtful accounts of $670 and $638 27,367 21,714
Accounts receivable from related parties 1,173 1,935
Inventories (Note 2) 76,338 90,967
Deferred income taxes (Note 6) 4,201 4,795
Prepaid expenses and other 3,238 3,417
--------------- --------------
Total current assets 114,724 129,002
Net property, plant and equipment (Note 3) 127,262 135,814
Other assets:
Investment in joint venture partnerships (Note 11) 104,772 103,980
Advances to joint venture partnerships (Note 11) 31,764 27,754
Goodwill 38,756 39,992
Intangibles and other 9,011 9,816
--------------- --------------
$ 426,289 $ 446,358
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 4) $ 192 $ 436
Accounts payable 17,145 16,390
Accrued payroll liabilities 7,136 6,072
Current portion of environmental liabilities (Note 5) 4,866 5,154
Other accrued liabilities 5,506 7,568
--------------- --------------
Total current liabilities 34,845 35,620
Deferred income taxes (Note 6) 28,616 27,882
Long-term debt less current portion (Note 4) 93,134 119,826
Environmental liabilities, net of current portion (Note 5) 18,541 19,661
Other long-term liabilities (Note 8) 2,723 2,996
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, 5,389 and 5,295 shares issued and outstanding 5,389 5,295
Class B common stock--25,000 shares $1 par value
authorized, 4,312 and 4,431 shares issued and outstanding 4,312 4,431
Additional paid-in capital 101,840 102,179
Retained earnings 136,889 128,468
--------------- --------------
Total shareholders' equity 248,430 240,373
--------------- --------------
$ 426,289 $ 446,358
=============== ==============
The accompanying notes are an integral part of this statement
32
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
Year Ended August 31,
------------------------------------------------------------
2000 1999 1998
----------------- ---------------- ----------------
(As adjusted) (As adjusted)
(Note 2) (Note 2)
Revenues $ 333,792 $ 265,047 $ 353,093
Cost of goods sold and other operating expenses 296,608 240,867 311,862
Selling and administrative expenses 26,477 23,753 24,088
----------------- ---------------- ----------------
Income from wholly-owned operations 10,707 427 17,143
Income from Joint Ventures (Note 11) 4,507 3,450 4,115
----------------- ---------------- ----------------
Income from operations 15,214 3,877 21,258
Other income (expense):
Interest expense (7,352) (6,971) (6,813)
Gain (loss) on sale of assets (1,156) 1,419 (2,224)
Other income 4,322 3,048 791
----------------- ---------------- ----------------
(4,186) (2,504) (8,246)
----------------- ---------------- ----------------
Income before income taxes 11,028 1,373 13,012
Income tax provision (Note 6) (662) (752) (4,900)
----------------- ---------------- ----------------
Net income $ 10,366 $ 621 $ 8,112
================= ================ ================
Basic earnings per share $ 1.07 $ 0.06 $ 0.81
================= ================ ================
Diluted earnings per share $ 1.06 $ 0.06 $ 0.80
================= ================ ================
The accompanying notes are an integral part of this statement
33
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 August 31, 1997 5,737 $ 5,737 4,445 $ 4,445 $ 109,994 $ 118,885 $ 239,061
Cumulative effect on prior years of
applying FIFO method of
accounting (Note 2) 4,823 4,823
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 8,112 8,112
Dividends paid (2,007) (2,007)
-------- ----------- -------- ----------- ------------- -------------- --------------
Balance at August 31, 1998 5,555 5,555 4,431 4,431 105,124 129,813 244,923
Class A common stock repurchased (260) (260) (2,945) (3,205)
Net income 621 621
Dividends paid (1,966) (1,966)
-------- ----------- -------- ----------- ------------- -------------- --------------
Balance at August 31, 1999 5,295 5,295 4,431 4,431 102,179 128,468 240,373
Class B common stock converted
to Class A common stock 119 119 (119) (119)
Class A common stock repurchased (28) (28) (366) (394)
Class A common stock issued 3 3 27 30
Net income 10,366 10,366
Dividends paid (1,945) (1,945)
-------- ----------- -------- ----------- ------------- -------------- --------------
Balance at August 31, 2000 5,389 $ 5,389 4,312 $ 4,312 $ 101,840 $ 136,889 $ 248,430
======== =========== ======== =========== ============= ============== ==============
The accompanying notes are an integral part of this statement
34
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended August 31,
------------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
(As adjusted) (As adjusted)
(Note 2) (Note 2)
Operations:
Net income $ 10,366 $ 621 $ 8,112
Noncash items included in income:
Depreciation and amortization 18,361 17,716 18,714
Deferred income taxes 1,328 1,866 333
Equity in earnings of joint ventures (4,507) (3,451) (4,115)
Environmental reserve reversal (1,904)
Loss (gain) on disposal of assets 1,156 (1,419) 2,224
Cash provided (used) by changes in working capital:
Accounts receivable (3,247) 5,771 2,636
Inventories 14,629 18,007 (5,755)
Prepaid expenses and other 179 5,059 (4,852)
Accounts payable 755 (2,729) (400)
Accrued payroll and other liabilities (998) (759) 496
Environmental liabilities (288) (912) (2,016)
Other assets and liabilities (2,356) (1,067) (2,030)
---------------- ---------------- ----------------
Net cash provided by operations 35,378 36,799 13,347
---------------- ---------------- ----------------
Investments:
Capital expenditures (10,732) (11,986) (14,205)
Advances to joint ventures (2,148) (3,797) (34,198)
Investments in joint ventures (86) (17,104)
Distributions from joint ventures 1,815 2,343 9,679
Proceeds from sale of assets 1,165 4,304 3,086
---------------- ---------------- ----------------
Net cash used by investments (9,900) (9,222) (52,742)
---------------- ---------------- ----------------
Financing:
Repurchase of Class A common stock (394) (3,205) (5,066)
Issuance of Class A common stock 30
Dividends declared and paid (1,945) (1,966) (2,007)
Increase in long-term debt 168 47,500
Reduction in long-term debt (26,936) (20,200) (338)
---------------- ---------------- ----------------
Net cash (used) provided by financing (29,245) (25,203) 40,089
---------------- ---------------- ----------------
Net (decrease) increase in cash (3,767) 2,374 694
Cash at beginning of year 6,174 3,800 3,106
---------------- ---------------- ----------------
Cash at end of year $ 2,407 $ 6,174 $ 3,800
================ ================ ================
The accompanying notes are an integral part of this statement
35
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
Schnitzer Steel Industries, Inc. (the Company) operates a metal processing
and recycling business and, through its Cascade Steel Rolling Mills, Inc.
subsidiary, a mini-mill steel manufacturing business. The Company's wholly
owned recycling facilities are located in Alaska, Washington, Oregon,
California and Nevada. Additionally, through joint ventures, the Company
participates in the management of additional metals processing and recycling
businesses in Arizona, California, Connecticut, Idaho, Illinois, Indiana,
Maine, Massachusetts, Nevada, New Hampshire, New Jersey, New York, Rhode
Island, Texas and Utah.
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 eleven 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
FIFO (first-in, first-out) and average cost methods. See Note 2.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Major renewals and
improvements are capitalized. Substantially all 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 approximately 20 to 40 years for buildings and
approximately 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 the straight-line basis over 40 years. At August
31, 2000 and 1999, accumulated amortization aggregated $7.4 million and $6.2
million, respectively. Goodwill is periodically reviewed by the Company for
impairments where the fair value may be less than the carrying value.
COMMON STOCK
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. Additionally, Class B common
stock may be converted to one share of Class A common stock.
36
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
EARNINGS PER SHARE
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 (in thousands, except per share
amounts):
Year Ended August 31, 2000
----------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS $10,366 9,725 $1.07
Options 67 =====
------- -----
Diluted EPS $10,366 9,792 $1.06
======= ===== =====
Year Ended August 31, 1999
----------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS $ 621 9,863 $0.06
Options 19 =====
------- -----
Diluted EPS $ 621 9,882 $0.06
======= ===== =====
Year Ended August 31, 1998
----------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS $ 8,112 10,048 $0.81
Options 69 =====
-------- ------
Diluted EPS $ 8,112 10,117 $0.80
======== ====== =====
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 491,000 in 2000 and 523,000 in 1999.
INTEREST AND INCOME TAXES PAID
The Company paid $6.8 million, $7.0 million, and $6.5 million in interest during
fiscal years 2000, 1999, and 1998, respectively. During fiscal 1999, the Company
received net income tax refunds of $6.2 million, and in fiscal years 2000 and
1998, the Company paid $0.4 million and $7.4 million, respectively, in income
taxes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, receivables and current liabilities in the consolidated financial
statements are considered to reflect the 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.
37
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
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.
REVENUE RECOGNITION
The Company recognizes revenue when title transfers which typically occurs at
time of shipment. In December 1999, Staff Accounting Bulletin (SAB 101) was
released. This bulletin provides guidance and interpretation by the SEC
regarding revenue recognition. SAB 101 is not expected to have a material impact
on the Company's results of operations. The SAB will be effective in the
Company's fourth quarter of fiscal 2001.
NOTE 2 - INVENTORIES:
Inventories consist of the following (in thousands):
August 31,
--------------------------------
2000 1999
---------- ----------
(as adjusted)
Recycled metals $ 23,359 $ 25,890
Work in process 9,534 20,372
Finished goods 29,428 29,578
Supplies 14,017 15,127
-------- ----------
$ 76,338 $ 90,967
======== ========
The production and accounting process utilized by the Company to record
recycled metals inventory quantities relies on significant estimates which
can be affected by weight imprecisions, moisture and other factors.
In the first quarter of fiscal 2000, the Company changed its method of
accounting for recycled metals inventories from Last-In, First-Out (LIFO) to
First-In, First-Out (FIFO). Given the volatility of both prices and
quantities, management believes that accounting for inventories using the
FIFO method better matches revenues and expenses, and therefore is
preferable. In addition, the method is consistent with its other inventory
pools. In accordance with Accounting Principles Board No. 20, "Accounting
Changes," upon adoption, the Company retroactively restated prior periods by
applying the FIFO method of accounting in prior periods. The effect of the
accounting change on net income as previously reported is as follows (in
thousands, except per share amounts):
Fiscal
------------------------
1999 1998
-------- --------
EFFECT ON:
Net income $ (2,758) $ (1,336)
Basic earnings per share $ (0.28) $ (0.13)
Diluted earnings per share $ (0.28) $ (0.13)
38
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT AND OPERATING LEASES:
Property, plant and equipment consist of the following (in thousands):
August 31,
--------------------------
2000 1999
-------- --------
Machinery and equipment $230,921 $218,124
Land and improvements 36,471 30,517
Buildings and leasehold improvements 15,078 15,264
Construction in progress 1,532 13,889
-------- -------
284,002 277,794
Less accumulated depreciation (156,740) (141,980)
-------- --------
$127,262 $135,814
======== ========
The Company leases certain property and equipment. The future minimum rental
payments under the operating leases are (in thousands):
2001 $510
2002 376
2003 236
2004 25
2005 6
See discussion of additional leases with related parties in Note 7.
NOTE 4 - LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
August 31,
-------------------------
2000 1999
-------- --------
Bank unsecured revolving credit facilities $ 83,300 $109,900
Tax-exempt economic development revenue bonds due
January 2022, interest payable monthly at a variable rate
(4.35% at August 31, 2000), secured by a letter of credit 7,700 7,700
State of Oregon loan for energy conservation equipment, secured
by equipment, 6.09% fixed-rate interest, principal and interest
installments payable monthly through June 2011 1,874 1,994
Other 452 668
-------- --------
Total long-term debt 93,326 120,262
Less portion due within one year 192 436
-------- --------
Long-term debt less current portion $ 93,134 $119,826
======== ========
39
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LONG-TERM DEBT (CONTINUED):
At August 31, 2000 the Company had a $200 million unsecured revolving credit
facility with its banks. Individual advances outstanding under the line bear
interest at floating rates. As of August 31, 2000, such rates averaged 6.89%.
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 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 million
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. This agreement expires in
February 2001.
In addition to the above facility, the Company has additional unsecured lines
of credit totaling $50 million, all of which is uncommitted.
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
(in thousands):
2001 $ 192
2002 206
2003 83,514
2004 224
2005 233
Thereafter 8,957
----------
$93,326
==========
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, as amended, is effective for fiscal quarters of fiscal years
beginning after June 15, 2000. 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, the
Company hired an independent third-party consultant 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, 2000 aggregated $17.9 million.
40
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - ENVIRONMENTAL LIABILITIES (CONTINUED):
General Metals of Tacoma (GMT), a subsidiary of MMI, owns and operates a
metals recycling facility located in the State of Washington 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 completed,
is approximately $2 million and is included in the reserve above. Any further
potential liabilities, if any, cannot be estimated at this time.
In 1996, prior to the Company's acquisition of Proler International Corp.
(Proler), the Company engaged an independent third-party consultant 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 $5.5 million
remained outstanding on August 31, 2000. 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.
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 metals recycling facility at its Terminal Island site in Los Angeles,
California, to be completed 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.
Metals Recycling LLC (Metals) is a scrap metals processing business with
locations in Rhode Island and Massachusetts. The members of Metals are one of
the Company's Proler joint ventures and Metals Recycling, Inc. On June 9,
1999, the Rhode Island Department of Environmental Management (DEM) issued a
Notice of Violation (NOV) against Metals alleging Metals had violated federal
and state regulations relating to the storage, management, and transportation
of hazardous waste and imposed an administrative penalty of $0.7 million.
Metals has filed an answer to the NOV in which it denied the allegations and
requested an adjudicatory hearing. In July 1999, the DEM issued a NOV to
Rhode Island Resource Recovery Corporation (RIRRC), which included a civil
penalty of $0.3 million, relating to the alleged disposal of hazardous waste
by Metals at a landfill operated by RIRRC. Metals and RIRRC have denied the
DEM's allegations. RIRRC has requested an adjudicatory hearing. Pursuant to
an Alternative Coverage Disposal Agreement between RIRRC and Metals, Metals
has agreed to defend and indemnify RIRRC with regard to the NOV.
41
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - ENVIRONMENTAL LIABILITIES (CONTINUED):
In January of 1999, federal and state officials searched Metal's Johnston, Rhode
Island and Worcester, Massachusetts facilities. Metals has been advised that the
search was part of a state criminal investigation into possible violations of
state and federal hazardous waste programs and a Rhode Island statute that
prohibits the disposal of out-of-state solid waste at the landfill operated by
RIRRC. A grand jury has been empanelled to consider the allegations. No
proceedings have been commenced against Metals or its officers. The Company
believes Metals has substantial defenses to the alleged violations.
During fiscal 1999, the Company engaged an independent consultant to review the
Company's environmental issues and to perform a periodic assessment of its
remaining potential liabilities. Based upon additional remediation
investigation, certain previously established reserves were eliminated. As a
result, cost of goods sold for the year ended August 31, 1999 was lowered by the
$1.9 million reversal of these reserves.
NOTE 6 - INCOME TAXES:
The provision for income taxes is as follows (in thousands):
Year Ended August 31,
-------------------------------------------
2000 1999 1998
---------- --------- --------
Current:
Federal $ $ (359) $ 3,075
State 375 250 858
Deferred:
Federal 296 733 853
State (9) 128 114
------- ------- -------
$ 662 $ 752 $ 4,900
======= ======= =======
Deferred tax assets and liabilities are as follows (in thousands):
August 31,
----------------------
2000 1999
------- -------
AMT carryforward $ 800 $ 307
Segment held for sale (423) (423)
Inventory valuation methods 1,420 2,480
Employee benefit accruals 2,524 2,623
State income tax and other (120) (192)
------- -------
Net current deferred tax assets $ 4,201 $ 4,795
======= =======
Accelerated depreciation
and basis differences $40,198 $38,775
Environmental liabilities (9,363) (9,926)
Net operating loss carryforwards (9,479) (10,856)
Other (603) (967)
------- -------
20,753 17,026
Deferred tax asset valuation allowance 7,863 10,856
------- -------
Net non-current deferred tax liabilities $28,616 $27,882
======= =======
42
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES (CONTINUED):
In acquiring Proler, the Company acquired net operating losses (NOLs)
totaling $31 million and minimum tax credits of $0.7 million that had arisen
in Proler's pre-acquisition years. Federal tax law limits the Company's
annual use of the NOLs and credits. If the respective annual limit exceeds
actual use for a taxable year, the unused NOLs or credits may be carried
forward to years when they can be used. The credits may be carried forward
indefinitely. The NOLs will expire in years 2007 through 2012 if not used by
then.
The limit for annual use of the NOLs is $2.4 million. The benefit for the
NOLs (or the credits) had been recognized in the financial statements as of
August 31, 1999 because prior Federal tax law made the ultimate realization
of a benefit from them uncertain. Previous federal tax rules limited the use
of the Proler NOLs to offset taxable income only from the acquired Proler
entities. New rules now allow the Company to use the Proler NOLs to offset
taxable income from all sources. The recent changes to Federal tax law,
described above, have reduced this uncertainty sufficiently to enable the
Company to recognize during the year ended August 31, 2000 a tax benefit for
the $8.6 million of NOLs carried forward from earlier taxable years. Benefit
for the remaining $22.5 million of NOLs remains unrecognized as of August 31,
2000.
The reasons for the difference between the effective income tax rate and the
statutory federal income tax rate are as follows:
Year Ended August 31,
------------------------------------------
2000 1999 1998
-------- -------- --------
Federal statutory rate 35% 35% 35%
Foreign sales corporation (6) (8) (3)
State taxes, net of credit 3 21 5
Proler NOLs (27)
Amortization of goodwill 4 6 2
Other (3) 1 (1)
--- --- ---
Effective tax rate 6% 55% 38%
=== === ===
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
recycled metal to foreign markets. Charges incurred for these charters were
$9.4 million, $4.6 million, and $6.7 million for 2000, 1999, and 1998,
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 $2.5 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 five-year time charter. The Company accounted
for the transaction as a capital lease. This vessel was sold during fiscal
2000 which resulted in a $1.0 million loss. See Note 12. The Company entered
into two additional seven-year time charters in May 1995 for other vessels.
43
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - RELATED PARTY TRANSACTIONS (CONTINUED):
The Company purchased recycled metals from its joint venture operations totaling
$14.7 million, $11.0 million, and $15.8 million in 2000, 1999, and 1998,
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 (in thousands):
Lease Current
Location: Expirations Annual Rent
--------- ----------- ------------
Metals Recycling Business:
Portland facility and marine terminal 2063 $1,112
Sacramento facility 2003 88
Administrative offices 2002 - 2006 246
Minimum Sublease Net Minimum
Rents Income Rents
------- -------- -----------
2001 1,446 (26) 1,420
2002 1,779 (26) 1,753
2003 1,785 (26) 1,759
2004 1,697 1,697
2005 1,697 1,697
Thereafter 93,156 93,156
The rent expense was $1.4 million, $1.6 million, and $1.3 million for 2000,
1999, and 1998, respectively.
The rent for the Metals Recycling Business's Portland facility will be
adjusted in 2003 and every 15 years thereafter to market rates. In 2008 and
every five years thereafter, except in the year of a market rate adjustment,
the rent will be adjusted based on the Consumer and Producer Price Indices.
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 $1.1
million, $1.1 million, and $1.2 million in 2000, 1999, 1998, 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, 2000, 1999, and 1998, charges
incurred for these sub-charters aggregated $0.3 million, $3.3 million, and
$3.2 million, offset by income of $0.2 million, $2.9 million, and $3.1
million, respectively.
Included in other assets are $2.2 million, $2.3 million, and $3.3 million of
notes receivable from joint venture partners at August 31, 2000, 1999, and
1998, respectively. The Company records interest income on certain of these
notes and advances which totaled $2.2 million, $1.5 million, and $0.9 million
for fiscal years 2000, 1999, and 1998, respectively.
44
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - EMPLOYEE BENEFITS:
In accordance with union agreements, the Company contributed to union pension
plans $2.3 million, $2.0 million, and $2.1 million, in fiscal 2000, 1999, and
1998, 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 $1.1 million, $1.0
million, and $1.1 million for fiscal 2000, 1999, and 1998, 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,
2000 and 1999 in accordance with SFAS 132 (in thousands).
August 31
---------------------
2000 1999
------- ------
Change in benefit obligation:
Benefit obligation at beginning of year $ 6,379 $ 5,192
Service cost 698 723
Interest cost 402 364
Actuarial loss (652) 517
Acquisition 2 (16)
Benefits paid (505) (401)
------- -------
Benefit obligation at end of year $ 6,324 $ 6,379
======= =======
Change in plan assets:
Fair value of plan assets at beginning of year $ 5,357 $ 3,879
Actual return on plan assets 1,358 867
Employer contribution 532 1,029
Acquisition 2 (16)
Benefits paid (505) (401)
------- -------
Fair value of plan assets at end of year $ 6,744 $ 5,358
======= =======
Funded status:
Plan assets greater (less) than benefit obligation $ 421 $(1,021)
Unrecognized actuarial (gain) loss (723) 788
Unrecognized prior service cost 58 62
------- -------
Accrued benefit cost $ (244) $ (171)
======= =======
45
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - EMPLOYEE BENEFITS (CONTINUED):
Assumptions used each year in determining the defined benefit net pension cost
are:
August 31,
--------------------------------
2000 1999 1998
---- ---- ----
Weighted average discount rate 7.0% 6.5% 7.0%
Expected rate of investment return 9.0% 9.0% 9.0%
Expected rate of compensation increase 4.0% 4.0% 4.0%
The components of net periodic pension benefit cost are (in thousands):
Year Ended August 31,
---------------------------------
2000 1999 1998
---- ---- ----
Service cost $698 $723 $634
Interest cost 402 364 307
Expected return on plan assets (512) (409) (363)
Amortization of past service cost 4 4 4
Recognized actuarial loss 13 19 1
---- ---- -----
Net periodic pension benefit cost $605 $701 $583
==== ==== ====
The Company has 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 (in thousands):
August 31,
-------------------------------------
2000 1999 1998
--------- ---------- ---------
Restricted trust fund $2,421 $1,204 $ 989
Deferred compensation expense 288 356 238
Long-term pension liability 1,575 1,470 1,195
Pension cost 166 156 105
NOTE 9 - STOCK INCENTIVE PLAN:
The Company has 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, except for options granted in
fiscal 1999, become exercisable for 20% of the shares covered by the option
on each of the first five anniversaries of the grant. The options granted in
fiscal 1999 became fully exercisable on the first anniversary of the grant
because the Company granted them to certain employees in lieu of annual
salary revisions.
46
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCK INCENTIVE PLAN (CONTINUED:
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.
Pro forma information for fiscal years 2000, 1999 and 1998 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:
Year Ended August 31,
-----------------------------------
2000 1999 1998
---- ----- ----
Risk-free interest rate 6.25% 5.0% 5.5%
Dividend yield .01% .01% .01%
Weighted average expected life of options 7.5 Years 7.5 Years 7.5 Years
Volatility .47 .43 .42
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 (in thousands,
except per share amounts):
Year Ended August 31,
-----------------------------------
2000 1999 1998
---- ---- ----
Pro forma net income (loss) $ 8,783 $ (141) $ 7,639
Pro forma diluted earnings (loss) per share $ 0.90 $ (0.01) $ 0.76
47
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCK INCENTIVE PLAN (CONTINUED):
A summary of the Company's stock option activity and related information is as
follows (in thousands, except per share amounts):
Year Ended August 31,
---------------------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
Outstanding--beginning of year 708 $19.60 523 $22.67 430 $22.33
Options granted 230 $14.10 201 $12.00 98 $24.25
Options exercised (3) $12.00
Options canceled (17) $22.58 (16) $24.49 (5) $24.55
------ ------ ------
Outstanding - end of year 918 $18.19 708 $19.60 523 $22.67
====== ====== ======
Exercisable at end of year 408 $20.94 296 $21.48 199 $20.96
====== ====== ======
Weighted-average fair value of
options granted during year $ 8.35 $ 6.54 $13.33
====== ====== ======
Exercise prices for options outstanding as of August 31, 2000 ranged from $12 to
$25. The weighted-average remaining contractual life of those options is 7.4
years.
NOTE 10 - SEGMENT INFORMATION:
Effective September 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131). SFAS No. 131 establishes new standards for
the way that public enterprises report information about operating segments. The
statement also requires companies to disclose information about the products and
services provided by the operating segments, geographic areas of business and
major customers.
The Company operates in two industry segments: metal processing and recycling
(Metals Recycling Business) and mini-mill steel manufacturing (Steel
Manufacturing Business). Additionally, the Company is a partner in joint
ventures, which are either in the metals recycling business or are suppliers of
unprocessed metals. The Company also considers these to be separate segments
because they are managed separately. These joint ventures are accounted for
using the equity method. As such, the operating information provided below
related to the joint ventures is shown separately from consolidated information,
except for the Company's equity in the net income of, investment in, and
advances to the joint ventures.
The Metals Recycling Business buys and processes ferrous metals for sale to
foreign and other domestic steel producers or their representatives and to the
Steel Manufacturing Business. The Metals Recycling Business also purchases
ferrous metals from other processors for shipment directly to the Steel
Manufacturing Business. Intersegment sales from the Metals Recycling Business to
the Steel Manufacturing Business are transferred at a negotiated market rate per
ton and are eliminated in consolidation.
48
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SEGMENT INFORMATION (CONTINUED):
The Steel Manufacturing Business produces rebar, merchant bar, wire rod, coiled
rebar and other specialty products.
The Joint Ventures in the Metals Recycling Business are also engaged in buying,
processing and selling primarily ferrous metal. Recycled metals are sold to
foreign and domestic steel mills.
The Joint Venture Suppliers of Metals include two predominant operations. One
joint venture operates self-service used auto parts yards. The Company purchases
substantially all of the auto bodies which come from these yards. Another joint
venture is an industrial plant demolition contractor. This joint venture
dismantles industrial plants, performs environmental remediation and sells
recovered metals and machinery. The Company purchases substantially all of the
ferrous recycled metals generated by this joint venture.
The information provided below is obtained from internal information that is
provided to the Company's chief operating decision-maker for the purpose of
corporate management. The Company does not allocate corporate interest income
and expense, income taxes or other income and expenses related to corporate
activity to its operating segments. Assets and capital expenditures are not
shown for the joint ventures as management does not use that information to
allocate resources or assess performance.
Year Ended August 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
Revenues from external customers (in thousands):
Metals Recycling Business $188,383 $137,070 $217,915
Steel Manufacturing Business 192,421 172,698 191,346
Intersegment revenues (47,012) (44,721) (56,168)
-------- -------- --------
Consolidated revenues $333,792 $265,047 $353,093
======== ======== ========
The joint ventures' revenues from external customers are as follows (in
thousands):
Year Ended August 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
Joint Ventures in the Metals Recycling Business $449,783 $303,014 $332,580
Joint Venture Suppliers of Metals 52,444 46,575 51,391
-------- -------- --------
$502,227 $349,589 $383,971
======== ======== ========
Revenues by geographic area (in thousands):
Year Ended August 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
Metals Recycling Business:
Asia $ 70,437 $ 39,454 $ 90,390
United States 117,946 97,616 127,525
Sales to Steel Manufacturing Business (47,012) (44,721) (56,168)
-------- -------- --------
Sales to external customers 141,371 92,349 161,747
Steel Manufacturing Business
United States 192,421 172,698 191,346
-------- -------- --------
Consolidated revenues $333,792 $265,047 $353,093
======== ======== ========
49
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SEGMENT INFORMATION (CONTINUED):
The Joint Ventures in the Metals Recycling Business do not maintain revenues by
geographic area and it would be impracticable to provide such disclosure. Sales
by the Joint Venture Suppliers of Metals are all made to customers in the United
States. See Note 7 regarding the Company's purchases from its joint ventures.
Year Ended August 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Income (loss) from operations:
Metals Recycling Business $ 12,873 $ (16) $ 14,246
Steel Manufacturing Business 7,220 6,561 9,838
Joint Ventures in the Metals Recycling Business 2,219 1,380 823
Joint Venture Suppliers of Metals 2,288 2,070 3,292
Corporate expense and eliminations (9,386) (6,118) (6,941)
-------- -------- --------
Consolidated income from operations $ 15,214 $ 3,877 $ 21,258
======== ======== ========
Income from operations from the joint ventures represents the Company's equity
in the net income of these entities.
Year Ended August 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Depreciation and amortization expense:
Metals Recycling Business $ 8,890 $ 7,672 $ 8,190
Steel Manufacturing Business 9,241 9,809 10,292
Corporate expense and eliminations 230 235 232
-------- -------- --------
Consolidated depreciation and
amortization expense $ 18,361 $ 17,716 $ 18,714
======== ======== ========
The Company's share of depreciation and amortization expense included in the
determination of the joint ventures' net income is as follows:
Year Ended August 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Joint Ventures in the Metals Recycling Business $5,888 $5,128 $3,437
Joint Venture Suppliers of Metals 782 644 650
50
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SEGMENT INFORMATION (CONTINUED):
The following is a summary of the Company's total assets and capital
expenditures:
Year Ended August 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Total assets:
Metals Recycling Business $129,454 $130,829 $140,666
Steel Manufacturing Business 144,477 163,172 184,916
Investment in:
Joint Ventures in the Metals Recycling Business 99,446 99,103 98,369
Joint Venture Suppliers of Recycled Metal 5,326 4,877 5,125
Corporate 47,586 48,377 45,751
-------- -------- --------
$426,289 $446,358 $474,827
======== ======== ========
Capital expenditures:
Metals Recycling Business $ 9,112 $ 11,652 $ 12,219
Steel Manufacturing Business 1,566 157 1,517
Corporate 54 177 469
-------- -------- --------
$ 10,732 $ 11,986 $ 14,205
======== ======== ========
In fiscal year 2000, one customer accounted for 15% of the Company's
consolidated revenues. No individual customer accounted for greater than ten
percent of the Company's consolidated revenues in fiscal years 1999 or 1998.
The Joint Ventures in the Metals Recycling Business have significant customers.
During fiscal 2000, one customer accounted for 22% of combined revenues for
these joint ventures. During fiscal 1999, one customer accounted for 17% and
another customer accounted for 13% of combined revenues. During fiscal 1998,
individual customers accounted for 17% and 13% of combined revenues.
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,
--------------------------------
2000 1999
--------- ---------
(in thousands)
Current assets $ 143,873 $ 134,510
Noncurrent assets 121,291 121,049
--------- ---------
$ 265,164 $ 255,559
========= =========
Current liabilities $ 91,170 $ 85,870
Noncurrent liabilities 17,610 13,545
Partners' equity 156,384 156,144
--------- ---------
$265,164 $255,559
========= =========
51
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - SUMMARIZED FINANCIAL INFORMATION OF JOINT VENTURES (CONTINUED):
Year Ended August 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Revenues $502,227 $349,589 $383,971
======== ======== ========
Income from operations $ 8,813 $ 645 $ 6,309
======== ======== ========
Net income before taxes $ 7,750 $ 7,858 $ 8,080
======== ======== ========
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 $ 0.2 million in each of fiscal years 2000,
1999, and 1998.
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.
NOTE 12 - DISPOSAL AND SALE OF ASSETS:
In fiscal 2000, the Company and its outside board members approved the sale by a
related party of a ship used by the Company to export recycled metal. The sale
resulted in a $1.0 million loss.
In fiscal 1999, Cascade Steel Rolling Mills, Inc. sold its Union City,
California mill depot recognizing a gain of $1.2 million which is included in
other income in the accompanying consolidated statement of operations.
In fiscal 1998, Proler disposed of a tin metals recycling facility in Lathrop,
California. The facility was acquired as part of the acquisition of Proler
International Corp. The sale resulted in a gain of $1.1 million, of which $0.8
million was recorded as a reduction in cost of goods sold and $0.3 million as a
gain on sale of assets.
NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS):
Fiscal Year 2000
-------------------------------------------------------
First Second Third Fourth
--------- -------- --------- --------
Net revenues $ 71,233 $ 75,822 $ 94,927 $ 91,810
Income from operations 3,454 5,527 5,159 1,073
Net income 1,998 2,144 3,983 2,240
Diluted earnings per share $ 0.20 $ 0.22 $ 0.40 $ 0.23
Fiscal Year 1999
-------------------------------------------------------
First Second Third Fourth
--------- -------- --------- --------
Net revenues $ 67,165 $ 51,722 $ 66,639 $ 79,521
Income (loss) from operations (1,054) (5,138) 2,494 7,575
Net income (loss) (1,591) (3,921) 1,855 4,278
Diluted earnings (loss)per share $ (0.16) $ (0.39) $ 0.19 $ 0.44
52
SCHNITZER STEEL INDUSTRIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended August 31
(In thousands)
Column A Column B Column C - Addtions Column D Column E
- --------------------------------------------- -------------- ----------------------------- ------------- --------------
Balance at Charged to Charged to Balance at
beginning cost and other end of
Description of period expenses accounts Deductions period
- --------------------------------------------- -------------- ------------- ------------- ------------- --------------
2000
Allowance for doubtful accounts 638 32 670
Inventories - net realizable value 5,330 (3,794) 1,536
Deferred tax asset valuation allowance 10,856 (2,993) 7,863
1999
Allowance for doubtful accounts 645 (7) 638
Inventories - net realizable value 1,634 3,696 5,330
Deferred tax asset valuation allowance 10,856 10,856
1998
Allowance for doubtful accounts 524 121 645
Inventories - net realizable value 922 712 1,634
Deferred tax asset valuation allowance 10,856 10,856
53
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of Schnitzer Steel Industries, Inc.
Our audits of the consolidated financial statements referred to in our report
dated September 29, 2000 appearing in this Form 10-K also included an audit of
the financial statement schedules listed in Item 14(a)(2) of this Form 10-K. In
our opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Portland, Oregon
September 29, 2000
54
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 2001 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 2001 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 2001 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 2001 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 2001 Annual Meeting of Shareholders and
is incorporated herein by reference.
55
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 30
of this report.
2. The following schedule and report of independent accountants
are filed as part of this report:
Page
----
Schedule II Valuation and Qualifying Accounts 53
Report of Independent Accountants on Financial Statement Schedule 54
All other schedules are omitted as the information is either
not applicable or is not required.
3. Exhibits:
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.
56
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 metals recycling operation. 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 recycled metals recycling operation. 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 metals recycling 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 metals recycling operation. 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.
57
10.17 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.
10.18 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.
10.19 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.
10.20 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.
*10.21 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.
*10.22 Supplemental Executive Retirement Bonus Plan of the
Registrant. Incorporated by reference to Exhibit 10.8 to
the Form S-1.
*10.23 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.
*10.24 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.
10.25 Third Amendment to Lease dated February 1998, relating to
Portland recycled metals recycling operation.
10.26 Fourth Amendment to Lease dated July 1, 1998, relating to
Portland recycled metals recycling operation
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, 2000.
58
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 29, 2000 By: /s/ BARRY A. ROSEN
------------------------ ----------------------------
Barry A. Rosen
Vice President, Finance and Treasurer
and Chief Financial Officer
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 :
November 29, 2000 in the capacities indicated.
Signature Title
- --------- -----
Principal Executive Officer:
*LEONARD SCHNITZER Chairman of the Board,
- ------------------------------------------ Chief Executive Officer and Director
Leonard Schnitzer
Principal Financial and Accounting Officer:
/s/ BARRY A. ROSEN Vice President, Finance and Treasurer
- ------------------------------------------ and Chief Financial Officer
Barry A. Rosen
59
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
60
SCHNITZER STEEL INDUSTRIES, INC.
INDEX TO EXHIBITS
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.
10.5 Third Amendment of Lease dated May 29, 1996 between Schnitzer
Investment Corp. and the Registrant, relating to the Corporate
61
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 metals recycling operation. 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 metals
recycling operation. 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 metals recycling 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
metals recycling operation. Filed as Exhibit 10.2 to Registrant's
Form 10-Q for the quarterly period ended November 30, 1995, and
incorporated herein by reference.
62
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 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.
10.18 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.
10.19 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.
10.20 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.
*10.21 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.
*10.22 Supplemental Executive Retirement Bonus Plan of the Registrant.
Incorporated by reference to Exhibit 10.8 to the Form S-1.
*10.23 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.
63
*10.24 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.
10.25 Third Amendment to Lease dated February 1998, relating to Portland
Recycled metals recycling operation
10.26 Fourth Amendment to Lease dated July 1, 1998, relating to Portland
Recycled metals recycling operation
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Powers of Attorney.
64