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, 1999 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
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(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. [X].
The aggregate market value and the number of voting shares of the registrant's
common stock outstanding on September 30, 1999 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 255,800 5,038,926 $91,960,400
Class B, $1 par value 4,430,328 0 N/A
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2000 Annual
Meeting of Shareholders are incorporated herein by reference in Part III.
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
TABLE OF CONTENTS
PART ITEM PAGE
I 1. BUSINESS........................................................3
Overview......................................................3
Business Strategy.............................................3
Metals Recycling Business.....................................5
Joint Ventures................................................8
Steel Manufacturing Business..................................9
Environmental Matters........................................13
Employees....................................................16
2. PROPERTIES.....................................................16
3. LEGAL PROCEEDINGS..............................................17
4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS..........................................17
4(a). EXECUTIVE OFFICERS OF THE REGISTRANT...........................17
II 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS..................................19
6. SELECTED FINANCIAL DATA........................................20
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................21
7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK............................................28
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................29
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.......................54
III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT...................................................54
11. EXECUTIVE COMPENSATION.........................................54
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT........................................54
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................54
IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K..........................................55
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SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
PART I
ITEM 1. BUSINESS
Overview
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Schnitzer Steel Industries, Inc. (the Company) collects, processes and recycles
metals (the Metals Recycling Business) and manufactures finished steel products
by operating one of the largest metals recycling businesses in the United States
and a 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 has collection and processing facilities
in Portland, Eugene, White City, Grants Pass and Bend, Oregon, Oakland,
Sacramento and Fresno, California, Tacoma and Pasco, Washington, Anchorage,
Alaska, and Reno, Nevada. Additionally, through joint ventures, the Company
participates in the management of an additional 28 metals recycling collection
and processing facilities, including export terminals in Los Angeles,
California, Everett, Massachusetts, Portland, Maine, Providence, Rhode Island
and Jersey City, New Jersey. It also has other joint venture yards in Salem,
Oregon and Caldwell, Idaho. 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, 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 Cascade Steel Rolling
Mills, Inc., a wholly owned subsidiary acquired in 1984. The Steel Manufacturing
Business produces steel reinforcing bar (rebar), coiled rebar, wire rod,
merchant bar, 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.
Business Strategy
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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 which 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.
Until the recent turmoil in the recycled metals market caused by the Asian
financial crisis, the Company was able to react to changing market conditions by
adjusting the price it pays for unprocessed metals. 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 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
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SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
negotiate prices with suppliers that secure profitable transactions. The Asian
financial crisis caused recycled metals selling prices to drop faster than the
Company was able to drop 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 stabilize, the
Company believes that it will be able to regain much of the margins it has lost
as a result of the Asian financial crisis.
It is the Company's intent to only make acquisitions that will be additive to
the Company's earnings and cash flows.
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 ferrous unprocessed metals through its
existing network and through selective acquisitions or through joint ventures
with metals processors and suppliers. During fiscal 1998, the Company and one
its joint venture partners increased their East Coast market position through
the buyout of a third joint venture partner and the completion of two other
strategic joint venture acquisitions. In November 1996, the Company acquired
Proler International Corp. (Proler). Proler's joint ventures process
approximately 2.5 million long tons of ferrous metals per year. The Company's
purchase of Manufacturing Management, Inc. (MMI), another metals processor, in
March 1995 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. To
facilitate increased purchasing of bundled metals available in its California
market area, the Company installed a pre-shredder at its Oakland facility in
1993 to break apart bundles for further processing into a higher-margin, more
marketable shredded product. 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. The
Company's Oakland facility receives car bodies from this joint venture for
processing and sale as shredded recycled metal.
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 the Metals Recycling Business. From
fiscal years 1992 through 1999, the Company spent $52.4 million on capital
improvements related to metals recycling. During this same time, the Company
made capital expenditures of $91.0 million to increase production and enhance
efficiencies at its Steel Manufacturing Business' steelmaking facility. The
Company continues to invest in technology to improve its key operating systems.
The Company recently 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 only 1,000 tons per day. The new shredder is expected to reduce
operating costs, improve product quality and allow 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 products.
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
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SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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 new wire rod and bar mill has upgraded and is expected to continue to
upgrade the Company's finished steel production and product mix.
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 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.
Metals Recycling Business
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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.
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 recycling 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.
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SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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,
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1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
Sales Vol.(1) Sales Vol.(1) Sales Vol.(1) Sales Vol.(1) Sales Vol.(1)
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(dollar amounts in millions)
Asian Steel Producers
and Representatives $ 39.5 491 $ 90.4 720 $ 111.1 853 $ 131.8 858 $ 125.9 680
Steel Manufacturing Business:
Supplied by Company Facilities 38.0 447 44.5 382 43.7 362 44.1 358 44.3 338
Purchased from Others
for Direct Shipment(2) 6.2 92 10.4 98 14.1 132 9.9 92 10.4 91
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total: Steel
Manufacturing Business 44.2 539 54.9 480 57.8 494 54.0 450 54.7 429
Other US Steel Producers 18.0 194 30.0 235 23.3 171 30.1 171 25.2 145
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ 101.7 1,224 $ 175.3 1,435 $ 192.2 1,518 $ 215.9 1,479 $ 205.8 1,254
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(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.
Asian recycled metals customers are located principally in China, Thailand,
Japan, Korea and Taiwan. To serve these customers more effectively, the Company
operates a wholly-owned subsidiary, SSI International Far East Ltd., in Seoul,
South Korea. Additionally, the Company uses representatives in Tokyo, Japan. The
Company believes these representatives not only enhance the Company's service to
its Asian customers, but also provide a valuable local presence and source of
information in these markets. In fiscal 1999, no individual customer accounted
for more than 10% of sales to unaffiliated customers. The Metals Recycling
Business' five largest customers accounted for 41% 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 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. 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
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FORM 10-K
PART I (CONTINUED)
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. The Oakland yard gives the Company sourcing capability in the
San Francisco Bay area, the fifth largest metropolitan region in the country.
The Sacramento and Fresno yards are smaller facilities that serve as collection
points for unprocessed metals from the central valley of California and Western
Nevada. The Company's Tacoma yard collects unprocessed metals from Seattle and
the entire Puget Sound area as well as from throughout Washington, Montana,
Idaho, Alaska, and Western Canada. No single supplier accounted for more than 5%
of the 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.
The Portland and Oakland facilities each operate a large auto shredder capable
of processing up to 1,500 tons of metal per day. The Tacoma facility recently
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.
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 upgrade materials which, in the past, could not have been shredded. The
Company expects to receive premium prices for this improved product.
A pre-shredder at the Oakland facility is used to break apart compacted bundles
of light gauge ferrous metals purchased from other metals processors and
dealers. The unbundled metals are further processed through the shredder.
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.
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SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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 both with respect to the purchase of
unprocessed metals from sources and the sale of processed recycled metals to
finished steel producers. Competition for unprocessed metals purchased in the
Company's markets comes primarily from larger, well financed competitors like
LMC Metals, a division of Simsmetal USA Corporation, headquartered in Richmond,
California, one large recycled metals broker, David J. Joseph Company, which
purchases recycled metals throughout the region for delivery to steel producers,
as well as from 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. To a lesser extent, the
Company also competes with smaller 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. The Company believes that its size and locations allow it to compete
effectively with other U.S. and foreign metals recyclers.
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 and earnings.
Backlog. At August 31, 1999, the Company's Metals Recycling Business had a
backlog of firm orders of $14.9 million, as compared to $6.8 million at August
31, 1998. All of the backlog at August 31, 1999 was related to export shipments
that were shipped during the first quarter of fiscal year 2000.
Joint Ventures
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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.
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 2.5
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.
During fiscal 1998, the Company and one of its joint venture partners increased
their East Coast market position through the buyout of a third joint venture
partner and the completion of two other strategic joint venture
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FORM 10-K
PART I (CONTINUED)
acquisitions. The Company with its joint venture partners continue to seek
expansion opportunities in both their existing markets and strategically
elsewhere in the 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.
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.
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. The
joint venture opened or acquired three yards in fiscal 1995, one yard in fiscal
1996, two yards in fiscal 1997, one yard in fiscal 1998, and four yards in
fiscal 1999 and intends to continue to open or acquire new yards as appropriate
sites are identified. During fiscal 1999, 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 1999,
the Company purchased substantially all of the ferrous metals generated by this
joint venture.
During fiscal 1999, the Company purchased 195,700 long tons of ferrous metals
from its joint ventures, on terms negotiated at arms-length between the Company
and the other partners to the joint ventures.
Steel Manufacturing Business
- ----------------------------
The Company's Steel Manufacturing Business is conducted by its 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.
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FORM 10-K
PART I (CONTINUED)
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,
----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
Sales Vol.(1) Sales Vol.(1) Sales Vol.(1) Sales Vol.(1) Sales Vol.(1)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(dollar amounts in millions)
Rebar $ 98.3 340 $ 101.9 325 $ 104.9 341 $ 98.7 321 $ 78.3 255
Merchant bar 37.4 113 46.2 123 43.1 117 35.5 95 34.4 87
Wire rod 13.9 59 11.3 37 4.6 15
Coiled rebar 6.9 22 6.0 18 1.7 5
Specialty products 16.2 37 22.0 50 28.1 68 25.8 60 23.5 56
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ 172.7 571 $ 187.4(2) 553 $ 182.4(2) 546 $ 160.0 476 $ 136.2(2) 398
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
(1) In thousands of short tons (2,000 pounds).
(2) Does not include billet sales of $4.0 million in 1998, $1.3 million in 1997, and $5.2 million in 1995.
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. The Company expects its Steel Manufacturing Business' total volume to
continue to increase due to greater efficiencies to be gained at Rolling Mill
#2.
The Steel Manufacturing Business sells directly from its plant in McMinnville,
Oregon and from its distribution center located in El Monte, California (Los
Angeles area). The distribution center facilitates sales by holding a ready
inventory of products close to major customers for just-in-time delivery. Due to
zoning changes, the Company closed its Union City distribution center in fiscal
1999 and has replaced it with a third party warehouse in Stockton, California.
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 the year ended August 31, 1999, the Steel Manufacturing Business sold its
steel products to approximately 500 customers primarily located in the 10
western states. In that period, approximately 41% of the Steel Manufacturing
10
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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 46% of its revenues during fiscal 1999. No individual customer
accounted for more than 10% of 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, 1999.
The Steel Manufacturing Business purchases hydroelectric power from McMinnville
Water & Light Company (McMinnville), a municipal utility that acquires its power
from the Bonneville Power Administration (BPA), and is McMinnville's largest
customer. McMinnville obtains power 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 1999, 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.
The Steel Manufacturing Business purchases natural gas for use in the reheat
furnaces from Panenergy Gas Services of Salt Lake City, Utah, 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, 2004. 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 hold enough gas to operate one of the rolling
mills for at least three days without refilling.
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 the fiscal years ended August 31, 1997, 1998 and 1999 the melt shop
produced 586,000, 611,000 and 628,000 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. The Company continues
to anticipate that the melt shop will produce over 700,000 tons of billets per
year when it is operating at capacity.
11
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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. Rolling Mill #2 is expected to 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,
substantially all 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.
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 Mill, 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 1999, 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 Steel Manufacturing
Business also experienced some competition from Mexican steel mills in the
Southern California market during fiscal 1996 and 1997.
12
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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. It therefore does not normally have any
material backlog of firm orders.
Environmental Matters
- ---------------------
Compliance with environmental laws and regulations is a significant factor in
the Company's business. The Company is subject to local, state, federal, and
supranational environmental laws and regulations concerning, among other
matters, solid waste disposal, air emissions, waste water disposal, dredging,
and employee health. Environmental legislation and regulations have changed
rapidly in recent years and it is likely that the Company will be subject to
even more stringent environmental standards in the future.
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 environmental liabilities. This reserve was carried over
to the Company's financial statements and at August 31, 1999 aggregated $18.2
million.
General Metals of Tacoma (GMT), MMI's 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,
which is now expected to be completed in late 1999, is approximately $2 million.
GMT may also be named in a claim for potential natural resource damages in
Commencement Bay currently under assessment by certain government agencies and
others acting as natural resource trustees.
In 1998, GMT entered into an Administrative Order on Consent with EPA pursuant
to which GMT agreed to replace its bulkhead and wharf with a steel sheet
pile/cement dock, including capping for inter-tidal sediments, to address
potential concerns about contaminated sediments being addressed in the Hylebos
Superfund matter. During 1999 the Company completed the replacement of the
bulkhead and wharf.
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 performed and it is now subject to a five year monitoring program. The
other site has not yet been subject to significant remedial investigation. MMI
has been named as a PRP at several other sites for which it has reached de
minimis settlements. In addition to the matters discussed above, the Company's
environmental reserve includes
13
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
amounts for potential future cleanup of other sites at which MMI has conducted
business or has allegedly disposed of other materials.
Proler
In 1996, prior to the Company's acquisition of Proler, Proler recorded a
liability for the probable costs to remediate its wholly owned properties based
upon a consultant's estimates. The Company carried over the aggregate reserve to
its financial statements upon acquiring Proler and $6.6 million remained
outstanding on August 31, 1999. Also, Proler's joint ventures recorded
additional liabilities of $4.1 million for the probable costs to remediate their
properties based on the consultant's estimates.
Between 1982 and 1987, MRI Corporation (MRI), a wholly owned subsidiary of
Proler, operated a tin can shredding and detinning facility in Tampa, Florida.
In 1989 and 1992, the EPA conducted a preliminary site investigation of this
property and, in December 1996, added the site to the "National Priorities
List". MRI and Proler, along with several other parties, have been named as PRPs
for the site by the EPA. Additionally, Proler and/or this subsidiary have been
named or identified as PRPs at several other sites. Proler included the probable
costs associated with these sites in the aforementioned reserve.
Proler leased lands from Kennecott in Copperton, Utah between 1966 and 1992 for
a detinning plant operation, which supplied iron precipitate to the mines.
Expenditures for environmental site clean-up activities from fiscal 1997 through
fiscal 1999 totaled $428,000 for Proler, with an estimated $260,000 of remaining
cleanup to be done. The amount of remaining work and the parties responsible for
such work to reach final closure on the site are currently in negotiation.
As part of the Proler acquisition, the Company became a fifty-percent owner of
Hugo Neu-Proler Company (HNP). HNP has agreed, as part of its 1996 lease renewal
with the Port of Los Angeles, to be responsible for a multi-year, phased
remedial clean-up project involving certain environmental conditions on its
metals recycling facility at its Terminal Island site in Los Angeles, California
by the year 2001. Remediation will include limited excavation and treatment of
contaminated soils, paving, installation of a stormwater management system,
construction of a noise barrier and perimeter wall around the facility, and
groundwater monitoring. The probable costs to remediate this property are
included in the aforementioned reserve.
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
$718,045. 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 $307,752, 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.
14
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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
disposed. State and federal standards prescribe fluff sampling protocols which
require representative samples of fluff to be analyzed to determine if they are
likely to leach heavy metals, PCBs or other hazardous substances in excess of
acceptable levels. Fluff from the Company's 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.
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 delists the EAF
dust as hazardous so it can be disposed of as a non-hazardous, solid waste. The
remaining volume of the Company's EAF dust is exported, pursuant to an annually
renewable export license, to a secondary smelter in Mexico that recycles EAF
dust to produce commercial grade zinc and lead.
The Steel Manufacturing Business' mini-mill operating permit under Title V of
the Clean Air Act Amendment (CAA) of 1990, which governs certain air quality
standards, was issued in 1998 and expires in April 2003. The mini-mill is
currently authorized to melt up to 900,000 tons of 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 anticipates that it will need to enhance its existing
facilities to properly control increased emissions in order to remain in
compliance with the operating permit. The Steel Manufacturing Business is
currently evaluating alternative methods for controlling the growth in
emissions. Any capital expenditures necessary to address this issue will not
have a material adverse effect on the Steel Manufacturing Business.
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.
15
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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 2000 or 2001.
Employees
- ---------
As of August 31, 1999, the Company had 1,041 full-time employees, consisting of
400 employees at the Company's Metals Recycling Business, 569 employees at the
Steel Manufacturing Business, and 72 corporate administrative employees. Of
these employees, 649 are covered by collective bargaining agreements with twelve
unions. The Steel Manufacturing Business' contract with the United Steelworkers
of America covers 433 of these employees and expires on February 1, 2000. The
Company believes that its labor relations generally are good.
ITEM 2. PROPERTIES
The Company's Portland 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 33
Tacoma 26
Fresno 17
Eugene 11
Grants Pass 5
White City 4
Bend 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."
16
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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, 1999.
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Office
- ---- --- ------
Leonard Schnitzer 75 Chairman of the Board and Chief Executive Officer
Robert W. Philip 52 President
Kenneth M. Novack 53 Executive Vice President
Gary Schnitzer 57 Executive Vice President - California Metals
Recycling Business
Barry A. Rosen 54 Vice President - Finance and Treasurer
Kurt C. Zetzsche 60 President of Steel Manufacturing Business
Edgar C. Shanks 51 Vice President - Taxation
Dori Schnitzer 45 Secretary
Kelly E. Lang 38 Vice President - Corporate Controller
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 and Treasurer of the
Company since 1982.
17
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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.
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.
Dori Schnitzer has been the Secretary of the Company since June 1987.
She also served as corporate counsel of the Company from October 1987 to May
1991 when she became Vice President of Lasco Shipping Co. Ms. Schnitzer is a
daughter of Morris Schnitzer, a deceased brother of Leonard Schnitzer.
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 is a
Certified Public Accountant.
18
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is traded on the Nasdaq National Market tier
of the Nasdaq Stock Market under the symbol SCHN. The approximate number of
shareholders of record on September 30, 1999 was 110. 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 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
Fiscal Year 1998
-----------------------------------------------------
High Price Low Price Dividends Per Share
---------- --------- -------------------
First Quarter $37.63 $27.38 $.05
Second Quarter 30.00 22.63 .05
Third Quarter 27.13 24.06 .05
Fourth Quarter 26.25 15.00 .05
19
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
ITEM 6. SELECTED FINANCIAL DATA
Year Ended August 31,
1999 1998 1997(1) 1996 1995(2)
------- ------- ------- ------- -------
(In millions, except per share, per ton and shipment data)
INCOME STATEMENT DATA:
Revenues $ 265.0 $ 353.1 $ 361.7 $ 339.3 $ 330.7
Cost of goods sold and other
operating expenses 236.3 309.6 313.2 289.2 283.5
Selling and administrative 23.7 24.1 22.8 20.5 17.2
Income from joint ventures 3.5 4.1 6.9 3.3 2.5
------- ------- ------- ------- -------
Income from operations 8.5 23.5 32.6 32.9 32.5
Interest expense (7.0) (6.8) (5.0) (3.8) (2.4)
Other income (expense) 4.5 (1.5) 4.6 1.7 3.9
------- ------- ------- ------- -------
Income before income taxes 6.0 15.2 32.2 30.8 34.0
Income tax provision (2.6) (5.8) (11.0) (10.0) (11.8)
------- ------- ------- ------- -------
Net income $ 3.4 $ 9.4 $ 21.2 $ 20.8 $ 22.2
======= ======= ======= ======= =======
Basic earnings per share $ 0.34 $ 0.94 $ 2.06 $ 2.25 $ 2.83
======= ======= ======= ======= =======
Diluted earnings per share $ 0.34 $ 0.93 $ 2.05 $ 2.24 $ 2.82
======= ======= ======= ======= =======
Dividends per common share $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20
======= ======= ======= ======= =======
OTHER DATA:
Shipments (in thousands of tons)(3):
Ferrous recycled metal 1,224 1,435 1,518 1,479 1,254
Finished steel products(4) 571 553 546 476 398
Average selling price per ton:
Ferrous recycled metal $ 83 $ 122 $ 127 $ 146 $ 154
Finished steel products(4) 303 339 334 336 342
Depreciation and amortization $ 17.7 $ 18.7 $ 18.3 $ 14.0 $ 11.6
Capital expenditures 12.0 14.2 15.5 44.6 31.1
August 31,
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In millions)
BALANCE SHEET DATA:
Working capital $ 92.7 $ 111.1 $ 104.9 $ 92.4 $ 56.8
Total assets 445.6 471.3 428.0 337.5 280.3
Short-term debt 0.4 0.2 0.4 0.2 0.2
Long-term debt 119.8 140.2 92.9 44.5 64.7
Shareholders' equity 239.6 241.4 239.1 223.8 136.0
(1) Includes the results of operations of Proler from November 29, 1996 through August 31, 1997. See Note 12 to
the Consolidated Financial Statements.
(2) Includes the results of operations of MMI from March 17, 1995, the date of acquisition, through August 31,
1995.
(3) Tons for ferrous recycled metals are long tons (2,240 pounds) and for finished steel products are short tons
(2,000 pounds).
(4) Does not include billet sales of $4.0 million in 1998, $1.3 million in 1997, and $5.2 million in 1995.
20
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The results of operations of the Company depend in large part upon demand and
prices for recycled metals in world markets and steel products on the U.S. West
Coast. Increasing steel demand and prices led to improved profitability during
the period of fiscal 1995 through fiscal 1997. Primarily due to the Asian
financial crisis, which severly curtailed demand and decreased prices, fiscal
1998 and 1999 results for the Metals Recycling Business were negatively
impacted.
The Company acquired Proler, effective November 29, 1996.
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)
1999 1998 1997(1)
------- ------- -------
Metals Recycling Business:
Ferrous $ 101.7 $ 175.3 $ 192.2
Nonferrous 26.0 27.3 27.7
Other 9.4 15.3 16.5
------- ------- -------
Recycled metals total 137.1 217.9 236.4
Sales to the Steel Manufacturing Business(2) (44.8) (56.2) (58.4)
------- ------- -------
Sales to Unaffiliated Customers 92.3 161.7 178.0
Steel Manufacturing Business 172.7 191.4 183.7
------- ------- -------
Total $ 265.0 $ 353.1 $ 361.7
======= ======= =======
21
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
Income from Operations
Year Ended August 31,
--------------------------------------
(In millions)
1999 1998 1997(1)
------- ------- -------
Metals Recycling Business $ 4.6 $ 16.5 $ 27.4
Steel Manufacturing Business 6.6 9.8 5.5
Joint Ventures in the Metals Recycling Business 1.4 0.8 3.8
Joint Venture Suppliers of Metals 2.1 3.3 3.1
Corporate Expense and Eliminations (3) (6.2) (6.9) (7.2)
------- ------- -------
Income from Operations $ 8.5 $ 23.5 $ 32.6
======= ======= =======
(1) Includes the results of operations of Proler from November 29, 1996, the
date of acquisition, through August 31, 1997.
(2) Ferrous recycled metal sales from the Metals Recycling Business to the
Steel Manufacturing Business are made at a negotiated market rate per ton.
(3) Corporate expense and eliminations consist 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 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.
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 is 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 1999, the Steel Manufacturing Business shipped
proportionately more lower-priced products than in the prior year. During fiscal
1998, the Company also sold 16,900 tons of billets, whereas in fiscal 1999,
sales of billets aggregated 500 tons.
22
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
Cost of Goods Sold. Consolidated cost of goods sold declined $73.4 million (24%)
to $236.3 million and increased as a percentage of revenues from 88% in fiscal
1998 to 89% in fiscal 1999. Gross profit declined by $14.7 million (34%) to
$28.8 million.
The Metals Recycling Business' cost of goods sold decreased $68.4 million to
$119.2 million before intercompany eliminations. Cost of sales per ferrous ton
declined, as the Company lowered the purchase price of recycled metals metals at
the scale in response to declining selling prices, and sales volumes declined.
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 $12.5 million. The Metals Recycling Business did generate income from
operations for fiscal 1999 of $4.6 million, despite the adverse international
financial climate in which it operated during the year.
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 $0.3 million to $23.7 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:
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
======== ========
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.
23
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
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 joint venture which operates self-service used auto
parts yards. 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 43% 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.
Fiscal 1998 Compared to Fiscal 1997
Revenues. Revenues for the Metals Recycling Business decreased, while revenues
for the Steel Manufacturing Business increased, resulting in a net decrease in
the Company's revenues of $8.6 million to $353.1 million for fiscal 1998
compared to $361.7 million for fiscal 1997. The Steel Manufacturing Business
achieved record shipments of finished steel products and produced record tons of
billets in fiscal 1998.
The Metals Recycling Business generated revenues of $217.9 million, before
intercompany eliminations, compared with $236.4 million in fiscal 1997,
representing a decrease of $18.5 million (8%). Ferrous revenues decreased $17.0
million (9%) as the result of a 5% decrease in ferrous tons shipped at lower
average selling prices. Sales to the Company's Steel Manufacturing Business were
down slightly. The Metals Recycling Business made 25 ferrous recycled metals
export shipments totaling 720,000 tons in fiscal 1998, compared with 30
shipments totaling 853,000 tons in fiscal 1997, while domestic third-party
tonnage increased 37% to 235,000 tons. The average selling price for ferrous
recycled metals declined $5 per ton to $122 with the largest decline occurring
in export prices during the second half of 1998.
The Steel Manufacturing Business' revenues increased $7.7 million (4%) to $191.4
million. Higher volumes sold, coupled with an increase in selling prices,
contributed to the increase. Average steel selling prices increased $5 per ton
to $339, while finished steel tons shipped increased 6,600 tons to 553,000 tons.
During fiscal 1998, the Steel Manufacturing Business also sold 16,900 tons of
billets, compared with 5,600 tons during 1997.
24
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
Cost of Goods Sold. Overall, cost of goods sold decreased $3.6 million (1%) to
$309.6 million and increased as a percentage of revenue from 87% in fiscal 1997
to 88% in fiscal 1998. Gross profit decreased $5.0 million (10%) to $43.5
million.
The Metals Recycling Business' cost of goods sold decreased $8.9 million (5%) to
$187.6 million as the result of a 5% decrease in ferrous tonnage shipped. Cost
of sales per ferrous ton shipped remained unchanged from 1997 to 1998. The
average selling price of ferrous recycled metals also declined, resulting in a
decrease in the Metals Recycling Business' gross profit of $9.5 million.
Cost of goods sold for the Steel Manufacturing Business increased $2.7 million
(2%) to $178.0 million as the result of increased tonnage shipped. Cost of sales
per ton decreased $4 as the result of lower recycled metals prices and increased
plant efficiencies. This decrease, coupled with a $5 per ton increase in the
average selling price for finished steel and a 1% increase in tonnage shipped,
resulted in a $4.8 million (56%) increase in overall gross profit and a 53%
increase in gross profit per ton for finished steel.
Selling and Administrative Expenses. Selling and administrative expenses
increased $1.3 million (6%) in fiscal 1998 compared to fiscal 1997 primarily as
the result of overhead added due to the Proler acquisition in November 1996.
Income from Joint Ventures. The Company's joint ventures' revenues and results
of operations were as follows:
Year Ended August 31,
---------------------------
1998 1997
-------- --------
Total revenues from external customers recognized by:
Joint Ventures in the Metals Recycling Business $332,580 $276,930
Joint Venture Suppliers of Metals 51,391 46,433
-------- --------
$383,971 $323,363
======== ========
Income from joint ventures recognized by the Company:
Joint Ventures in the Metals Recycling Business $ 823 $ 3,785
Joint Venture Suppliers of Metals 3,292 3,091
-------- --------
$ 4,115 $ 6,876
======== ========
The increase in revenues generated by the Joint Ventures in the Metals Recycling
Business from fiscal 1997 to fiscal 1998 was due to the fact that the Company
acquired an interest in the majority of these joint ventures through its
acquisition of Proler effective November 29, 1996. Thus, the results for fiscal
1997 include the operations of these joint ventures since that date. During
fiscal 1998, these joint ventures shipped 2.3 million tons of ferrous recycled
metals from its facilities compared with 2.0 million tons from November 1996
through the end of fiscal 1997. On an annualized basis, tons declined year to
year primarily as a result of the Asian financial crisis. The average selling
price of ferrous recycled metals processed and sold from the joint ventures'
facilities declined from $121 per ton to $117 per ton also due to the financial
crisis in Asia.
The decrease in the Company's share of income from the Joint Ventures in the
Metals Recycling Business from fiscal 1997 to fiscal 1998 resulted from
operating losses due to the Asian financial crisis. Also, the Company's share of
a $.4 million charge to income for the closure of redundant plant facilities and
a $3.1 million charge to state inventory at the lower of cost or market were
included in the results for fiscal 1998. These were partially offset by $2.2
million of other favorable inventory adjustments primarily related to LIFO.
25
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
Revenues from the Joint Venture Suppliers of Metal increased by 10%,
contributing to an increase in the Company's equity in earnings from these joint
ventures of $.2 million. For some of these joint ventures, revenues vary year to
year depending upon the projects in which the joint ventures are engaged.
Interest Expense. Interest expense for fiscal 1998 increased by $1.8 million
because of additional debt required to support joint venture operations and
capital expenditures and lower cash flow from operations. Average borrowings for
fiscal 1998 were $97.6 million compared with $96.1 million for 1997. The average
interest rate for fiscal 1998 was 5.8% compared with 5.7% for fiscal 1997.
Gain (Loss) on Sale of Fixed Assets. Results for fiscal 1998 include a $2.2
million charge to reflect the estimated loss which the Company expected to
realize upon the sale of its Tacoma shredders, which has since been replaced
with a state-of-the-art automobile shredder.
Other Income. Other income decreased $3.6 million during the year ended August
31, 1998 compared with the prior year. Fiscal 1997 included a $3 million gain on
settlement of an interest rate agreement which it had entered into for the sole
purpose of locking in the interest rate on a planned private placement of debt,
which the Company subsequently decided against pursuing.
Income Tax Provision. The effective tax rate for fiscal 1998 increased to 38%
from 34% in fiscal 1997 as a result of lower benefits from the Company's foreign
sales corporation and a reduced benefit from state tax credits.
Year 2000. The following discussion is provided in response to the Securities
and Exchange Commission's Interpretation of Disclosure of Year 2000 Issues and
Consequences by Public Companies, Investment Advisors, Investment Companies, and
Municipal Securities Issuers.
In response to Year 2000 compliance issues, the Company has developed a
systematic approach that consists of the following three phases: (1)
identification and assessment of potential Year 2000 issues, (2) modification or
replacement of equipment and software, (3) final testing to ensure that all
systems are Year 2000 compliant after modifications are installed.
The Company has divided its Year 2000 issues into the following categories: (a)
physical hardware and related operating systems at the Corporate Data Processing
Facility, (b) business and financial reporting systems at all locations, (c)
personal computers and peripheral equipment at all locations, (d) facility and
support systems (including communication devices and safety systems) at all
locations, (e) manufacturing systems at its Steel Manufacturing Business, (f)
business systems for Pick-N-Pull, the Company's self-service auto dismantling
joint venture.
The Company has completed the identification and assessment phase.
The Company has completed the modification of equipment at the Corporate Data
Processing Facility, the business and financial reporting systems at all
locations, personal computers at all locations, and the remainder of Phase 2
activities, except for Pick-N-Pull, which are expected to be complete by
December 31, 1999.
The Company completed Phase 3 activities in October 1999, except for
Pick-N-Pull, which are expected to be complete by December 31, 1999.
Management estimates that the costs for correction of the Year 2000 issues,
including any software and hardware upgrades (but excluding replacements that
would have occurred even without the Year 2000 issue), and the cost of personnel
allocated to this project should not exceed $1,300,000, of which $1,000,000 is
expected to be capital
26
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
expenditures. Approximately $879,500 has been spent to date. The Year 2000
upgrades are being funded through normal operating funds and are expected to
account for less than 5% of the Company's Information Technology (IT),
maintenance and manufacturing capital budgets. There can be no assurance that
the costs and timeframes above will not change as the Company continues its
assessments.
The Year 2000 project is a priority project for the Company's IT and Engineering
departments. No significant IT or engineering projects are being deferred as a
result of the Company's Year 2000 efforts.
The Company has also assessed the Year 2000 readiness of its "key" vendors using
questionnaires and letters. No critical vendors have been found to be
non-compliant.
As the Company is not dependent on any significant customer, and given the
nature of the metals recycling business, no Year 2000 assessment of customers is
anticipated.
At the present time, the Company has not expended the resources to develop a
contingency plan with respect to year 2000 compliance as the Company believes it
will be Year 2000 ready.
Liquidity and Capital Resources
For the year ended August 31, 1999, cash generated by operations was $36.8
million compared to $13.3 million for the same period last year. The increase in
cash generated this year is predominantly due to decreases in inventories,
accounts receivable and prepaid expenses.
Capital expenditures and payments for purchase of interest in joint ventures
totaled $12.1 million, $31.3 million, and $58.5 million million for fiscal years
1999, 1998, and 1997, respectively. Expenditures for fiscal 1997 included the
acquisition of Proler for $42.5 million and remaining payments for the new wire
rod block for the steel mill that was completed in February 1997.
As part of its acquisitions of Proler and MMI, the Company assumed environmental
liabilities aggregating $24.8 million as of August 31, 1999. The Company expects
significant future cash outlays as it incurs the actual costs relating to the
remediation of such environmental liabilities.
In June 1997, the Company completed a renegotiation of its unsecured revolving
credit agreement whereby it increased the facility to $200 million and extended
the maturity of the facility to June 2002. During fiscal 1998, the maturity of
the facility was extended to June 2003. As of August 31, 1999, the Company also
had additional lines of credit available of $85 million, $65 million of which
was uncommitted. In the aggregate, the Company had borrowings outstanding under
these lines of $109.9 million. The Company's debt agreements have certain
restrictive covenants.
As of August 31, 1999, the Company was in compliance with such covenants.
Pursuant to a stock repurchase program, the Company is authorized to repurchase
up to 1.6 million shares of its stock when the market price of the Company's
stock is not reflective of management's opinion of an appropriate valuation of
the stock. Management believes that repurchasing shares under these conditions
enhances shareholder value. As of August 31, 1999, a total of 708,600 shares had
been purchased under this program. During fiscal 1999, the Company repurchased
260,300 shares of its stock for a total of $3.2 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.
27
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
Forward Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, all
of which are subject to risks and uncertainties. One can identify these forward
looking statements through the use of words such as "expect," "believe," and
other words which convey a similar meaning. One can also identify these
statements as they do not relate strictly to historical or current facts. They
are likely to address the Company's business strategy, financial projections and
results and other global factors affecting the Company's financial prospects. An
example of this is the current financial crisis facing certain Asian countries
and Year 2000 compliance matters. Other factors that could cause actual results
to differ materially are the following: supply and demand conditions; the
Company's ability to mitigate the effects of the Asian situation and foreign
fiscal policies on its profitability; railroad service difficulties; competitive
factors and pricing pressures from national steel companies; imports of foreign
steel; availability of recycled metals supply; fluctuations in recycled metals
prices and seasonality of results. One should understand that it is not possible
to predict or identify all factors that could cause actual results to differ
from the Company's forward looking statements. Consequently, the reader should
not consider any such list to be a complete statement of all potential risks or
uncertainties. Further, the Company does not assume any obligation to update any
forward looking statement.
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, 1999. If market rates would have
averaged 10 percent higher than actual levels in either fiscal 1999 or fiscal
1998, 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.
28
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....................................30
Consolidated Balance Sheet - August 31, 1999 and 1998................31
Consolidated Statement of Operations - Years ended
August 31, 1999, 1998, and 1997.................................32
Consolidated Statement of Shareholders' Equity - Years ended
August 31, 1999, 1998, and 1997.................................33
Consolidated Statement of Cash Flows - Years ended
August 31, 1999, 1998, and 1997.................................34
Notes to Consolidated Financial Statements...........................35
All other schedules and exhibits are omitted, as the information is not
applicable or is not required.
29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Schnitzer Steel Industries, Inc.
In our opinion, the accompanying consolidated balance sheet and 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, 1999
and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended August 31, 1999, in conformity with
generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
October 6, 1999 , except as to Note 15
which is as of November 15, 1999
30
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
August 31,
--------------------------------
1999 1998
--------- ---------
ASSETS
CURRENT ASSETS:
Cash $ 6,174 $ 3,800
Accounts receivable, less allowance for
doubtful accounts of $638 and $645 21,714 26,161
Accounts receivable from related parties 1,935 3,428
Inventories (Notes 2 and 15) 89,752 103,136
Deferred income taxes (Note 6) 5,281 5,723
Prepaid expenses and other 3,417 8,020
--------- ---------
TOTAL CURRENT ASSETS 128,273 150,268
--------- ---------
NET PROPERTY, PLANT & EQUIPMENT (Note 3) 135,814 142,582
--------- ---------
OTHER ASSETS:
Investment in joint venture partnerships (Note 11) 103,980 103,494
Advances to joint venture partnerships (Note 11) 27,754 23,957
Goodwill 39,992 41,017
Intangibles and other 9,816 10,022
--------- ---------
$ 445,629 $ 471,340
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 4) $ 436 $ 168
Accounts payable 16,390 19,056
Accrued payroll liabilities 6,072 5,603
Current portion of environmental liabilities (Note 5) 5,154 5,552
Other accrued liabilities 7,568 8,781
--------- ---------
TOTAL CURRENT LIABILITIES 35,620 39,160
--------- ---------
DEFERRED INCOME TAXES (Note 6) 27,882 24,619
--------- ---------
LONG-TERM DEBT LESS CURRENT PORTION (Note 4) 119,826 140,236
--------- ---------
ENVIRONMENTAL LIABILITIES,
NET OF CURRENT PORTION (Note 5) 19,661 22,749
--------- ---------
OTHER LONG-TERM LIABILITIES (Note 8) 2,996 3,140
--------- ---------
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, 5,295 and 5,555 shares issued and outstanding 5,295 5,555
Class B common stock--25,000 shares $1 par value
authorized, 4,431 shares issued and outstanding 4,431 4,431
Additional paid-in capital 102,179 105,124
Retained earnings 127,739 126,326
--------- ---------
239,644 241,436
--------- ---------
$ 445,629 $ 471,340
========= =========
The accompanying notes are an integral part of this statement
31
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
Year Ended August 31,
--------------------------------------------------
1999 1998 1997
--------- --------- ---------
REVENUES $ 265,047 $ 353,093 $ 361,753
--------- --------- ---------
COSTS AND EXPENSES:
Cost of goods sold and
other operating expenses 236,270 309,635 313,226
Selling and administrative 23,753 24,088 22,797
--------- --------- ---------
260,023 333,723 336,023
--------- --------- ---------
INCOME FROM JOINT VENTURES (Note 11) 3,450 4,115 6,876
--------- --------- ---------
INCOME FROM OPERATIONS 8,474 23,485 32,606
OTHER INCOME (EXPENSE):
Interest expense (6,971) (6,813) (5,026)
Gain (loss) on sale of assets 1,419 (2,224) 203
Other income (Note 4) 3,048 791 4,388
--------- --------- ---------
(2,504) (8,246) (435)
--------- --------- ---------
INCOME BEFORE INCOME TAXES 5,970 15,239 32,171
Income tax provision (Note 6) (2,591) (5,791) (10,946)
--------- --------- ---------
NET INCOME $ 3,379 $ 9,448 $ 21,225
========= ========= =========
BASIC EARNINGS PER SHARE $ 0.34 $ 0.94 $ 2.06
========= ========= =========
DILUTED EARNINGS PER SHARE $ 0.34 $ 0.93 $ 2.05
========= ========= =========
The accompanying notes are an integral part of this statement
32
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
Class A Class B
Common Stock Common Stock Additional
------------------- --------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
-------- -------- -------- -------- -------- -------- --------
BALANCE AT 8/31/96 5,773 $ 5,773 4,575 $ 4,575 $113,747 $ 99,718 $223,813
Class B common stock converted
to Class A common stock 130 130 (130) (130)
Class A common stock repurchased (166) (166) (3,753) (3,919)
Net income 21,225 21,225
Dividends paid (2,058) (2,058)
-------- -------- -------- -------- -------- -------- --------
BALANCE AT 8/31/97 5,737 5,737 4,445 4,445 109,994 118,885 239,061
Class B common stock converted
to Class A common stock 14 14 (14) (14)
Class A common stock repurchased (196) (196) (4,870) (5,066)
Net income 9,448 9,448
Dividends paid (2,007) (2,007)
-------- -------- -------- -------- -------- -------- --------
BALANCE AT 8/31/98 5,555 5,555 4,431 4,431 105,124 126,326 241,436
Class A common stock repurchased (260) (260) (2,945) (3,205)
Net income 3,379 3,379
Dividends paid (1,966) (1,966)
-------- -------- -------- -------- -------- -------- --------
BALANCE AT 8/31/99 5,295 $ 5,295 4,431 $ 4,431 $102,179 $127,739 $239,644
======== ======== ======== ======== ======== ======== ========
The accompanying notes are in integral part of this statement
33
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended August 31,
--------------------------------------------
1999 1998 1997
--------- --------- ---------
OPERATIONS:
Net income $ 3,379 $ 9,448 $ 21,225
Noncash items included in income:
Depreciation and amortization 17,716 18,714 18,265
Deferred income taxes 3,705 1,224 (2,211)
Equity in earnings of joint ventures (3,451) (4,115) (6,876)
Environmental reserve reversal (1,904)
Loss (gain) on disposal of assets (1,419) 2,224 (180)
Cash provided (used) by changes in working capital:
Accounts receivable 5,771 2,636 (5,345)
Inventories 13,410 (7,982) (2,267)
Prepaid expenses and other 5,059 (4,852) 2,414
Accounts payable (2,729) (400) (3,929)
Accrued payroll and other liabilities (759) 496 4,507
Environmental liabilities (912) (2,016) (2,420)
Other assets and liabilities (1,068) (2,030) (49)
--------- --------- ---------
NET CASH PROVIDED BY OPERATIONS 36,798 13,347 23,134
--------- --------- ---------
INVESTMENTS:
Payment for purchase of Proler (Note 12) (42,456)
Capital expenditures (11,986) (14,205) (15,486)
Advances (to) from joint ventures (3,797) (34,198) 14,392
Investments in joint ventures (86) (17,104) (550)
Distributions from joint ventures 2,343 9,679 1,442
Capitalization of losses on assets held for sale (1,689)
Proceeds from sale of assets 4,304 3,086 4,887
--------- --------- ---------
NET CASH USED BY INVESTMENTS (9,222) (52,742) (39,460)
--------- --------- ---------
FINANCING:
Repurchase of Class A common stock (3,205) (5,066) (3,919)
Dividends declared and paid (1,966) (2,007) (2,058)
Increase in long-term debt 168 47,500 48,600
Reduction in long-term debt (20,200) (338) (25,087)
--------- --------- ---------
NET CASH (USED) PROVIDED BY FINANCING (25,203) 40,089 17,536
--------- --------- ---------
NET INCREASE IN CASH 2,374 694 1,210
CASH AT BEGINNING OF YEAR 3,800 3,106 1,896
--------- --------- ---------
CASH AT END OF YEAR $ 6,174 $ 3,800 $ 3,106
========= ========= =========
The accompanying notes are an integral part of this statement
34
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 1 - Nature of Business and Summary of Significant Accounting Policies:
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, Maine, Massachusetts, Nevada, New Hampshire, New Jersey, New
York, and Rhode Island.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. The Company, through subsidiaries, holds a 50%
interest in 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
LIFO (last-in, first-out) and average cost methods. See Note 15.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Major renewals and
improvements are capitalized. Expenditures for maintenance and repairs are
charged to operations as incurred.
Depreciation is determined principally using the straight-line method over
estimated useful lives of 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, 1999 and 1998, accumulated amortization aggregated $6,178 and $4,943,
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.
35
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 1 - Nature of Business and Summary of Significant Accounting Policies
(Continued):
Earnings Per Share
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.
Year Ended August 31, 1999
-----------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $ 3,379 9,863 $0.34
=====
Options 19
------- -------
Diluted EPS $ 3,379 9,882 $0.34
======= ======= =====
Year Ended August 31, 1998
-----------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $ 9,448 10,048 $0.94
=====
Options 69
------- -------
Diluted EPS $ 9,448 10,117 $0.93
======= ======= =====
Year Ended August 31, 1997
-----------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS $21,225 10,305 $2.06
=====
Options 72
------- -------
Diluted EPS $21,225 10,377 $2.05
======= ======= =====
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
523 in 1999 and 98 in 1998.
Interest and Income Taxes Paid
The Company paid $6,951, $6,535, and $5,093 in interest during fiscal years
1999, 1998, and 1997, respectively. During fiscal 1999, the Company received net
income tax refunds of $6,175, and in fiscal years 1998 and 1997, the Company
paid $7,440,and $7,283, respectively, in income taxes.
Fair Value of Financial Instruments
Cash, receivables and current liabilities are reflected in the consolidated
financial statements at fair value because of the short-term maturity of these
instruments. The fair value of long-term debt is deemed to be the same as that
reflected in the consolidated financial statements given the variable interest
rates on the significant credit facilities. There are no quoted prices for the
Company's investments in joint ventures accounted for on the equity method. A
reasonable estimate of fair value could not be made without incurring excessive
costs.
36
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 1 - Nature of Business and Summary of Significant Accounting Policies
(Continued):
Use of Estimates in Financial Statement Preparation
The preparation of financial statements in accordance with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications of prior year balances have been made for consistent
presentation with the current year.
Note 2 - Inventories:
Inventories consist of the following:
August 31,
--------------------------
1999 1998
-------- --------
Recycled metals $ 24,675 $ 28,952
Work in process 20,372 13,192
Finished goods 29,578 44,276
Supplies 15,127 16,716
-------- --------
$ 89,752 $103,136
======== ========
Recycled metal inventories are valued at LIFO; the remainder are at average
cost. The cost of recycled metal inventories exceeded the stated LIFO value by
$1,215 and $5,811 at August 31, 1999 and 1998, respectively. See Note 15.
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.
Note 3 - Property, Plant and Equipment:
Property, plant and equipment consist of the following:
August 31,
--------------------------
1999 1998
-------- --------
Machinery and equipment $218,124 $216,649
Land and improvements 30,517 33,034
Buildings and leasehold improvements 15,264 15,835
Construction in progress 13,889 3,918
-------- --------
277,794 269,436
Less accumulated depreciation (141,980) (126,854)
-------- --------
$135,814 $142,582
======== ========
37
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 4 - Long-Term Debt:
Long-term debt consists of the following:
August 31,
--------------------------
1999 1998
-------- --------
Bank unsecured revolving credit facilities $109,900 $130,100
Tax-exempt economic development revenue bonds due
January 2022, interest payable monthly at a variable rate
(3.35% at August 31, 1999), 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 1,994 2,096
Other 668 508
-------- --------
Total long-term debt 120,262 140,404
Less portion due within one year 436 168
-------- --------
Long-term debt less current portion $119,826 $140,236
======== ========
At August 31, 1999, the Company had a $200,000 unsecured revolving credit
facility with its banks. Individual advances outstanding under the line bear
interest at floating rates. As of August 31, 1999, such rates averaged 5.6%.
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 $50,000 notional principal amount for
a fixed interest obligation of 5.55% for three years. The differential paid or
received on interest rate agreements is recognized as an adjustment to interest
expense.
In addition to the above facility, the Company has additional unsecured lines of
credit totaling $85,000, of which $20,000 is committed.
The committed bank credit facilities and other borrowings contain financial
covenants, including covenants related to net worth, interest coverage and
leverage.
38
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 4 - Long-Term Debt (Continued):
Payments on long-term debt during the next five fiscal years are as follows:
2000 $ 436
2001 217
2002 229
2003 110,142
2004 222
Thereafter 9,016
--------
$120,262
========
In April 1999, the Company agreed to become a guarantor for one of its joint
ventures' bank credit facilities. Under the agreement, the Company may be liable
for up to $10,000.
In February 1997, the Company entered into an interest rate agreement for the
sole purpose of locking in the interest rate on a planned private placement of
debt. The Company subsequently decided against pursuing the private placement in
April 1997 and, thus, recognized the deferred gain on the agreement of
approximately $3 million. This amount is included in other income in the
accompanying statement of operations for the year ended August 31, 1997.
On June 15, 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133).
FAS 133, 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, 1999 aggregated $18,200.
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 expected to be completed in
late 1999, is approximately $2,000 and is included in the reserve above. Any
further potential liabilities, if any, cannot be estimated at this time.
39
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 5 - Environmental Liabilities (Continued):
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 $8,600 for the probable costs to remediate its wholly owned properties based
upon the consultant's estimates, increasing its environmental reserve to $9,800.
The Company carried over the aggregate reserve to its financial statements upon
acquiring Proler and $6,560 remained outstanding on August 31, 1999. Also,
Proler's joint ventures recorded additional liabilities of $4,100 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
$718,045. 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 $307,752, 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.
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
$1,900 reversal of these reserves.
40
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 6 - Income Taxes:
The provision for income taxes is as follows:
Year Ended August 31,
--------------------------------------
1999 1998 1997
------- ------- -------
Current:
Federal $ (359) $ 3,075 $ 5,361
State 250 858 786
Deferred:
Federal 2,342 1,633 4,199
State 358 225 600
------- ------- -------
$ 2,591 $ 5,791 $10,946
======= ======= =======
Deferred tax assets and liabilities are as follows:
August 31,
----------------------
1999 1998
------- -------
AMT carryforward $ 307 $ 1,031
Segment held for sale (423) (853)
Inventory valuation methods 2,966 2,810
Employee benefit accruals 2,623 2,777
State income tax and other (192) (42)
------- -------
Net current deferred tax assets $ 5,281 $ 5,723
======= =======
Accelerated depreciation
and basis differences $38,775 $36,688
Environmental liabilities (9,926) (11,274)
Net operating loss carryforwards (10,856) (10,856)
Other (967) (795)
------- -------
17,026 13,763
Deferred tax asset valuation allowance 10,856 10,856
------- -------
Net non-current deferred tax liabilities $27,882 $24,619
======= =======
In acquiring Proler, the Company succeeded to net operating losses (NOLs) of
$31,018 and minimum tax credits of $742 that had arisen in Proler's
pre-acquisition years. Use of the NOLs is limited to $2,395 per year. If not
used, they will expire in the years 2007 through 2012. The use of the credits is
limited to the tax on the future earnings of the corporations constituting
Proler. No benefit for the NOLs or the credits has been recognized in the
financial statements.
41
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 6 - Income Taxes (Continued):
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,
--------------------------------------
1999 1998 1997
------- ------- -------
Federal statutory rate 35% 35% 35%
Foreign sales corporation (7) (3) (5)
State taxes, net of credit 8 5 3
Amortization of goodwill 6 2 1
Other 1 (1)
------- ------- -------
43% 38% 34%
======= ======= ========
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
$4,580, $6,726, and $9,296 for 1999, 1998 and 1997, respectively. In 1993, the
Company signed a five-year time-charter agreement for one vessel which expired
in June 1998. The agreement guaranteed the ship owner a residual market value of
$2,500 at the end of the time-charter. Upon expiration of the time charter, the
Company paid the guaranteed residual and entered into an additional five-year
time charter. The Company accounted for the transaction as a capital lease, as
ownership of the vessel is transferred at expiration of the time-charter. The
Company entered into two additional seven-year time charters in May 1995 for
other vessels.
The Company purchased recycled metals from its joint venture operations totaling
$10,954, $15,825 and $13,856 in 1999, 1998 and 1997, respectively.
The Company leases certain land and buildings from a related real estate company
under operating leases. The following table summarizes the lease terms, annual
rents and future minimum rents:
Lease Current
Location: Expirations Annual Rent
--------- ----------- -----------
Metals Recycling Business:
Portland facility and marine terminal 2063 $1,078
Sacramento facility 2003 88
Administrative offices 2002 - 2006 246
42
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 7 - Related Party Transactions (Continued):
Minimum Sublease Net Minimum
Rents Income Rents
------- -------- -----------
2000 1,412 (36) 1,376
2001 1,719 (42) 1,677
2002 1,779 (42) 1,737
2003 1,785 (42) 1,743
2004 1,697 1,697
Thereafter 59,218 59,218
The rent expense was $1,554, $1,330 and $1,351 for 1999, 1998 and 1997,
respectively.
The rents for the Metals Recycling Business will be adjusted in 2000 based upon
changes in the Consumer and the Producer Price Indices. Beginning in 2003 and
every 15 years thereafter, the rent will be adjusted to then market rates.
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 $1,144, $1,223 and
$1,046 in 1999, 1998 and 1997, 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, 1999, 1998 and 1997, charges incurred for these
sub-charters aggregated $3,305, $3,151 and $871, offset by income of $2,921,
$3,099 and $747, respectively.
Included in other assets are $3,506, $3,340 and $1,180 of notes receivable from
joint venture partners at August 31, 1999, 1998 and 1997, respectively. Interest
income from both these notes and advances to joint venture partnerships totaled
$1,541, $944 and $580 for fiscal years 1999, 1998 and 1997, respectively.
Note 8 - Employee Benefits:
In accordance with union agreements, the Company contributed to union pension
plans $1,989, $2,065 and $2,164, in 1999, 1998 and 1997, 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 $1,025, $1,060 and $1,028 for
1999, 1998 and 1997, 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, 1999
and 1998 in accordance with SFAS 132.
43
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 8 - Employee Benefits (Continued):
August 31,
---------------------
1999 1998
------- -------
Change in benefit obligation:
Benefit obligation at beginning of year $ 5,192 $ 4,086
Service cost 723 634
Interest cost 364 307
Actuarial loss 517 443
Acquisition (16)
Benefits paid (401) (278)
------- -------
Benefit obligation at end of year $ 6,379 $ 5,192
======= =======
Change in plan assets:
Fair value of plan assets at beginning of year $ 3,879 $ 4,162
Actual return on plan assets 867 (336)
Employer contribution 1,029 331
Acquisition (16)
Benefits paid (401) (278)
------- -------
Fair value of plan assets at end of year $ 5,358 $ 3,879
======= =======
Funded status:
Plan assets less than benefit obligation $(1,021) $(1,313)
Unrecognized actuarial loss 788 747
Unrecognized prior service cost 62 67
------- -------
Accrued benefit cost $ (171) $ (499)
======= =======
Assumptions used each year in determining the defined benefit net pension cost
are:
August 31,
--------------------------------
1999 1998 1997
---- ---- ----
Weighted average discount rate 6.5% 7.0% 7.5%
Expected rate of investment return 9.0% 9.0% 9.0%
Expected rate of compensation increase 4.0% 4.0% 4.5%
Year Ended August 31,
--------------------------------
1999 1998 1997
---- ---- ----
Components of net periodic pension benefit cost:
Service cost $723 $634 $529
Interest cost 364 307 257
Expected return on plan assets (409) (363) (299)
Amortization of past service cost 4 4 4
Recognized actuarial loss 19 1
---- ---- ----
Net periodic pension benefit cost $701 $583 $491
==== ==== ====
44
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 8 - Employee Benefits (Continued):
During 1991, the Company adopted a nonqualified supplemental retirement plan for
certain executives. A restricted trust fund has been established and invested in
life insurance policies which can be used for plan benefits, but which are
subject to claims of general creditors. The trust fund and deferred compensation
expense are classified as other assets. The status of this plan is summarized as
follows:
August 31,
----------------------------------
1999 1998 1997
------ ------ ------
Restricted trust fund $1,204 $ 989 $ 684
Deferred compensation expense 356 238 490
Long-term pension liability 1,470 1,195 1,343
Pension cost 156 105 149
Note 9 - Stock Incentive Plan:
In September 1993, the Company adopted a stock incentive plan for employees,
consultants and directors of the Company. The plan covers 1,200 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 become fully exercisable on the first anniversary of the grant
because the Company granted them to certain employees in lieu of annual salary
revisions.
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 1999, 1998 and 1997 regarding net income
and earnings per share is required by SFAS 123 and has been determined as if the
Company had accounted for its employee stock options under the fair value method
of that Statement. The fair value for these awards was estimated at the date of
grant using the Black-Scholes option pricing model with the following
assumptions:
Year Ended August 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
Risk-free interest rate 5.0% 5.5% 6.6%
Dividend yield .01% .01% .01%
Weighted average expected life of options 7.5 Years 7.5 Years 7.5 Years
Volatility .43 .42 .43
45
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 9 - Stock Incentive Plan (Continued):
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:
Year Ended August 31,
--------------------------------------
1999 1998 1997
------- ------- -------
Pro forma net income $ 2,617 $ 8,975 $20,945
Pro forma earnings per share $ 0.26 $ 0.89 $ 2.02
A summary of the Company's stock option activity and related information is as
follows:
Year Ended August 31,
-----------------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
Outstanding-beginning of year 523 $22.67 430 $22.33 295 $21.10
Options granted 201 $12.00 98 $24.25 137 $25.00
Options canceled (16) $24.49 (5) $24.55 (2) $24.25
------ ------ ------
Outstanding - end of year 708 $19.60 523 $22.67 430 $22.33
====== ====== ======
Exercisable at end of year 296 $21.48 199 $20.96 115 $19.99
====== ====== ======
Weighted-average fair value of
options granted during year $ 6.54 $13.33 $14.11
====== ====== ======
Exercise prices for options outstanding as of August 31, 1999 ranged from $12 to
$25. The weighted-average remaining contractual life of those options is 7.6
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.
46
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 10 - Segment Information (Continued:
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 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 metas 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.
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,
----------------------------------------
1999 1998 1997
-------- -------- --------
Revenues from external customers:
Metals Recycling Business $137,070 $217,915 $236,392
Steel Manufacturing Business 172,698 191,346 183,740
Intersegment revenues (44,721) (56,168) (58,379)
-------- -------- --------
Consolidated revenues $265,047 $353,093 $361,753
======== ======== ========
The joint ventures' revenues from external customers are as follows:
Year Ended August 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
Joint Ventures in the Metals Recycling Business $303,014 $332,580 $276,930
Joint Venture Suppliers of Metals 46,575 51,391 46,433
-------- -------- --------
$349,589 $383,971 $323,363
======== ======== ========
47
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 10 - Segment Information (Continued):
Revenues by geographic area:
Year Ended August 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
Metals Recycling Business:
Asia $ 39,454 $ 90,390 $111,183
United States 97,616 127,525 125,209
Sales to Steel Manufacturing Business (44,721) (56,168) (58,379)
-------- -------- --------
Sales to external customers 92,349 161,747 178,013
Steel Manufacturing Business
United States 172,698 191,346 183,740
-------- -------- -------
Consolidated revenues $265,047 $353,093 $361,753
======== ======== ========
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,
----------------------------------------
1999 1998 1997
-------- -------- --------
Income from operations:
Metals Recycling Business $ 4,581 $ 16,473 $ 27,399
Steel Manufacturing Business 6,561 9,838 5,493
Joint Ventures in the Metals Recycling Business 1,380 823 3,785
Joint Venture Suppliers of Metals 2,070 3,292 3,091
Corporate expense and eliminations (6,118) (6,941) (7,162)
-------- -------- --------
Consolidated income from operations $ 8,474 $ 23,485 $ 32,606
======== ======== ========
Income from operations from the joint ventures represents the Company's equity
in the net income of these entities.
Year Ended August 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
Depreciation and amortization expense:
Metals Recycling Business $ 7,672 $ 8,190 $ 7,573
Steel Manufacturing Business 9,809 10,292 10,464
Corporate expense and eliminations 235 232 228
-------- -------- --------
Consolidated depreciation and amortization
expense $ 17,716 $ 18,714 $ 18,265
======== ======== ========
48
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 10 - Segment Information (Continued):
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,
----------------------------------------
1999 1998 1997
-------- -------- --------
Joint Ventures in the Metals Recycling Business $ 5,128 $ 3,437 $ 2,218
Joint Venture Suppliers of Metals 644 650 679
The following is a summary of the Company's total assets and capital
expenditures:
Year Ended August 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
Total assets:
Metals Recycling Business $129,614 $134,854 $129,841
Steel Manufacturing Business 163,172 184,916 194,649
Investment in:
Joint Ventures in the Metals Recycling Business 99,103 98,369 80,426
Joint Venture Suppliers of Recycled Metal 4,877 5,125 11,553
Corporate 48,863 48,076 11,517
-------- -------- --------
$445,629 $471,340 $427,986
======== ======== ========
Capital expenditures:
Metals Recycling Business $ 11,652 $ 12,219 $ 6,315
Steel Manufacturing Business 157 1,517 8,834
Corporate 177 469 337
-------- -------- --------
$ 11,986 $ 14,205 $ 15,486
======== ======== ========
No individual customer accounted for greater than ten percent of the Company's
consolidated revenues in fiscal years 1999, 1998 or 1997.
The Joint Ventures in the Metals Recycling Business have significant customers.
During fiscal 1999, one customer accounted for 17% and another customer
accounted for 13% of combined revenues for these joint ventures. During fiscal
1998, one customer accounted for 17% and another customer accounted for 13% of
combined revenues. During fiscal 1997, individual customers accounted for 13%,
11% and 10% of combined revenues.
49
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 11 - Summarized Financial Information of Joint Ventures:
A summary of combined operations of joint ventures in which the Company is a
partner is as follows:
Year Ended August 31,
--------------------------------
1999 1998
-------- --------
Current assets $134,510 $145,476
Noncurrent assets 121,049 104,416
-------- --------
$255,559 $249,892
======== ========
Current liabilities $ 85,870 $ 53,908
Noncurrent liabilities 13,545 32,907
Partners' equity 156,144 163,077
-------- --------
$255,559 $249,892
======== ========
Year Ended August 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
Revenues $349,589 $383,971 $323,363
======== ======== ========
Income from operations $ 645 $ 6,309 $ 14,399
======== ======== ========
Net income before taxes $ 7,858 $ 8,080 $ 14,156
======== ======== ========
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 $185, $241 and $214 in 1999, 1998 and 1997,
respectively.
Advances from and to joint venture partnerships from the Company are included in
noncurrent assets and liabilities above. Certain advances bear interest at the
prime rate less one percent. Although these advances are collectible on demand,
management does not intend to request payment in the foreseeable future.
Note 12 - Acquisition of Proler International Corp.:
On November 29, 1996, PIC Acquisition Corp. (PIC), a wholly owned subsidiary of
the Company, acquired 4,079 shares of common stock of Proler, representing
approximately 86% of its outstanding shares, for $9 cash per share pursuant to a
tender offer for all of the outstanding shares of common stock of Proler.
Subsequent to November 30, 1996, PIC purchased an additional 343 shares, thereby
increasing its ownership to approximately 94% of the outstanding Proler shares.
On December 6, 1996, the Company completed the merger of PIC with Proler and, as
a result, Proler became a wholly-owned subsidiary of the Company. As a result of
the merger, all remaining outstanding shares of Proler common stock were
converted into the right to receive the same $9 per share in cash paid in the
tender offer. The Company borrowed funds to pay for the Proler shares under
existing credit facilities.
50
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 12 - Acquisition of Proler International Corp. (Continued):
The Company accounted for the acquisition using the purchase method.
Accordingly, the purchase price was allocated to the assets acquired and the
liabilities assumed based on their fair values as of the effective date of the
acquisition.
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and Proler as though the acquisition had
occurred at the beginning of the period shown.
For the Year Ended
August 31, 1997
---------------
(in thousands)
Revenues $ 364,899
=========
Net income $ 14,606
=========
Diluted earnings per share $ 1.41
=========
During the year ended August 31, 1997, Proler recorded a provision for
environmental liabilities of $8.6 million.
These pro forma results have been prepared for comparative purposes only and
include certain adjustments to give effect for the acquisition, together with
related income tax effects. They do not purport to be indicative of the results
of operations which actually would have resulted had the combination been in
effect at the beginning of the periods presented or of future results of
operations of the consolidated entities.
In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $100,685
Cash paid for the stock 42,456
--------
Liabilities assumed $ 58,229
========
Note 13 - Disposal and Sale of Assets:
In March 1999, Cascade Steel Rolling Mills, Inc. sold its Union City, California
mill depot recognizing a gain of $1,200 which is included in other income in the
accompanying consolidated statement of operations.
In May 1998, Proler disposed of a tin metals recycling facility in Lathrop,
California. The facility was acquired as part of the Proler acquisition (Note
12). The sale resulted in a gain of $1.1 million, of which $.8 million was
recorded as a reduction in cost of goods sold and $.3 million as a gain on sale
of assets.
51
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 14 - Quarterly Financial Data (Unaudited):
Fiscal Year 1999
-----------------------------------------------------------
First Second Third Fourth
-------- -------- -------- --------
Net revenues $ 67,165 $ 51,722 $ 66,639 $ 79,521
Income from operations (1,054) (5,138) 2,494 12,172
Net income (1,591) (3,921) 1,855 7,036
Diluted earnings per share $ (0.16) $ (0.39) $ 0.19 $ 0.72
Fiscal Year 1998
-----------------------------------------------------------
First Second Third Fourth
-------- -------- -------- --------
Net revenues $105,403 $ 81,895 $ 80,918 $ 84,877
Income from operations 10,562 6,802 5,519 602
Net income 6,289 3,777 2,569 (3,187)
Diluted earnings per share $ 0.61 $ 0.37 $ 0.26 $ (0.32)
52
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 15 - Subsequent Event:
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. Had the Company adopted this change in fiscal 1999,
the retroactive impact would have been as follows:
Year Ended August 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
Income Statement
----------------
Net income, as reported $ 3,379 $ 9,448 $ 21,225
Adjustment for change in accounting principle (2,758) (1,336) (106)
-------- -------- --------
Net income, as adjusted $ 621 $ 8,112 $ 21,119
======== ======== ========
Basic earnings per share $ 0.34 $ 0.94 $ 2.06
Adjustment for change in accounting principle (0.28) (0.13) (0.01)
-------- -------- --------
Basic earnings per share, as adjusted $ 0.06 $ 0.81 $ 2.05
======== ======== ========
Diluted earnings per share $ 0.34 $ 0.93 $ 2.05
Adjustment for change in accounting principle (0.28) (0.13) (0.01)
-------- -------- --------
Diluted earnings per share, as adjusted $ 0.06 $ 0.80 $ 2.04
======== ======== ========
Statement of Retained Earnings
------------------------------
Balance at beginning of year, as reported $126,326 $118,885 $ 99,718
Cumulative effect on prior years of
applying FIFO method of accounting 3,487 4,823 4,929
Net income 621 8,112 21,119
Dividends paid (1,966) (2,007) (2,058)
-------- -------- --------
Balance at end of year, as adjusted $128,468 $129,813 $123,708
======== ======== ========
53
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 2000 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 2000 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 2000 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 2000 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 2000 Annual Meeting of Shareholders and
is incorporated herein by reference.
54
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following financial statements are filed as part of this
report:
See Index to Consolidated Financial Statements and Schedule on page 28
of this Report.
2. All schedules are omitted as the information is either not
applicable or is not required.
3. Exhibits:
2.1 Agreement and Plan of Merger dated September 15, 1996
between the Registrant and Proler International Corp.
Incorporated by reference to Exhibit (c) (1) to
Registrants' Schedule 14D-1 filed September 20, 1996.
3.1 1993 Restated Articles of Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1,
Registration No. 33-69352 (the Form S-1).
3.2 Restated Bylaws of the Registrant. Filed as Exhibit 3.2 to
Registrant's Form 10-Q for the quarter ended May 31, 1998,
and incorporated herein by reference.
9.1 Schnitzer Steel Industries, Inc. Voting Trust and Buy-Sell
Agreement dated March 31, 1991. Incorporated by reference
to Exhibit 9.1 to the Form S-1.
9.2 First Amendment to Voting Trust and Buy-Sell Agreement
dated July 15, 1991. Incorporated by reference to Exhibit
9.2 to the Form S-1.
9.3 Second Amendment to Voting Trust and Buy-Sell Agreement
dated November 30, 1996. Filed as Exhibit 9.3 to
Registrant's Form 10-K for the fiscal year ended August 31,
1997 and incorporated herein by reference.
10.1 Lease Agreement dated September 1, 1988 between Schnitzer
Investment Corp. and the Registrant, as amended, relating
to the Corporate Headquarters. Incorporated by reference to
Exhibit 10.1 to the Form S-1.
10.2 Second Amendment of Lease dated October 18, 1995 between
Schnitzer Investment Corp. and the Registrant, relating to
the Corporate Headquarters. Filed as Exhibit 10.5 to
Registrant's Form 10-Q for the quarterly period ended
November 30, 1995, and incorporated herein by reference.
10.3 Second Extension of Lease dated May 28, 1996 between
Schnitzer Investment Corp. and the Registrant, relating to
the Corporate Headquarters. Filed as Exhibit 10.1 to the
Registrant's Form 10-Q for the quarterly period ended May
31, 1996, and incorporated herein by reference.
10.4 Lease Agreement dated March 24, 1980 between Schnitzer
Investment Corp. and the Registrant, as amended, relating
to the Corporate Headquarters. Incorporated by reference to
Exhibit 10.2 to the Form S-1.
55
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.
10.17 Uniform Time Charter dated June 22, 1998 between the
Registrant and Trans-Pacific Shipping Co. Filed as Exhibit
10.17 to Registrant's Form 10-K for the fiscal year ended
August 31, 1998, and incorporated herein by reference.
56
10.18 Uniform Time Charter dated May 9, 1995 between the
Registrant and Trans-Pacific Shipping Co. Filed as Exhibit
10.10 to Registrant's Form 10-K for the fiscal year ended
August 31, 1995, and incorporated herein by reference.
10.19 Addendum No. 4 to M/V Jade Pacific Uniform Time Charter
Agreement dated October 31, 1997 between the Registrant and
Trans-Pacific Shipping Co. Filed as Exhibit 10.2 to
Registrant's Form 10-Q for the quarter ended November 30,
1997, and incorporated by reference.
10.20 Uniform Time Charter dated May 9, 1995 between the
Registrant and Trans-Pacific Shipping Co. Filed as Exhibit
10.11 to Registrant's Form 10-K for the fiscal year ended
August 31, 1995, and incorporated herein by reference.
10.21 Addendum No. 4 to M/V Jade Orient Uniform Time Charter
Agreement dated October 31, 1997 between the Registrant and
Trans-Pacific Shipping Co. Filed as Exhibit 10.1 to
Registrant's Form 10-Q for the quarter ended November 30,
1997, and incorporated by reference.
*10.22 1993 Stock Incentive Plan of the Registrant. Filed as
Exhibit 10.22 to Registrant's Form 10-K for the fiscal year
ended August 31, 1997 and incorporated herein by reference.
*10.23 Supplemental Executive Retirement Bonus Plan of the
Registrant. Incorporated by reference to Exhibit 10.8 to
the Form S-1.
*10.24 Assistant Secretary's Certificate dated November 25, 1995
amending the Supplemental Executive Retirement Bonus Plan
of the Registrant. Filed as Exhibit 10.6 to Registrant's
Form 10-Q for the quarterly period ended November 30, 1995,
and incorporated herein by reference.
*10.25 Deferred Bonus Agreement between the Company and an
executive officer. Filed as Exhibit 10.3 to Registrant's
Form 10-Q for the quarterly period ended May 31, 1996, and
incorporated herein by reference.
10.26 Vessel Purchase and Sale Agreement dated June 22, 1998
between the Registrant and Trans-Pacific Shipping Co. Filed
as Exhibit 10.26 to Registrant's Form 10-K for the fiscal
year ended August 31, 1998, and incorporated herein by
reference.
18.1 Letter Regarding Change in Accounting Principle
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, 1999.
57
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, 1999 By: 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, 1999 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:
BARRY A. ROSEN Vice President, Finance and Treasurer
- --------------------------- and Chief Financial Officer
Barry A. Rosen
58
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
59
SCHNITZER STEEL INDUSTRIES, INC.
INDEX TO EXHIBITS
2.1 Agreement and Plan of Merger dated September 15, 1996 between the
Registrant and Proler International Corp. Incorporated by
reference to Exhibit (c) (1) to Registrant's Schedule 14D-1 filed
September 20, 1996.
3.1 1993 Restated Articles of Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1, Registration No. 33-69352 (the
Form S-1).
3.2 Restated Bylaws of the Registrant. Filed as Exhibit 3.2 to
Registrant's Form 10-Q for the quarter ended May 31, 1998, and
incorporated herein by reference.
9.1 Schnitzer Steel Industries, Inc. Voting Trust and Buy-Sell
Agreement dated March 31, 1991. Incorporated by reference to
Exhibit 9.1 to the Form S-1.
9.2 First Amendment to Voting Trust and Buy-Sell Agreement dated July
15, 1991. Incorporated by reference to Exhibit 9.2 to the Form
S-1.
9.3 Second Amendment to Voting Trust and Buy-Sell Agreement dated
November 30, 1996. Filed as Exhibit 9.3 to Registrant's Form 10-K
for the fiscal year ended August 31, 1997 and incorporated herein
by reference.
10.1 Lease Agreement dated September 1, 1988 between Schnitzer
Investment Corp. and the Registrant, as amended, relating to the
Corporate Headquarters. Incorporated by reference to Exhibit 10.1
to the Form S-1.
10.2 Second Amendment of Lease dated October 18, 1995 between Schnitzer
Investment Corp. and the Registrant, relating to the Corporate
Headquarters. Filed as Exhibit 10.5 to Registrant's Form 10-Q for
the quarterly period ended November 30, 1995, and incorporated
herein by reference.
10.3 Second Extension of Lease dated May 28, 1996 between Schnitzer
Investment Corp. and the Registrant, relating to the Corporate
Headquarters. Filed as Exhibit 10.1 to the Registrant's Form 10-Q
for the quarterly period ended May 31, 1996, and incorporated
herein by reference.
10.4 Lease Agreement dated March 24, 1980 between Schnitzer Investment
Corp. and the Registrant, as amended, relating to the Corporate
60
Headquarters. Incorporated by reference to Exhibit 10.2 to the
Form S-1.
10.5 Third Amendment of Lease dated May 29, 1996 between Schnitzer
Investment Corp. and the Registrant, relating to the Corporate
Headquarters. Filed as Exhibit 10.2 to the Registrant's Form 10-Q
for the quarterly period ended May 31, 1996, and incorporated
herein by reference.
10.6 Fourth Amendment of Lease dated March 31, 1997 between Schnitzer
Investment Corp. and the Registrant, relating to the Corporate
Headquarters. Filed as Exhibit 10.6 to Registrant's Form 10-K for
the fiscal year ended August 31, 1997 and incorporated herein by
reference.
10.7 Lease Agreement dated March 1, 1995 between Schnitzer Investment
Corp. and the Registrant, relating to the Corporate Headquarters.
Filed as Exhibit 10.3 to Registrants Form 10-Q for the quarterly
period ended November 30, 1995, and incorporated herein by
reference.
10.8 Amendment of lease dated March 31, 1997 between Schnitzer
Investment Corp. and the Registrant relating to the Corporate
Headquarters. Filed as Exhibit 10.8 to Registrant's Form 10-K for
the fiscal year ended August 31, 1997 and incorporated herein by
reference.
10.9 Lease Agreement dated April 20, 1995 between Schnitzer Investment
Corp. and the Registrant, relating to the Corporate Headquarters.
Filed as Exhibit 10.4 to Registrant's Form 10-Q for the quarterly
period ended November 30, 1995, and incorporated herein by
reference.
10.10 Lease Agreement dated February 18, 1997 between Schnitzer
Investment Corp. and the Registrant relating to the Corporate
Headquarters. Filed as Exhibit 10.10 to Registrant's Form 10-K for
the fiscal year ended August 31, 1997 and incorporated herein by
reference.
10.11 Lease Agreement dated September 1, 1988 between Schnitzer
Investment Corp. and the Registrant, as amended, relating to the
Portland 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
61
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.
10.17 Uniform Time Charter dated June 22, 1998 between the Registrant
and Trans-Pacific Shipping Co. Filed as Exhibit 10.17 to
Registrant's Form 10-K for the fiscal year ended August 31, 1998,
and incorporated herein by reference.
10.18 Uniform Time Charter dated May 9, 1995 between the Registrant and
Trans-Pacific Shipping Co. Filed as Exhibit 10.10 to Registrant's
Form 10-K for the fiscal year ended August 31, 1995, and
incorporated herein by reference.
10.19 Addendum No. 4 to M/V Jade Pacific Uniform Time Charter Agreement
dated October 31, 1997 between the Registrant and Trans-Pacific
Shipping Co. Filed as Exhibit 10.2 to Registrant's Form 10-Q for
the quarter ended November 30, 1997, and incorporated herein by
reference.
10.20 Uniform Time Charter dated May 9, 1995 between the Registrant and
Trans-Pacific Shipping Co. Filed as Exhibit 10.11 to Registrant's
Form 10-K for the fiscal year ended August 31, 1995, and
incorporated herein by reference.
10.21 Addendum No. 4 to M/V Jade Orient Uniform Time Charter Agreement
dated October 31, 1997 between the Registrant and Trans-Pacific
Shipping Co. Filed as Exhibit 10.1 to Registrant's Form 10-Q for
the quarter ended November 30, 1997, and incorporated herein by
reference.
*10.22 1993 Stock Incentive Plan of the Registrant. Filed as Exhibit
10.22 to Registrant's Form 10-K for the fiscal year ended August
31, 1997 and incorporated herein by reference.
*10.23 Supplemental Executive Retirement Bonus Plan of the Registrant.
Incorporated by reference to Exhibit 10.8 to the Form S-1.
*10.24 Assistant Secretary's Certificate dated November 25, 1995 amending
the Supplemental Executive Retirement Bonus Plan of the
Registrant. Filed as Exhibit 10.6 to Registrant's Form 10-Q for
the quarterly period ended November 30, 1995, and incorporated
herein by reference.
62
*10.25 Deferred Bonus Agreement between the Company and an executive
officer. Filed as Exhibit 10.3 to Registrant's Form 10-Q for the
quarterly period ended May 31, 1996, and incorporated herein by
reference.
10.26 Vessel Purchase and Sale Agreement dated June 22, 1998 between the
Registrant and Trans-Pacific Shipping Co. Filed as Exhibit 10.26
to Registrant's Form 10-K for the fiscal year ended August 31,
1998, and incorporated herein by reference.
18.1 Letter Regarding Change in Accounting Principle
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Powers of Attorney.
63