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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
or
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 333-79587
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CALIFORNIA STEEL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 33-0051150
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
14000 San Bernardino Avenue
Fontana, California 92335
(Address of principal executive offices) (Zip code)
</TABLE>
(909) 350-6200
(Registrant's telephone number, including area code)
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Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class: on Which Registered:
-------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
8 1/2% Series B Senior Notes due 2009
(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 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]
As of March 15, 2000, there were 1,000 shares of the registrant's common
stock, no par value, outstanding.
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CALIFORNIA STEEL INDUSTRIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For The Fiscal Year Ended December 31, 1999
<TABLE>
<CAPTION>
Page
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<C> <S> <C>
PART I.................................................................. 1
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 9
Item 3. Legal Proceedings............................................. 9
Item 4. Submission of Matters to a Vote of Security Holders........... 10
PART II................................................................. 11
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 11
Item 6. Selected Financial Data....................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... 16
Item 8. Consolidated Financial Statements and Supplementary Data...... 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 17
PART III................................................................ 18
Item 10. Directors and Executive Officers of the Registrant............ 18
Item 11. Executive Compensation........................................ 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 23
Item 13. Certain Relationships and Related Transactions................ 23
PART IV................................................................. 25
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... 25
</TABLE>
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PART I
Item 1. Business
Statements of our belief in this section are based on our own internal
studies or research, estimates of members of our senior sales management team,
our knowledge of the industry or other information we have internally
compiled.
Introduction
We believe we are the leading producer of flat rolled steel in the western
United States based on tonnage billed. We produce the widest range of flat
rolled steel products in the region, including hot rolled, cold rolled and
galvanized coil and sheet. We also produce electric resistance weld pipe.
Unlike integrated steel mills and mini-mills, we do not manufacture steel.
Rather, we process steel slab manufactured by third parties. Our principal
market consists of the 11 states located west of the Rocky Mountains. We have
four main competitors located in the western United States. Steel products are
also supplied to the western United States via imports from foreign companies
and to a lesser extent from domestic suppliers located in the midwestern
United States. We believe our slab-based business model, breadth of products,
non-union work environment, southern California location and long-standing
customer relationships provide us with significant advantages over our
competition.
Industry Overview
The steel industry is highly cyclical in nature. It is influenced by a
combination of factors including periods of economic growth or recession,
strength or weakness of the U.S. dollar, worldwide production capacity, levels
of steel imports and tariffs. Other factors including the failure to adapt to
technological change, plant inefficiencies and high labor costs have affected
the industry. Steel, regardless of product type, responds to forces of supply
and demand, and prices have been volatile and have fluctuated in reaction to
general and industry-specific economic conditions.
There are generally two types of steel producers: "integrated mills" and
"mini-mills." Steel manufacturing by an integrated producer includes
ironmaking from raw materials, like iron ore and coal in a blast furnace,
followed by steelmaking, slab making, reheating and further rolling into coil
or other shapes. A mini-mill is generally a smaller volume steel producer that
uses an electric arc furnace rather than a blast furnace to create steel from
ferrous scrap metal. Mini-mills typically service regional markets.
Unlike integrated steel mills and mini-mills, we do not manufacture steel.
Rather, we process steel slab manufactured by third parties. As a result, we
do not have the fixed costs associated with the manufacturing of steel.
Historically, raw material costs comprise approximately 70% of our cost of
goods sold. We believe we are the largest importer and the second largest
purchaser of steel slab in the world. Our purchasing power provides us with
the ability to negotiate favorable terms and conditions for steel slab from
low cost and high quality producers throughout the world. Prices of our flat
rolled steel products have historically experienced a close correlation to the
prices of steel slab. Although we remain subject to the cyclicality inherent
in the steel industry, we believe this correlation, combined with our slab-
based business model, provides us with operating margins that are more
consistent than those of a typical flat rolled steel producer.
Recent Industry Conditions
Beginning in the fourth quarter of 1997 and extending through 1998, many
foreign steel producers, particularly those located in Asia and Russia,
experienced difficult financial and economic conditions in their domestic
markets. Economic weakness within their home borders caused a significant
decrease in local demand for steel and other industrial materials. Thus, many
foreign steel producers were forced to export to countries like the United
States that have more stable economic conditions. In addition, the substantial
weakness in value of their local currencies relative to the U.S. dollar
enabled many exporters to drive prices substantially lower in
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the U.S. steel market. This increase in foreign steel supply and commensurate
pricing pressure negatively affected all U.S. steel producers in 1998 and into
1999. Because of its proximity to Asia, the western United States was one of
the first regions to be targeted by the additional export steel supply. We
believe that our market began to experience significant export intrusion in
the fourth quarter of 1997.
During 1999, the International Trade Commission of the U.S. Department of
Commerce and the U.S. International Trade Commission imposed anti-dumping
duties ranging from 17% to 67% on certain foreign steel producers.
Additionally, agreements were concluded between the U.S. government and the
governments of Brazil and Russia to limit hot rolled shipments into the United
States for a period of five years. We believe that this measure of relief
against the significant supply of hot rolled products entering the U.S.
market, through clearly defined limits on imports or additional tariffs,
served as a stabilizing force to domestic steel prices in 1999. However, while
prices on flat rolled steel products began to recover throughout 1999, as of
December 31, 1999 unit prices still remained below prices experienced in the
prior year.
In 1999, several U.S. steel producers filed petitions seeking relief from
foreign dumping of several other types of steel including, but not limited to,
cold rolled steel and electric resistance welded pipe. We were not a party to
these additional petitions.
Products and Customers
Our principal product lines are hot rolled coil and sheet, cold rolled coil
and sheet, galvanized coil and sheet and electric resistance weld (ERW) pipe.
The following table sets forth our sales by product category as a percentage
of total shipments for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1999 1998 1997 1996 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Hot rolled coil and sheet............... 47.3% 52.1% 58.0% 58.8% 59.7%
Cold rolled coil and sheet.............. 15.9% 15.1% 12.0% 12.2% 11.8%
Galvanized coil and sheet............... 29.7% 24.4% 21.8% 22.2% 21.6%
ERW pipe................................ 7.1% 8.4% 8.2% 6.8% 6.9%
----- ----- ----- ----- -----
Total................................. 100% 100% 100% 100% 100%
----- ----- ----- ----- -----
Total tons billed, excluding scrap (in
thousands)............................. 1,803 1,614 1,625 1,563 1,497
===== ===== ===== ===== =====
</TABLE>
The western U.S. steel market is comprised of many consumers typically
requiring small order sizes with a wide variety of metallurgical qualities and
specifications. In contrast, the majority of other U.S. steel markets
primarily depend on heavy-tonnage steel consumers like the automotive and
durable goods manufacturing industries. We believe that the western United
States' smaller and more diverse customer base helps shift pricing power away
from the consumer and to the supplier. Instead of competing solely on price,
we believe we benefit from having customers that place greater value on our
competitive strengths, including integrated service, timeliness of delivery
and ability to meet unique customer needs. We believe that we benefit from our
strategic location in Fontana, California.
We have over 300 active customers, with no single customer accounting for
more than 6% of our 1999 sales. Our customers include service and processing
centers, construction and building material companies, roofing and decking
manufacturers, structural tubing concerns, oil and gas producers and
distributors, wheel and rim manufacturers, packaging and container companies
as well as various customers in other industries.
We do not actively pursue sales in foreign markets and we make foreign sales
only when they are economically advantageous to us. In 1999, we sold
approximately 8,600 tons of steel product to customers in Mexico and Canada,
which represented approximately 0.48% of our total 1999 tons billed.
Hot rolled coil and sheet is our largest product category as measured by
tons sold per year. Our customers use hot rolled steel for a variety of
manufacturing applications, including the production of spiral weld pipe,
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shipping containers, auto wheels and rims, strapping, tubing and a variety of
construction related products. In 1999, we directed approximately 49.2% of our
hot rolled production to our customers and we further processed approximately
50.8% internally for our own product needs.
Cold rolled coil and sheet are used in exposed steel applications where high
surface quality is important. Typically, cold rolled material is coated or
painted. Applications for our cold rolled products include electronic
cabinetry, lighting fixtures, metal office furniture, water heaters, container
manufacturers, tubing, appliances, galvanized containers and a variety of
construction related products. In 1999, we directed approximately 39.9% of our
cold rolled production to our customers and we further processed approximately
60.1% internally for our own product needs.
Galvanized coil and sheet is produced by adding zinc to cold rolled steel
for additional corrosion resistance. We believe we offer the broadest range of
thicknesses, widths and coatings of galvanized products in the western U.S.
market. Applications for our galvanized coil product include tubing, drums,
tanks, culvert and a variety of construction related products.
We supply ERW pipe with diameters ranging from 4.59 to 16.09 in the western
U.S. markets. The principal end-users of our ERW pipe production are oil and
gas transmission companies. We also sell standard pipe to industrial accounts
for load bearing and low-pressure applications.
Operations
Modernization Program
In 1993, we began a capital expenditure program of approximately $250.0
million to be spent over a six year period. As of December 31, 1999, we had
completed the capital investments originally contemplated under the
modernization program. We believe that these investments have strengthened our
competitive position by reducing operating costs, broadening our product line,
improving product quality and significantly increasing our throughput capacity
of flat rolled steel products.
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The following table describes the primary investments made under our
modernization program:
<TABLE>
<CAPTION>
Major Investment Amount Completion Benefit
---------------- ------ ---------- -------
(in millions)
<C> <C> <C> <S>
Continuous pickling . Replaced two pickling lines
and increased annual
line................ $68 1994 continuous pickling
capacity from 780,000 to
1.2 million tons
. Increased overall
efficiency, productivity
and product quality
Five-stand cold . Revamped five-stand cold
rolling rolling mill and increased
mill modernization.. $64 1997 throughput capacity and
improved overall product
quality
. Increased maximum width of
coils produced from 429 to
629, allowing for a
commensurate increase in
coil weight from 18 to 35
tons (increased width
matches width capacity on
new continuous pickling
line)
Reheat furnace....... $28 1997 . Walking beam furnace
substantially replaced
3 pusher furnaces
. Reduced emissions from
reheating process and
decreased energy costs
Second continuous $73 1998 . Increased annual capacity
galvanizing line.... from 375,000 to
550,000 tons
. Provided ability to produce
a broader product range (we
believe the widest range in
the western United States)
. Improved efficiency by
allowing each galvanizing
line to focus on either
high or low gauge product
. Investment includes a
capital expenditure of
$38.5 million and an
operating lease of
$34.5 million
Coil handling $14 1999 . Reduced hot coil cooling
system.............. times from 3 days to
6-8 hours
. Improved product quality
and efficiency by
eliminating manual coil
handling process
</TABLE>
We believe the success of our modernization program contributes to our being
a low cost producer of flat rolled steel products. We believe that the full
benefits of the modernization program have yet to be achieved as production
efficiencies continue to be gained through improved operating and maintenance
practices, targeted capital investments and enhanced production planning and
quality control procedures. Two of the principal achievements realized from
the modernization program have been increased production capacity and a
continued shift to higher margin, value added products.
Hot Strip Rolling and Finishing Mills
We produce hot rolled coil and sheet from slab in our hot strip mill. A
walking beam furnace reheats slab, directs it to a multi-stand rolling mill to
reduce thickness and rolls it into coil. Equipped with an automatic gauge
control system and technologically advanced computer controls, the hot strip
mill currently possesses a throughput capacity of over 1.7 million tons and
can produce hot rolled coil in gauges from .0539 to .75.9
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The hot strip mill facility is primarily composed of the following:
. a walking beam furnace with a capacity of 5,820 tons of slab per day
supported by one pusher type reheat furnace that can be used to provide
incremental production needs and increase capacity by 310 tons per day;
and
. the 869 mill which consists of five roughing stands, a scale breaker,
six finishing stands and two downcoilers.
In addition, the hot strip finishing lines are composed of the following:
. an 809 coil slitter line that can trim product up to 0.3759 in thickness
and can be easily adjusted to meet a variety of customer-specified
widths;
. one shear line using a synchronized flying shear;
. a skin pass line that uses one 2-hi mill with 329 diameter x 869 rolls
which is used for surface improvements; and
. a build-up line that is used to increase coil sizes to customers
specifications.
Continuous Pickle Line
We can further process hot rolled coil on the 629 continuous pickle line for
direct sales to our customers or for cold rolling and galvanizing production.
The continuous pickle line is a conventional horizontal design with a coil
entry section, welder, hot water preheat tanks, acid tanks, water rinse,
dryer, looper, side trimmer, coiler, oiling equipment and scale. The line,
which was installed in 1994, can currently yield up to approximately
1.2 million tons per year.
Cold Rolled Mill
Cold rolled sheet is hot rolled steel that has been further processed
through the continuous pickle line and then successively passed through a
rolling mill without reheating until the desired gauge and other physical
properties have been achieved. Cold rolling reduces gauge and hardens the
steel and, when further processed through an annealing furnace and temper
mill, improves uniformity, ductility and formability. Cold rolling can also
impart various surface finishes and textures. Cold rolled steel is used in
applications that demand higher quality or finish. The thinner coil is usually
annealed to increase ductility, while some coil is cut into sheet.
The cold rolled facility, with a current annual finished capacity of
approximately 1.1 million tons, includes the following:
. a five-stand reduction mill;
. an electrolytic cleaning line; and
. nine single stack annealing furnaces.
The five-stand reduction mill reduces pickled steel strip from a gauge range
of .0759 to .2259 to a range of .0109 to .1729 in thickness, with a maximum
width of 609. The five-stand reduction mill was completely revamped in 1997.
After cold reduction, coil is cleaned in a 2008 to 1,0008 per minute
electrolytic cleaning line, producing smut-free steel which is then batch
annealed before final production in the 60" temper mill, where the steel is
tempered to specified finish and gauge.
Galvanizing Mills
Galvanized coil and sheet represent our highest value added products,
requiring the greatest degree of processing and quality controls. We produce
galvanized sheet by taking cold rolled coil, heating it in an annealing
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furnace and dipping the coil, while still hot, into a pot of molten zinc. As
the coil leaves the pot, coating controls insure product specifications match
customer requirements. The steel's corrosion resistance makes it ideal for
applications like air conditioning units, air ducts, metal ties, studs,
siding, decking, roofing and culverts.
With the addition of our second continuous galvanizing line that started
production in August 1998, we believe that our galvanizing facilities can
produce the full range of coated steel. The combined current capacity of our
galvanizing lines is approximately 550,000 tons per year. The first
galvanizing line is horizontally configured and produces gauges from .0129 to
.174.9 The second continuous galvanizing line is vertically configured and
produces gauges from .019 to .069.
Electric Resistance Weld (ERW) Pipe Mill
We produce ERW pipe by rollforming hot rolled coil into a pipe shape,
welding the edges together with a high frequency welder, annealing the weld
and cutting the finished product to length on a continuous line. The ERW pipe
may then undergo additional testing and/or finishing operations like
hydrotesting and end beveling.
The pipe mill produces pipe with outside diameters ranging from 4.59 to 169
and wall thickness ranging from .1569 to .3759, with lengths available up to
638 without mid-weld. Process coating is available through local coating
applicators, one of whom lease space on our property. The ERW pipe mill has a
current capacity of approximately 150,000 tons per year.
Semi-Finished Steel Slab and Suppliers
Steel slab is a semi-finished steel product in rectangular form and is
generally the first form taken by molten steel after it solidifies. The
principal users of steel slab are steel producers or processors that roll slab
into finished products like plate or coil.
Historically, our raw material consumption costs have comprised
approximately 70% of our cost of goods sold. We are the largest importer and
the second largest purchaser of slab in the world. We purchase slab from a
diverse group of foreign suppliers and one U.S. supplier to obtain high
quality steel at low cost through reliable sources. Our foreign vendors are
located in Brazil, Australia, Japan, Germany, Netherlands, Russia, Mexico, and
Venezuela.
Prior to 1999, we made our slab purchases on a quarterly basis. In 1999,
however, approximately 90% of our slab procurement needs were met with slab
purchased under purchase contracts. We changed from our traditional method of
slab purchasing when an opportunity was recognized to assure slab suppliers
with guaranteed volume in exchange for attractive pricing. Toward the latter
half of 1999, the worldwide slab market had reversed course and the
opportunities to enter into similar purchase contracts for 2000 have
diminished. We will return to negotiating slab prices on a quarterly basis
with respect to our slab purchases for year 2000.
Although we are not reliant on any one single vendor, we currently expect to
purchase approximately 50% of our estimated 2000 supply from Companhia
Siderurgica de Tubarao. Located in Brazil, we believe that Companhia
Siderurgica de Tubarao is the largest commercial producer and exporter of slab
in the world. We also currently expect to purchase approximately 20% of our
2000 supply from Broken Hill Proprietary Company Ltd. Both of these mills have
been our traditional suppliers for over 10 years. All of our existing
contracts with our parent or affiliated companies are negotiated on an "arm's
length" basis and in accordance with market conditions.
We are related to Companhia Siderurgica de Tubarao. Companhia Siderurgica de
Tubarao is a subsidiary of both Companhia Vale do Rio Doce and Kawasaki Steel
Corporation, our stockholders' parent companies. We are not related to Broken
Hill Proprietary Company Ltd.
We negotiate directly with a variety of shipping companies to deliver our
slab directly to the Port of Los Angeles. We also charter vessels from Seamar
Shipping Corporation, a subsidiary of Companhia Vale do Rio Doce. The vessels
are loaded following a specific stowage plan that we developed. The plan
ensures high
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productivity rates at both the loading and unloading sites. Our agents are on
site for the loading of each shipment. After unloading, the slab is
transported to our facility by rail using the services of the Burlington
Northern Santa Fe Railroad. A recently renewed long-term contract with
Burlington Northern covers our transportation service at fixed rates through
2003.
According to the Shareholders' Agreement, we have agreed to continuously
purchase slabs from Companhia Siderurgica de Tubarao as raw material for our
operations according to basic terms and conditions we agree upon from time to
time. In addition, our stockholders have agreed to maintain the existing
contracts between us and Companhia Siderurgica de Tubarao and Seamar Shipping
Corporation in accordance with their respective terms and conditions.
We believe that our integrated slab procurement system allows us to manage
our slab inventory levels, ensuring optimal tonnage levels as well as the slab
quality necessary to meet our customers' order specifications. As of December
1999, we had what we believed to be firm backlog orders of approximately
248,000 tons. Based on our average sales price at that time, the backlog value
was approximately $95,000,000. As of December 1998, we had what we believed to
be firm backlog orders of approximately 116,000 tons. Based on our average
sales price at that time, the backlog value was approximately $49,000,000.
Marketing and Customer Service
We believe that we provide the highest level of customer service and product
support in the western U.S. market. Our emphasis on customer service and
product quality has enabled us to establish long-standing relationships with
our customers. Our relationships with 90% of our top 30 customers extend
beyond 10 years. We attribute this customer loyalty, in large part, to our
strategy of delivering superior customer service as well as the in-depth
market knowledge of our salesforce. Each member of our senior sales team has
in excess of 25 years of experience selling to our western U.S. customer base.
Our marketing and customer service strategies emphasize three principal
objectives:
. To provide a broad range of products;
. To provide consistent service and on time product availability; and
. To provide ancillary, value added services.
We are the only producer of flat rolled steel products located in the
western United States which can supply hot rolled, cold rolled and galvanized
coil and sheet. We also produce ERW pipe in diameters ranging from 4.59 to
16.09. We believe that we are well equipped to provide "one-stop shopping" for
our customers and we believe that this maximizes sales opportunities and
increases the convenience and value of the service we provide to customers. We
will continue to invest in the quality of our products across all product
lines, allowing us to market ourselves as a full-service provider of flat
rolled steel in the region.
Our location in southern California not only gives us a significant freight
cost advantage over our competition, but also allows us to provide a more
service-oriented approach to our customers. Our operating structure allows us
to respond quickly to changes in the timing of customer requirements, adjust
schedules, source stock inventory and meet specialized shipping needs. Our
ability to deliver made-to-order products in a timely manner allows our
customers to maximize their inventory turns and meet production targets. By
maintaining a regional focus, we believe that we can most effectively service
our customers and achieve our goal of increasing market share in higher margin
value added products.
As part of our strategy to provide superior customer service, we offer our
customers ancillary services such as engineering and metallurgical advice. A
substantial portion of our customers are small to medium-sized businesses. As
a result, many do not have the resources to employ a sophisticated
metallurgical engineering staff. Our metallurgical engineers work with our
customers on a daily basis, often on site, providing advisory services
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focused on reducing procurement costs and improving overall production
efficiency. In addition to ancillary services, we also provide "service
center" like operations including slitting, shearing, coating and single-
billing for third party processing. We believe that these value added services
help to further differentiate us from our competitors.
Competition
The steel industry is cyclical in nature and highly competitive. We compete
with domestic and foreign steel producers on the basis of customer service,
product quality and price. The domestic steel industry has been adversely
affected in recent years by high levels of steel imports, worldwide production
overcapacity, increased domestic and international competition and other
factors. We believe that the competitive landscape within the steel industry
will continue to evolve, especially as new technologies and production methods
are introduced. We believe that because of our slab-based business model,
breadth of products, non-union work environment, southern California location
and long-standing customer relationships, we are well positioned to meet
competitive threats. However, some of our competitors are larger and may have
substantially greater capital resources, more modern technology and lower
labor and raw material costs than us, as well as excess production capacity in
some products and could exert downward pressure on prices for some of our
products in the future.
We are also subject to general economic trends and conditions, such as the
presence or absence of sustained economic growth and currency exchange rates.
We are particularly sensitive to trends in the construction, agriculture, oil
and gas and gas transmission industries, because these industries are
significant markets for our steel products. If there were a downturn in one or
more of these industries, our sales volume could be adversely affected.
U.S. Competition
We compete with western U.S. based producers of steel sheet products
including steel processors, one integrated producer and, to a lesser extent,
service centers. Historically, high transportation costs have deterred
midwestern steel manufacturers from accessing the western U.S. market. Many of
our competitors have invested in new plants and equipment, that have improved
their product quality and increased their production efficiencies. In the hot
rolled segment, our principal domestic competitor is Geneva Steel, located in
Provo, Utah. UPI, located in Pittsburgh, California, is our principal
competitor in galvanized and cold rolled products. We also compete in the
galvanized market with Broken Hill Proprietary Company Ltd., located in
Kalama, Washington, and MSC Pinole-Point Steel, located in Richmond,
California.
We also compete with steel service and processing centers. Service and
processing centers serve as both our customers as well as competitors. Service
centers serve as wholesale distributors for a broad line of sheet products and
also provide value added services including slitting, shearing and coating.
Over the past 10 years, mini-mills have been transforming the competitive
environment of the U.S. steel industry. Mini-mills are generally smaller
volume steel producers that use ferrous scrap metal as their basic raw
material and serve regional markets. While no mini-mills in our market
currently produce significant amounts of flat rolled products, at least one
mini-mill has expressed an intention to construct facilities in the western
U.S. to produce hot rolled coil and sheet that might compete with products we
manufacture. Manufacturing techniques have allowed mini-mills to produce types
of sheet products that have traditionally been supplied by us or integrated
producers. We also face increasing competition from producers of materials
such as aluminum, composites, plastics and concrete that compete with steel in
many markets.
Foreign Competition
Foreign steel producers have consistently competed in the western United
States steel market in all of our product categories. Some foreign producers
benefit from low labor costs, weak local currencies and government subsidies.
Beginning in the fourth quarter of 1997 and extending through 1998, we
experienced increased
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competition from importers primarily within the hot rolled products sector.
Although imported steel has relatively long lead times to reach the western
U.S. market, economic and currency dislocations in foreign markets encourage
many importers to target the United States with excess capacity at aggressive
prices. Existing trade laws and regulations may not be adequate to prevent
unfair trade practices concerning steel imports that could pose increasing
problems for us and the rest of the domestic steel industry.
Employee Relations
At December 31, 1999, we had 952 full-time employees. We have the largest
non-union workforce located at any one steel facility in the United States. We
provide our employees with supplemental work training and education programs.
Our officers also routinely discuss our business plan with them. We believe
that we have a good relationship with our employees.
Forward-Looking Statements
Certain statements contained in this Form 10-K regard matters that are not
historical facts and are forward-looking statements (as such term is defined
in the rules promulgated pursuant to the Securities Act of 1933, as amended).
Such forward-looking statements include any statement that may predict,
forecast, indicate or imply future results, performance or achievements, and
may contain the words "anticipate," "believe," "estimate," "expect,"
"project," "imply," "intend," "foresee," "will be," "will continue," "will
likely result," and similar words and expressions. Such forward-looking
statements reflect our current views about future events, but are not
guarantees of future performance and are subject to risk, uncertainties and
assumptions. Such risks, uncertainties and assumptions include those
specifically identified in this Form 10-K and the following:
. our substantial indebtedness, interest expense and principal repayment
obligations under our bank facility and 8 1/2% senior notes, which could
limit our ability to use operating cash flow in our business other than
for debt-servicing obligations, obtain additional financing and react to
changing market and general economic conditions, and which increase our
vulnerability to interest rate increases,
. because our board of directors is elected by our two stockholders, each
of whom holds 50% of our stock, there is a possibility of deadlocks
among our board of directors that could result in costly delays in
making important business decisions and put us at a competitive
disadvantage,
. competitive factors and pricing pressures,
. our ability to control costs and maintain quality,
. future expenditures for capital projects, and
. industry-wide market factors and general economic and business
conditions.
Our actual results could differ materially from those projected in these
forward-looking statements as a result of these risks, uncertainties and
assumptions, many of which are beyond our control.
Item 2. Properties
We are located on approximately 450 acres in Fontana, California. Our
facilities are situated on approximately 115 acres of this space. The property
includes a 22 mile railroad system serviced by Burlington Northern Santa Fe
and Southern Pacific rail lines.
Item 3. Legal Proceedings
We are from time to time in the ordinary course of business, subject to
various pending or threatened legal actions. We believe that any ultimate
liability arising from pending or threatened legal actions should not have a
material adverse effect on our financial position, results of operations or
liquidity.
9
<PAGE>
Environmental Matters
Compliance with environmental laws and regulations is a significant factor
in our business. We are subject to various federal, state, and local
environmental laws and regulations concerning, among other things, air
emissions, waste water discharges and solid and hazardous waste disposal. We
own property and conduct or have conducted operations at properties that are
contaminated with hazardous materials and will require investigation and
remediation according to federal, state or local environmental laws and
regulations. Expenditures on environmental matters, including expenditures on
pollution control equipment and remediation activities, totaled approximately
$3.2 million in 1997, $2.3 million in 1998 and $1.1 million in 1999. We plan
to spend approximately $2.4 million in 2000, with the largest component
representing investigation activities at our Fontana site.
In 1996, we entered into an Expedited Remedial Action Voluntary Enforceable
Agreement with the California Environmental Protection Agency, Department of
Toxic Substances Control. This agreement superseded a Voluntary and
Enforceable Agreement and Imminent and/or Substantial Endangerment Order
issued by the Department in 1992 and amended in 1994. According to the
agreement, we are conducting an investigation of potential soil contamination
at approximately 28 areas of concern at our facility in Fontana, California.
We currently expect to propose a remedial action plan to the Department in the
spring of 2000. We estimate remedial costs could range from $5.2 to $11.0
million. However, the current estimate is an approximation based on incomplete
information. This estimate is less than earlier estimates and could be further
reduced as more information becomes available. On the other hand, these costs
could be significantly higher if substantial soil excavation is required or if
the agency requires any groundwater investigation or remediation. Our actual
future expenditures for response actions regarding environmental conditions
existing at our properties and other similar matters cannot be conclusively
determined at this time. There can be no guarantee that these expenditures
will not have a material adverse effect on our financial condition or results
of operations. At December 31, 1999, we accrued $800,000 for a remedial action
feasibility study, which is expected to be completed over the next two years.
In October 1998, we received a Notice of Violation of Waste Discharge
Requirements from the California Regional Water Quality Control Board, Santa
Ana Region, relating to stormwater discharges at our Fontana facility. Based
on the facts and circumstances of this case, we believe that the outcome of
this matter will not materially affect our financial position, results of
operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
None.
10
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Not applicable.
Item 6. Selected Financial Data
The selected consolidated financial information presented below as of and
for the fiscal years ended December 31, 1999, 1998, 1997, 1996 and 1995 has
been derived from our audited consolidated financial statements. Except for
the fiscal years ended December 31, 1995 and 1996 these consolidated financial
statements are contained elsewhere in this Form 10-K. The following selected
consolidated financial information is qualified by reference to, and should be
read in conjunction with the historical consolidated financial statements,
including notes accompanying them and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" found elsewhere in this Form
10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Income Statement
Data(3):
Net sales .............. $687,050 $673,439 $722,458 $694,444 $707,641
Cost of sales........... 564,889 603,613 638,159 591,672 615,945
Gross profit............ 122,161 69,826 84,299 102,772 91,696
Selling, general and
administrative
expenses............... 29,946 28,626 27,088 26,215 25,593
Income from operations.. 92,215 41,200 57,211 76,557 66,103
Interest expense, net... (16,345) (16,954) (13,977) (10,145) (16,332)
Income before income
taxes.................. 77,027 26,816 44,316 67,725 46,988
Net income.............. 46,847 19,800 28,792 39,403 27,632
EBITDA, as adjusted
Data(1):
Income before income
taxes.................. $ 77,027 $ 26,816 $ 44,316 $ 67,725 $ 46,988
Interest expense........ 16,345 16,954 13,977 10,145 16,332
Excluding (gain) loss of
fixed assets........... (13) 308 1,054 2,518 2,916
Depreciation and
amortization........... 26,331 26,659 24,374 18,844 18,623
-------- -------- -------- -------- --------
EBITDA, as adjusted..... $119,690 $ 70,737 $ 83,721 $ 99,232 $ 84,859
-------- -------- -------- -------- --------
EBITDA, as adjusted
margin................. 17.4 % 10.5 % 11.6 % 14.3 % 12.0 %
Other Data:
Operating margin........ 13.4 % 6.1 % 7.9 % 11.0 % 9.3 %
Cash flows provided by
operating activities... 72,287 63,456 57,211 66,503 34,260
Cash flows used in
investing activities... (37,321) (49,335) (57,954) (82,300) (21,792)
Cash flows (used in)
provided by financing
activities............. (39,029) (12,502) 1,067 15,623 (14,640)
Capital expenditures.... $ 37,397 $ 49,354 $ 58,296 $ 50,421 $ 21,890
Total tons billed,
excluding scrap (in
thousands)............. 1,803 1,614 1,625 1,563 1,497
Number of employees at
end of period.......... 952 976 945 923 925
Man hours per ton
produced............... 1.18 1.29 1.30 1.30 1.42
Selected Ratios:
Ratio of earnings to
fixed charges(2)....... 5.3x 2.3x 3.6x 6.3x 3.8x
Ratio of EBITDA, as
adjusted to interest
expense, net........... 7.3x 4.2x 6.0x 9.8x 5.2x
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ....... $ 7,899 $ 11,962 $ 10,343 $ 10,019 $ 10,193
Property, plant and equipment,
net ............................ 262,696 251,163 228,795 194,615 163,073
Total assets .................... 552,805 533,606 500,151 491,931 391,421
Total long-term debt including
current portion and notes
payable to banks ............... 230,000 243,700 241,900 213,500 194,050
Total stockholders' equity(3) ... 217,079 190,272 184,774 183,315 147,739
</TABLE>
- --------
(1) EBITDA, as adjusted represents income before income taxes, gain/loss on
sale of fixed assets, plus net interest expense, depreciation and
amortization. EBITDA, as adjusted is not intended to represent cash flows
from operations, cash flows from investing or cash flows from financing
activities as defined by generally accepted accounting principles and
should not be considered as an alternative to cash flow or a measure of
liquidity or as an alternative to net earnings as indicative of operating
performance. EBITDA, as adjusted is included because we believe that
investors find it a useful tool for measuring our ability to service our
debt. EBITDA, as adjusted is not necessarily comparable to similarly
titled measures reported by other companies.
(2) For the purpose of determining the ratio of earnings to fixed charges,
earnings represent income before income taxes plus fixed charges and
amortization of capitalized interest, minus capitalized interest. Fixed
charges consist of interest expensed and capitalized, an estimate of the
interest within rental expense.
(3) During the fourth quarter of 1999, we changed our inventory costing method
from the last-in, first-out (LIFO) method to the first-in, first-out
(FIFO) method. We believe that the accounting change is preferable
primarily because under the current economic environment of low inflation,
the change to FIFO would result in a better measurement of operating
results. All previously reported results have been restated to reflect the
retroactive application of this accounting change as required by generally
accepted accounting principles. The accounting change increased net income
for 1995 by $4,678,000, decreased net income for 1996 by $1,263,000,
decreased net income for 1997 by $1,979,000, decreased net income for 1998
by $9,295,000 and decreased net income for 1999 by $6,276,000, net of
applicable income taxes, due principally to the effect of LIFO allowance
liquidations.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
From our site in Fontana, California, we produce four steel products: hot
rolled sheet, cold rolled sheet, galvanized sheet and ERW pipe, with a current
annual finished production of over 1.8 million tons. We service a broad range
of customers with applications that include pipe and tubing, heating,
ventilating and air conditioning, strapping, drums, steel wheels, culverts and
a variety of construction related products. We ship our products by truck and
rail to manufacturers, contractors and distributors primarily in the 11 states
west of the Rocky Mountains.
In 1993, we began a modernization program of approximately $250.0 million to
be spent over a six year period. In 1999, we completed the capital investments
originally contemplated under our modernization program. We believe these
investments have strengthened our competitive position by reducing operating
costs, broadening our product line, improving product quality and
significantly increasing throughput capacity. Between 1992 and 1999, our tons
billed increased from 953,000 to 1,803,000, an increase of 89.2%. Hot rolled
tons billed increased 362,000 tons and accounted for 42.6% of the volume gains
during this period. Cold rolled tons billed increased 148,000 tons, or 17.4%,
and galvanized tons billed increased 282,000, or 33.2%.
Our products are shipped via customer truck, common carrier or by rail. We
generally sell our product free on board, commonly referred to as FOB,
shipping point and title is passed when products are loaded for shipment. We
recognize revenue from product sales when products are shipped or delivered to
the customer,
12
<PAGE>
depending on the terms of the sale. For products shipped FOB shipping point,
revenue is recognized at the time of shipment. For products shipped FOB
destination, revenue is recognized at the time of delivery. Our revenue is
dependent on the volume, product mix and sales prices of our products. General
economic conditions as well as the supply and demand of steel products within
our market influence sales prices. We generally set our sales prices quarterly
and we maintain no long-term sales agreements.
Cost of goods sold consists primarily of raw materials, labor, natural gas,
electricity and zinc costs. Raw material costs have historically comprised
approximately 70% of our cost of goods sold. Our slab unit cost was
significantly lower in 1999 compared to previous years. Additionally, during
1999 we opportunistically purchased hot rolled and cold rolled coil as raw
material feedstock.
We generally purchase steel slab in boatload quantities. Imported slab
arrives on chartered vessels in the Port of Los Angeles and is transported by
rail to our Fontana facility. We generally purchase steel slab on open
negotiated payment terms. Steel slab consumption costs include the FOB value
of steel slab, ocean transportation costs, rail freight, duties, unloading and
insurance. Historically, we negotiated slab FOB costs quarterly and other
costs through contracts of varying lengths. In 1999, however, approximately
90% of our slab procurement needs were met with slab purchased under purchase
contracts. We changed from our traditional method of slab purchasing when an
opportunity was recognized to assure slab suppliers with guaranteed volume in
exchange for attractive pricing. Toward the latter half of 1999 the worldwide
slab market had reversed course and the opportunities to enter into similar
purchase contracts for 2000 have diminished. We will return to our practice of
negotiating slab costs on a quarterly basis for year 2000. Our purchasing
power and extensive knowledge of the worldwide slab market continues to
provide us with the opportunity to negotiate with slab suppliers on terms that
we believe are favorable to us. We will continue to actively manage slab
procurement to minimize costs and may opportunistically purchase slab on a
forward basis.
We use zinc in the production of our galvanized products. We currently
purchase zinc from several suppliers. Zinc is purchased on a monthly basis and
is priced using a formula tied to the London Metals Exchange zinc index. In
the past, we have managed our purchase price of zinc by entering into
contracts to lock in favorable prices and may continue to do so in the future.
We purchase natural gas and electricity from local vendors active in the
California market. Rates for natural gas are based on a discount formula tied
to published indices and rates for electricity are based on market prices. In
1998, the State of California partially deregulated the electricity market.
Based on publicly available information, the electricity market is expected to
be completely deregulated by the year 2002. We believe the cost of electricity
is higher in California than in other parts of the country and, therefore, as
a major consumer of electricity we should benefit in a deregulated
environment.
Selling, general and administrative expenses consist primarily of sales and
labor, various administrative expenses, materials, supplies and shipping
costs. Labor costs comprise approximately 50% of selling, general and
administrative expenses.
Results of Operations
<TABLE>
<CAPTION>
Tons Billed
-----------------------------
Year Ended December 31,
-----------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Hot Rolled..................................... 853,539 841,275 941,903
Cold Rolled ................................... 287,371 242,908 195,110
Galvanized..................................... 534,861 394,100 354,660
ERW Pipe....................................... 127,599 135,753 133,201
--------- --------- ---------
Total........................................ 1,803,370 1,614,036 1,624,874
========= ========= =========
</TABLE>
13
<PAGE>
During the fourth quarter of 1999, we changed our inventory costing method
from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO)
method. We believe that the accounting change is preferable primarily because
under the current economic environment of low inflation, the change to FIFO
would result in a better measurement of operating results. All previously
reported results have been restated to reflect the retroactive application of
this accounting change as required by generally accepted accounting
principles. The accounting change increased net income for 1995 by $4,678,000,
decreased net income for 1996 by $1,263,000, decreased net income for 1997 by
$1,979,000, decreased net income for 1998 by $9,295,000 and decreased net
income for 1999 by $6,276,000, net of applicable income taxes, due principally
to the effect of LIFO allowance liquidations.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net sales. For the year ended December 31, 1999 net sales were $687,050,000.
This was a $13,611,000, or 2.0%, increase from the $673,439,000 net sales
generated for the year ended December 31, 1998. The year over year increase is
attributable to an increase in sales volume and a better product mix partially
offset by a lower unit price. In 1999 we sold 1,803,370 net tons of steel,
excluding steel scrap. This exceeded 1998 tonnage sold of 1,614,036 by 189,334
net tons. The 11.7% increase in tonnage sold contributed approximately
$78,414,000 in additional net sales. In 1999 we sold more cold rolled and
galvanized steel as a percentage of total products then in 1998. This improved
product mix contributed an additional $21,400,000 in additional net sales.
Unit prices, after adjusting for product mix, decreased year over year
impacting net sales by approximately $87,700,000.
Gross profit. Gross profit increased $52,335,000, or 75.0%, from $69,826,000
for the year ended December 31, 1998 to $122,161,000 for the year ended
December 31, 1999. Gross profit as a percentage of net sales increased from
10.4% in 1998 to 17.8% in 1999. Our gross profit increased as a result of (1)
our slab prices decreasing at a faster rate than our sales prices, (2) higher
sales volumes, and (3) a product mix that included more of the higher value
added galvanized products.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1,320,000, or 4.6%, from $28,626,000 for
the year ended December 31, 1998 to $29,946,000 for the year ended December
31, 1999. Selling, general and administrative expenses as a percentage of net
sales remained comparable at 4.4% and 4.3% for the years ended December 31,
1999 and 1998, respectively. We experienced an increase in selling, general
and administrative expenses predominately as a result of profit sharing
increases.
Equity in income (loss) of affiliate. We maintain a 1.5% ownership interest
in Companhia Siderurgica de Tubarao. Our investment in Companhia Siderurgica
de Tubarao is accounted for under the equity method of accounting. For the
year ended December 31, 1999, we recognized a $1,125,000 loss from our
investment in Companhia Siderurgica de Tubarao, which consists of our pro-rata
share of Companhia Siderurgica de Tubarao's loss offset by $1,200,000 of
amortized negative goodwill. Companhia Siderurgica de Tubarao is a publicly-
traded Brazilian company engaged in the production of steel slab.
Approximately 95% of Companhia Siderurgica de Tubarao's products are exported
outside of Brazil and sold predominantly in U.S. dollars. This high percentage
of U.S. dollar denominated cash flow tends to lessen the impact of market
risks related to fluctuations in currency exchange rates. For the year ended
December 31, 1998, we recognized income of $1,932,000, including amortization
of negative goodwill, from our investment in Companhia Siderurgica de Tubarao.
Net Interest expense. Net interest expense decreased $609,000, or 3.6%, from
$16,954,000 for the year ended December 31, 1998 to $16,345,000 for the year
ended December 31, 1999. Interest expense figures are net of interest income
and capitalized interest of $2,522,000 in 1998 and $1,046,000 in 1999.
Income taxes. Income taxes increased $23,164,000 from $7,016,000 for the
year ended December 31, 1998 to $30,180,000 for the year ended December 31,
1999. The effective tax rate for 1998 was 26.2% compared to an effective tax
rate of 39.2% in 1999. Income tax expense is net of state manufacturing
investment credit of $3,869,000 in 1998 and $1,050,000 in 1999.
14
<PAGE>
Net income. Net income for the year ended December 31, 1999 was $46,847,000.
This was $27,047,000, or 136.6%, higher than the net income of $19,800,000 for
the year ended December 31, 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales. Net sales decreased $49,019,000, or 6.8%, from $722,458,000 for
the year ended December 31, 1997 to $673,439,000 for the year ended December
31, 1998. We experienced lower net sales due to a 0.7% decrease in tons billed
and a 5.8% decrease in the average unit price of our products. We realized
lower unit prices as prices on all flat rolled products were negatively
impacted by a significant increase in competition from low priced imports. The
impact of imports was somewhat offset by a shift in mix from hot rolled
products to galvanized products. We generally sell galvanized products at
higher prices than hot rolled products.
Gross profit. Gross profit for 1998 was $69,826,000 or 10.4% of net sales.
Our gross profit for 1997 was $84,299,000 or 11.7% of net sales. We
experienced a lower gross profit principally from a decrease in net sales.
Additionally, depreciation expense for the year ended December 31, 1998
increased $2,285,000 due to the start of our second continuous galvanizing
line in September 1998.
In 1998 we made two changes in accounting estimates. The first accounting
estimate changed the estimated useful lives of the hot strip mill reheat
furnace, five stand cold reduction mill, continuous pickling line and the
second galvanizing line from 10 to 15 years. We made this change following an
investigation our engineers conducted and our operations staff concluded the
economic useful lives of the listed equipment ranged from 12 to 18 years. We
adopted 15 years representing the midpoint within the range. Changing the
useful life of this equipment increased 1998 net income by approximately
$1,500,000.
The second accounting estimate changed the estimated useful life of our
rolls from one year to three years and ten years for back-up rolls. We made
changes to better reflect how these assets are expected to be used over time,
to provide a better matching of revenues and expenses and to be consistent
with industry practice. Changing the useful life of this equipment increased
our 1998 net income by approximately $2,000,000.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1,538,000, or 5.7%, from $27,088,000 for
the year ended December 31, 1997 to $28,626,000 for the year ended December
31, 1998. Selling, general and administrative expenses as a percentage of net
sales increased from 3.7% in 1997 to 4.3% in 1998. We experienced the increase
in expenses primarily from an increase in doubtful accounts, outside legal
services and directors' fees.
Interest expense. Interest expense increased $2,977,000, or 21.3%, from
$13,977,000 for the year ended December 31, 1997 to $16,954,000 for the year
ended December 31, 1998. We experienced this increase from $2,100,000 in
interest expense paid to the Internal Revenue Service as a result of a review
of its audits for the years ended December 31, 1992 and 1993. Interest expense
figures are net of interest income and capitalized interest of $2,583,000 in
1997 and $2,522,000 in 1998.
Income taxes. Income taxes decreased $8,508,000, or 54.8%, from $15,524,000
for the year ended December 31, 1997 to $7,016,000 for the year ended December
31, 1998. Income tax expense is net of a state manufacturing investment credit
of $2,700,000 in 1997 and $3,869,000 in 1998.
Net Income. Net income was $19,800,000 for the year ended December 31, 1998,
as compared to $28,792,000, for the prior year. If we had not made accounting
estimate changes extending the useful lives of the hot strip mill reheat
furnace, five stand cold reduction mill, continuous pickling line and the
second continuous galvanizing line from 10 to 15 years, extending the
estimated useful life of rolls from one year to three years, and extending the
estimated useful life of back-up rolls from one year to ten years, the net
income for the year ended December 31, 1998 would have been reduced to
approximately $16,300,000.
15
<PAGE>
Liquidity and Capital Resources
At December 31, 1999, we had $7,899,000 in cash and cash equivalents and
$36,666,000 available under our credit facility. During the year ended
December 31, 1999, cash flows from operations generated $72,287,000, which
consisted of $46,847,000 in net income, $26,331,000 in depreciation and
amortization expense and a net cash flow decrease of $891,000 due to changes
in assets and liabilities, the majority of which were due to a $5,085,000
increase in inventories, a $15,236,000 decrease in accounts receivable and a
$4,157,000 increase in accounts payable. Cash flows from investing activities
during the year ended December 31, 1999 consisted predominately of $37,397,000
of capital expenditures. Cash flows from financing activities during the year
ended December 31, 1999 consisted primarily of net repayments under both
short-term and long-term lines of credit and a dividend payment of
$20,040,000.
As of March 10, 1999, we entered into a new $130,000,000 five-year bank
facility of which $80,000,000 was outstanding as of December 31, 1999. The new
bank facility is collateralized by cash, accounts receivable, inventory and
other assets. Subject to the satisfaction of customary conditions and a
borrowing base, advances under the new bank facility may be made at any time
prior to the new bank facility termination date. The termination date is the
earlier to occur of March 10, 2004 or the date that is 60 days prior to the
maturity of our 8.5% senior notes. Advances may be used for working capital,
capital expenditures and other lawful corporate purposes, including the
refinancing of existing debt.
On April 6, 1999, we issued an aggregate of $150,000,000 of ten-year 8.5%
senior unsecured notes. Interest is payable on the notes on April 1 and
October 1, commencing October 1, 1999. The notes are senior in right of
payment to all of our subordinated indebtedness and equal in right of payment
to all of our existing and future indebtedness that is not by its terms
subordinated to the notes. We may redeem the notes at any time after April 1,
2004. The indenture governing the notes contains covenants that limit our
ability to incur additional indebtedness, pay dividends on, redeem or
repurchase capital stock and make investments, create liens, sell assets, sell
capital stock of certain of our subsidiaries, engage in transactions with
affiliates and consolidate, merge or transfer all or substantially all of our
assets and the assets of certain of our subsidiaries on a consolidated basis.
Proceeds from the notes were used to permanently repay outstanding bank debt
under a $10,000,000 term loan provided by The Dai-Ichi Kangyo Bank,
Netherlands, and a $50,000,000 revolving credit facility and an $80,000,000
term loan, both provided by a syndicate of institutions led by the Industrial
Bank of Japan, Ltd., Los Angeles Agency.
We currently have approximately $12,300,000 million in material commitments
for capital investments expected to be completed during fiscal 2000. At any
one time we are involved in 40 to 60 individual capital projects designed to
maintain or enhance operational performance.
We anticipate that our primary liquidity requirements will be for working
capital, capital expenditures, debt service and the payment of dividends. We
believe that cash generated from operations and available borrowings under the
new bank facility will be sufficient to enable us to meet our liquidity
requirements for fiscal 2000.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks related to fluctuations in interest rates on
our notes and on our $130 million floating rate bank facility. We do not
currently use interest rate swaps or other types of derivative financial
instruments.
For fixed rate debt like the senior notes, changes in interest rates
generally affect the fair value of the debt instrument. For variable rate debt
like our bank facility, changes in interest rates generally do not affect the
fair value of the debt, but do affect earnings and cash flow. We do not have
an obligation to repay our senior notes prior to maturity in 2009 and, as a
result, interest rate risk and changes in fair value should not have a
significant impact on us. We believe that the interest rate on the 8 1/2%
senior notes approximates the current rates available
16
<PAGE>
for similar types of financing and as a result the carrying amount of the 8
1/2% senior notes approximates fair value. The carrying value of the floating
rate bank facility approximates fair value as the interest rate is variable
and resets frequently. The bank facility bears interest at the Eurodollar
rate, which was 5.87% at December 31, 1999. We estimate that the average
amount of debt outstanding under the facility for fiscal year 2000 will be
$80.0 million. Therefore, a one percentage point increase in interest rates
would result in an increase in interest expense of $800,000 for the year.
We do not believe that the future market rate risk related to the senior
notes and the floating rate bank facility will have a material impact on our
financial position, results of operations or liquidity.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and hedging activities. SFAS 133, as
amended by SFAS 137, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Application of this accounting standard is not
expected to have a material impact on our financial position, results of
operations or liquidity.
Year 2000 Costs
As of this date, we have not experienced any significant disruptions in our
operating activities or any significant effect on our financial condition due
to failure of our computerized systems to accurately receive, provide and
process date and time data from, into and between the twentieth and twenty-
first centuries (the "Year 2000 Issue"). We do not expect the Year 2000 Issue
to have a material adverse effect on our operations or financial results in
fiscal year 2000.
Item 8. Consolidated Financial Statements and Supplementary Data
The Consolidated Financial Statements required in response to this Item are
included under Item 14(a) of Part IV of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
17
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth our Directors and executive officers as of
December 31, 1999. All Directors hold their positions until their terms expire
and until their respective successors are elected and qualified. Executive
officers are elected by and serve at the discretion of the Board of Directors
until their terms expire and their successors are duly chosen and qualified.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Tatsuhiko Hamamoto...... 59 Chairman of the Board of Directors
Hajime Bada............. 51 Director
Francisco Povoa......... 50 Director
Nadim Sareyed-Dim....... 58 Director
C. Lourenco Goncalves... 41 President and Chief Executive Officer
James E. Declusin....... 57 Senior Executive Vice President, Commercial
Junsuke Takasaki........ 50 Executive Vice President, Operations
Vicente Wright.......... 47 Executive Vice President, Finance
Donald Duffy............ 65 Vice President, Operations
Brett Guge.............. 45 Vice President, Administration and Corporate Secretary
</TABLE>
Tatsuhiko Hamamoto has served as Chairman of the Board of Directors since
July 1998. From 1995 to 1998, Mr. Hamamoto was Corporate Auditor on the Board
of Kawasaki Steel Corporation. From 1993 to 1995, Mr. Hamamoto was Executive
Vice President of KLI, an aviation leasing company. From 1990 to 1992,
Mr. Hamamoto served as Vice President, Technology and Finance at Armco Steel.
From 1987 to 1989, Mr. Hamamoto was General Manager of the Overseas Steel
Business Department at Kawasaki Steel Corporation and our Executive Vice
President. He graduated from Kobe University with a Bachelor of Arts Degree in
Economics.
Hajime Bada has served as a Director since March 1998. He has been employed
by Kawasaki Steel Corporation since 1973 where he has held positions as Chiba
Works Steelmaking Shop No. 1 Manager, Mizushima Works Steelmaking Shop No. 2
Manager, Steel Business Planning Manager, General Manager of the Steel
Business Planning Department and General Manager of the Corporation Planning
Department. He graduated from Tokyo University with a Master's Degree in
Metallurgy.
Francisco Povoa has served as a Director since March 1998. He has worked at
Companhia Vale do Rio Doce since February 1972 and has held positions as
Superintendent of Technology, Mining Superintendent and General Manager of the
South System, Industrial Engineering General Manager. From 1991 to 1993, Mr.
Povoa served as the Executive Director of Rio Doce International in Brussels.
Since 1997, he has served as both the Chairman of the board of directors and
the President of Companhia Vale do Rio Doce's Employees Investment Club, a
shareholder of Companhia Vale do Rio Doce. He served as President of SIBRA-
Eletrosiderurgica Brasileira S.A. and Companhia Paulista de Ferro-Ligas, a
Brazilian manganese producer, from 1997 to 1998. He has served as a member of
the board of directors of Companhia Vale do Rio Doce since 1997, Societe
Europeenne D'Alliages Pour La Siderurgie (SEAS), a French ferro-alloy producer
since 1998, Nova Era Silicon, a Brazilian ferro-silicon company, since 1998,
and Companhia Vale do Rio Doce's pension fund since 1993. Mr. Povoa graduated
from Universidade Federal de Minas Gerais with a Mining Engineering Degree.
Nadim Sareyed-Dim has been a member of the Board since August 1997 and
served as the Chairman of the board from August 1997 to March 1998. Mr.
Sareyed-Dim has been a Director, the President and Executive Vice President of
Rio Doce America Inc. (USA), a subsidiary of Companhia Vale do Rio Doce, since
1996, and the President of the Board and Chief Executive Officer of Rio Doce
Ltd. (USA), also a subsidiary of Companhia Vale do Rio Doce, since 1997. From
1989 to 1995, he served as President, Vice President and Commercial Director
of Vale do Rio Doce Navegacao SA-Docenave, a subsidiary of Companhia Vale do
Rio Doce. Mr. Sareyed-Dim has also been a member of the board of directors of
SEAS, a French ferro-manganese company,
18
<PAGE>
and a Member of the Board of Directors of Rio Doce Pasha Terminal, a cargo
terminal in the Port of Los Angeles. He received his Ph.D in Metallurgy from
Monash University, Melbourne, Australia.
C. Lourenco Goncalves has served as President and Chief Executive Officer
since March 1998. From 1981 to 1998, he was employed by Companhia Siderurgica
Nacional, the largest steel company in Brazil, where he held positions as a
Managing Director, General Superintendent of Volta Redonda Works, Hot Rolling
General Manager, Cold Rolling and Coated Products General Manager, Hot Strip
Mill Superintendent, Continuous Casting Superintendent and Quality Control
Manager. Mr. Goncalves graduated from the Federal University of Minas Gerais
State with a Master's Degree in Metallurgy.
James E. Declusin has served as the Senior Executive Vice President,
Commercial since July 1998. From 1984 until July 1998, he served as our Vice
President, Commercial and Chief Operating Officer. Prior to joining us, Mr.
Declusin spent 17 years in various management positions in the commercial area
of Kaiser Steel Corporation. Mr. Declusin graduated from University of Santa
Clara with a Bachelor of Science Degree in Commerce.
Vicente Wright has served as Executive Vice President, Finance since
February 1998. Mr. Wright was the Steel Division General Manager, from 1992 to
1998, and Iron Ore Sales General Manager from 1991 to 1992 of Companhia Vale
do Rio Doce. From 1987 to 1988, he served as Iron Ore Sales General Manager
for Rio Doce Asia Ltd., a subsidiary of Companhia Vale do Rio Doce. In 1986
and 1987, he was the assistant to the President of California Steel Industries
in charge of slab procurement and all of its related logistics. From 1978 to
1986, Mr. Wright served as Purchasing Executive and Slab Marketing Manager at
Companhia Siderurgica de Tubarao. Mr. Wright was a member of the Board of
Directors of Companhia Siderurgica Nacional, the largest steel company in
Brazil, from 1993 to 1997, Acominas, a Brazilian steel mill, from 1994 to
1998, Siderar, an Argentine steel mill, from 1994 to 1997, Chairman of Nova
Era Silicon, a Brazilian ferro-silicon company mill, from 1994 to 1997 and
SEAS from 1994 to 1998. He graduated from Marquette University, Milwaukee,
Wisconsin with a Bachelor's Degree in Business Administration.
Junsuke Takasaki has served as Executive Vice President, Operations since
June 1998. Prior to joining us, he was employed by Kawasaki Steel Corporation
from 1973 to 1998 where he held positions as Cold Rolling Department General
Manager and Quality Department Manager at Chiba Works and Kawasaki Steel
Corporation's New York and Detroit offices. Mr. Takasaki graduated from Kyushu
University with a Master's Degree in Metallurgy.
Donald Duffy retired effective December 31, 1999 from his position as Vice
President, Operations, a position he held since 1992. Prior to becoming the
Vice President of Operations, Mr. Duffy served as our Maintenance Coordinator
and Major Project Manager. From 1952 through 1985, Mr. Duffy was employed by
Kaiser Steel Corporation where he held positions as Machinist, Planning
Department Supervisor, Machine Shop General Foreman, General Foreman
Maintenance of Continuous Caster, Superintendent of Maintenance and
Superintendent of Operations and Maintenance. Mr. Duffy received a Certificate
in Mechanical Engineering and Industrial Supervision from Chaffey College.
Brett Guge has served as Vice President, Administration and Corporate
Secretary since May 1997. From 1994 to 1997, he served as the Manager of
Administration of Gallatin Steel. From 1983 to 1994, he was employed by Alcoa
where he held positions as the Superintendent of Industrial Relations and
Employment, Supervisor of Employee Relations and Superintendent of Industrial
Relations and Training. Mr. Guge graduated from the University of Tennessee
with a Bachelor's Degree in Communications, and from Xavier University with a
Master's Degree in Business Administration.
Board Committees
Our Board of Directors has a Compensation Committee and an Operations and
Finance Committee. The Compensation Committee is comprised of four members:
Director Tatsuhiko Hamamoto, Director Nadim
19
<PAGE>
Sareyed-Dim, Mr. Toshiro Kabasawa of Kawasaki Steel Corporation and Ms. Carla
Grasso of Companhia Vale do Rio Doce. The Compensation Committee met twice
during 1999. The Compensation Committee reviews compensation packages for our
officers and prepares the executive compensation proposal to the Board.
The Operations and Finance Committee is comprised of four members including
Directors Nadim Sareyed-Dim and Hajime Bada, Ms. Gloria Serra of Companhia
Vale do Rio Doce and Mr. Takashi Sekita of Kawasaki Steel Corporation. This
committee met twice during 1999. The Operations and Finance Committee mainly
reviews our investment plans, business plan, annual operating plan and budget.
The Operations and Finance Committee is also responsible for reviewing our
operating results and performance.
Director Compensation
For their service as our Directors for fiscal year 1999, all Directors,
except the Chairman, received $3,000 per month and committee members received
$1,000 per month, each payable on a monthly basis. Mr. Hamamoto, Chairman of
the Board of Directors, is paid a salary of $310,000 as our employee. During
1999, he received $310,000 in salary, $97,099 in bonus and $6,744 in matching
contributions to his account in our 401(k) Plan.
Item 11. Executive Compensation
The following summary compensation table sets forth information regarding
compensation earned in the fiscal year ended December 31, 1999 by our Chief
Executive Officer and each of our other four most highly compensated executive
officers whose salary and bonus exceeded $100,000 in the 1999 fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------ ------------
Name and Principal Other Annual All Other
Position Salary Bonus Compensation LTIP Payouts Compensation
- ------------------ -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
C. Lourenco Goncalves... $310,000 $127,284 $49,521(1) -- $7,470(2)
President and Chief
Executive Officer
James E. Declusin....... $282,000 $109,315 -- (3) -- $7,884(2)
Senior Executive Vice
President, Commercial
Vicente Wright.......... $190,000 $ 87,404 $62,509(4) -- $8,237(2)
Executive Vice
President, Finance
Junsuke Takasaki........ $190,000 $ 59,771 -- (3) -- $8,237(2)
Executive Vice
President, Operations
Donald Duffy(5)......... $175,000 $ 70,675 -- (3) -- $8,208(2)
Vice President
Operations
</TABLE>
- --------
(1) Represents $9,250 in car allowance and $40,271 in personal and family
medical expenses and home leave reimbursements. Home leave reimbursement
is paid to our executives who are foreign nationals in connection with
trips by them and their family members to their country of origin.
(2) Represents matching contributions made to the executive's account in our
401(k) plan.
(3) Executive received perquisites that are not disclosed here in accordance
with SEC regulations because the value of such perquisites is less than
the lesser of $50,000 or 10% of the executive's total salary and bonus.
(4) Represents $9,250 in car allowance and $53,259 in medical expenses and
home leave reimbursements. Home leave reimbursement is paid to our
executives who are foreign nationals in connection with trips by them and
their family members to their country of origin.
(5) Mr. Duffy resigned effective December 31, 1999.
20
<PAGE>
Supplemental Executive Retirement Plans and Separation Agreement
On August 7, 1998, we entered into a Supplemental Executive Retirement Plan
with James E. Declusin, Senior Executive Vice President, Commercial. The plan
reduced Mr. Declusin's annual base salary effective July 1, 1998 from $360,000
to $282,000, based on reassignment from his position of Chief Operating
Officer, and granted him retirement payments in order to induce him to remain
in our employ. Upon Mr. Declusin's retirement, we will pay Mr. Declusin a
monthly benefit for 180 months calculated as follows: one-twelfth of the
product of 2.5% multiplied by the number of years he is employed with us,
limited to 16 years, multiplied by his average annual compensation, multiplied
by a vested percent, currently standing at 24%, and which increases to 100% if
Mr. Declusin continuously remains employed by us on October 30, 2000.
On February 24, 1997, we entered into a Supplemental Executive Retirement
Plan with Donald W. Duffy, Vice President, Operations, intended to induce Mr.
Duffy to remain in our employ. Effective upon his retirement on December 31,
1999, we are obligated to pay Mr. Duffy a monthly benefit for 180 months
calculated as follows: one-twelfth of the product of 2.5% multiplied by the
number of years he is employed with us limited to 18 years, multiplied by his
average annual compensation.
On June 12, 1998, we entered into a Separation Agreement with David
Catterlin, Vice President, Commercial. According to this agreement, following
his termination of employment on June 15, 1998, we have paid and will pay Mr.
Catterlin as follows: we paid him wages through July 17, 1998, continued his
medical plan coverage through July 31, 1998, paid him $173,316 in 1999,
$86,658 in 2000, and will pay him $86,658 in 2001.
Shareholders' Agreement
We are owned 50% by Kawasaki Steel Holdings (USA), Inc., a Delaware
corporation and a subsidiary of Kawasaki Steel Corporation, a Japanese
corporation, and 50% by Rio Doce Limited, a New York corporation and a
subsidiary of Companhia Vale do Rio Doce, a Brazilian corporation. Our two
stockholders entered into a Shareholders' Agreement dated June 27, 1995,
replacing a Shareholders' Agreement dated June 1, 1987. According to the
Shareholders' Agreement, the stockholders agreed to subscribe for additional
shares of our stock in proportion to their respective ownership if any new
stock is issued. According to the Shareholders' Agreement, increases in our
capital stock from time to time shall be allocated between our common stock
and preferred stock as agreed upon by the stockholders. Each of the
stockholders has the right and obligation to subscribe and pay fully for the
new shares in proportion to its respective ownership of our common stock. In
addition, either stockholder may let its Affiliated Corporations, as defined
the Shareholders' Agreement, subscribe, in whole or in part, to the new shares
to be issued to it under the terms described below.
The Shareholders' Agreement provides that the Board of Directors shall be
constituted of five directors, one of whom shall be chairman, as elected by
and among the directors. Each stockholder shall have the right to appoint two
Directors and the fifth Director shall be elected by unanimous affirmative
vote of the shareholders. In addition, the stockholders shall jointly appoint
a president, who shall appoint other officers designated by the Board of
Directors. The Shareholders' Agreement also provides for a Consultative
Council consisting of two members, one appointed by each of the stockholders.
It is unclear whether the Consultative Council provisions are valid under
Delaware corporation law. The Consultative Council decides on all relevant
matters submitted to it by both or either of the stockholders and specifically
resolves any deadlock among the Directors. Because no stockholder holds a
majority of our stock and the Directors and members of the Consultative
Council are elected by the stockholders in proportion to each of the
stockholders' holdings, there is a possibility that a deadlock may occur on
any issue voted on by the stockholders, Board of Directors and Consultative
Council. If a deadlock were to occur and the Consultative Council could not
resolve the issue, the last recourse is arbitration according to the
Shareholders' Agreement. Furthermore, according to the Shareholders'
Agreement, we have agreed to purchase slab from Companhia Siderurgica de
Tubarao and use Seamar Shipping Corporation for ocean transportation of slab
at negotiated prices.
21
<PAGE>
The Shareholders' Agreement provides that, subject to any limitation on the
payment of dividends contained in any agreement we are a party to, the
stockholders shall cause us to distribute from our profits as many dividends
as possible that may be distributed under the applicable laws and regulations,
provided that the profits shall first be applied to the payment of dividends
on the preferred stock. We have historically paid dividends of 50% of our net
income per year.
If either one of the stockholders wishes to transfer or assign their shares
of our stock to a third party, other than to one of its affiliated
corporations, the stockholder must first offer to sell those shares to the
other stockholder upon the same terms and conditions that the third party has
offered to purchase the shares. Any stockholder who sells, transfers, assigns,
or creates a pledge or other encumbrance on its shares in favor a third party,
other than its affiliated corporations, is obligated to obtain an undertaking
letter from the third party according to which the third party undertakes
unconditionally and irrevocably the obligations of the transferring
stockholder under the Shareholders' Agreement in proportion to the number of
shares transferred. Either stockholder may sell, transfer or assign to its
affiliated corporations all or any part of its shares or preemptive rights to
subscribe for new shares of our stock by giving written notice to the other
stockholder, provided that the affiliated corporation has agreed to become a
party to the Shareholders' Agreement. In this case, both the transferor and
the affiliated corporation shall jointly assume all of the obligations of the
transferor under the Shareholders' Agreement.
401(k) Plan
We maintain the California Steel Industries, Inc. 401(k) Savings Plan, a tax
qualified cash or deferred tax arrangement under Section 401(k) of the
Internal Revenue Code of 1986, as amended. The 401(k) Plan provides the
participants with benefits upon retirement, death, disability or termination
of employment with us. Employees are eligible to participate in the salary
reduction portion of the plan on the first day of the calendar month following
their date of hire.
Participants may authorize us to contribute to the 401(k) Plan on their
behalf a percentage of their compensation, not to exceed legally permissible
limits, including an overall dollar limit of $10,000 for 1999. The 401(k) Plan
provides for our discretionary matching and profit sharing contributions. We
currently match 100% of the first 4% of the participant's deferral under the
401(k) Plan each year and 50% of the next 2% of the participant's deferral
under the 401(k) Plan each year. Each plan year we may also make an additional
contribution to the 401(k) Plan. This discretionary employer contribution, if
we make it, is allocated to each participant's account based on the
participant's compensation for the year relative to the compensation of all
participants for that year. In order to share in the allocation of the
discretionary employer contribution, if any, a participant must complete 1,000
hours of service in the plan year.
Profit-Sharing Plan
We maintain a profit sharing plan under which bonuses are awarded based on a
pool amount, equal to 8% of our income before taxes excluding gain or loss on
disposition of fixed assets. The basis for determining the profit sharing pool
is subject to review and approval of our Board of Directors. The employee's
share in the pool amount is based on his or her length of service with us
during the profit sharing period. Employees who voluntarily terminate their
employment for reasons others than retirement before the end of the profit
sharing period and employees whose employment is involuntarily terminated are
not eligible to receive any profit sharing award.
Compensation Committee Interlocks and Inside Participation
Nadim Sareyed-Dim, Toshiro Kabasawa, Carla Grasso and Tatsuhiko Hamamoto
served as members of our Compensation Committee in 1999. Except for Mr.
Hamamoto, none of the members of the Compensation Committee was, during 1999,
an officer, employee or formerly an officer or employee of ours or our
subsidiary.
22
<PAGE>
Mr. Kabasawa served as Staff Manager, Steel Business Planning of Kawasaki
Steel Corporation during 1999. Kawasaki Steel Corporation's subsidiary,
Kawasaki Steel Holdings (USA), Inc. is one of our stockholders. During 1999,
we paid $51,089,000 pursuant to related party transactions with Kawasaki Steel
Corporation. In 1999, Mr. Sareyed-Dim served as the President of the Board and
Chief Executive Officer of Rio Doce Ltd. (USA), one of our stockholders, and
also a subsidiary of Companhia Vale do Rio Doce. In 1999, Ms. Grasso served as
Director of Human Resources and Corporate Administration of Companhia Vale do
Rio Doce, the parent of one of our stockholders, Rio Doce Limited.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of December 31, 1999, information
regarding the shares of our common stock and Class C preferred stock
beneficially owned by each stockholder that beneficially owns in excess of 5%
of the outstanding shares of our common stock and Class C preferred stock. No
director or named executive officer beneficially owns any shares of our common
stock or Class C preferred stock.
<TABLE>
<CAPTION>
Class C
Common Preferred
------------ ------------
% of % of
Name of Beneficial Owner Number Class Number Class
------------------------ ------ ----- ------ -----
<S> <C> <C> <C> <C>
Rio Doce Limited.................................. 500 50% 1,500 50%
546 5th Avenue, 12th Floor
New York, New York 10036
Kawasaki Steel Holdings (USA), Inc. .............. 500 50% 1,500 50%
c/o Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
</TABLE>
Rio Doce Limited is a subsidiary of Companhia Vale do Rio Doce, a Brazilian
corporation, and Kawasaki Steel Holdings (USA), Inc. is a subsidiary of
Kawasaki Steel Corporation, a Japanese corporation.
Item 13. Certain Relationships and Related Transactions
Our stockholders, Kawasaki Steel Holdings (USA), Inc., a subsidiary of
Kawasaki Steel Corporation, and Rio Doce Limited, a subsidiary of Companhia
Vale do Rio Doce, are parties to a Shareholders' Agreement. According to the
Shareholders' Agreement, the stockholders control the election of the Board of
Directors. The stockholders also indirectly control the appointment of
officers through their right to jointly elect the president, who is entitled
to appoint our other officers.
The Shareholders' Agreement also provides for a Consultative Council,
comprised of two members. Each stockholder is entitled to elect one member.
The Consultative Council decides on all matters submitted to it by either or
both of the stockholders and resolves deadlocks among the Board of Directors.
We have transactions in the normal course of business with affiliated
companies. For example, we purchase slab from Companhia Siderurgica de
Tubarao, a subsidiary of both Companhia Vale do Rio Doce and Kawasaki Steel
Corporation. During 1999, we purchased $105,248,000 of slab from Companhia
Siderurgica de Tubarao and $51,089,000 of various raw materials from Kawasaki
Steel Corporation. We expect to purchase approximately 50% of our estimated
2000 supply of steel slab from Companhia Siderurgica de Tubarao. We also hold
a 4% interest in the common stock of Companhia Siderurgica de Tubarao.
We conducted arms-length negotiations with Companhia Siderurgica de Tubarao
in 1999. We also negotiated with Companhia Siderurgica Nacional on the same
basis for 1999. The Shareholders' Agreement provides that we shall
continuously purchase slabs from Companhia Siderurgica de Tubarao under terms
and conditions as agreed upon by Companhia Siderurgica de Tubarao and us. The
executive officer negotiating the market price for the steel slab was our
Executive Vice President-Finance. In addition to the steel slab purchases
23
<PAGE>
from Companhia Siderurgica de Tubarao described above, we purchased steel slab
from Companhia Siderurgica Nacional in 1999, for which we paid approximately
$14,499,000. Companhia Siderurgica Nacional is a stockholder of Companhia Vale
do Rio Doce.
We charter vessels from Seamar Shipping Corporation, a subsidiary of
Companhia Vale do Rio Doce, for the ocean transfer of slab to the Port of Los
Angeles. During 1999, we incurred $8,003,000 in charter fees from Seamar
Shipping Corporation for their services. The Shareholders' Agreement provides
that we shall charter vessels from Seamar. We entered into a 15-year contract
with Seamar for shipping services that expires on May 29, 2000. We negotiate
rates annually on an arms-length basis. The contract specifies that Seamar is
our sole supplier of shipping services for all slab shipped from Port Praia
Mole, Brazil. Under the agreement, we have agreed to ship a minimum of 600,000
metric tons of slab per year. Volume in 1999 exceeded this amount and we
expect the same in 2000. Approximately 50% of our chartering services are
provided by Seamar Shipping Corporation. The executive officer negotiating the
price for shipping services was our Executive Vice President--Finance.
We contract with Rio Doce Pasha Terminal, a joint venture of Companhia Vale
do Rio Doce, to unload our ocean cargo from ships at the Port of Los Angeles.
During 1999, we incurred $16,076,000 for Rio Doce Pasha Terminal's services.
The Shareholders' Agreement provides that we shall contract with Rio Doce
Pasha Terminal for their unloading services. We have a five-year contract with
Rio Doce for terminal unloading services that expires on December 31, 2000. We
negotiate rates annually on an arms-length basis. The contract specifies that
we will process a minimum of 1.0 million tons of steel slab through Rio Doce
Pasha Terminal per year. The price per ton may be renegotiated July 1 of each
year to reflect a change in union labor contracts. If we ship more than 1.0
million tons per year, we will receive a discount per ton for the unloading of
any slabs after 1.0 million tons of slabs have been unloaded. Approximately
100% of our unloading services are provided by Rio Doce Pasha Terminal. The
executive officer negotiating the price for unloading services was our
Executive Vice President--Finance.
24
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) (1) and (2) Financial Statements:
The following consolidated financial statements and schedule of the
Registrant are included in response to Item 8 of this Report:
1. Consolidated Financial Statements:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Index to Consolidated Financial Statements............................ F-1
Independent Auditors' Report.......................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998.......... F-3
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997.................................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997..................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.................................................. F-6
Notes to Consolidated Financial Statements............................ F-7
2. Consolidated Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts........................ S-1
</TABLE>
All other schedules have been omitted since they are either not required,
not applicable or the information is otherwise included.
(b) Reports on Form 8-K, filed during the last quarter of 1999:
None.
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
3.1 Certificate of Incorporation of the Registrant as amended by
Amendment to the Certificate of Incorporation filed June 6, 1984,
with Delaware Secretary of State, as amended by the Certificate
of Amendment to the Certificate of Incorporation filed August 2,
1984, with the Delaware Secretary of State, as amended by the
Certificate of Amendment to the Certificate of Incorporation,
filed January 12, 1988, with the Delaware Secretary of State,
and, as amended by the Certificate of Ownership merging
California Steel Industries Tubular Products, Inc. into the
Registrant, filed with the Delaware Secretary of State on
December 20, 1993.(1)
3.2 Bylaws of the Registrant.(1)
4.1 Indenture dated as of April 6, 1999 between the Registrant and
State Street Bank Trust Company of California, N.A., Trustee,
relating to the Registrant's 8% Senior Notes due April 6,
2009.(1)
4.2 Specimen Series B note.(1)
4.3 Shareholders' Agreement, dated June 27, 1995, by and among Rio
Doce Limited, Companhia Vale do Rio Doce, Kawasaki Steel Holdings
(USA), Inc. and Kawasaki Steel Corporation.(1)
10.1 Revolving Credit Agreement, dated as of March 10, 1999, among the
Registrant, the Lending Institutions from time to time party
thereto as lenders, BancBoston, N.A., in its capacity as Loan and
Collateral Agent, and Bank of America National Trust and Savings
Association, in its capacity as Letter of Credit and
Documentation Agent and BancBoston Robertson Stephens Inc. and
NationsBanc Montgomery Securities LLC, as the Arrangers.(1)
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.2 Agreement for the Purchase of Carbon Steel Slabs, dated as of
December 5, 1984, by and between the Registrant and Companhia
Siderurgica de Tubarao, as amended by Memorandum of Agreement,
dated as of June 7, 1985, Memorandum of Agreement No. MA-02,
dated as of December 9, 1986, Memorandum of Agreement No. MA-03,
dated as of December 11, 1986, Memorandum of Agreement No. MA-04,
dated as of December 11, 1986, Memorandum of Agreement No. MA-05,
dated as of May 22, 1987 and Memorandum of Agreement No. MA-06,
dated as of December 11, 1996.(1)
10.3 Facsimile transmission, dated October 27, 1998 from the Registrant
to Companhia Siderurgica de Tubarao, confirming the parties
mutual understanding that the Registrant will acquire 700,000
metric tons of steel slab from Companhia Siderurgica de Tubarao
for 1999 delivery.(1)
10.4 E-mails from Broken Hill Proprietary Company Ltd. to the
Registrant, dated October 13, 1998 and October 15, 1998,
respectively, confirming the Registrant's and Broker Hill
Proprietary Company Ltd.'s mutual agreement of October 9, 1998
and October 14, 1998, to purchase and supply 70,000 metric tons
and 280,000 metric tons of steel slab during 1999.(1)
10.5 Letter, dated October 6, 1998, from the Registrant to Companhia
Siderurgica Nacional, confirming Companhia Siderurgica Nacional's
agreement to supply the Registrant with 100,000 metric tons of
steel in 1999.(1)
10.6 Contract, dated August 20, 1990, by and between the Registrant and
Seamar Shipping Corporation of Monrovia, Liberia.(1)
10.7 The Burlington Northern and Santa Fe Railway Company BNSFC 302606
Regulated Transportation Contract, dated as of November 19, 1998,
by and between the Registrant and Burlington Northern Railroad
Company.(1)
10.8 Stevedore and Terminal Services Agreement, dated as of January 1,
1996, between Rio Doce Pasha Terminal L.P. and the Registrant, as
amended.(1)
10.9 Equipment Lease Agreement, dated as of September 30, 1998, by and
between the Registrant and State Street Bank and Trust Company of
California, National Association.(1)
10.10 Settlement Agreement, dated as of June 1, 1995, by and among the
Registrant, Kaiser Ventures, Inc., KSC Recovery, Inc. and Kaiser
Steel Land Development, Inc.(1)
10.11 Groundwater Indemnity Agreement, dated as of June 1, 1995, between
the Registrant and Kaiser Ventures, Inc.(1)
10.12 A 1996 Expedited Remedial Action Voluntary Enforceable Agreement,
by and among the Registrant and the California Environmental
Protection Agency, Department of Toxic Substances Control.(1)
10.13 Purchase Agreement dated March 30, 1999 by and among the
Registrant, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, BancBoston Robertson Stephens Inc. and
NationsBanc Montgomery Securities LLC.(1)
10.14 Registration Rights Agreement dated as of April 6, 1999 by and
among the Registrant, Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, BancBoston Robertson Stephens Inc.
and NationsBanc Montgomery Securities LLC.(1)
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges.
12.2 Statement of Computation of Ratio of EBITDA to Interest Expense.
18.1 Letter re: Change in Accounting Principle.
21.1 Subsidiaries of the Registrant.(1)
23.1 Independent Auditors' Report on Schedule.
27.1 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-4, File No. 333-79587, as filed with the Securities and Exchange
Commission on May 28, 1999, as amended.
26
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998............. F-3
Consolidated Statements of Income for the years ended December 31, 1999,
1998 and 1997........................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997........................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
California Steel Industries, Inc.:
We have audited the accompanying consolidated balance sheets of California
Steel Industries, Inc. and subsidiary as of December 31, 1999 and 1998 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of California
Steel Industries, Inc. and subsidiary as of December 31, 1999 and 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally
accepted accounting principles.
KPMG LLP
Orange County, California
January 18, 2000
F-2
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
-------- --------
(dollars in
thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 7).......................... $ 7,899 $ 11,962
Trade accounts receivable, less allowance for doubtful
receivables of $300,000 in 1999 and $720,000 in 1998 (note
7)......................................................... 68,866 53,630
Inventories (notes 3 and 7)................................. 166,570 171,655
Deferred income taxes (note 11)............................. 2,382 5,308
Other receivables and prepaid expenses...................... 4,832 5,162
-------- --------
Total current assets....................................... 250,549 247,717
Investment in affiliated company (note 6).................... 34,801 34,726
Other assets (note 7)........................................ 4,759 --
Property, plant and equipment, net (notes 4, 7 and 13)....... 262,696 251,163
-------- --------
Total assets............................................... $552,805 $533,606
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks (note 7)............................. $ -- $103,700
Current installments of long-term debt (note 7)............. -- 20,000
Accounts payable (note 9)................................... 54,707 50,550
Accrued interest expense (note 7)........................... 4,064 1,498
Other accrued expenses (notes 10 and 12).................... 13,757 20,846
-------- --------
Total current liabilities.................................. 72,528 196,594
-------- --------
Long-term debt, excluding current installments (note 7)...... 230,000 120,000
Deferred income taxes (note 11).............................. 33,198 26,740
Stockholders' equity (note 8):
Class A preferred stock, $10,000 par value per share.
Authorized 1,000 shares; none issued....................... -- --
Class B preferred stock, $10,000 par value per share.
Authorized 2,000 shares; none issued....................... -- --
Class C preferred stock, $10,000 par value per share.
Authorized 3,000 shares; issued and outstanding 3,000
shares..................................................... 30,000 30,000
Common stock, no par value. Authorized 2,000 shares; issued
and outstanding 1,000 shares............................... 10,000 10,000
Retained earnings........................................... 177,079 150,272
-------- --------
Total stockholders' equity................................. 217,079 190,272
-------- --------
Commitments and contingencies (notes 5, 7, 9, 10, 11 and 12)
Total liabilities and stockholders' equity................. $552,805 $533,606
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Net sales ...................................... $687,050 $673,439 $722,458
Costs of sales (notes 2 and 9).................. 564,889 603,613 638,159
-------- -------- --------
Gross profit ................................. 122,161 69,826 84,299
Selling, general and administrative expenses
(note 12)...................................... 29,946 28,626 27,088
-------- -------- --------
Income from operations ....................... 92,215 41,200 57,211
Other income (expense):
Equity in income of affiliate (note 6).......... 75 1,932 1,477
Interest expense, net (note 7).................. (16,345) (16,954) (13,977)
Other, net...................................... 1,082 638 (395)
-------- -------- --------
Income before income taxes ................... 77,027 26,816 44,316
Income taxes (note 11) ......................... 30,180 7,016 15,524
-------- -------- --------
Net income ................................... $ 46,847 $ 19,800 $ 28,792
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Class C Total
preferred Common Retained stockholders'
stock stock earnings equity
--------- ------- -------- -------------
(dollars in thousands, except per share
amounts)
<S> <C> <C> <C> <C>
Balance at December 31, 1996 as
previously reported ............... $30,000 $10,000 $133,068 $173,068
Change in accounting principle (note
2) ................................ -- -- 10,247 10,247
------- ------- -------- --------
Balance at December 31, 1996
(restated) ........................ 30,000 10,000 143,315 183,315
Net income for the year ended
December 31, 1997 ................. -- -- 28,792 28,792
Cash dividends (note 8):
Class C Preferred Stock, $7,333 on
3,000 shares .................... -- -- (21,999) (21,999)
Common Stock, $5,334 on 1,000
shares .......................... -- -- (5,334) (5,334)
------- ------- -------- --------
Balance at December 31, 1997
(restated) ........................ 30,000 10,000 144,774 184,774
Net income for the year ended
December 31, 1998 ................. -- -- 19,800 19,800
Cash dividends (note 8):
Class C Preferred Stock, $3,826 on
3,000 shares .................... -- -- (11,478) (11,478)
Common Stock, $2,824 on 1,000
shares .......................... -- -- (2,824) (2,824)
------- ------- -------- --------
Balance at December 31, 1998
(restated) ........................ $30,000 $10,000 $150,272 $190,272
Net income for the year ended
December 31, 1999 ................. -- -- 46,847 46,847
Cash dividends (note 8):
Class C Preferred Stock, $5,260 on
3,000 shares .................... -- -- (15,780) (15,780)
Common Stock, $4,260 on 1,000
shares .......................... -- -- (4,260) (4,260)
------- ------- -------- --------
Balance at December 31, 1999 ....... $30,000 $10,000 $177,079 $217,079
======= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 46,847 $ 19,800 $ 28,792
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 26,331 26,659 24,374
(Gain) loss on disposition of property, plant
and equipment................................ (13) 308 433
Loss on disposition and write-down of idle
plant and equipment.......................... -- -- 621
Undistributed earnings of affiliate........... (75) (1,932) (1,477)
Dividends received from affiliate............. -- 789 872
Changes in assets and liabilities:
Trade accounts receivable, net............... (15,236) 4,650 (1,486)
Inventories.................................. 5,085 (10,142) 27,324
Other receivables and prepaid expenses....... 330 (2,576) (1,123)
Accounts payable............................. 4,157 19,166 (17,082)
Income taxes payable......................... -- -- (4,982)
Accrued interest expense..................... 2,566 (683) 534
Other accrued expenses....................... (7,089) 6,996 (1,813)
Deferred income taxes........................ 9,384 421 2,224
--------- -------- --------
Net cash provided by operating activities... 72,287 63,456 57,211
--------- -------- --------
Cash flows from investing activities:
Additions to property, plant and equipment..... (37,397) (49,354) (58,296)
Proceeds from sale of property, plant and
equipment..................................... 76 19 250
Proceeds from sale of idle assets.............. -- -- 92
--------- -------- --------
Net cash used in investing activities....... (37,321) (49,335) (57,954)
--------- -------- --------
Cash flows from financing activities:
Net advances (repayments) under line of credit
agreement with banks.......................... (103,700) 6,800 (1,600)
Proceeds from issuance of long-term debt....... 150,000 10,000 30,000
Borrowings on credit facility.................. 80,000 -- --
Repayment of long-term debt.................... (140,000) (15,000) --
Deferred financing costs....................... (5,289) -- --
Dividends paid................................. (20,040) (14,302) (27,333)
--------- -------- --------
Net cash provided by (used in) financing
activities................................. (39,029) (12,502) 1,067
--------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................ (4,063) 1,619 324
Cash and cash equivalents at beginning of year.. 11,962 10,343 10,019
--------- -------- --------
Cash and cash equivalents at end of year........ $ 7,899 $ 11,962 $ 10,343
========= ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest (net of amount capitalized).......... $ 13,974 $ 18,254 $ 13,638
Income taxes.................................. 21,035 7,050 18,976
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(1) Organization and Nature of Operations
California Steel Industries, Inc. (the Company) was incorporated in the
state of Delaware on November 3, 1983. Its stockholders consist of two U.S.
companies, Kawasaki Steel Holdings (USA), Inc., a Delaware corporation, and
Rio Doce Limited, a New York corporation, which each own 50% of the stock
of the Company. From its site in Fontana, California, the Company
manufactures a wide range of flat rolled steel products, including hot
rolled, cold rolled and galvanized coil and sheet. The Company also
produces electric resistance weld pipe.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents
For purposes of the statements of cash flows, all highly liquid debt
instruments purchased with an original maturity of three months or less are
considered to be cash equivalents. The statement of cash flows is prepared
using the indirect method.
(c) Inventories
During the fourth quarter of 1999, the Company changed its inventory
costing method from the last-in, first-out (LIFO) method to the first-in,
first-out (FIFO) method. Management believes that the accounting change is
preferable because under the current economic environment of low inflation,
the change to FIFO would result in a better measurement of operating
results. All previously reported results have been restated to reflect the
retroactive application of this accounting change as required by generally
accepted accounting principles. The accounting change decreased net income
for 1999 by $6,276,000, net of applicable income taxes, due principally to
the effect of LIFO allowance liquidations. The effect of the accounting
change on income as previously reported for the years ended 1998 and 1997
is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Net income as previously reported................. $ 29,095 30,771
Adjustment for effect of a change in accounting
principle that is applied retroactively.......... (9,295) (1,979)
----------- ----------
Net income as adjusted.......................... $ 19,800 28,792
=========== ==========
</TABLE>
The balances of retained earnings for 1996, 1997 and 1998 have been
adjusted for the effect (net of applicable income taxes) of applying
retroactively the new method of accounting.
(d) Investment in Affiliated Company
Investment in affiliated company consists of 4% of the common stock of
Companhia Siderurgica de Tubarao (CST), a Brazilian steel slab
manufacturer. The investment is accounted for by the equity method, since
combined investments in CST by the Company and certain other related
companies allow for
F-7
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
significant influence over the financing and operating activities of CST.
The Company's share of earnings or losses from this investment is reflected
in other income (expense) in the accompanying consolidated statements of
income. Dividends are credited against the investment when received. The
excess of the Company's share of the net assets of CST over the cost of the
common stock is being amortized straight-line over a five-year period.
(e) Property, Plant and Equipment
Property, plant and equipment is stated at cost and depreciation is
computed on the straight-line method over the estimated useful lives (see
note 13) of the respective assets as follows:
<TABLE>
<S> <C>
Plant and equipment........................................ 3 to 25 years
Plant refurbishment costs.................................. 10 years
</TABLE>
Assets under construction are not depreciated until placed into service.
(f) Deferred Financing Costs
Costs related to the issuance of debt are deferred and amortized on a
straight-line basis over the terms of the respective debt issues.
(g) Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value
of the asset. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(i) Environmental
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures are capitalized if they meet
one of the following criteria: (1) extend the life, increase the capacity
or improve the safety or efficiency of property, (2) mitigate or prevent
environmental contamination that has yet to occur and that otherwise may
result from future operations or activities, (3) incurred in
F-8
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
preparing property currently held for sale. The Company accrues for costs
associated with environmental remediation obligations when such losses are
probable and reasonably estimable. Accruals for estimated losses from
environmental remediation obligations are recognized no later than
completion of the remedial feasibility study. Such accruals are adjusted as
further information develops or circumstances change.
(j) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(k) Reclassifications
Certain reclassifications have been made to the 1998 and 1997
consolidated financial statements to conform with the 1999 presentation.
(l) Fair Value of Financial Instruments
The carrying value of cash, trade accounts receivable, other accounts
receivable, accounts payable and other accrued expenses are measured at
cost which approximates their fair value because of the short maturity of
those instruments. The fair values of long-term indebtedness are estimated
based on the quoted market prices for the same or similar issues, or the
current rates offered to the Company for debt of similar maturities. The
carrying amounts and fair values of financial instruments at December 31,
1999 and 1998 are listed as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
Carrying Fair Carrying Fair
amount value amount value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Senior notes............................... $150,000 145,500 -- --
Notes payable.............................. 80,000 80,000 120,000 120,000
======== ======= ======= =======
</TABLE>
(m) Revenue Recognition
The Company recognizes revenue when products are shipped or delivered to
the customer, depending on the terms of the sale. For products shipped FOB
shipping point, revenue is recognized at the time of shipment. For products
shipped FOB destination, revenue is recognized at the time of delivery.
(3) Inventories
Inventories at December 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------- -------
(Dollars in
thousands)
<S> <C> <C>
Finished goods.............................................. $ 39,526 44,624
Work in process............................................. 18,723 25,346
Raw materials............................................... 103,399 95,985
Supplies.................................................... 4,922 5,700
-------- -------
Total inventories......................................... $166,570 171,655
======== =======
</TABLE>
F-9
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Property, Plant and Equipment
The following is a summary of property, plant and equipment at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Dollars in
thousands)
<S> <C> <C>
Land..................................................... $ 17,422 17,422
Plant and equipment...................................... 416,458 380,314
Plant refurbishment costs................................ 22,219 22,219
Construction in progress................................. 16,830 17,260
-------- --------
472,929 437,215
Less accumulated depreciation............................ (210,233) (186,052)
-------- --------
Total property, plant and equipment.................... $262,696 251,163
======== ========
</TABLE>
Capitalized interest was $587,000, $1,940,000 and $1,952,000 for 1999, 1998
and 1997, respectively.
(5) Leases
The Company is obligated under various leases for equipment that expires at
various dates during the next eight years. At December 31, 1999, the future
minimum lease payments under noncancelable operating leases with commitments
of at least one year are as follows (dollars in thousands):
<TABLE>
<S> <C>
Year ending December 31:
2000........................................................... $ 6,066
2001........................................................... 3,517
2002........................................................... 5,133
2003........................................................... 3,244
2004........................................................... 7,026
Thereafter..................................................... 18,245
-------
$43,231
=======
</TABLE>
Lease expense totaled approximately $6,346,000 $2,300,000 and $1,125,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
(6) Investment in Affiliated Company
The investment in the net assets of CST accounted for under the equity
method amounted to $34,801,000 and $34,726,000 at December 31, 1999 and 1998,
respectively.
The unamortized portion of the excess of the Company's share of net assets
over the cost of the common stock is $2,100,000 at December 31, 1999 and
$3,300,000 at December 31, 1998.
The Company and its parents purchased their investment in CST at a premium
over the market price of the shares which was paid in order to obtain
significant influence over CST.
F-10
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Notes Payable and Long-Term Debt
As of December 31, 1998, notes payable to banks consisted of advances under a
$130,000,000 line of credit agreement, as amended on March 13, 1998, with a
group of seven financial institutions with principal and interest due at
various dates through March 12, 1999. The applicable interest rate was the
London InterBank Offered Rate (LIBOR) plus 0.6% if it was a LIBOR Advance or
the Federal Funds Rate (FFR) plus 0.6% if it was a FFR Advance. Commitment fee
was applied on the daily unused amount at 0.15% per annum. All notes were
secured by accounts receivable, inventories and cash and cash equivalents. As
of December 31, 1998, all amounts outstanding under the line of credit
agreement consisted of advances on notes payable at the applicable LIBOR rate.
As of December 31, 1998, the LIBOR rate was 5.38%. Amounts available under
this agreement were limited based on a formula that considered receivable and
inventory balances. The Company had $26,300,000 available under this line of
credit at December 31, 1998. The agreement required that the Company maintain
specific financial ratios and other financial conditions. The Company was in
compliance with all such covenants at December 31, 1998.
On March 10, 1999, the Company entered into a new five-year revolving credit
facility (the New Facility) with a syndicate of three financial institutions.
The New Facility provides for an aggregate principal amount of up to
$130,000,000, including a $25,000,000 sublimit for letters of credit, subject
in all respects to a borrowing base coverage requirement. The Company drew a
substantial portion of the advances available under the New Facility on the
closing date to repay advances under the then existing credit agreement.
Under the New Facility, a commitment fee is applied on the average daily
undrawn portion of the commitments at a rate equal to the applicable margin.
The applicable margin in effect from time to time will range from 0.150% to
0.200%, based upon the leverage ratio, provided that the applicable margin
with respect to the commitment fee will increase to 0.500% if borrowings fall
below a certain level. The New Facility is secured by a first priority
security interest in cash, accounts receivable inventory and other assets.
At the Company's election, the amounts advanced under the New Facility bear
interest at the base rate or the Eurodollar rate, plus the applicable margin.
Interest is payable monthly and any accrued interest and principal is due and
payable in full in March 2004. As of December 31, 1999, outstanding borrowings
of $80,000,000 consisted of advances payable at the Eurodollar rate, which was
5.87%. The Company had $36,666,000 of borrowings available under the New
Facility as of December 31, 1999. The unamortized amount of the related
financing costs was approximately $775,000 at December 31, 1999.
The New Facility requires that the Company maintain certain financial ratios
and other financial covenants. The Company was in compliance with all such
covenants at December 31, 1999.
On April 6, 1999, the Company issued an aggregate principal amount of
$150,000,000 unsecured senior notes (the Senior Notes). The Senior Notes are
due in April 2009, carry an 8.5% coupon rate and are redeemable by the Company
beginning on April 1, 2004. Interest is payable semi-annually on each April 1
and October 1, commencing October 1, 1999. The notes are senior in right of
payment to all of the Company's subordinated indebtedness and equal in right
of payment to all of the Company's existing and future indebtedness that is
not by its terms subordinate to the Senior Notes. The indenture governing the
Senior Notes contains covenants that limit the Company's ability to incur
additional indebtedness, pay dividends, redeem or repurchase capital stock and
make investments, create liens, sell assets, sell capital stock of its
subsidiary, engage in transactions with affiliates and consolidate, merge or
transfer all or substantially all of the Company's assets and the assets of
its subsidiary on a consolidated basis. The Company was in compliance with all
such covenants at December 31, 1999. Proceeds from the Senior Notes were used
to repay in full the then existing long-term debt (see below). The unamortized
portion of the related financing costs was approximately $3,984,000 at
December 31, 1999.
F-11
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt at December 31, 1999 and 1998 consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Term loan payable to banks in $5,000,000 quarterly principal
installments from June 15, 1998 through March 29, 2003
bearing interest at LIBOR plus 0.65%, payable quarterly and
secured by specific property, plant and equipment. Balance
was paid in full in April 1999.............................. $ -- $ 85,000
Term loan payable to banks on September 21, 2000, bearing
interest at LIBOR plus .375% through September 21, 1998 and
LIBOR plus .475% from September 22, 1998 through September
21, 2000, payable semiannually. Balance was paid in full in
April 1999.................................................. -- 10,000
Notes payable to banks consist of advances under a
$50,000,000 line of credit agreement with principal payable
to banks no later than March 15, 2003 bearing interest at
LIBOR plus 0.425%, payable quarterly, secured by property,
plant and equipment. A facility fee of 0.225% applies to the
entire $50,000,000 bank commitment, payable quarterly.
Balance was paid in full in April 1999...................... -- 45,000
Senior Notes bearing interest at 8.5%, payable semi-annually,
due April 2009.............................................. 150,000 --
Notes payable to banks consist of advanced under a
$130,000,000 revolving credit facility, bearing interest at
Eurodollar rate, plus the applicable margin. Interest is
payable monthly and any accrued interest and principal are
due and payable in full in March 2004....................... 80,000 --
-------- --------
230,000 140,000
Less current installments.................................... -- 20,000
-------- --------
Long-term debt, excluding current installments............. $230,000 $120,000
======== ========
</TABLE>
(8) Stockholders' Equity
The Class C preferred stock is redeemable by the Company at its option, in
whole or in part, at par value. Class C preferred stock has priority over the
common stock in the distribution of dividends and is entitled to a dividend
equivalent to 10% of the par value per annum on a cumulative basis and is
thereafter entitled to participate in the distribution of dividends at the
same rate and upon the same conditions as the common stock.
Each holder of common stock is entitled to one vote for each share held of
record on each matter submitted to a vote of the stockholders. Holders of the
common stock have no cumulative voting, conversion or redemption rights, but
are entitled to preemptive rights to subscribe for additional shares of common
stock in any additional issuance of common stock or any security convertible
into common stock. Subject to any preferences that may be granted to the
holders of preferred stock, each holder of common stock is entitled to receive
ratably dividends as may be declared by the Board of Directors, and in the
event of liquidation, dissolution or winding up, is entitled to share ratably
in all Company assets remaining after payment of liabilities.
During the years ended December 31, 1999, 1998 and 1997, $20,040,000,
$14,302,000 and $27,333,000, respectively, in dividends were declared and
paid.
(9) Related Party Transactions
The Company has transactions in the normal course of business with
affiliated companies. The Company is 50% owned by Kawasaki Steel Holdings
(USA), Inc., a subsidiary of Kawasaki Steel Corporation, a Japanese
F-12
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
corporation, and 50% owned by Rio Doce Limited, a subsidiary of Companhia Vale
do Rio Doce (CVRD), a Brazilian corporation.
The Company purchases steel slab from CST, an investee, from Kawasaki Steel
Corporation, and from Companhia Siderurgica Nacional (CSN). CSN maintains an
ownership interest in CVRD. The Company charters vessels from Seamar Shipping
Corporation, a subsidiary of CVRD, for the ocean transfer of slab from Brazil
to the Port of Los Angeles. The Company also contracts with Rio Doce Pasha
Terminal, a joint venture of CVRD, to unload ocean cargo from ships in the
Port of Los Angeles. The following represents amounts paid to the various
affiliated companies for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
CST.............................................. $105,248 $112,695 $130,600
Kawasaki Steel Corporation....................... 51,089 60,258 --
Rio Doce Pasha Terminal.......................... 16,076 16,732 16,345
CSN.............................................. 14,499 -- --
Seamar Shipping Corporation...................... 8,003 11,825 11,791
</TABLE>
At December 31, 1999 and 1998, the Company owed affiliated companies
$19,264,000 and $21,203,000, respectively, for goods and services.
(10) Commitments and Contingencies
At December 31, 1999, the Company is committed, in the form of open purchase
orders, to purchase approximately $57,462,000 in steel slabs, of which
$19,789,000 is from related parties, and approximately $4,600,000 in zinc.
The Company has been contacted by various governmental agencies regarding
specific environmental matters, at its operating facility. During September
1990, the Company reached a preliminary agreement with the California Regional
Department of Health Services, which allows the Company to draft its own
remediation agreement and move forward with its own plan of action at its
operating facility. In November 1992, the Company entered into a Voluntary and
Enforceable Agreement (the Agreement) with the California Department of Toxic
Substances Control which sets forth certain terms and conditions related to
the remediation of hazardous substances at the Company's operating facility.
The Agreement also preserves the Company's right as to future assignment and
apportionment of costs to other parties.
The Company is addressing environmental concerns caused by the former
occupant at the Company's Fontana site and is currently in the remedial
investigation stage. The Company is unable to reasonably estimate the range of
liability until completion of a remedial feasibility study. The site
investigation is expected to be completed over the next two years. At December
31, 1999, the Company has accrued $800,000, which represents management's best
estimate of the costs to complete the remedial feasibility study.
Although the level of future expenditures for environmental remediation
matters cannot be reasonably estimated, based on the facts presently known to
management, it does not believe that the costs will have a material effect on
the Company's financial position, results of operations, or liquidity.
The Company is involved in legal actions and claims arising in the ordinary
course of business. It is the opinion of management, based on advice of legal
counsel, that this litigation will be resolved without material effect on the
Company's financial position, results of operations, or liquidity.
F-13
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11) Income Taxes
Income tax expense (benefit) for the years ended December 31, 1999, 1998 and
1997 consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Current:
Federal........................................... $20,504 $ 3,546 $13,300
State............................................. 291 3,000 --
------- ------- -------
20,795 6,546 13,300
------- ------- -------
Deferred:
Federal........................................... 4,718 6,005 1,825
State............................................. 4,667 (5,535) 399
------- ------- -------
9,385 470 2,224
------- ------- -------
$30,180 $ 7,016 $15,524
======= ======= =======
</TABLE>
Actual tax expense differs from the "expected" tax expense (computed by
applying the U.S. Federal corporate tax rate of 35% to income before income
taxes) as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
(Dollars in
thousands)
<S> <C> <C> <C>
Computed "expected" tax expense................... $26,959 9,385 15,510
State income taxes, net of Federal benefit........ 3,935 537 1,944
State manufacturing investment credit, net of
Federal benefit.................................. (712) (2,515) (1,755)
Other............................................. (2) (391) (175)
------- ------ ------
$30,180 7,016 15,524
======= ====== ======
</TABLE>
F-14
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- -------
(Dollars in
thousands)
<S> <C> <C>
Deferred tax assets:
Inventory............................................... $ 2,583 2,517
State taxes............................................. 894 3,260
Reserves................................................ 217 401
Accrued expenses........................................ 1,835 737
Other................................................... 11 11
-------- -------
Total gross deferred tax assets....................... 5,540 6,926
Less valuation allowance................................ -- --
-------- -------
Net deferred tax assets............................... 5,540 6,926
-------- -------
Deferred tax liabilities:
Property, plant and equipment........................... (31,929) (22,428)
Change in inventory valuation........................... (3,072) (4,608)
Undistributed earnings of affiliate..................... (1,273) (1,240)
Other................................................... (82) (82)
-------- -------
Total gross deferred tax liabilities.................. (36,356) (28,358)
-------- -------
Net deferred tax liability............................ $(30,816) (21,432)
======== =======
</TABLE>
Based on the Company's historical pretax earnings, adjusted for significant
items such as nonrecurring charges, management believes it is more likely than
not that the Company will realize the benefit of the deferred tax assets
existing at December 31, 1999. Management believes the existing deductible
temporary differences will reverse during periods in which the Company
generates net taxable income. Nevertheless, certain tax planning or other
strategies will be implemented, if necessary, to supplement income from
operations to fully realize recorded tax benefits.
The Company's U.S. Federal income tax returns for the years ended 1994, 1995
and 1996 are currently under examination by the Internal Revenue Service.
Management of the Company believes that the ultimate outcome of this matter
will not have a material adverse effect on the Company's consolidated
financial statements.
(12) Employee Benefit and Retirement Plans
401(k) Plan
The Company sponsors a 401(k) plan covering substantially all employees of
the Company who are full-time employees.
Participants may make contributions to the plan on a pretax basis from 1% to
16% of their annual salary. Company contributions, when made, will match 100%
of employee contributions up to 4% of employees' salaries and 50% of employee
contributions for the next 2% of employees' salaries. Participants are
immediately 100% vested in both their contributions and Company contributions
plus actual earnings thereon. Company contributions are accrued as participant
contributions are withheld, and are paid in full to the Trustee of the plan on
a pay period basis.
F-15
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Plan expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $2,189,000, $2,084,000 and $2,002,000, respectively.
Profit Sharing
The Company has a profit sharing plan under which bonuses are awarded based
on a pool amount, equal to 8% of the Company's income before taxes and gain or
loss on disposition of fixed assets. The basis for determining the profit
sharing pool is subject to review and approval of the Company's Board of
Directors. The employee's share in the pool amount is based on his or her
length of service with the Company during the profit sharing period. Employees
who voluntarily terminate their employment for reasons other than retirement
before the end of the profit sharing period and employees whose employment is
involuntarily terminated are not eligible to receive any profit sharing award.
Profit sharing expense for the years ended December 31, 1999, 1998 and 1997
was $6,394,000, $2,248,000 and $3,537,000, respectively.
(13) Changes in Accounting Estimates
In fiscal 1998, the Company made changes in the estimated useful lives of
the hot strip mill reheat furnace, five stand cold reduction mill, continuous
pickling line, and the second galvanizing line from 10 to 15 years. This
change increased 1998 net income by $1,500,000. Also, effective in fiscal
1998, the Company changed the estimated useful life of its rolls from 1 year
to 3 years for work rolls and 10 years for backup rolls. This change increased
1998 net income by $2,000,000. These changes were made to better reflect how
these assets are expected to be used over time, to provide a better matching
of revenues and expenses, and to be consistent with industry practice.
(14) Selected Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for 1999 and 1998 is as follows (amounts
in thousands):
<TABLE>
<CAPTION>
Quarter
----------------------------------------
1st 2nd 3rd 4th Total
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1999
Total revenues......................... $160,994 170,264 183,566 172,226 687,050
Operating income*...................... 12,092 23,232 30,055 26,836 92,215
Net income*............................ 5,096 11,956 16,168 13,627 46,847
1998
Total revenues......................... $176,175 180,559 162,391 154,314 673,439
Operating income*...................... 10,298 10,605 8,379 11,918 41,200
Net income*............................ 3,958 4,382 2,491 8,969 19,800
</TABLE>
- --------
* In the fourth quarter of 1999, the Company changed its inventory costing
method from the LIFO method to the FIFO method. All previously reported
results have been restated to reflect the retroactive application of this
accounting change (see note 2).
F-16
<PAGE>
CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Beginning Ending
Balance Additions Deductions Balance
--------- --------- ---------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
A/R Allowance....................... 720,000 296,747 (716,747) 300,000
Year ended December 31, 1998
A/R Allowance....................... 720,000 618,157 (618,157) 720,000
Year ended December 31, 1997
A/R Allowance....................... 720,000 117,766 (117,766) 720,000
</TABLE>
S-1
<PAGE>
SIGNATURES
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.
CALIFORNIA STEEL INDUSTRIES, INC.
/s/ C. Lourenco Goncalves
By: _________________________________
C. Lourenco Goncalves,
Chief Executive Officer and
President
March 22, 2000
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 and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ C. Lourenco Goncalves Chief Executive Officer and March 22, 2000
____________________________________ President (Principal
C. Lourenco Goncalves Executive Officer)
/s/ Vicente B. Wright Executive Vice President-- March 22, 2000
____________________________________ Finance (Principal
Vicente B. Wright Financial and Accounting
Officer)
/s/ Tatsuhiko Hamamoto Director March 22, 2000
____________________________________
Tatsuhiko Hamamoto
/s/ Hajime Bada Director March 22, 2000
____________________________________
Hajime Bada
/s/ Francisco Povoa Director March 22, 2000
____________________________________
Francisco Povoa
/s/ Nadim Sareyed-Dim Director March 22, 2000
____________________________________
Nadim Sareyed-Dim
</TABLE>
II-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
3.1 Certificate of Incorporation of the Registrant as amended by
Amendment to the Certificate of Incorporation filed June 6, 1984,
with Delaware Secretary of State, as amended by the Certificate of
Amendment to the Certificate of Incorporation filed August 2, 1984,
with the Delaware Secretary of State, as amended by the Certificate
of Amendment to the Certificate of Incorporation, filed January 12,
1988, with the Delaware Secretary of State, and, as amended by the
Certificate of Ownership merging California Steel Industries Tubular
Products, Inc. into the Registrant, filed with the Delaware
Secretary of State on December 20, 1993.(1)
3.2 Bylaws of the Registrant.(1)
4.1 Indenture dated as of April 6, 1999 between the Registrant and State
Street Bank Trust Company of California, N.A., Trustee, relating to
the Registrant's 8% Senior Notes due April 6, 2009.(1)
4.2 Specimen Series B note.(1)
4.3 Shareholders' Agreement, dated June 27, 1995, by and among Rio Doce
Limited, Companhia Vale do Rio Doce, Kawasaki Steel Holdings (USA),
Inc. and Kawasaki Steel Corporation.(1)
10.1 Revolving Credit Agreement, dated as of March 10, 1999, among the
Registrant, the Lending Institutions from time to time party thereto
as lenders, BancBoston, N.A., in its capacity as Loan and Collateral
Agent, and Bank of America National Trust and Savings Association,
in its capacity as Letter of Credit and Documentation Agent and
BancBoston Robertson Stephens Inc. and NationsBanc Montgomery
Securities LLC, as the Arrangers.(1)
10.2 Agreement for the Purchase of Carbon Steel Slabs, dated as of
December 5, 1984, by and between the Registrant and Companhia
Siderurgica de Tubarao, as amended by Memorandum of Agreement, dated
as of June 7, 1985, Memorandum of Agreement No. MA-02, dated as of
December 9, 1986, Memorandum of Agreement No. MA-03, dated as of
December 11, 1986, Memorandum of Agreement No. MA-04, dated as of
December 11, 1986, Memorandum of Agreement No. MA-05, dated as of
May 22, 1987 and Memorandum of Agreement No. MA-06, dated as of
December 11, 1996.(1)
10.3 Facsimile transmission, dated October 27, 1998 from the Registrant to
Companhia Siderurgica de Tubarao, confirming the parties mutual
understanding that the Registrant will acquire 700,000 metric tons
of steel slab from Companhia Siderurgica de Tubarao for 1999
delivery.(1)
10.4 E-mails from Broken Hill Proprietary Company Ltd. to the Registrant,
dated October 13, 1998 and October 15, 1998, respectively,
confirming the Registrant's and Broker Hill Proprietary Company
Ltd.'s mutual agreement of October 9, 1998 and October 14, 1998, to
purchase and supply 70,000 metric tons and 280,000 metric tons of
steel slab during 1999.(1)
10.5 Letter, dated October 6, 1998, from the Registrant to Companhia
Siderurgica Nacional, confirming Companhia Siderurgica Nacional's
agreement to supply the Registrant with 100,000 metric tons of steel
in 1999.(1)
10.6 Contract, dated August 20, 1990, by and between the Registrant and
Seamar Shipping Corporation of Monrovia, Liberia.(1)
10.7 The Burlington Northern and Santa Fe Railway Company BNSFC 302606
Regulated Transportation Contract, dated as of November 19, 1998, by
and between the Registrant and Burlington Northern Railroad
Company.(1)
10.8 Stevedore and Terminal Services Agreement, dated as of January 1,
1996, between Rio Doce Pasha Terminal L.P. and the Registrant, as
amended.(1)
10.9 Equipment Lease Agreement, dated as of September 30, 1998, by and
between the Registrant and State Street Bank and Trust Company of
California, National Association.(1)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.10 Settlement Agreement, dated as of June 1, 1995, by and among the
Registrant, Kaiser Ventures, Inc., KSC Recovery, Inc. and Kaiser
Steel Land Development, Inc.(1)
10.11 Groundwater Indemnity Agreement, dated as of June 1, 1995, between the
Registrant and Kaiser Ventures, Inc.(1)
10.12 A 1996 Expedited Remedial Action Voluntary Enforceable Agreement, by
and among the Registrant and the California Environmental Protection
Agency, Department of Toxic Substances Control.(1)
10.13 Purchase Agreement dated March 30, 1999 by and among the Registrant,
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, BancBoston Robertson Stephens Inc. and NationsBanc
Montgomery Securities LLC.(1)
10.14 Registration Rights Agreement dated as of April 6, 1999 by and among
the Registrant, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, BancBoston Robertson Stephens Inc. and
NationsBanc Montgomery Securities LLC.(1)
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges.
12.2 Statement of Computation of Ratio of EBITDA to Interest Expense.
18.1 Letter re: Change in Accounting Principle.
21.1 Subsidiaries of the Registrant.(1)
23.1 Independent Auditors' Report on Schedule.
27.1 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-4, File No. 333-79587, as filed with the Securities and Exchange
Commission on May 28, 1999, as amended.
II-3
<PAGE>
EXHIBIT 12.1
CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY
Computation of Ratio of Earnings to Fixed Charges
(All dollar amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Income before income taxes............. 77,027 26,816 44,316 67,725 46,988
Fixed charges.......................... 17,861 19,645 16,642 12,578 17,018
Amortization of capitalized interest... 686 609 409 198 198
Capitalized interest................... (588) (1,940) (1,952) (1,667) --
------ ------ ------ ------ ------
Earnings............................. 94,986 45,130 59,415 78,834 64,204
====== ====== ====== ====== ======
Imputed interest relating to rental
expense............................... 470 169 83 58 52
Interest expense....................... 17,391 19,476 16,559 12,520 16,966
------ ------ ------ ------ ------
Fixed charges........................ 17,861 19,645 16,642 12,578 17,018
====== ====== ====== ====== ======
Ratio of earnings to fixed charges..... 5.3 2.3 3.6 6.3 3.8
</TABLE>
<PAGE>
Exhibit 12.2
California Steel Industries, Inc. and Subsidiary
<TABLE>
<CAPTION>
Computation Of Ratio Of EBITDA,
As Adjusted To Interest Expense
Year ended December 31,
--------------------------------------------------------
(All dollar amounts in thousands)
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Income before Income Taxes............................................ 77,027 26,816 44,316 67,725 46,988
Add: Interest Expense - Net........................................... 16,345 16,954 13,977 10,145 16,332
Exclude Gain/Loss on Fixed Assets..................................... (13) 308 1,054 2,518 2,916
Depreciation (Cash Flow).............................................. 26,331 26,659 24,374 18,844 18,623
------ ------ ------ ------ ------
EBITDA, As Adjusted................................................... 119,690 70,737 83,721 99,232 84,859
====== ====== ====== ====== ======
Interest Expense, Net................................................. 16,345 16,954 13,977 10,145 16,332
Ratio EBITDA, As Adj to Interest Expense, Net......................... 7.3 4.2 6.0 9.8 5.2
</TABLE>
<PAGE>
LETTER RE CHANGE IN ACCOUNTING PRINCIPLE
EXHIBIT 18.1
January 18, 2000
Mr. Vicente Wright
Executive Vice President, Finance
California Steel Industries, Inc. and Subsidiary
14000 San Bernardino Avenue
Fontana, California 92335
Dear Vicente:
We have audited the consolidated balance sheets of California Steel Industries,
Inc. and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1999, and have reported
thereon under date of January 18, 2000. The aforementioned consolidated
financial statements and our audit report thereon are included in the Company's
annual report on Form 10-K for the year ended December 31, 1999. As stated in
Note 2 to those consolidated financial statements, the Company changed its
method of accounting for inventories from the last-in, first out (LIFO) method
to the first-in, first-out (FIFO) method and states that the newly adopted
accounting principle is preferable in the circumstances, because under the
current economic environment of low inflation, the change to FIFO would result
in a better measurement of operating results. In accordance with your request,
we have reviewed and discussed with Company officials the circumstances and
business judgement and planning upon which the decision to make this change in
the method of accounting was based.
With regard to the aforementioned accounting change, authoritative criteria have
not been established for evaluating the preferability of one acceptable method
of accounting over another acceptable method. However, for purposes of
California Steel Industries, Inc.'s compliance with the requirements of the
Securities and Exchange Commission, we are furnishing this letter.
Based on our review and discussion, with reliance on management's business
judgment and planning, we concur that the newly adopted method of accounting is
preferable in the Company's circumstances.
Very truly yours,
KPMG LLP
<PAGE>
EXHIBIT 23.1
Independent Auditors' Report on Schedule
----------------------------------------
The Board of Directors and Stockholders
California Steel Industries, Inc.:
Under date of January 18, 2000, we reported on the consolidated balance sheets
of California Steel Industries, Inc. and subsidiary as of December 31, 1999 and
1998, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1999, as contained in the 1999 annual report to stockholders. These
consolidated financial statements and our report thereon are included in the
annual report on Form 10-K for the year ended December 31, 1999. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related financial statement schedule as listed in the accompanying
index. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
Orange County, California
January 18, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,899
<SECURITIES> 0
<RECEIVABLES> 69,166
<ALLOWANCES> (300)
<INVENTORY> 166,570
<CURRENT-ASSETS> 250,549
<PP&E> 472,929
<DEPRECIATION> (210,233)
<TOTAL-ASSETS> 552,805
<CURRENT-LIABILITIES> 72,528
<BONDS> 230,000
0
30,000
<COMMON> 10,000
<OTHER-SE> 177,079
<TOTAL-LIABILITY-AND-EQUITY> 552,805
<SALES> 687,050
<TOTAL-REVENUES> 687,050
<CGS> 564,889
<TOTAL-COSTS> 594,835
<OTHER-EXPENSES> (1,157)
<LOSS-PROVISION> (400)
<INTEREST-EXPENSE> 16,345
<INCOME-PRETAX> 77,027
<INCOME-TAX> 30,180
<INCOME-CONTINUING> 46,847
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,847
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
