SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
From the transition period from to
Commission file number
BIRMINGHAM STEEL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3213634
------------------------------- -----------------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
1000 Urban Center Drive, Suite 300
Birmingham, Alabama 35242-2516
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(205) 970-1200
Securities Registered pursuant to Section 12 (b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- --------------------
Common Stock, par value New York Stock
$0.01 per share Exchange
Securities Registered pursuant to Section 12 (g) of the Act:
NONE
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 report), 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 August 27, 1996, 28,624,467 shares of Common Stock of the
registrant were outstanding. On such date the aggregate market value of shares
(based upon the closing market price of the Company's Common Stock on the New
York Stock Exchange on August 27, 1996) held by non-affiliates was $332,721,047.
For purposes of this calculation only directors, officers and holders of more
than 5% of the Company's Common Stock are deemed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement dated September 13, 1996
for the 1996 Annual Meeting of Stockholders are incorporated herein by reference
in response to items 10 through 13 in Part III of this report.
PART I
ITEM 1. BUSINESS
Birmingham Steel Corporation (the "Company") operates four non-union mini-mills
located across the United States that produce primarily steel reinforcing bar
("rebar") and merchant products on a low-cost basis. The Company also
specializes in manufacturing high quality steel rod and wire from semi-finished
billets at its American Steel and Wire ("ASW") subsidiary.
The Company, through its rebar/merchant facilities, produces carbon steel rebar
products sold primarily to independent fabricators for use in the construction
industry, and merchant products which include rounds, flats, squares, strip,
angles and channel which are sold to fabricators, steel service centers and
original equipment manufacturers for use in general industrial applications.
In November 1993, the Company acquired American Steel & Wire Corporation ("ASW")
as part of its strategy to diversify the Company's product mix. ASW, the
Company's rod, bar and wire facilities located in Cleveland, Ohio, converts
semi-finished steel billets into high quality steel rod and subsequently
transforms a portion of its rod production into finished wire products
(approximately 7.0% in fiscal 1996). Steel rod and wire products produced by ASW
are sold primarily to customers in the automotive, fastener, welding, appliance
and aerospace industries. ASW is also the sole manufacturer of the ultra-high
tensile strength specialty wire utilized in the U.S. Government's TOW anti-tank
missile guidance system.
The Company's operating strategy with respect to its rebar/merchant facilities
is (i) to improve its position as a low-cost producer through continued
operating cost reductions, (ii) to optimize capacity utilization at each of its
facilities and (iii) to increase production and sales of higher margin merchant
products. The Company estimates that its mini-mills have annual steel melting
capacity of approximately 2.5 million tons and finished product rolling capacity
of approximately 2.8 million tons (including high quality rod production). In
fiscal 1996, the Company achieved record steel shipments of 2.4 million tons.
In fiscal 1996, the Company invested approximately $172 million in capital
improvements in accordance with the Company's long-standing program of
modernizing and upgrading its production facilities. Since July 1984, the
Company has invested approximately $577 million for expansion and modernization
projects designed to reduce overall manufacturing costs. The Company defines
manufacturing costs as conversion costs per ton excluding the cost of scrap raw
material. The Company's average conversion cost per ton in fiscal 1996 was $122,
down from a high of $139 in fiscal 1990. The Company believes its conversion
costs may be reduced in the future as a result of anticipated improvements in
the performance of some newer equipment and optimization of production
techniques. Because of its modern production techniques, labor incentives and
cost controls, the Company believes that it is one of the most efficient
mini-mill producers of rebar and merchant steel products in the United States.
At the onset of the economic recession in fiscal 1990, the Company initiated a
program for restructuring its steel-making business and began evaluating certain
unprofitable operations. In fiscal 1991, the Company shut down mini-mill
facilities in Emeryville, California and Norfolk, Virginia. The production
equipment from these facilities has been employed elsewhere within the Company,
or sold as used equipment, primarily to buyers located outside the United
States. Despite these shut-downs, the Company's total production capacity of its
rebar and merchant steel operations has expanded as a result of strategic
acquisitions and equipment enhancements at its other facilities. Furthermore,
since 1990, the Company has increased its market share in the rebar and merchant
steel markets.
In November 1993, the Company acquired ASW as part of its strategy to diversify
the Company's product mix. With the acquisition of ASW and its experienced
management group, the Company gained immediate entry into the markets for high
quality steel products - markets which are very difficult to penetrate as a
result of customers' stringent product quality requirements. ASW achieved QS9000
registration in June 1996. QS9000 is a quality system requirement established by
Chrysler, Ford and General Motors and is based upon the internationally
recognized ISO9000 series of standards. The Company believes that ASW is the
largest producer of high quality rod and wire products in North America and that
compliance with QS9000 will strengthen the current inroads it is building with
both domestic and transplant auto producers. The high quality rod and wire
market historically has been less subject to new competition because of the
significant capital requirements and the quality and process control systems
orientation necessary to produce high quality rod and wire. ASW's quality
orientation has enabled it to attract customers in markets which previously had
been served by foreign suppliers or where customers had been accepting lower
quality products. ASW currently purchases 100% of its high quality semi-finished
steel billet requirements from outside sources and management believes that ASW
is one of the largest purchasers of billets in the world. In fiscal 1996, ASW
shipped approximately 532,000 tons of rod and wire products, compared with
632,000 tons last year. The Company estimates the current annual capacity of the
ASW rod production facilities to be approximately 550,000 tons. The Company
recently completed construction of a $115 million bar and rod mill at the
Cleveland facility which began production and shipment of product in June 1996.
Upon completion of the startup phase, this state-of-the-art facility will
approximately double the Cleveland facility's production capacity to
approximately 1.1 million tons annually.
The Company's operating strategy with respect to ASW is to increase its market
penetration and profitability by (i) constructing additional production capacity
and increasing rod shipments by as much as 100%, (ii) expanding the product
range to include larger diameter rod and (iii) reducing costs through improved
sourcing of high quality billets and through the construction and operation of a
high quality billet manufacturing facility. The Company recently awarded
contracts for construction of a high quality melting facility in Memphis,
Tennessee at an expected capital cost of $200 million. The Memphis facility
is scheduled for startup in the fourth calendar quarter of 1997. The
facility is expected to provide the rod and bar operations with 1 million
tons of high quality steel billets annually.
With respect to its overall business strategy, the Company continues to review
opportunities for the potential acquisition of steel producing assets, the
construction of new steel plants and the establishment of a presence in the raw
materials markets.
Steel Manufacturing
The Company's mini-mills are located in Birmingham, Alabama; Kankakee, Illinois;
Jackson, Mississippi; and Seattle, Washington. The Company operates its Port
Everglades Steel Company ("PESCO") steel distribution facilities in Florida and
Texas.
The Company's mini-mill operations melt ferrous scrap to produce a limited range
of rebar and merchant steel products. Operations commence with the melting of
ferrous scrap in an electric arc furnace. The molten steel is then funneled
through a continuous caster from which it emerges as continuous rectangular
strands of steel which are cut into predetermined lengths. These semi-finished
steel shapes are referred to as billets. The billets are transferred to a
rolling mill where they are reheated, passed through a roughing mill for size
reduction, and then rolled into finished reinforcing bars or other steel
products. Products emerge from the rolling mill onto a cooling bed where they
are cooled uniformly. Most merchant products then pass through state-of-the-art
straightening and stacking equipment, with all products then passing through
automated bundling equipment for uniform packaging.
The Company also warehouses finished steel products at third-party distribution
depots located in Livermore and Fontana, California and Baltimore, Maryland.
These third-party distribution depots service steel requirements for customers
in certain geographic regions.
Steel can be produced at significantly lower costs by mini-mills than by
integrated steel operations, which typically process iron ore and other raw
materials in blast furnaces to produce steel. Integrated steel mills generally
use costlier raw materials, consume more energy, consist of older and less
efficient facilities which are more labor-intensive and employ a larger labor
force. In general, mini-mills produce a limited line of rebar and merchant
products and service geographic markets. Because there are no technological
barriers to entry into the industry and a new mini-mill can be constructed in
approximately two years, the domestic mini-mill steel industry currently has
excess production capacity. This over-capacity, together with competition from
foreign producers, has resulted in competitive product pricing and cyclical
pressures on industry profit margins. In this environment, efficient production
and cost controls are critical to the viability of domestic mini-mill steel
producers.
In contrast to the Company's mini-mill operations, the Company's rod, bar and
wire facility purchases high quality carbon and alloy semi-finished steel
billets from outside sources and converts the billets into a variety of high
quality rod, bar and wire products. Purchased billets are inspected for surface
defects and, when necessary, conditioned before transfer into the rod/bar mills.
Upon entering the rod/bar mills, the billets pass through a computer controlled
multi-zone recuperative reheat furnace, where a closely controlled heating
process imparts more uniform metallurgical characteristics to the steel. The
heated billets are then fed into the rolling line, where they pass through
roughing, intermediate and no-twist finishing stands during the rod/bar
production process. After rolling, the rod/bar is coiled and control cooled.
Once the cooling process is complete, the coiled rod/bar passes through
inspection stations for metallurgical, surface and diameter checks. Approved
coils are compacted and banded and then either shipped to customers or
transferred to ASW's wire mill for conversion into wire.
Although ASW has production capabilities to produce rod, bar and wire of
virtually all qualities, it has chosen to concentrate on a select number of high
quality products which include cold heading, cold finishing, cold rolling,
welding, bearing and specialty high carbon steel grades. ASW's operating
strategy is to focus on the U.S. high quality rod and wire markets, which demand
exacting metallurgical and size tolerance specifications and defect-free surface
qualities. In fiscal 1996, approximately 7.0% of finished rod products were
transferred to the wire production facility and converted into smaller-diameter
wire through a cold-drawing process. Finished steel rod products are also
transferred to the wire mill solely for surface or thermal treatment
applications and then shipped to rod customers. The Company's rod and bar mills
are located in Cleveland, Ohio and Joliet, Illinois. The Company's steel wire
production facility is located adjacent to the rod mill in Cleveland. The ASW
TOW wire production facility, located in Cleveland, purchases specialty steel
rod from a third party. The steel rod is then extensively treated and converted
in a multiple drawing process into wire used in the TOW anti-tank missile
guidance system.
Raw Materials and Energy Costs
The principal raw material used in the Company's mini-mills is ferrous scrap
generally derived from automobile, industrial and railroad scrap. The market for
scrap steel is highly competitive and its price volatility is influenced by
periodic shortages, freight costs, speculation by scrap brokers and other
conditions largely beyond the control of the Company. The Company purchases its
outside scrap requirements from a number of dealers and is not dependent on any
single supplier. In fiscal 1996, scrap costs represented approximately 56% of
the Company's total manufacturing costs at its mini-mills.
Within the commodity product ranges dominated by the mini-mill industry,
fluctuations in scrap market conditions have an industry-wide impact on
manufacturing costs and selling prices of finished goods. During periods of
scrap price escalation, the mini-mill industry seeks to maintain profit margins
and the Company has generally been able to pass along increased raw material
costs to customers. However, temporary reductions in profit margin spreads
frequently occur due to a timing lag between the escalation of scrap prices and
the effective market acceptance of higher selling prices for finished steel
products. Following this delay in margin recovery, steel industry profitability
has historically escalated during periods of inflated scrap market pricing.
However, there can be no assurance that competitive conditions will permit the
Company to pass on scrap cost increases in the future.
The principal raw material for the Company's rod and bar operations is high
quality steel billets. Because of the metallurgical characteristics demanded in
ASW's final products, ASW obtains its billets only from those suppliers whose
billets can meet the required metallurgical specifications of its customers. ASW
manufactures its products from approximately 120 generic grades of billets. To
obtain high quality billets needed to provide the sophisticated products that
ASW manufactures, a team approach among the suppliers, ASW and customers is
required. Typically, the approval process for a particular billet supplier
requires six to twelve months. ASW currently purchases from thirteen approved
billet suppliers.
During fiscal 1996, ASW acquired approximately 37% of its billets from Broken
Hill Proprietary Company, Limited (BHP) located in Australia. ASW has a supply
agreement with BHP which expires on May 31, 1997 and an agreement with QIT-Fer
et Titane Inc., located in Montreal, Canada, which expires June 30, 1997. ASW is
currently involved in discussions with current and potential billet suppliers
regarding its fiscal 1997 billet requirements, which are expected to be
substantially higher than historical levels due to the new bar mill expansion.
Management believes that its current agreements and its relationships with these
and other suppliers ensure a supply of steel billets sufficient to meet its
anticipated needs. In addition, the Company recently awarded the construction
contracts for a high quality melting facility in Memphis, Tennessee which is
scheduled to supply approximately 1 million tons annually of ASW's high quality
billet requirements. Startup of the facility is scheduled for the fourth
calendar quarter of 1997.
The Company's mini-mill operations consume large amounts of energy in the form
of electricity and natural gas. The Company purchases its electrical energy from
regulated utilities under interruptible service contracts which provide for
economical electricity rates. These high volume industrial discount rates are
provided in return for the utility's right to periodically interrupt service
during peak demand periods. These interruptions are generally limited to several
hours and have occurred no more than ten days per year. Since deregulation of
the natural gas industry, natural gas requirements generally have been provided
through negotiated contract purchases of well-head gas with supplemental
transportation through local pipeline distribution networks.
The principal sources of energy for the Company's rod and bar operations are
electricity and natural gas. ASW has supply contracts for electricity and
natural gas and believes that adequate supplies of both sources of energy are
readily available.
Production Capacity
Mini-Mill Operations. The table below indicates the percentage of capacity at
which the Company's rebar/merchant mini-mills operated during the fiscal year
ended June 30, 1996. The capacities presented are management's estimates and are
based on a normal 168 hour weekly work schedule, an average product mix and
include the effects of existing melting or rolling capacity limitations within
each operation. Production capacities listed below are estimated year-end
capacity levels.
Annual FY1996 Capacity Annual FY1996 Capacity
Melting Melting Utilization Rolling Rolling Utilization
Capacity Production Percentage Capacity Production Percentage
-------- ---------- ----------- -------- ---------- -----------
(ln thousands of tons) (in thousands of tons)
Kankakee 750 635 84.7 550 526 95.6
Birmingham 500 359 71.8 500 370 74.0
Jackson 450 294 65.3 400 283 70.8
Seattle 750 526 70.1 600 471 78.5
----- ----- ---- ----- ----- ----
2,450 1,814 74.0 2,050 1,650 80.5
===== ===== ==== ===== ===== ====
The Company has the capability to produce rebar and merchant products at all
four of its operating mini-mills. The conversion from production of rebar to
merchant products at these four facilities is part of the routine operations of
these plants, and no major impediments exist which would preclude changing
between product mixes.
Rod and Wire Operations. The table below indicates the capacity at which ASW's
rod and wire production facilities operated during the fiscal year ended June
30, 1996. The capacities presented are management's estimates and are based on
ASW's anticipated staffing levels and an average product mix.
Annual Fiscal Capacity
Production 1996 Utilization
Capacity Production Percentage
---------- ---------- -----------
(in thousands of tons)
Cleveland rod 550 410 74.5
Joliet rod 190 161 84.7
--- --- ----
Total rod 740 571 77.2
=== === ====
Cleveland wire 60 39 65.0
=== === ====
Rebar/Merchant Mini-Mill Production Facilities
The Kankakee, Illinois Facility
The Kankakee facility is located approximately 50 miles south of Chicago. Since
its acquisition in 1984, a comprehensive modernization program costing more than
$70 million has provided a new melt shop, continuous caster, modern in-line
rolling mill, upgraded reheat furnace and in-line straightening, stacking and
bundling equipment to accelerate the merchant steel marketing program.
Kankakee enjoys a favorable geographical proximity to the primary rust-belt
markets for merchant products. This freight cost advantage and modernized
equipment capability at Kankakee are competitive advantages in the Company's
strategy to expand market share in the merchant product sector.
The Company has more than tripled the facility's original melting and rolling
capacities to 750,000 tons and 550,000 tons per year, respectively.
Additionally, the Company developed an environmentally sound process for scrap
handling and storage. These improvements completed an extensive modernization
program at the Kankakee facility and concluded the total renovation of all major
aspects of this operation.
Management believes that the Kankakee facility is one of the most modern and
operationally efficient mini-mills in the United States. Producing merchant
products and rebar, in fiscal 1996 the facility shipped 617,000 tons of steel
and produced 2,046 tons per worker-year.
The Birmingham, Alabama Facility
The Birmingham facility was the first mini-mill built in the United States and
was in need of major renovations when acquired in August of 1984. Since the
acquisition, the facility has undergone a $37 million transformation, outfitting
the mill with a new electric arc furnace and sequence casting system in the melt
shop, new reheat furnace, finishing stands, cooling bed and product shear in the
rolling mill and a new finished goods storage area. The November 1992
installation of an in-line rolling mill, utilizing equipment transferred from
the idled mill in Norfolk, Virginia, transformed the 1950s vintage rolling
operation into a modern, efficient mill.
In August 1994, the mill began operating a modern finished goods bundling and
transfer system, which automated a previously time-consuming, manual process.
During fiscal 1995, the mill installed a new 120 ton-per-hour reheat furnace as
well as minor refinements to the melt shop which evenly matched the mill's total
melting and rolling capacity at 500,000 tons annually.
The Birmingham facility produces primarily rebar. In fiscal year 1996, the
Birmingham facility direct shipped 368,000 tons of steel product and provided
inventory for 14,000 tons of steel shipped from the Company's Baltimore depot.
The Birmingham mill produced steel at 1,785 tons per worker-year in fiscal 1996.
The Jackson, Mississippi Facility
The acquisition of the Jackson facility in 1985 provided the Company with an
efficient, modern mini-mill operation, utilizing in-line rolling mill equipment.
When acquired, the Jackson mill's annual melting and rolling capacities were
210,000 tons and 300,000 tons, respectively. Although minor improvements raised
the annual melting capacity to 220,000 tons, excess rolling mill capacity
necessitated the purchase of semi-finished billets from other Company mills or
outside sources. To alleviate the need to purchase billets and significantly
reduce the melt shop's conversion costs, construction of a new melt shop was
completed in March 1993. This $22 million project increased the mill's melting
capacity to 450,000 tons and eliminated the need for outside billet purchases,
resulting in significant annual cost savings.
To complement Jackson's modern rolling mill, the Company installed a new reheat
furnace, additional finishing stands and automated in-line straightening and
stacking equipment (to enhance automated bundling equipment already in place)
during 1993 and 1994. The improvements have elevated finished rolling capacity
for the mill to 400,000 tons annually.
The Jackson mill produces rebar, merchant rounds, squares, flats, strip and
angles. In fiscal 1996, Jackson shipped 296,000 tons of steel product and
produced 1,403 tons per worker-year.
The Seattle, Washington Facility
Situated adjacent to the Port of Seattle, the Seattle operation is the Company's
largest mini-mill. The facilities in Seattle were originally purchased in 1986,
providing the Company's entrance into the West Coast steel market. At the time
of acquisition, Seattle's melting (Kent, Washington) and rolling facilities
(Ballard, Washington) were approximately 25 miles apart. The May 1991
acquisition of the former Seattle Steel, Inc. assets, allowed the Company to
consolidate the majority of operations to the new West Seattle site and double
the mill's former capacity.
Soon after the acquisition of the West Seattle operations, the Company began a
modernization program which included the installation of a new baghouse, new
ladle turret and billet runout table. Construction of the facility's new rolling
mill was completed in June 1993. This $50 million rolling mill consists of
state-of-the art equipment replacing two older, less efficient mills which were
operating in Ballard and West Seattle. The new mill generated an approximate 15%
increase in finished rolling capacity and a significant reduction in the
facility's total workforce. The new rolling mill includes automated in-line
straightening, stacking and bundling equipment designed to facilitate Seattle's
expansion in merchant product production. The new additions increased Seattle's
finished rolling capacity to approximately 600,000 tons per year.
Melting capacity at Seattle recently increased to approximately 750,000 tons
upon installation of a new furnace in July 1995 which replaced the mill's two
older, less productive furnaces. The facility produces a variety of products
including rebar, merchant rounds, angles, channels, squares, flats and strip.
The facility also supplies the steel for the Company's western distribution
depots.
In fiscal 1996, the Seattle facility direct shipped 456,000 tons of steel, and
provided inventory for 102,000 tons of shipments through the West Coast depot
locations. The Seattle mill produced steel at 1,819 tons per worker-year in
fiscal 1996.
PESCO Facilities
In December 1994, the Company acquired substantially all of the assets of Port
Everglades Steel Corporation ("PESCO"), a Florida based steel distributor which
operates facilities in Florida and Texas. PESCO obtains the majority of its
steel requirements from the Company's Birmingham, Jackson and Kankakee mini-
mills. The Company estimates that PESCO will ship approximately 180,000 tons of
steel per year to its customers.
Rod, Bar and Wire Production Facilities
The Cleveland, Ohio Facilities
The Cleveland facilities include a rod mill, a bar mill and a wire mill. The rod
mill and wire mill assets were purchased from United States Steel Corporation
(now "USX Corporation") in 1986 upon the formation of American Steel and Wire
Corporation. The Cleveland rod mill consists of a two strand, 25-stand rolling
mill with single-line pre-finishers and no-twist finishing. The mill utilizes a
Stelmor controlled slow cooling conveyor system, where precise cooling practices
provide a metallurgical structure normally imparted only through additional and
more costly thermal treatment. Management believes that this capability provides
the Company with an important competitive advantage in producing certain of its
quality rods. The rod mill is capable of producing rod coils in sizes ranging
from 7/32" to 15/16" in diameter. In fiscal 1996, the Cleveland rod mill shipped
396,000 tons of finished steel rod.
The recently constructed bar mill consists of a 28 stand horizontal/vertical no-
twist mill. The bar mill utilizes Stelmor cooling conveyors, laser sizing gauges
and two compactor/banders. The bar mill began production and shipment operations
in June 1996. Upon completion of the startup phase, the bar mill will be capable
of producing bar and rod products in sizes ranging from 45/64" to 1 9/16" in
diameter in 4,300 pound and 5,700 pound coils.
The wire mill, located adjacent to the rod mill at the Cleveland facility,
serves two functions. Some finished rod is transferred from the ASW rod mills
and either converted into high quality wire for sale to customers or processed
and shipped to rod customers. The wire mill also processes customer material.
The ability to offer high quality processing of rod to customers' specifications
is a service that distinguishes ASW from a number of its competitors. Such
processing includes surface treatment (cleaning and coating), thermal treatment
(annealing) and wire drawing. Wire is produced in the wire mill through a cold
drawing process which involves reducing the diameter of the steel rod by pulling
the rod through dies. Rod that is to be drawn into wire may be surface or
thermal treated before or after drawing. Depending upon the processing required,
many wire orders require up to three weeks to complete, while the typical rod
coil is manufactured in several hours.
In fiscal 1996, the Cleveland wire mill shipped approximately 39,000 tons of
wire and approximately 38,000 tons of processed rod. Cold heading and
wool-quality wire manufactured by ASW is used by its customers to produce such
products as industrial fasteners and brake pad linings.
The Joliet, Illinois Facility
The rod mill located in Joliet, Illinois consists of a 19-stand mill and
includes a three-zone, top-fired walking beam furnace and no-twist finishing
equipment. The Joliet mill uses 4" billets to produce a full range of carbon and
alloy steel rods including free-machining and boron grades in cold heading and
cold finishing qualities. The mill produces 2,100 pound rod coils in sizes
ranging from 23/64" through 15/16" diameter. In fiscal 1996, the Joliet mill
shipped 136,000 tons of finished rod.
As part of the Company's current mill modernization program, the Company is
currently phasing out production of high quality steel rod at the Joliet
facility and shifting that production to the new bar mill located in Cleveland.
The Company expects to convert the mill to 100% rebar and merchant (flats,
rounds and squares) coil and straight length products in the second quarter of
fiscal 1997. When the operation is fully converted, the rolling mill will be
capable of producing approximately 280,000 tons of rebar and merchant products
annually.
TOW Wire Production
ASW operates a facility in Cleveland which produces ultra-high tensile strength
specialty wire for use in the U.S. Government's anti-tank missile guidance
systems. ASW is the only producer of TOW missile wire. The manufacture of TOW
wire is a highly specialized process. The principal raw material is specialty
steel rod which is purchased from an outside supplier. The rod is subjected to a
series of surface and thermal treatments and drawing operations which take
approximately five weeks to complete and which reduce the original .197"
diameter rod to .0049" diameter wire. The wire must pass seven U.S.
Government-mandated final inspection tests, including a test assuring tensile
strength of 500,000 pounds per square inch. Upon completing successful
inspection, the wire is packaged and shipped to a single customer which is the
exclusive producer of the TOW missile.
Products and Markets
Rebar/Merchant Steel Products
Of the 1,870,000 tons of rebar/merchant steel products shipped from the
Company's various locations in fiscal 1996, approximately 66% was rebar and
approximately 26% was merchant products. Approximately 8% consisted of
semi-finished billet sales.
From its various rebar/merchant locations, the Company has freight-competitive
access to most major rebar and merchant markets. The Company's multiple
locations have also enhanced flexibility and reliability in meeting the demands
of large rebar fabricators and steel service centers.
The following table presents, for the periods indicated, the percentage of the
Company's net sales dollars generated by the rebar/merchant product class:
Fiscal
----------------------
1994 1995 1996
---- ---- ----
Rebar products 57% 51% 64%
Merchant products 23 36 31
Mine roof support
products (1) 14 9 -
Semi-finished
steel billets 6 4 5
---- ---- ----
100% 100% 100%
==== ==== ====
(1) Roof support system products consisted of modified rebar and merchant
steel products. The Company's Mine Roof Support Products Business was
sold in March 1995 (see Note 3 to the Consolidated Financial
Statements).
Rebar Products. The Company produces rebar products at all four of its mini-
mills. Rebar is generally sold to fabricators and manufacturers who cut, bend,
shape and fabricate the steel to meet engineering, architectural or end product
specifications. Rebar is used primarily for strengthening concrete in highway
construction, building construction and other construction applications. Unlike
some other manufacturers of rebar, the Company does not engage in the rebar
fabrication business which might put the Company into direct competition with
its major rebar customers. The Company instead focuses its marketing efforts on
independent rebar fabricators and steel service centers.
Rebar is a commodity steel product, making price the primary competitive factor.
As a result, freight costs limit rebar competition from non-regional producers,
and rebar deliveries are generally concentrated within a 700 mile radius of the
mill. Except in unusual circumstances, the customer's delivery expense is
limited to freight from the nearest mini-mill and any incremental freight
charges from another source must be absorbed by the supplier.
Rebar is consumed in a wide variety of end uses, divided into roughly equal
portions between private sector applications and public works projects. Private
sector applications include commercial and industrial buildings, construction of
apartments and hotels, utility construction, agricultural uses and various
maintenance and repair applications. Public works projects include construction
of highways and streets, public buildings, water treatment facilities and other
projects.
The following data, reported by the American Iron and Steel Institute (a rebar
fabricators' trade association), depict apparent rebar consumption in the United
States from 1986 through 1995. The table also includes rebar shipments by the
Company and its approximate market share percentage for the periods indicated.
Rebar Company Approximate
Consumption Shipments Market
Calendar Year (in tons) (in tons) Share
- ------------- ----------- ---------- ------------
1986 4,787,000 259,000 5.4%
1987 5,301,000 558,000 10.5%
1988 5,416,000 808,000 14.9%
1989 5,213,000 972,000 18.6%
1990 5,386,000 972,000 18.0%
1991 4,779,000 945,000 19.8%
1992 4,764,000 1,060,000 22.3%
1993 5,051,000 1,181,000 23.4%
1994 5,151,000 1,185,000 23.0%
1995 5,454,000 1,108,000 20.3%
The Company's rebar operations are subject to a period of moderately reduced
sales from November to February, when winter weather and the holiday season
impact the construction market demand for rebar.
Merchant Products. The Company has the capability to produce merchant products
at all four of its mini-mills. Merchant products consist of rounds, squares,
flats, strip, angles and channel. Merchant products are generally sold to
fabricators, steel service centers, and manufacturers who cut, bend, shape and
fabricate the steel to meet engineering or end product specifications. Merchant
products are used to manufacture a wide variety of products, including gratings,
steel floor and roof joists, safety walkways, ornamental furniture, stair
railings and farm equipment.
Merchant products typically require more specialized processing and handling,
including straightening, stacking and specialized bundling. Because of the
greater variety of shapes and sizes, merchant products are typically produced in
shorter production runs, necessitating more frequent changeovers in rolling mill
equipment. Merchant products command higher prices and produce higher profit
margins than rebar products.
The Company has installed modern straightening, stacking and bundling equipment
at its mills in Kankakee, Jackson and Seattle and automated bundling equipment
in Birmingham, which has helped strengthen its competitiveness in merchant
markets in the South, Midwest and West Coast.
The following data reported by the American Iron and Steel Institute depict
apparent consumption of merchant products in the United States from 1986 through
1995. The table also includes merchant product shipments by the Company and its
approximate market share percentage for the periods indicated.
Merchant
Product Company Approximate
Consumption Shipments Market
Calendar Year (in tons) (in tons) Share
- ------------- ----------- --------- -----------
1986 7,256,000 67,000 1.0%
1987 7,911,000 147,000 1.9%
1988 8,546,000 264,000 3.1%
1989 8,398,000 272,000 3.2%
1990 8,379,000 306,000 3.7%
1991 7,045,000 287,000 4.1%
1992 7,504,000 330,000 4.4%
1993 8,445,000 395,000 4.6%
1994 10,113,000 484,000 4.8%
1995 10,618,000 524,000 4.9%
Rod, Bar and Wire Products
The Company's rod, bar and wire facilities (ASW) markets high-quality steel rod,
bar and wire to customers in the automotive, agricultural, industrial fastener,
welding, appliance and aerospace industries. In fiscal 1996, approximately 52%
of ASW's shipments are cold heading quality steel rod. Cold finish bar products
represented approximately 18%, welding wire products represented approximately
9% and specialty high carbon represented approximately 8% of ASW's shipments in
fiscal 1996. The approximate remaining 13% of its shipments in fiscal 1996
include other wire and quality rod products. Approximately 70% of ASW's sales
are to customers serving the original equipment and after market segments of the
automotive industry.
The following table presents, for the periods indicated, the percentage of ASW's
net sales dollars by principal product categories:
Fiscal
--------------------
1994 1995 1996
---- ---- ----
Steel rod 87.4% 89.2% 89.5%
Wire 11.4 10.0 9.8
Tow wire 1.2 0.8 0.7
---- ---- ----
100% 100% 100%
==== ==== ====
The Cleveland rod mill currently produces steel rods in sizes ranging from 7/32"
to 15/16" in diameter and in a wide variety of alloy and carbon grades. The
recently constructed bar mill, which began production and shipments in June 1996
is capable of producing bar and rod sizes ranging from 45/64" to 1 9/16" in
diameter. ASW's wire mill produces wool wire and cold heading quality products
in a variety of carbon and alloy grades in sizes from .120" through .820" in
diameter.
End-uses of ASW's rod products include the manufacture of electric motor shafts,
engine bolts, lock hasps, screws, pocket wrenches, seat belt bolts, springs,
cable wire, chain, bearings, tire bead and welding wire. Steel wire produced by
ASW is used by customers to produce steel wool pads, brake pads, golf spikes and
fasteners such as bolts, rivets, screws, studs and nuts. ASW's TOW wire products
are used exclusively in the defense industry to produce guidance systems for the
TOW anti-tank missile.
Because of the nature of the end-uses, ASW's products must meet exacting
metallurgical and size tolerance specifications and defect-free surface
characteristics. ASW's marketing and sales activities emphasize its ability to
meet or exceed customers' requirements for high quality steel rod and wire
manufactured to close tolerances and exacting surface characteristics.
ASW's pricing policy is market driven depending on the market served and supply
and demand dynamics. Typically, market pricing prevails for most customers that
rely on market competition to determine price. The major exception to this has
been automotive related model year pricing which fixes a twelve month price
(generally beginning August 1). This allows suppliers to deal with automotive
industry requirements for twelve months fixed pricing.
The following data, reported by the WEFA Group and based on data from the
American Iron and Steel Institute, depict apparent consumption of carbon and
alloy rod and wire products in the United States from 1986 through 1995 (in
tons).
Total
Calendar Rod Wire Rod & Wire
Year Consumption Consumption Consumption
- ---------- ----------- ----------- -----------
1986 4,800,000 2,100,000 6,900,000
1987 5,300,000 2,100,000 7,400,000
1988 5,500,000 1,600,000 7,100,000
1989 5,200,000 1,500,000 6,700,000
1990 5,200,000 1,300,000 6,500,000
1991 5,000,000 1,200,000 6,200,000
1992 5,400,000 1,300,000 6,700,000
1993 6,100,000 1,200,000 7,300,000
1994 6,400,000 1,200,000 7,600,000
1995 6,500,000 1,100,000 7,600,000
Management estimates that the high quality segment of the rod and wire market
represents approximately 48% of rod market demand in the U.S. ASW's strategy has
been to serve this approximately 3.6 million ton per year high quality segment,
which has historically been dominated by foreign suppliers. Generally, mini-
mills have historically focused on less demanding quality markets.
In calendar 1995, ASW shipped approximately 601,000 tons of rod and wire to
trade customers, which represented approximately 17% of the estimated high
quality rod and wire products consumed in the U.S. during that year. Management
estimates that ASW's shipments presently account for approximately 8% of the
U.S. consumption of all carbon and alloy rod and wire products.
Steel Rod Products. The following is a summary of the principal rod product
qualities manufactured by ASW.
Cold heading quality (CHQ) - ASW produces CHQ steel rod in a wide range of
carbon and alloy grades. CHQ is specified for the manufacture of wire used for
parts requiring severe deformation or upsetting. Examples of such parts include
seat belt bolts, lug nuts, engine bolts and lock nuts used in automotive
applications as well as slotted and phillips head screws for the appliance
industry. CHQ products accounted for approximately 52% of ASW's fiscal 1996
shipments.
Cold finish quality (CFQ) - ASW's CFQ steel rod is intended for the manufacture
of cold drawn bars and is generally produced with additives such as lead or
selenium to enhance machinability. CFQ is specified for the manufacture of parts
such as shock absorber rods, electric motor shafts, bearings, socket wrenches,
screw driver shafts and drill bits.
Cold rolling quality (CRQ) - ASW produces CRQ steel rod in a wide range of
carbon and alloy grades. CRQ is specified for the manufacture of wire used for a
variety of shaped wires including square, oval, half-round and half-oval.
Intricately shaped parts, such as the center support section for steering wheels
and the regulator spring used to lower and raise automobile power windows, are
typical examples of products incorporating wire made from CRQ.
Welding quality (WQ) - ASW's WQ steel rod is produced in a wide variety of
specialized carbon and alloy chemistries in order to match the characteristics
of the materials being joined. WQ is intended for the production of wire for
gas, electric arc, submerged arc and inert gas welding applications.
Specialty high carbon quality (SHCQ) - SHCQ steel rod is produced in a variety
of carbon and alloy grades. SHCQ is specified for the manufacture of wire used
for parts requiring high-tensile strength or resiliency. Typical examples of
such parts are overhead garage door springs, lock washers, upholstery springs,
music spring wire, tire bead and wire rope.
Bearing quality - ASW produces bearing quality steel to serve a range of alloy
grades into ball, needle and roller type bearings.
Wire Products. ASW produces cold heading quality wire in a full range of carbon
and a variety of alloy grades in sizes ranging from .120" to .820" in diameter.
Direct-drawn wire is supplied to customers desiring wire with the physical
properties of rod except for the surface treatment and close diameter tolerance.
Cold heading wire is primarily supplied to fastener manufacturers.
ASW produces wool quality wire utilizing special wire drawing practices which
ensure a consistent, high quality product. Customers shave ASW's wire to
manufacture steel wool. The steel wool is then used to produce items such as
soap pads, furniture finishing pads and steel fibers for automotive brake
linings, which are currently being used to replace asbestos brake linings.
TOW Wire. TOW wire is an ultra-high tensile strength product utilized in the TOW
anti-tank missile system, a defense weapon which has been in use since 1967. ASW
is currently the only supplier of TOW wire, which is extremely ductile, measures
.0049" in diameter and has a tensile strength of 500,000 pounds per square inch.
Each TOW missile carries two wire bobbins, each containing nearly three miles of
wire.
Competition
Price sensitivity in markets for the Company's products is driven by competitive
factors and the cost of steel production. The geographic marketing areas for the
Company's products are similar.
Rebar and Merchant Steel Products. Because rebar and merchant products are
commodity products, the major factors governing the sale of rebar and merchant
products are manufacturing cost, competitive pricing, inventory availability,
facility location and service. The Company competes in the rebar and merchant
product markets primarily with numerous regional domestic mini-mill companies.
Rod and Wire Products. ASW's major competitors are divisions of domestic and
foreign integrated steel companies and domestic mini-mill companies. ASW
competes primarily in the high quality end of the rod and wire markets,
differentiating itself from many of its competitors.
Although price is an important competitive factor in ASW's business,
particularly during recessionary times, ASW believes that its sales are
principally dependent upon product quality, on-time delivery and customer
service. ASW's marketing and sales activities emphasize its ability to meet or
exceed customers' requirements for high quality steel rod and wire manufactured
to close tolerances and exacting surface and internal characteristics. These
markets constitute a relatively small percentage of total domestic steel
consumption, and therefore some domestic integrated mills have exited this
business or given it a low priority. Additionally, mini-mills are generally
unable to produce steel of sufficient quality and metallurgical characteristics
to produce rod, bar and wire comparable in quality to that manufactured by ASW.
Foreign Competition. In recent years, a declining U.S. dollar and increased
efficiency in the U.S. steel industry have improved the competitive position of
U.S. steel producers. Foreign steel is a competitive factor on a sporadic basis.
Federal legislation currently prohibits the use of foreign steel in federally
funded highway construction.
Based on data provided by the American Iron and Steel Institute, management
believes that foreign steel producers currently account for approximately 26% of
sales in the U.S. rod and wire markets. Changes in currency exchange rates can
impact the competitive position of foreign steel producers.
Employees
Rebar/Merchant Mini-Mill Facilities. At June 30, 1996, the Company employed 973
people at its mini-mill operations. The Company estimates that approximately 25%
of its current employee compensation at its mini-mills is earned on an incentive
basis linked to production. The percentage of incentive pay varies from mill to
mill based upon operating efficiencies. During fiscal 1996, hourly employee
costs at these facilities were approximately $27 per hour, including overtime
and fringe benefits, which was competitive with other mini-mills. The Company's
mini-mill facilities are not unionized. The Company has never experienced a
strike or other work stoppage at its steel mills and management believes that
employee relations are currently good.
Rod and Wire Production Facilities. At June 30, 1996, the Company's ASW
subsidiary employed 398 persons at its Cleveland and Joliet rod mills, 90 people
at the Cleveland wire mill and 13 people at the ASW TOW wire production
facility. The production and maintenance employees at the Joliet facility have
been represented by United Steelworkers of America since 1986, and are parties
to a collective bargaining contract which expires in June 2000. During fiscal
1996, hourly employee costs at these facilities were approximately $22 per hour,
including overtime and fringe benefits. The Company considers its labor
relations with its employees to be good.
Sales and Administrative Personnel. At June 30, 1996, the Company employed 130
sales and administrative personnel, of which 73 were employed at the Company's
corporate office headquarters located in Birmingham.
Environmental and Regulatory Matters
The Company is subject to federal, state and local environmental laws and
regulations concerning, among other matters, waste water effluent, air emissions
and furnace dust disposal. As these regulations increase in complexity and
scope, environmental considerations will play an increasingly important role in
planning, daily operations and expenses.
The Company operates engineering/environmental services departments and has
environmental coordinators at its facilities to maintain compliance with
applicable laws and regulations. These personnel are responsible for the daily
management of environmental matters. The Company believes it is currently in
compliance with all known material and applicable environmental regulations,
other than as discussed below. Changes in federal or state regulations or a
discovery of unknown conditions could require additional substantial
expenditures by the Company.
Mini-Mill Operations. The Company's mini-mills are classified as generating
hazardous waste because they produce and collect certain types of dust
containing lead and cadmium. The Company currently collects and disposes of such
wastes at approved recycling sites through contracts with approved waste
recycling firms.
In August 1987, the Virginia Department of Waste Management advised the Company
of a hazardous waste condition relating to the disposal of hazardous furnace
dust at the Company's idled Norfolk facility by the former owners during 1983
and 1984. Based upon the Company's prior experience in correcting similar
environmental conditions, it does not expect the costs of corrective action with
respect to the hazardous waste condition will exceed the reserves established.
By letter dated October 20, 1992, the Department of Toxic Substances Control of
the Environmental Protection Agency of the State of California ("DTSC")
submitted to Barbary Coast Steel Corporation ("BCSC"), a wholly owned subsidiary
of the Company, for its review and comment a proposed Consent Order relating to
BCSC's closed steel facility at Emeryville, California. BCSC and DTSC executed
the terms of a Consent Order on March 22, 1993. Pursuant to that Consent Order,
BCSC has completed an environmental assessment of the site and, on June 10,
1996, received DTSC approval of its proposal for the remediation of the
property. BCSC is now actively remediating the property pursuant to the approved
remedial action plan. The Company believes that the net realizable values of the
property less the remediation costs will exceed the carrying amount for the
property.
Rod and Wire Operations. At its Cleveland facilities, ASW has developed systems
to ensure compliance with water discharge permits and timely filing of monthly
operating reports. ASW has succeeded in substantially reducing wastewater
discharged into the waters of the United States in the last three years. ASW has
applications pending for, and has received, the appropriate permits for all
relevant air pollution sources at all of its facilities. ASW does not expect the
Clean Air Act regulations to materially affect its operations beyond more
stringent permitting and sampling requirements. ASW manages its hazardous wastes
by contracting with reputable transport and disposal companies to properly
treat, dispose of, and, wherever possible, recycle hazardous wastes generated
from ASW's operations.
The ASW facilities were acquired pursuant to an Asset Sales Agreement dated May
19, 1986 (the "Agreement'), by and between ASW and USX Corporation (formerly
United States Steel Corporation) ("USX"). Pursuant to the Agreement, ASW is
indemnified by USX for certain claims, if any, which may be asserted against ASW
under the Resource Conservation and Recovery Act Of 1976, as amended, 42 U.S.C.
Subsection 6901, et seq., and the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended,42 U.S.C. Sub-section 9601,
et. seg., or which may be asserted under similar federal or state statutes or
regulations, which arise out of USX's actions on or prior to June 30, 1986, the
date on which ASW acquired these facilities. To date, no such claims have been
asserted against ASW. Any potential environmental liabilities identified by ASW
to date have not materially affected, and, based on current information, are not
expected to materially affect, its operations and/or may be subject to
indemnification by USX as described above.
Pursuant to General Instruction G(3) to Form 10-K, information regarding the
executive officers of the Company called for by Item 401(b) of Regulation S-K is
hereby included in Part I of this report.
The following table sets forth the name of each executive officer of the
Company, the offices held, and the ages (as of August 1996) of such officers.
Name Age Office Held
- --------------------- ---- -------------------------------------
Robert A. Garvey 58 Chairman of the Board and
Chief Executive Officer
John M. Casey 48 Executive Vice President-
Finance and Chief Financial Officer
William R. Lucas 40 Executive Vice President-
Administration and General
Counsel
Frederick J. Rocchio 49 Executive Vice President-
Development and Technology
Jack R. Wheeler 60 Vice President-Plant Operations
Robert A. Garvey was elected Chairman of the Board and Chief Executive Officer
in January 1996. Prior to joining the Company, Mr. Garvey served as President of
North Star Steel Company from 1984 to 1996.
John M. Casey was appointed Executive Vice President-Finance and Chief Financial
Officer in October 1994. Prior to joining the Company, Mr. Casey served as
Executive Vice President and Chief Financial Officer of Safeskin Corporation
from 1993 to 1994 and as Treasurer of Spiegel, Inc. from 1985 to 1993.
William R. Lucas, Jr. joined the Company in July 1995 as Executive Vice
President-Administration and General Counsel. Prior to joining the Company, Mr.
Lucas was a founding partner of the Birmingham, Alabama based law firm
Lightfoot, Franklin, White & Lucas, where he served as managing partner from
1990 to 1995.
Frederick J. Rocchio, Jr. joined the Company in October 1995 and serves as
Executive Vice President-Development and Technology. Prior to joining the
Company, Mr. Rocchio served as a Vice President of Inland Steel Company from
1988 to 1995.
Jack R. Wheeler joined the Company in November 1992 and serves as Vice
President-Plant Operations. Prior to joining the Company, Mr. Wheeler served
as Vice President and Works Manager at SMI Steel Inc. from 1986 to 1992.
ITEM 2. PROPERTIES
The following table lists the Company's real property and production facilities.
BUILDING
SQUARE OWNED OR
LOCATION ACREAGE FOOTAGE LEASED
- ----------------------- ------- --------- ---------
Corporate Headquarters:
Birmingham, Alabama - 30,400 Leased
Steel Mini-Mills:
Birmingham, Alabama 26 260,900 Owned (1)
Jackson, Mississippi 99 323,000 Owned (1)
Kankakee, Illinois 222 400,000 Owned
Seattle, Washington 69 736,000 Owned
American Steel & Wire:
Cleveland, Ohio 216 2,041,600 Owned
Joliet, Illinois 58 529,000 Owned
Cleveland, Ohio (TOW) 3 41,000 Owned
PESCO Facility:
Ft. Lauderdale, FL - 175,000 Leased
Idle Facilities:
Ballard, Washington 20 301,000 Owned (2)
Emeryville, California 15 1,000 Owned (3)
Norfolk, Virginia 116 160,000 Owned (4)
(1) Portions of equipment that were financed by industrial revenue bonds and the
land upon which such equipment is located are leased pursuant to the terms of
such bonds.
(2) The Company has entered into a signed agreement to sell the real property at
its idle facility in Ballard, Washington.
(3) The Company closed this operation in January 1991. The Company continues its
efforts to sell the real property.
(4) The Company closed this operation in May 1991. The Company continues its
efforts to sell the real property.
Legal Proceedings
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business. Some of these claims against the
Company are covered by insurance, although the insurance policies do include
deductible amounts. It is the opinion of management that any uninsured or
unindemnified liability resulting from existing litigation would not have a
material adverse effect on the Company's business or financial position. There
can be no assurance that insurance, including product liability insurance, will
be available in the future at reasonable rates.
By letter dated October 20, 1992, the Department of Toxic Substances Control of
the Environmental Protection Agency of the State of California ("DTSC")
submitted to Barbary Coast Steel Corporation ("BCSC"), a wholly owned subsidiary
of the Company, for its review and comment a proposed Consent Order relating to
BCSC's closed steel facility at Emeryville, California. BCSC and DTSC executed
the terms of a Consent Order on March 22, 1993. Pursuant to that Consent Order,
BCSC has completed an environmental assessment of the site and, on June 10,
1996, received DTSC approval of its proposal for the remediation of the
property. BCSC is now actively remediating the property pursuant to the approved
remedial action plan. The Company believes that the net realizable values of the
property less the remediation costs will exceed the carrying amount for the
property.
On March 26, 1993, an action entitled IMACC Corporation v. Warburton. et al. was
filed in the U.S. District Court for the Northern District of California, Case
No. C93-1114-CW, against BCSC and numerous other defendants. This lawsuit was
brought by IMACC Corporation ("IMACC"), the parent of Myers Container
Corporation, the lessee of property in Emeryville, California on which an
industrial drum and barrel reconditioning facility operated from the 1940's
until 1991 (hereinafter, the "IMACC property"). BCSC owns the property
immediately south of the IMACC property. IMACC has sued BCSC, Judson Steel
Corporation ("Judson Steel") (from whom BCSC purchased the adjacent property in
October 1987), the current owners of the IMACC property and other persons and
entities alleged to have previously operated the drum reconditioning facility,
under the Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA"), 42 U.S.C. SS 9601 -9675 and various state law causes of
action, alleging that the Defendants contributed to environmental contamination
on and under the IMACC property. IMACC has since amended its complaint several
times, which now includes a citizens' suit claim for injunctive and other
equitable relief under the Resource Conservation and Recovery Act ("RCRA"), 42
U.S.C. SS 6972.
BCSC has interposed numerous affirmative defenses to IMACC's claims. In
addition, BCSC has counterclaimed and cross-claimed against IMACC and its
predecessors, including Kaiser Steel and Myers Drum Company, alleging that their
drum reconditioning operations resulted in contamination of the BCSC property.
BCSC has also cross-claimed against Judson Steel and its corporate parent,
alleging that they must indemnify BCSC for any response costs and damaged
allegedly owed to IMACC. Other parties in the case have brought additional
counterclaims and cross-claims against each other, BCSC, and other third
parties, including senior executives and shareholders of IMACC and Kaiser Steel
Resources.
In February 1996, the parties filed motions and cross-motions for summary
judgment, and to dismiss. The motions were heard on March 29, 1996. In an Order
dated July 9, 1996, the Court granted in part BCSC's summary judgment motion as
to a portion of IMACC's RCRA claim for equitable restitution. The remainder of
BCSC's motions were denied. The Court also denied defendants' summary judgment
motions for dismissal of IMACC's claim seeking to hold all defendants jointly
and severally liable for IMACC's response costs under section 107(a) of CERCLA,
which if granted would limit IMACC's CERCLA remedy to an action for contribution
under section 113(f). The Court held that IMACC may bring claims under both
sections 107 and 113 against other potentially responsible parties.
Over the past two years, the parties have engaged in extensive written
discovery, produced voluminous documents and taken numerous depositions. The
parties have each designated expert witnesses and exchanged expert reports, and
are currently in the process of taking the depositions of a few remaining
percipient witnesses. It is anticipated that all discovery will be concluded
by or shortly after September 30, 1996.
A final pre-trial conference has been set for October 11, 1996, with a jury
trial currently set to commence on October 28, 1996. Presently before the Court
are motions of other defendants for bifurcation, which propose that certain
contractual and by-law indemnity issues be tried before the remainder of the
case. A decision on these motions is expected within the next few weeks.
IMACC alleges that it has sustained current and prospective response and
environmental remediation costs, excluding attorneys' fees, of as much as $4.7
million in connection with the Emeryville drum reconditioning site. Based upon
discovery taken to date and laboratory analyses of soil samples, BCSC believes
that IMACC's contention that BCSC is responsible for contamination of the
IMACC/Emeryville property is without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, par value $.01 per share (the "Common Stock"), is
traded on the New York Stock Exchange under the symbol BIR.
The table below sets forth for the two fiscal years ended June 30, 1996 and
1995, the high and low prices of the Company's Common Stock based upon the high
and low sales prices of the Common Stock as reported on the New York Stock
Exchange Composite Tape.
High Low
------ ------
Fiscal Year Ended June 30, 1996
First Quarter $21.63 $16.50
Second Quarter 17.50 14.00
Third Quarter 18.00 14.63
Fourth Quarter 17.25 14.50
Fiscal Year Ended June 30, 1995
First Quarter $29.13 $23.63
Second Quarter 27.38 18.75
Third Quarter 22.75 17.50
Fourth Quarter 21.38 17.88
The last sale price of the Common Stock as reported on the New York Stock
Exchange on August 27, 1996 was $15.50. As of August 27, 1996, there were 1,797
holders of record of the Common Stock. The Company's registrar and transfer
agent is First Union National Bank of North Carolina.
The ability of the Company to pay dividends in the future will be dependent upon
general business conditions, earnings, capital requirements, funds legally
available for such dividends, contractual provisions of debt agreements and
other relevant factors (see "Selected Financial Data" for information concerning
dividends paid by the Company during the past five fiscal years).
<TABLE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
<CAPTION>
For the Years Ended June 30,
----------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 832,489 $ 885,553 $ 702,893 $ 442,326 $ 417,655
Cost of sales:
Other than depreciation
and amortization 730,447 723,558 599,154 374,846 341,826
Depreciation and amortization 34,701 32,310 27,671 18,036 16,804
--------- --------- --------- --------- ---------
Gross profit 67,341 129,685 76,068 49,444 59,025
Provision for loss on mill modernization
program, unusual items and
suspended operations 23,907 1,337 - 2,272 -
Selling, general and administrative 37,731 43,149 33,847 24,008 21,861
Interest 12,036 8,889 11,061 3,084(1) 9,154
--------- --------- --------- --------- ---------
(6,333) 76,310 31,160 20,080 28,010
Other income, net 3,975 9,443 4,689 1,222 2,402
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of a change in accounting principle (2,358) 85,753 35,849 21,302 30,412
Provision for (benefit from) income taxes (181) 35,104 14,603 8,517 11,605
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of a
change in accounting principle (2,177) 50,649 21,246 12,785 18,807
Cumulative effect, as of July 1, 1993, of a
change in the method of accounting for
income taxes - - 380 - -
--------- --------- --------- --------- ---------
Net income (loss) $ (2,177) $ 50,649 $ 21,626 $ 12,785 $ 18,807
========= ========= ========= ========= =========
Earnings (loss) per share:
Income (loss) before cumulative effect of a
change in accounting principle $ (0.08) $ 1.74 $ 0.86 $ 0.60 $ 1.05
Cumulative effect, as of July 1, 1993, of a
change in the method of accounting for
income taxes - - 0.02 - -
--------- --------- --------- --------- ---------
Net income (loss) $ (0.08) $ 1.74 $ 0.88 $ 0.60 $ 1.05
========= ========= ========= ========= =========
Dividends declared per share $ 0.40 $ 0.40 $ 0.40 $ 0.37 $ 0.33
========= ========= ========= ========= =========
June 30,
-------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital $ 211,595 $ 206,901 $ 213,075 $ 33,131 $ 74,428
Total assets 927,987 756,804 689,878 456,042 388,028
Long-term debt less current portion 307,500 142,500 142,500 90,095 93,728
Stockholders' equity 448,191 459,719 439,049 223,421 214,481
<FN>
(1) During fiscal 1993, the Company incurred $8,682,000 of interest and
capitalized $5,598,000 of interest related to assets under construction.
</FN>
</TABLE>
BIRMINGHAM STEEL CORPORATION
Selected Quarterly Financial Data
(Unaudited; in thousands, except per share data)
1996 Quarters
---------------------------------------------------
First Second Third Fourth
--------- --------- --------- ---------
Net sales $ 207,252 $ 197,398 $ 197,057 $ 230,782
Gross profit $ 26,423 $ 16,190 $ 6,182 $ 18,546
Net income (loss) $ 8,178 $ 656 $ (14,397) $ 3,386
Weighted average shares
outstanding 28,521 28,538 28,598 28,609
Earnings (loss) per share $ 0.29 $ 0.02 $ (0.50) $ 0.12
Cash dividends declared
per share $ 0.10 $ 0.10 $ 0.10 $ 0.10
Price range of common stock
High $ 21.63 $ 17.50 $ 18.00 $ 17.25
Low $ 16.50 $ 14.00 $ 14.63 $ 14.50
1995 Quarters
---------------------------------------------------
First Second Third Fourth
--------- --------- --------- ---------
Net sales $ 220,601 $ 203,238 $ 236,900 $ 224,814
Gross profit $ 32,294 $ 31,975 $ 34,509 $ 30,907
Net income $ 12,205 $ 12,369 $ 13,264 $ 12,811
Weighted average shares
outstanding 29,404 29,450 29,283 28,506
Earnings per share $ 0.42 $ 0.42 $ 0.45 $ 0.45
Cash dividends declared
per share $ 0.10 $ 0.10 $ 0.10 $ 0.10
Price range of common stock
High $ 29.13 $ 27.38 $ 22.75 $ 21.38
Low $ 23.63 $ 18.75 $ 17.50 $ 17.88
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
In fiscal 1996, Birmingham Steel Corporation reported a loss of $2,177,000, a
sharp decline from the prior year's earnings. The decline was principally due to
charges and expenses resulting from the Company's mill modernization program and
a decline in average steel selling prices. Pretax charges for mill modernization
and unusual items amounted to $23.9 million, of which $8.4 million related to
pre-operating/start-up costs at the Company's Seattle, Washington, Cleveland,
Ohio and Memphis, Tennessee facilities; $6.6 million related to equipment
write-downs and $1.7 million related to property cleanup reserves (see Note 14
to the Consolidated Financial Statements).
The following table sets forth, for the years indicated, selected items in the
consolidated statements of income as a percentage of net sales and the amount of
steel shipments in tons.
For the Years Ended June 30,
----------------------------
1996 1995 1994
---- ---- ----
Net sales 100% 100% 100%
Cost of sales:
Other than depreciation and
amortization 87.7 81.7 85.2
Depreciation and amortization 4.2 3.6 3.9
Provision for loss on mill
modernization and unusual items 2.9 0.2 -
Selling,general & administrative 4.5 4.9 4.8
Interest 1.5 1.0 1.6
Other income, net (0.5) (1.1) (0.7)
Provision for income taxes - 4.0 2.1
------ ------- ------
Net income (loss) (0.3%) 5.7% 3.1%
------ ------- ------
Steel shipments (000's tons) 2,402 2,375 2,130
RESULTS OF OPERATIONS
Net Sales
Fiscal 1996 compared to fiscal 1995
Net sales in fiscal 1996 were $832,489,000, a decline of 6.0 percent from
$885,553,000 reported in fiscal 1995. This decrease is primarily the result of a
decline in average steel selling prices and a shift in product mix.
For fiscal 1996, the average selling price in the Company's rebar/merchant
business was $300 per ton compared with $311 per ton in fiscal 1995, while the
average selling price for the Company's high quality rod products remained
constant at $472 per ton. The decline in selling prices for rebar/merchant
products is a result of overall market decline in construction products. The
Company's average selling price for all products was $347 per ton, compared with
$373 per ton reported for fiscal 1995.
During fiscal 1996, total shipments were 2,402,000 tons, up 1.1 percent from
2,375,000 tons in fiscal 1995. While total shipments increased from the prior
year, shipment of merchant products fell 7.7 percent and high quality rod
shipments decreased 15.8 percent partially offset by a 12.9 percent increase in
rebar shipments. Total shipments included approximately 138,000 tons of lower
margin semi-finished steel billets in fiscal 1996 compared with 117,000 tons in
fiscal 1995.
Fiscal 1995 compared to fiscal 1994
From fiscal 1994 to fiscal 1995, net sales increased 26.0 percent. This rise in
net sales was essentially due to an 11.5 percent increase in fiscal 1995 steel
shipments and a substantial rise in average selling prices for all products. The
overall rise in selling price occurred as the result of favorable conditions in
both the construction and automotive related markets.
Cost of Sales
Fiscal 1996 compared to fiscal 1995
As a percent of net sales, cost of sales (other than depreciation and
amortization) increased to 87.7 percent in fiscal 1996 from 81.7 percent in the
prior year. This increase was primarily attributed to the decline in steel
selling prices mentioned previously, elevated cost of FIFO inventories charged
to cost of sales due to production curtailments at the Company's rebar/merchant
facilities in the first three quarters of the year and an increase in raw
material billet costs at the Company's high quality rod production facilities.
At the Company's mini-mill facilities, the cost to convert scrap into finished
steel products rose modestly in fiscal 1996 to approximately $122 per ton,
compared with $119 per ton for fiscal 1995. The increase was primarily the
result of production curtailments to reduce inventory levels. The Company also
experienced a transformer failure at the Birmingham, Alabama facility in the
second quarter which contributed to the rise in conversion cost.
Scrap raw material cost at the Company's rebar/merchant mini-mills rose slightly
to an average of $137 per ton for fiscal 1996 compared with $136 per ton for
fiscal 1995. While scrap pricing did rise modestly early in the year, prices
stabilized at an average of $137 per ton for the second and third quarters and
dropped to an average of $136 per ton in the last quarter of fiscal 1996.
The cost of conversion in the Company's high quality rod mills rose to an
average of $64 per ton compared with $53 per ton for fiscal 1995. The increased
conversion cost is primarily attributed to reduced production efficiencies due
to a reallocation of employees to the Company's new bar mill which began
start-up operations in May.
High quality billet raw material cost at the Company's rod operations averaged
$345 per ton in fiscal 1996, up $19 per ton compared with $326 per ton in the
prior year period. The Company has begun construction of a high quality melting
facility in Memphis, Tennessee designed to initially supply approximately 1
million tons of the Company's high quality billet requirements. Contracts for
the construction of the facility were awarded in June with an expected capital
cost of approximately $200 million. Start-up of the facility is scheduled for
the fourth calendar quarter of 1997.
Depreciation and amortization expense increased in fiscal 1996 to $34,701,000
from $32,310,000 reported last year. This increase was primarily due to the
recognition of depreciation on fixed assets purchased during fiscal 1996 and
fiscal 1995 and amortization of goodwill associated with the Company's purchase
of certain assets of Western Steel Limited and the stock of Richmond Steel
Recycling Limited, a subsidiary of Western Steel Limited (see Note 2 to the
Consolidated Financial Statements) in fiscal 1996.
Fiscal 1995 compared to fiscal 1994
Cost of sales (other than depreciation and amortization) as a percentage of net
sales, decreased in fiscal 1995 compared with fiscal 1994 essentially due to an
overall rise in average steel selling prices and the absence of acquisition
costs which negatively impacted rod/wire cost of sales as a percentage of net
sales in fiscal 1994 partially offset by a modest rise in steel conversion costs
at the Company's mini-mills and increased scrap raw material costs.
Depreciation and amortization expense increased 16.8 percent in fiscal 1995
compared with fiscal 1994 primarily due to the recognition of a full year's
depreciation on the assets of American Steel and Wire Corporation (ASW) acquired
in November 1993 (see Note 2 to the Consolidated Financial Statements).
Selling, General and Administrative Expenses ("SG&A")
Fiscal 1996 compared to fiscal 1995
SG&A amounted to $37,731,000 in fiscal 1996, a decline of 12.6 percent from
$43,149,000 reported in fiscal 1995. The favorable decline is due to decreased
costs associated primarily with salaries and benefits, partially offset by
additional costs under the Company's information technology contract with
Electronic Data Systems (EDS). The EDS contract was renegotiated in the fourth
quarter of fiscal 1996 (See Note 8 to the Consolidated Financial Statements). As
a percentage of net sales, fiscal 1996 SG&A were 4.5 percent, compared with 4.9
percent last fiscal year.
Fiscal 1995 compared to fiscal 1994
SG&A increased 27.5 percent in fiscal 1995 to $43,149,000 from $33,847,000
reported in fiscal 1994. The rise in SG&A expenses was primarily due to the full
year inclusion of ASW's SG&A. As a percentage of net sales, fiscal 1995 SG&A
were 4.9 percent, compared with 4.8 percent for fiscal 1994.
Interest Expense
Fiscal 1996 compared to fiscal 1995
Interest expense increased to $12,036,000 in fiscal 1996 compared with
$8,889,000 in the prior year primarily due to the funding in mid-December of a
$150 million private debt placement and increased debt levels on the Company's
short-term lines of credit during the first half of fiscal 1996. The increase in
interest was partially offset by capitalized interest related to construction
projects amounting to approximately $6.4 million in fiscal 1996, compared with
$2.1 million in the prior year.
Fiscal 1995 compared to fiscal 1994
Interest expense decreased significantly in fiscal 1995 to $8,889,000 from
$11,061,000 reported in fiscal 1994, primarily reflecting a 34 percent decline
in the Company's average outstanding debt from fiscal 1994 to fiscal 1995. The
Company capitalized approximately $2.1 million in interest related to
construction projects during fiscal 1995, compared with $2.9 million in fiscal
1994.
Income Tax
The Company's effective income tax rate in fiscal 1996 was 7.7 percent,
reflecting the income tax benefit from the current year loss before taxes
partially offset by certain permanent differences relating primarily to goodwill
amortization.
The Company's effective income tax rates in fiscal 1995 and 1994 were 40.9
percent and 40.7 percent, respectively, reflecting the Company's historical tax
rates.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash provided by operating activities in fiscal 1996 was $50.5 million,
compared with $72.8 million reported in fiscal 1995. This decrease in operating
cash flow is essentially the result of a decrease in net income and changes in
operating assets, principally inventory, and liabilities partially offset by the
write-down of equipment and other assets as a result of the Company's mill
modernization program. The increase in inventory resulted primarily from
elevated purchases of billets at the Company's rod and bar facilities partially
offset by decreased finished goods inventory levels at the Company's mini-mills
as a result of planned production curtailments. The increase in accounts payable
is also attributable to the elevated purchasing levels of billets at the
Company's rod production facilities and increased expenditures related to the
Company's mill modernization program (see "Capital Expenditures" below).
Investing Activities
Net cash flow used in investing activities was $193.3 million in fiscal 1996,
compared with $74.0 million in fiscal 1995. In fiscal 1996, the Company invested
approximately $172 million to finance recently completed or current projects
encompassed in its mill modernization program (see "Capital Expenditures"
below).
In the first quarter of fiscal 1996, the Company acquired certain assets of
Western Steel Limited and in a related transaction in the second quarter,
Birmingham Recycling Investment Company, a subsidiary of the Company, purchased
the stock of Richmond Steel Recycling Limited, a subsidiary of Western Steel
Limited for a total purchase price of approximately $16.9 million (see Note 2 to
the Consolidated Financial Statements).
Capital Expenditures
The Company invested approximately $172 million in capital modernization
projects during fiscal 1996 primarily related to the Company's mill
modernization program. Included in the mill modernization program is a new $115
million bar and rod mill in Cleveland, Ohio. This state-of-the-art facility,
which began start-up operations in May, will approximately double the Cleveland
facility's production and shipment capacity to approximately 1.1 million tons
annually of high quality steel products. Also included in the mill modernization
program is construction of a high quality melting facility in Memphis, Tennessee
at an expected capital cost of approximately $200 million, to provide the
majority of the billet needs for the Company's rod and bar production facilities
in Cleveland, Ohio. Start-up of the Memphis facility is scheduled for the fourth
calendar quarter of 1997. In July, the Company started up the new electric arc
furnace at the Seattle, Washington facility with excellent production results
exceeding initial expectations.
Eventual funding for the above mentioned projects is expected to be derived from
available cash reserves, net cash flow and/or negotiated short-term or long-term
financing arrangements.
Financing Activities
Net cash provided by financing activities was $145.1 million in fiscal 1996
compared with net cash used in financing activities of $23.5 million in fiscal
1995. In fiscal 1996 the Company completed a $15 million, 30 year tax-free bond
financing at Cleveland and issued $150 million in senior debt notes with an
average interest rate of 7.05 percent in mid-December, using a portion of the
proceeds to pay down the short-term lines of credit. During the year the Company
also purchased approximately 33,000 shares of its Common Stock in the open
market pursuant to Board authorization.
Working Capital
Working capital in fiscal 1996 was $211.6 million, compared with $206.9 million
in fiscal 1995 and $213.1 million in fiscal 1994.
Outlook
From a long-term prospective, the Company's broad access to capital markets and
internal cash flows are expected to be sufficient to provide the capital
resources necessary to support increased operating needs and to finance
continued growth.
COMPLIANCE WITH ENVIRONMENTAL LAWS AND REGULATIONS
The Company is subject to federal, state and local environmental laws and
regulations concerning, among other matters, waste water effluents, air
emissions and furnace dust disposal. Company management is highly conscious of
these regulations, and supports an ongoing capital investment program to
maintain the Company's strict adherence to required standards.
The Company has been advised by the Virginia Department of Waste Management of
certain conditions involving the disposal of hazardous materials at the
Company's Norfolk, Virginia property which existed prior to the Company's
acquisition of the facility. The Company has also been notified by the
Department of Toxic Substances Control (DTSC) of the Environmental Protection
Agency of the State of California of certain environmental conditions regarding
its property in Emeryville, California. The Company has performed environmental
assessments of these sites and developed work plans for remediation of the
properties for approval by the applicable regulatory agencies. The Company has
received approval by DTSC for its remedial action plan for the Emeryville site
and is currently implementing the plan.
As part of its ongoing compliance and monitoring programs, the Company is
voluntarily developing work plans for environmental conditions involving certain
of its operating facilities and properties which are held for sale. Based upon
the Company's study of the known conditions and its prior experience in
investigating and correcting environmental conditions, the Company estimates
that the potential cost of these site restoration and remediation efforts may
range from $3,050,000 to $5,250,000. Approximately $2,761,000 of these costs is
recorded in accrued liabilities at June 30, 1996. The remaining costs
principally consist of site restoration and environmental exit costs to ready
the idle facilities for sale (see Note 12 to the Consolidated Financial
Statements), and have been considered in determining whether the carrying
amounts of the properties exceed their net realizable values. These expenditures
are expected to be made in the next one to two years, if the necessary
regulatory agency approvals of the Company's work plans are obtained.
Though the Company believes it has adequately provided for the costs of all
known environmental conditions, the applicable regulatory authorities could
insist upon different and possibly more costly remediative measures than those
believed by the Company to be adequate and in accordance with existing law.
Except as stated above, the Company believes that it is currently in compliance
with all known material and applicable environmental regulations.
IMPACT OF INFLATION
The Company has not experienced any material adverse effects on operations in
recent years because of inflation, though margins can be affected by
inflationary conditions. The Company's primary cost components are ferrous
scrap, high quality semi-finished steel billets, energy and labor, all of which
are susceptible to domestic inflationary pressures. Finished product prices,
however, are influenced by nationwide construction activity, automotive
production and manufacturing capacity within the steel industry. While the
Company has generally been successful in passing on cost increases through price
adjustments, the effect of steel imports, severe market price competition and
under-utilized industry capacity has in the past, and could in the future, limit
the Company's ability to adjust pricing.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BIRMINGHAM STEEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares)
June 30,
---------------------
1996 1995
---------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 6,663 $ 4,311
Accounts receivable, net of allowance for
doubtful accounts of $1,554 at June 30, 1996;
$1,368 at June 30, 1995 111,565 110,883
Inventories 196,752 173,053
Prepaid expenses 1,390 1,154
Other 11,623 13,595
-------- --------
Total current assets 327,993 302,996
Property, plant and equipment
(including property and equipment, net,
held for disposition of $18,210 and
$27,655 at June 30, 1996 and June 30,
1995, respectively):
Land and buildings 123,465 117,835
Machinery and equipment 376,744 350,275
Construction in progress 178,011 53,932
-------- --------
678,220 522,042
Less accumulated depreciation (134,196) (110,385)
-------- --------
Net property, plant and equipment 544,024 411,657
Excess of cost over net assets acquired 46,077 32,338
Other assets 9,893 9,813
-------- --------
Total assets $927,987 $756,804
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 8,020
Accounts payable 83,226 63,082
Accrued operating expenses 5,936 4,137
Accrued payroll expenses 6,888 8,791
Income taxes payable 369 583
Other accrued liabilities 19,979 11,482
-------- --------
Total current liabilities 116,398 96,095
Deferred income taxes 50,292 53,265
Deferred compensation 5,606 5,225
Long-term debt less current portion 307,500 142,500
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, par value $.01;
authorized: 5,000,000 shares - -
Common stock, par value $.01;
authorized: 75,000,000 shares;
issued and outstanding: 29,679,761
at June 30, 1996 and 29,594,286 at
June 30, 1995 297 296
Additional paid-in capital 331,430 330,490
Treasury stock, 1,070,727 and 1,098,356
shares at June 30,1996 and June 30,
1995, respectively, at cost (21,148) (21,909)
Unearned compensation (2,165) (2,537)
Retained earnings 139,777 153,379
-------- --------
Total stockholders' equity 448,191 459,719
-------- --------
Total liabilities and stockholders' equity $927,987 $756,804
======== ========
See accompanying notes.
BIRMINGHAM STEEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the Years Ended June 30,
-----------------------------
1996 1995 1994
-------- -------- ---------
Net sales $832,489 $885,553 $702,893
Cost of sales:
Other than depreciation
and amortization 730,447 723,558 599,154
Depreciation and amortization 34,701 32,310 27,671
-------- -------- --------
Gross profit 67,341 129,685 76,068
Provision for loss on mill modernization
program and unusual items 23,907 1,337 -
Selling, general and administrative 37,731 43,149 33,847
Interest 12,036 8,889 11,061
-------- -------- --------
(6,333) 76,310 31,160
Other income, net 3,975 9,443 4,689
-------- -------- --------
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle (2,358) 85,753 35,849
Provision for (benefit from) income taxes (181) 35,104 14,603
-------- -------- --------
Income (loss) before cumulative effect of a
change in accounting principle (2,177) 50,649 21,246
Cumulative effect, as of July 1, 1993,
of a change in the method of accounting
for income taxes - - 380
-------- -------- --------
Net income (loss) $ (2,177) $ 50,649 $ 21,626
======== ======== ========
Weighted average shares outstanding 28,566 29,162 24,595
======== ======== ========
Earnings (loss) per share:
Income (loss) before cumulative effect
of a change in accounting principle $ (0.08) $ 1.74 $ 0.86
Cumulative effect, as of July 1, 1993,
of a change in the method of accounting
for income taxes - - 0.02
-------- -------- --------
Net income (loss) $ (0.08) $ 1.74 $ 0.88
======== ======== ========
See accompanying notes.
BIRMINGHAM STEEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended June 30,
----------------------------------
1996 1995 1994
---------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,177) $ 50,649 $ 21,626
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Cumulative effect of change in
accounting principle - - (380)
Depreciation and amortization 34,701 32,310 27,671
Provision for doubtful accounts
receivable 418 540 1,107
Deferred income taxes (4,150) 10,537 2,810
Write-down of equipment and
other assets 13,269 1,337 -
Other 3,829 4,204 4,082
Changes in operating assets and
liabilities, net of effects from
business acquisitions:
Accounts receivable 847 4,400 (17,964)
Inventories (23,291) (47,808) (15,132)
Prepaid expenses (236) 47 1,981
Other current assets 2,378 (7,546) (2,045)
Accounts payable 16,113 23,836 (538)
Income taxes payable (213) (2,910) 3,493
Other accrued liabilities 8,655 2,533 (2,184)
Deferred compensation 381 709 787
--------- --------- ---------
Net cash provided by operating
activities 50,524 72,838 25,314
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment (171,778) (76,193) (40,438)
Payments for business acquisitions (16,916) (11,374) (5,391)
Net proceeds from sale of mine roof
bolt business unit - 15,542 -
Proceeds from disposal of property,
plant and equipment 219 615 8,399
Additions to other non-current assets (5,489) (2,935) (3,300)
Reductions in other non-current assets 672 394 405
--------- --------- ---------
Net cash used in investing activities (193,292) (73,951) (40,325)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings and repayments (8,020) 8,020 (73,332)
Proceeds from issuance of long-term debt 165,000 - 130,000
Payments of long-term debt - - (158,316)
Proceeds from issuance of common stock 105 2,150 154,111
Issuance of stock from treasury - - 1,107
Purchase of treasury stock (540) (21,974) (348)
Cash dividends paid (11,425) (11,688) (9,565)
--------- --------- ---------
Net cash provided by (used in)
financing activities 145,120 (23,492) 43,657
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 2,352 (24,605) 28,646
Cash and cash equivalents at:
Beginning of period 4,311 28,916 270
--------- --------- ---------
End of period $ 6,663 $ 4,311 $ 28,916
========= ========= =========
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 11,500 $ 8,611 $ 11,715
Income taxes $ 5,570 $ 31,646 $ 6,853
See accompanying notes.
<TABLE>
BIRMINGHAM STEEL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share and per share data)
<CAPTION>
For the Years Ended June 30, 1996, 1995 and 1994
-----------------------------------------------------------------------------------------
Common Stock Treasury Stock
-------------------- Additional ------------------ Unearned Total
Paid-in Compen- Retained Stockholders'
Shares Amount Capital Shares Amount sation Earnings Equity
----------- -------- ---------- ---------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1993 22,177,612 $ 222 $131,881 (773,631) $(9,221) $(1,817) $102,356 $223,421
Issuance of shares:
Public offering of common shares 5,750,000 57 153,152 - - - - 153,209
Acquisition of American Steel & Wire
Corporation (Note 2) 1,273,804 13 37,764 725,553 8,658 - - 46,435
Options exercised, net of tax benefit 187,758 2 4,488 62,163 911 (2,038) - 3,363
Purchase of treasury stock - - - (14,085) (348) - - (348)
Reduction of unearned compensation - - - - - 908 - 908
Net income - - - - - - 21,626 21,626
Cash dividends declared,
$.40 per share - - - - - - (9,565) (9,565)
----------- -------- ---------- ---------- --------- --------- --------- -------------
Balances at June 30, 1994 29,389,174 294 327,285 - - (2,947) 114,417 439,049
Options exercised, net of tax benefit 205,112 2 3,205 3,044 65 (792) - 2,480
Purchase of treasury stock - - - (1,101,400) (21,974) - - (21,974)
Reduction of unearned compensation - - - - - 1,202 - 1,202
Net income - - - - - - 50,649 50,649
Cash dividends declared,
$.40 per share - - - - - - (11,687) (11,687)
----------- -------- ---------- ---------- --------- --------- --------- ------------
Balances at June 30, 1995 29,594,286 296 330,490 (1,098,356) (21,909) (2,537) 153,379 459,719
Options exercised, net of tax benefit 85,475 1 940 60,929 1,301 (1,413) - 829
Purchase of treasury stock - - - (33,300) (540) - - (540)
Reduction of unearned compensation - - - - - 1,785 - 1,785
Net loss - - - - - - (2,177) (2,177)
Cash dividends declared,
$.40 per share - - - - - - (11,425) (11,425)
----------- -------- ---------- ---------- --------- --------- --------- -------------
Balances at June 30, 1996 29,679,761 $ 297 $331,430 (1,070,727) $(21,148) $(2,165) $139,777 $ 448,191
=========== ======== ========== ========== ========= ========= ========= =============
See accompanying notes.
</TABLE>
BIRMINGHAM STEEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
1. Description of the Business and Significant Accounting Policies
Description of the Business
Birmingham Steel Corporation (the Company) operates steel mini-mills in the
United States producing steel reinforcing bar, merchant products and high
quality rod and wire. The Company operates in one industry segment and sells to
third parties primarily in the construction and automotive industries throughout
the United States and Canada.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. In the opinion of management,
all adjustments considered necessary for a fair presentation have been included.
All significant intercompany accounts and transactions have been eliminated.
Cash equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. The carrying amounts
reported in the accompanying consolidated balance sheets for cash and cash
equivalents approximate their fair values.
Inventories
Inventories are stated at the lower of cost or market value. The cost of
inventories is determined using the first-in, first-out method.
Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation is provided using
the straight-line method for financial reporting purposes and accelerated
methods for income tax purposes. Estimated useful lives range from ten to thirty
years for buildings and from five to twenty years for machinery and equipment.
Excess of cost over net assets acquired
The excess of cost over net assets acquired (goodwill) is amortized on a
straight-line basis over periods not exceeding twenty years. Accumulated
amortization was approximately $6,663,000 and $3,999,000 at June 30, 1996 and
1995, respectively. The carrying value of goodwill will be reviewed if
circumstances suggest that it has been impaired. If this review indicates that
goodwill will not be recoverable, based on the estimated undiscounted cash flows
over the remaining amortization period, the Company's carrying value of the
goodwill will be reduced by the estimated shortfall of cash flows.
Other assets
Customer supply contracts and debt issuance costs, included in other assets, are
amortized over the life of the contracts and debt instruments. Accumulated
amortization was approximately $2,675,000 and $1,530,000 at June 30, 1996 and
1995, respectively. Other non-current assets are stated at the lower of cost or
their estimated net realizable values.
Income taxes
Deferred income taxes are provided for temporary differences between taxable
income and financial reporting income. The Company adopted the liability method
of accounting for income taxes prescribed in FASB Statement No. 109 as of July
1, 1993 and reported a benefit of $380,000 ($.02 per share) in the first quarter
of fiscal 1994 to reflect the cumulative effect of adoption.
Earnings per share
Earnings per share are computed using the weighted average number of outstanding
common shares and dilutive equivalents (if any).
On February 23, 1994, the Company issued 5,750,000 additional shares of common
stock in a public offering. The proceeds from the offering were used, in part,
to retire $75,000,000 of Senior Promissory Notes. On a supplemental basis,
assuming the public offering had occurred on July 1, 1993, and the proceeds had
been used to retire the notes at that time, net income per share would have been
approximately $.92 for the year ended June 30, 1994. Pro forma supplementary
earnings per share, assuming that both the acquisition of American Steel & Wire
Corporation (ASW) and the stock offering had occurred on July 1, 1993 (See Note
2), would have been $.95 for such period.
Stock Based Compensation
The Company issues stock based awards in several forms as described in Note 10.
These stock options and awards are accounted for in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". In
October 1995, the Fnancial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", which provides an alternative to Opinion No. 25 in accounting for
stock-based compensation issued to employees. The Statement allows for a fair
value based method of accounting for employee stock options and similar equity
instruments. However, for companies that continue to account for stock-based
compensation arrangements under Opinion No. 25, Statement No. 123 requires
disclosure of the pro forma effect on net income and earnings per share of its
fair value based accounting for those arrangements. These disclosure
requirements are effective for fiscal years beginning after December 15, 1995,
or upon initial adoption of the Statement, if earlier. The Company continues to
evaluate the provisions of Statement No. 123 and has not determined whether it
will adopt the recognition and measurement provisions of that Statement.
Credit risk
The Company extends credit, primarily on the basis of 30-day terms, to various
companies in a variety of industrial market sectors. The Company does not
believe it has a significant concentration of credit risk in any one geographic
area or market segment.
The Company performs periodic credit evaluations of its customers and generally
does not require collateral. Historically, credit losses have not been
significant.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Recent Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board issued Statement No. 121
that requires impairment losses to be recorded on long-lived assets used in
operations, including goodwill, when impairment indicators are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of in future periods. The
Company will adopt Statement No. 121 in the first quarter of fiscal 1997 and,
based on current circumstances, does not believe the effect of adoption will be
material.
2. Business Acquisitions
On August 8, 1995, the Company purchased certain assets of Western Steel
Limited, a subsidiary of IPSCO Inc., located in Calgary, Alberta, Canada for a
purchase price of approximately $11,206,000. On December 13, 1995, Birmingham
Recycling Investment Company, a wholly owned subsidiary of the Company,
completed a related transaction when it purchased the stock of Richmond Steel
Recycling Limited, a scrap processing facility and subsidiary of Western Steel
Limited, located in Richmond, British Columbia, Canada for a purchase price of
approximately $5,710,000.
On December 31, 1994, the Company purchased Port Everglades Steel Corporation
(PESCO), a steel distribution company headquartered in Fort Lauderdale, Florida
for $11,400,000 in cash and assumption of liabilities of $3,100,000. The
purchase price has been allocated to the assets and liabilities of PESCO based
upon their estimated fair values. Pro forma results for fiscal 1995 would not be
materially different from the amounts reported in the Company's consolidated
income statements if the acquisition had occurred as of the beginning of the
period.
On November 23, 1993, the Company acquired all of the outstanding capital stock
of American Steel and Wire Corporation (ASW), a manufacturer of high quality
steel rod and wire headquartered in Cuyahoga Heights, Ohio for a total purchase
price of $55,720,000. The purchase price consisted of 1,999,357 shares of its
common stock, valued at $46,435,000; approximately $5,214,000 paid to the
stockholders of ASW; cash payments of $3,028,000 to redeem stock warrants and
acquisition costs of $1,043,000. The results of operations for each of the two
years ended June 30, 1996 include the operations of ASW. Assuming the
acquisition had occurred at the beginning of fiscal 1994, pro forma net sales
for the twelve months ended June 30, 1994 would have been $810,360,000. Pro
forma net income and earnings per share would have been $23,198,000 and $.91,
respectively.
3. Business Disposition
On March 12, 1995 the Company sold its mine roof bolt business unit for
$17,300,000 in cash, less costs approximating $1,758,000, and a note receivable
with a fair value of $4,200,000 and recognized a pretax gain, included in other
income, of $2,200,000. In connection with the sale, the Company entered into a
five year supply agreement to provide the purchaser the majority of its steel
requirements.
4. Inventories
Inventories were valued as summarized in the following table (in thousands):
June 30, June 30,
1996 1995
-------- --------
At lower of cost (first-in, first-out)
or market:
Raw materials and mill supplies $ 37,871 $ 45,074
Work-in-progress 95,423 51,516
Finished goods 63,458 76,463
-------- --------
$196,752 $173,053
======== ========
5. Property, Plant and Equipment
Capital expenditures totaled $171,823,000, $77,670,000 and $41,617,000 in fiscal
1996, 1995 and 1994, respectively, excluding amounts relating to business
acquisitions. At June 30, 1996, the estimated costs to complete authorized
projects under construction amounted to $200,000,000.
The Company capitalized interest of $6,429,000, $2,076,000 and $2,940,000 in
fiscal 1996, 1995 and 1994, respectively, related to qualifying assets under
construction. Total interest incurred, including amounts capitalized during
these same periods, was $18,465,000, $10,965,000 and $14,001,000 respectively.
The aggregate carrying values of the idle facilities held for sale amounted to
$18,210,000 and $27,655,000 at June 30, 1996 and 1995, respectively. The
facilities are valued at the lower of their historical cost or their estimated
net realizable values, after providing for estimated site restoration and other
costs of disposal (see Note 12).
6. Short-Term Borrowing Arrangements
Under line of credit arrangements for short-term borrowings with four banks, the
Company may borrow up to $185,000,000 with interest at market rates mutually
agreed upon by the Company and the banks. One of these lines of credit supports
a bankers' acceptance and commercial paper program. The full line of credit was
available under these facilities at June 30, 1996.
The following information relates to the Company's borrowings, excluding
commercial paper, under short-term credit facilities during the years ended June
30, 1996, 1995 and 1994 (in thousands):
For the Years Ended June 30,
--------------------------------
1996 1995 1994
------- -------- --------
Maximum amount outstanding $96,326 $18,230 $161,825
Average amount outstanding $45,490 $ 506 $ 64,657
Weighted average interest rate 6.3% 6.6% 3.5%
7. Long-Term Debt
Long-term debt consists of the following (in thousands):
June 30,
-------------------
1996 1995
-------- --------
Capital lease obligations, interest rates
principally ranging from 46% to 56% of
bank prime, payable in 1999,
2001 and 2025 $ 27,500 $ 12,500
Senior unsecured notes, $130,000 and
$150,000 face amount, interest at
7.28% and 7.05% respectively, payable 2001
through December 2005 280,000 130,000
-------- --------
$307,500 $142,500
======== ========
The fair value of the Company's senior secured notes is estimated using
discounted cash flow analysis, based on the Company's incremental borrowing
rates for similar types of borrowings. The aggregate fair value of the Company's
senior secured notes was approximately $274,500,000 at June 30, 1996. The
carrying amounts of the variable rate capital lease obligations approximate
their fair values.
Future maturities of long-term debt are as follows (in thousands):
Capital Other
Fiscal Lease Long-term
Year Obligations Debt Total
------ ----------- ---------- --------
1997 $ 1,258 $ - $ 1,258
1998 1,259 - 1,259
1999 1,259 - 1,259
2000 11,009 - 11,009
2001 751 - 751
Thereafter 31,463 280,000 311,463
-------- -------- --------
46,999 280,000 326,999
Less amount representing
interest (19,499) - (19,499)
--------- -------- --------
$ 27,500 $280,000 $307,500
========= ======== ========
Property, plant and equipment with a net book value of $4,166,000 is pledged as
collateral on the capital lease obligations. The long-term debt obligations
contain restrictive covenants, including debt restrictions and requirements to
maintain working capital and debt to tangible net worth ratios.
8. Commitments
The Company leases office space and certain production equipment under operating
lease agreements. The following is a schedule by year of future minimum rental
payments, net of minimum rentals on subleases, required under operating leases
that have initial lease terms in excess of one year as of June 30, 1996 (in
thousands):
Fiscal
Year
------
1997 $ 835
1998 709
1999 509
2000 461
2001 373
Thereafter 849
-------
$ 3,736
=======
Rental expense under operating lease agreements was $1,082,000, $1,281,000 and
$1,178,000 in fiscal 1996, 1995 and 1994, respectively.
In April, 1995, the Company entered into a ten year contract with Electronic
Data Systems (EDS), an information management and consulting firm. In April,
1996, the contract with EDS was renegotiated. Under the existing ten year
contract, EDS will provide information systems development, technical support
and consulting services to the Company. Future minimum payments under the
contract are $2,600,000 per year.
9. Income Taxes
Deferred income taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets are as follows (in thousands):
June 30,
--------------------
1996 1995
------- -------
Deferred tax liabilities:
Tax in excess of book depreciation $62,138 $58,399
Inventories - 193
------- -------
Total deferred tax liabilities 62,138 58,592
Deferred tax assets:
NOL carryforward 3,781 2,700
AMT credit carryforwards 6,333 319
Deferred compensation 2,154 2,043
Worker's compensation 1,708 1,242
Other accrued liabilities 605 1,361
-------- --------
Total deferred tax assets 14,581 7,665
-------- --------
Net deferred tax liabilities $47,557 $50,927
======== ========
Deferred tax assets and liabilities are classified as follows in the
accompanying consolidated balance sheet (in thousands):
June 30,
---------------------
1996 1995
-------- --------
Included in other current assets $(2,735) $(2,338)
Non-current deferred tax liability 50,292 53,265
-------- --------
$47,557 $50,927
======== ========
At June 30, 1996, the Company has net operating loss carryforwards for federal
income tax purposes of $10,095,000 that expire in years 2005 through 2006.
The provisions for income taxes consisted of the following (in thousands):
For the Years Ended June 30,
---------------------------------
1996 1995 1994
--------- -------- --------
Current:
Federal $ 3,517 $19,674 $ 8,594
State 506 4,893 3,199
Foreign (54) - -
-------- ------- -------
3,969 24,567 11,793
Deferred:
Federal (3,596) 9,001 2,984
State (554) 1,536 (174)
-------- ------- -------
(4,150) 10,537 2,810
-------- ------- -------
$ (181) $35,104 $14,603
======== ======= =======
The provisions for income taxes differ from the statutory tax amounts as follows
(in thousands):
For the Years Ended June 30,
--------------------------------
1996 1995 1994
------- ------- --------
Tax at maximum enacted
statutory rates during
the year $ (761) $30,014 $12,547
State income taxes-net (31) 4,179 1,966
Foreign (54) - -
Effect of 1% federal
tax rate increase
on deferred taxes - - 600
Other 665 911 (510)
------- ------- --------
$ (181) $35,104 $14,603
======= ======= ========
10. Stock Compensation Plans
In 1986, the Company established the Birmingham Steel Corporation 1986 Stock
Option Plan whereby key employees may be granted options to purchase up to
900,000 shares of the Company's common stock at a price not less than 100% to
110% of the fair market value of the common stock on the date of grant. At June
30, 1996, a total of 243,675 shares were reserved for issuance under the plan,
and an additional 24,749 shares were available for future grants. The options
are exercisable in three annual installments commencing no earlier than the
first anniversary of the date of grant of such options.
On July 18, 1989, the Company granted 338,528 options, exercisable at $14.08 per
share, to all non-union employees who had not been previously granted options
under the stock option plan for key employees. These non-union employees were
granted 300,383 additional stock options, exercisable at $16.92 per share, on
August 17, 1992.
A summary of activity relating to stock options is as follows:
Price Range Number of
Per Share Stock Options
Outstanding, June 30, 1993 $6.89-$16.92 758,054
Granted 31.88 2,500
Exercised 6.89- 16.92 (177,466)
Cancelled 14.08- 16.92 (9,763)
----------
Outstanding, June 30, 1994 6.89- 31.88 573,325
Granted -
Exercised 6.89- 16.92 (134,732)
Cancelled 14.18- 16.92 (3,323)
----------
Outstanding, June 30, 1995 6.89- 31.88 435,270
Granted 17.13 100,000
Exercised 6.89- 16.92 (73,635)
Cancelled 14.08- 16.92 (16,423)
----------
Outstanding, June 30, 1996 6.89- 31.88 445,212
==========
Exercisable, June 30, 1996 6.89- 31.88 343,963
==========
The Birmingham Steel Corporation 1990 Management Incentive Plan provides for
awards of incentive and non-qualified stock options, stock appreciation rights,
common stock of the Company and cash for certain performance achievements. The
Company has granted 317,250 shares, as adjusted for a 3 for 2 stock split in
1993, of restricted stock under the plan to date. The shares vest in annual
installments over three to four years from the dates of the grants. As of June
30, 1996, 215,750 shares were vested and 582,750 shares were available for grant
under the plan.
In April 1995, as part of the 1990 Management Incentive Plan, the Company
established the Birmingham Steel Corporation Stock Accumulation Plan. The Plan
provides for the payment of restricted stock, vesting in three years, to
participants in lieu of a portion of their cash compensation. The Company has
reserved 350,000 shares of the 900,000 shares of common stock issuable under the
1990 Management Incentive Plan for restricted stock grants under the Stock
Accumulation Plan. As of June 30, 1996, 63,973 shares had been issued under the
Plan.
11. Deferred Compensation and Employee Benefits
The Company recognized expenses of approximately $2,844,000, $3,064,000 and
$2,571,000 in fiscal 1996, 1995 and 1994, respectively, in connection with a
defined contribution plan to which non-union employees contribute and the
Company makes discretionary and matching contributions based on employee
compensation.
Certain officers and key employees are participants in a deferred compensation
plan ("Management Security Plan") providing fixed benefits payable in equal
monthly installments upon retirement or death. The Company enters into separate
deferred compensation agreements with each covered employee. The Company
recognizes compensation costs pursuant to each individual agreement over the
projected service life of each employee as deferred compensation, following the
vesting provisions of each individual agreement. The Company has purchased life
insurance on the covered employees to fund its obligations under the Management
Security Plan.
Other than the plans referred to above, the Company provides no
postretirement or postemployment benefits to its employees that would
be subject to the provisions of FASB Statement No. 106 or No. 112.
12. Contingencies
Environmental
The Company is subject to federal, state and local environmental laws and
regulations concerning, among other matters, waste water effluents, air
emissions and furnace dust disposal.
The Company has been advised by the Virginia Department of Waste Management of
certain conditions involving the disposal of hazardous materials at the
Company's Norfolk, Virginia property which existed prior to the Company's
acquisition of the facility. The Company has also been notified by the
Department of Toxic Substances Control (DTSC) of the Environmental Protection
Agency of the State of California of certain environmental conditions regarding
its property in Emeryville, California. The Company has performed environmental
assessments of these sites and developed work plans for remediation of the
properties for approval by the applicable regulatory agencies. The Company has
received approval by DTSC for its remedial action plan for the Emeryville site
and is currently implementing the plan.
As part of its ongoing environmental compliance and monitoring programs, the
Company is voluntarily developing work plans for environmental conditions
involving certain of its operating facilities and properties which are held for
sale. Based upon the Company's study of the known conditions and its prior
experience in investigating and correcting environmental conditions, the Company
estimates that the potential costs of these site restoration and remediation
efforts may range from $3,050,000 to $5,250,000. Approximately $2,761,000 of
these costs is recorded in accrued liabilities at June 30, 1996. The remaining
costs principally consist of site restoration and environmental exit costs to
ready the idle facilities for sale, and have been considered in determining
whether the carrying amounts of the properties exceed their net realizable
values. These expenditures are expected to be made in the next one to two years,
if the necessary regulatory agency approvals of the Company's work plans are
obtained. Though the Company believes it has adequately provided for the cost of
all known environmental conditions, the applicable regulatory agencies could
insist upon different and more costly remediative measures than those the
Company believes are adequate or required by existing law. Except as stated
above, the Company believes that it is currently in compliance with all known
material and applicable environmental regulations.
Legal Proceedings
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business. Such claims are generally covered
by various forms of insurance. In the opinion of management, any uninsured or
unindemnified liability resulting from existing litigation would not have a
material effect on the Company's business, its financial position, liquidity or
results of operations.
13. Disposition of Idle Facilities
In Fiscal 1995, the Company entered into an agreement to sell the real property
at its idle facility in Ballard, Washington. In December, 1995, the Company
incurred a write-off of $2,055,000, which is included in the provision for loss
on mill modernization program, primarily related to the equipment at the Ballard
facility after termination of the sales contract on the equipment. In August,
1995, the Company completed the exchange of the idle Kent, Washington facility
and other property at the Seattle, Washington steel-making facility with the
Port of Seattle for property owned by the Port which will be used in the
Company's Seattle operations. No gain or loss was recognized as a result of the
transaction.
14. Provision for Loss on Mill Modernization and Other Unusual Items
For the year ended June 30, 1996, the Company incurred charges for (1)
write-down of equipment which will be removed from service as part of the
Company's modernization and capital development program, (2)
pre-operating/start-up expenses for the new melt shop in Seattle, Washington,
the new bar mill in Cleveland, Ohio and the new melting facility in Memphis,
Tennessee and (3) charges for other unusual items. The amounts included in
provision for loss on mill modernization program and unusual items in the
accompanying financial statements are as follows (in thousands):
Year Ended
June 30, 1996
-------------
Equipment write-downs $ 6,580
Property cleanup reserves 1,700
Pre-operating/start-up expenses 8,409
Restructuring of EDS contract 4,522
Severance/reorganization costs 1,064
Other 1,632
---------
Total $ 23,907
=========
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Birmingham Steel Corporation
We have audited the accompanying consolidated balance sheets of Birmingham Steel
Corporation as of June 30, 1996 and 1995, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1996. Our audits also
included the financial statement schedule listed in the index at Item 14(a)2.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 consolidated financial position of
Birmingham Steel Corporation at June 30, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
As discussed in Note 1 to the financial statements, in 1994 the Company changed
its method of accounting for income taxes.
Ernst & Young LLP
- -----------------
Ernst & Young LLP
Birmingham, Alabama
August 2, 1996
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained on pages 4, 5 and 6 of Birmingham Steel Corporation's
Proxy Statement dated September 13, 1996, with respect to directors and
executive officers of the Company, is incorporated herein by reference in
response to this item.
ITEM 11. EXECUTIVE COMPENSATION
The information contained on pages 6 through 11 of Birmingham Steel
Corporation's Proxy Statement dated September 13, 1996, with respect to
directors and executive officers of the Company, is incorporated herein by
reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on pages 2 and 3 of Birmingham Steel Corporation's
Proxy Statement dated September 13, 1996, with respect to directors and
executive officers of the Company is incorporated herein by reference in
response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained on page 12 of Birmingham Steel Corporation's Proxy
Statement dated September 13, 1996, with respect to certain relationships and
related transactions is incorporated herein by reference in response to this
item.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
ITEM 14 (a) 1. INDEX TO CONSOLIDATED STATEMENTS COVERED BY REPORT OF INDEPENDENT
AUDITORS
The following consolidated financial statements of Birmingham Steel Corporation
are included in Item 8:
Consolidated Balance Sheets-June 30, 1996 and 1995
Consolidated Statements of Operations-Years ended June 30, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders Equity-Years ended June 30,
1996, 1995 and 1994
Consolidated Statements of Cash Flows-Years ended June 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements-June 30, 1996
Report of Independent Auditors-June 30, 1996
ITEM 14 (a) 2. INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules are filed as a separate
section of this report.
Form 10-K
Schedules Description
- ----------- -------------------------------------
VIII - Valuation and Qualifying Accounts
Schedules other than those listed above are omitted because they are not
required or are not applicable, or the required information is shown in the
Consolidated Financial Statements or notes thereto. Columns omitted from
schedules filed have been omitted because the information is not applicable.
ITEM 14 (a) 3. EXHIBITS
The exhibits listed on the Exhibit Index below are filed or incorporated by
reference as part of this report and such Exhibit Index is hereby incorporated
herein by reference.
Exhibit Description of Exhibits
3.1 Restated Certificate of Incorporation of the Registrant
(incorporated by reference from Form 8-A, Exhibit 2.2, filed
November 16, 1986)
3.2.1 By-Laws of the Registrant (incorporated by reference from Form
10-K for the fiscal year ended June 30, 1986, Exhibit 3.2)
3.2.2 Secretary's certification and Amendment to By-Laws of
Registrant dated August 17, 1990 (incorporated by reference
from Form 10-K for the fiscal year ended June 30, 1990,
Exhibit 3.2.1)
3.2.3 Amendment to By-Laws of the Registrant dated June 27, 1991.
(Incorporated by reference from Form 10-K for the fiscal year
ended June 30, 1991, Exhibit 3.2.3)
4.1 Birmingham Steel Corporation $130,000,000 Senior Note Purchase
Agreement dated December 15, 1993 between the Registrant and
the following group of investors: The Equitable Life
Assurance Society of the U.S., The Guardian Life Insurance
Company of America, Principal Mutual Life Insurance Company,
The Travelers Indemnity Company, Jefferson-Pilot Life
Insurance Company, Phoenix Home Life Mutual Life Insurance
Company, American United Life Insurance Company, Canada Life
Assurance Company, Canada Life Assurance Company of America,
Canada Life Assurance Company of New York, Ameritas Life
Insurance Corporation, Berkshire Life Insurance Company,
Provident Mutual Life Insurance Company-CALIC, Provident
Mutual Life Insurance Company of Philadelphia (incorporated by
reference from Form 10-Q for quarter ended December 31, 1993,
Exhibit 4.1).
4.2 Birmingham Steel Corporation $150,000,000 Senior Note Purchase
Agreement dated December 15, 1995 between the Registrant and
the following group of investors: Connecticut General Life
Insurance Company, Life Insurance Company of North America,
CIGNA Property and Casualty Insurance Company, Principal
Mutual Life Insurance Company, Nationwide Life Insurance
Company, Employers Life Insurance Company of Wausau, The
Northwestern Mutual Life Insurance Company, The Equitable Life
Assurance Society of the United States, Sun Life Assurance
Company of Canada (U.S.), Sun Life Assurance Company of
Canada, Sun Life Insurance and Annuity Company of New York,
The Minnesota Mutual Life Insurance Company, Mutual Trust Life
Insurance Company, The Reliable Life Insurance Company,
Federated Mutual Insurance Company, Federated Life Insurance
Company, Minnesota Fire and Casualty Company, National
Travelers Life Company, First National Life Insurance Company
of America, Guarantee Reserve Life Insurance Company, First
Colony Life Insurance Company, American United Life Insurance
Company, The State Life Insurance Company, Ameritas Life
Insurance Company (incorporated by reference from Form 10-Q
for quarter ended December 31, 1995, Exhibit 4.1).
4.3 Shareholder Rights Plan of Registrant (incorporated by
reference from Form 8-K filed January 23, 1996).
10.1 1986 Stock Option Plan of Registrant, as amended (incorporated
by reference from Registration Statement on Form S-8
(No. 33-16648), filed August 20, 1987)
10.2 Amended and Restated Management Security Plan, effective
January 1, 1994 (incorporated by reference from Form 10-K for
year ended June 30, 1994, Exhibit 10.2).
10.3 Steel Billet Sale and Purchase Master Agreement between
American Steel & Wire Corporation and QIT-Fer et Titane, Inc.
dated July 1, 1994 (incorporated by reference from Form 10-K
for year ended June 30, 1995, Exhibit 10.3)
10.4 Billet Supply Agreement between American Steel & Wire
Corporation and The Broken Hill Proprietary Company Ltd. and
BHP Trading Inc. (incorporated by reference from Form 10-K for
year ended June 30, 1995, Exhibit 10.4)
10.5 Supply Agreement, dated as of August 2, 1985, among MC
Acquisition Corp., Birmingham Bolt Company, Inc., Magna
Corporation, Contractors Material Co., Inc., and Hackney Steel
Co., Inc. (incorporated by reference from Registration
Statement No. 33-945, Exhibit 10.6.3, filed November 20, 1985)
10.6 1989 Non-Union Employees' Stock Option Plan of the Registrant
(incorporated by reference from a Registration Statement on
Form S-8, Registration No. 33-30848, filed August 31, 1989,
Exhibit 4.1)
10.7 Restated Non-Union Employees' 401(k) Plan restated as of
January 1, 1990 (incorporated by reference from Post-Effective
Amendment No. 1 to Form S-8, Registration No. 33-23563, filed
July 12, 1990, Exhibit 4.1)
10.8 Special Severance Benefits Plan of the Registrant
(incorporated by reference from the Annual Report on Form 10-K
for the Year ended June 30, 1989, Exhibit 10.12)
10.9 Lease Agreement, as amended, dated July 13, 1993 between
Torchmark Development Corporation and Birmingham Steel
Corporation (incorporated by reference from Annual Report on
Form 10-K for year ended June 30, 1994, Exhibit 10.11)
10.9.1 Amendment to Lease Agreement, as amended, dated July 13, 1993
between Torchmark Development Corporation and Birmingham Steel
Corporation (incorporated by reference from Annual Report on
Form 10-K for year ended June 30, 1994, Exhibit 10.11.1)
10.10 1990 Management Incentive Plan of the Registrant (incorporated
by reference from a Registration Statement on Form S-8,
Registration No. 33-41595, filed July 5, 1991, Exhibit 4.1)
10.11 1992 Non-Union Employees' Stock Option Plan of the Registrant
(incorporated by reference from a Registration Statement on
Form S-8, Registration No. 33-51080, filed August 21, 1992,
Exhibit 4.1)
10.12 Employment Agreement, dated January 5, 1996 between Registrant
and Robert A. Garvey (incorporated by reference from Form 10-Q
for quarter ended December 31, 1995 exhibit 10.1).
10.13 1995 Stock Accumulation Plan of the Registrant (incorporated
by reference from a Registration Statement on Form S-8,
Registration No. 33-64069, filed November 8, 1995, Exhibit
4.1)
22.1 Subsidiaries of the Registrant*
23.1 Consent of Independent Auditors*
* Being filed herewith
ITEM 14 (b). REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter ended June 30, 1996.
ITEM 14 (c). EXHIBITS
None
ITEM 14 (d). CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
BIRMINGHAM STEEL CORPORATION
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance Provision Less Balance
at for Accounts at End
Beginning Acquisi- Doubtful Written of
of Year tion Accounts Off Year
--------- -------- --------- -------- --------
Allowance for Doubtful
Accounts:
Year ended June 30, 1996 $1,368 $ - $418 $ 232 $1,554
Year ended June 30, 1995 1,737 136 558 1,063 1,368
Year ended June 30, 1994 1,134 932 1,107 1,436 1,737
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.
BIRMINGHAM STEEL CORPORATION
Robert A. Garvey 09/20/96
----------------------------
Robert A. Garvey Date
Chairman of the Board
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.
E. Mandell de Windt 09/20/96 Robert A. Garvey 09/20/96
- -------------------------------- ---------------------------
E. Mandell de Windt Date Robert A. Garvey Date
Chairman-Executive Committee Chairman of the Board,
Chief Executive
Officer, Director
Paul H. Ekberg 09/20/96 James A. Todd, Jr. 09/20/96
- -------------------------------- ----------------------------
Paul H. Ekberg Date James A. Todd, Jr. Date
Director Director
Harry Holiday, Jr. 09/20/96 C. Stephen Clegg 09/20/96
- -------------------------------- ----------------------------
Harry Holiday, Jr. Date C. Stephen Clegg Date
Director Director
George A. Stinson 09/20/96 E. Bradley Jones 09/20/96
- -------------------------------- ----------------------------
George A. Stinson Date E. Bradley Jones Date
Director Director
Reginald H. Jones 09/20/96 T. Evans Wyckoff 09/20/96
- -------------------------------- ----------------------------
Reginald H. Jones Date T. Evans Wyckoff Date
Director Director
William J. Cabaniss, Jr.09/20/96 Robert E. Powell 09/20/96
- -------------------------------- ----------------------------
William J. Cabaniss, Jr. Date Robert E. Powell Date
Director Vice President-Controller
John M. Casey 9/20/96
- --------------------------------
John M. Casey Date
Executive Vice President-
Finance & Chief Financial
Officer
EXHIBIT 22.1
BIRMINGHAM STEEL CORPORATION
SUBSIDIARIES OF THE REGISTRANT
AS OF JUNE 30, 1996
American Steel & Wire Corporation, a Delaware corporation
Norfolk Steel Corporation, a Virginia corporation
Barbary Coast Steel Corporation, a Delaware corporation
Birmingham Steel Overseas, Ltd, a Barbados corporation
Port Everglades Steel Corporation, a Delaware corporation
Birmingham Recycling Investment Company, a Delaware corporation
Richmond Steel Recycling Limited, a British Columbia corporation
EXHIBIT NO. 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference (i) in the Registration Statement
(Form S-8 No. 33-16648) pertaining to the Birmingham Steel Corporation 1986
Stock Option Plan; (ii) in the Registration Statement (Form S-8 No. 33-23563)
pertaining to the Birmingham Steel Corporation Non-Union Employees' 401(k) Plan;
(iii) in the Registration Statement (Form S-8 No. 33-30848) pertaining to the
Birmingham Steel Corporation 1989 Non-Union Stock Option Plan; (iv) in the
Registration Statement (Form S-8 No. 33-41595) pertaining to the Birmingham
Steel Corporation 1990 Management Incentive Plan; and (v) in the Registration
Statement (Form S-8 No. 33-51080) pertaining to the Birmingham Steel Corporation
1992 NonUnion Employees' Stock Option Plans of our report dated August 2, 1996
with respect to the consolidated financial statements and schedule of Birmingham
Steel Corporation included in the Annual Report (Form 10-K) for the year ended
June 30, 1996.
Ernst & Young LLP
- ---------------------
Ernst & Young LLP
Birmingham, Alabama
September 16, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the June 30,
1996 Consolidated Balance Sheets and Consolidated Statements of Operations of
Birmingham Steel Corporation and is qualified in its entirety by reference to
such.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Jun-30-1996
<PERIOD-END> Jun-30-1996
<CASH> 6,663
<SECURITIES> 0
<RECEIVABLES> 111,565
<ALLOWANCES> 1,554
<INVENTORY> 196,752
<CURRENT-ASSETS> 327,993
<PP&E> 678,220
<DEPRECIATION> 134,196
<TOTAL-ASSETS> 927,987
<CURRENT-LIABILITIES> 116,398
<BONDS> 307,500
0
0
<COMMON> 297
<OTHER-SE> 447,894
<TOTAL-LIABILITY-AND-EQUITY> 927,987
<SALES> 832,489
<TOTAL-REVENUES> 832,489
<CGS> 765,148
<TOTAL-COSTS> 765,148
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 23,907
<INTEREST-EXPENSE> 12,036
<INCOME-PRETAX> (2,358)
<INCOME-TAX> (181)
<INCOME-CONTINUING> (2,177)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,177)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
