<PAGE>
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
From the transition period from to
Commission file number 1-9820
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
---------------------------------------- ----------
(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 September 30, 1999, 29,732,615 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 September 30, 1999) held by non-affiliates was
$221,856,443. For purposes of this calculation only directors and officers are
deemed to be affiliates.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the 1999 Annual Meeting of Stockholders
are incorporated herein by reference in response to items 10 through 12 in Part
III of this report.
PART I
ITEM 1. BUSINESS
Overview
Birmingham Steel Corporation (the Company) owns and operates facilities in the
mini-mill sector of the steel industry. In addition, the Company owns equity
interests in scrap collection and processing operations. From these facilities,
which are located across the United States and Canada, the Company produces a
variety of steel products including semi-finished steel billets, reinforcing
bars and merchant products such as rounds, flats, squares, strips, angles and
channels. The Company also operates regional warehouse and steel distribution
facilities.
The following table summarizes the Company's principal production facilities:
<TABLE>
<CAPTION>
Location Operation Primary Products Produced
- -------- --------- -------------------------
<S> <C> <C>
Birmingham, AL Mini Mill Steel Billets, Rebar, Merchant Products
Cartersville, GA/1/ Mini Mill Steel Billets, Merchant Products
Joliet, IL Rolling Mill Rebar, Merchant Products
Kankakee, IL Mini Mill Steel Billets, Rebar, Merchant Products
Jackson, MS/1/ Mini Mill Steel Billets, Rebar, Merchant Products
Cleveland, OH/2/ Rolling Mills SBQ Rods, Bars and Wire
Memphis, TN/2/ Melt Shop SBQ Blooms and Billets
Seattle, WA Mini Mill Steel Billets, Rebar, Merchant Products
Jackson, MS Scrap Processing Scrap
</TABLE>
1 Facilities owned by Birmingham Southeast, LLC, an 85% owned consolidated
subsidiary.
2 These facilities are designated as discontinued operations in fiscal 1999 -
see "Restructuring Plan."
In addition to the production facilities listed above, the Company owns 50%
equity interests in two joint venture scrap collection and processing
operations: Richmond Steel Recycling, LLC, located in Vancouver, British
Columbia, and Pacific Coast Recycling, LLC (Pacific Coast), located in southern
California. The Company also owns a 50% interest in American Iron Reduction, LLC
(AIR), which operates a direct reduced iron (DRI) production facility in
Convent, Louisiana.
Restructuring Plan
On August 18, 1999, the Company announced a strategic restructuring plan
intended to permit the Company to focus on its profitable core reinforcing bar,
merchant product and scrap businesses and to reduce its financial leverage. As
part of the restructuring plan, the Company intends to dispose of its special
bar quality (SBQ) operations, including its facilities in Cleveland, Ohio and
Memphis, Tennessee, and its 50% interest in American Iron Reduction, LLC, (AIR)
a company which supplies raw material to the
2
<PAGE>
Memphis facility. The SBQ operations are a "major line of business" as defined
in Accounting Principals Board Opinion No. 30. Accordingly, as explained in Note
2 to the Consolidated Financial Statements, the impact of the Company's decision
to dispose of the SBQ operations is reported as discontinued operations in
fiscal 1999 and in prior periods reflected in this report.
As part of the restructuring plan announced on August 18, 1999, the Company also
announced that it would be exploring alternatives with respect to its 50%
interest in Pacific Coast Recycling, LLC (Pacific Coast), a joint venture
established in 1996 to operate in Southern California as a collector, processor
and seller of scrap. Management and the Board of Directors subsequently
determined that Pacific Coast was no longer a strategic fit for the Company's
core mini-mill operations and decided not to continue to support its operations.
In light of this decision, the Company re-evaluated its investment in Pacific
Coast, and concluded that it should be written down in the fourth quarter of
fiscal 1999. The resulting provision for loss of $19.3 million, which reflects a
write-down of the then remaining carrying value of the Company's investment in
Pacific Coast, is reflected in "Loss from equity investments" within continuing
operations in the 1999 Consolidated Statement of Operations.
The Company believes that the implementation of its strategic restructuring plan
will enable it to achieve greater financial flexibility while providing a
platform for future growth and success.
History
The Company was formed in 1983 and commenced operations in 1984. Upon
commencement of operations, the Company owned two mini-mills--in Birmingham,
Alabama and Kankakee, Illinois. Subsequently, the Company has followed a
strategy of growing by acquisition when market and economic conditions warrant.
The Company acquired additional mini-mills in Jackson, Mississippi (1985) and
Seattle, Washington (1986). In 1991, the Company acquired the assets of Seattle
Steel, Inc. and consolidated all of its Seattle operations at the former Seattle
Steel site. In 1993, the Company entered the SBQ market with the acquisition of
American Steel & Wire, which added the Joliet mini-mill as well as rod and wire
mill assets that are currently in use in the Company's Cleveland facility.
In 1994, the Company acquired a Florida-based steel distributor, Port Everglades
Steel Corporation, which distributes steel products manufactured by the Company
and by third parties. In December 1996, the Company contributed its Jackson,
Mississippi mini-mill facility to Birmingham Southeast LLC (Birmingham
Southeast), a consolidated subsidiary owned 85% by Birmingham East Coast
Holdings, a wholly owned subsidiary of the Company, and 15% by a subsidiary of
IVACO, Inc. Birmingham Southeast then purchased steel making assets located in
Cartersville, Georgia from Atlantic Steel Industries, Inc. (Atlantic), a
subsidiary of IVACO, Inc. At the time of its formation, Birmingham Southeast
entered into a tolling agreement with Atlantic pursuant to which Atlantic
converted billets produced by Birmingham Southeast into merchant product for a
tolling fee. Birmingham Southeast also entered into a take or pay agreement to
supply billets to Atlantic. These agreements expired January 1, 1999. In March
1999, the Company commenced start-up of a new medium-section mill to replace the
rolling production that was provided under the tolling arrangement with
Atlantic.
Following its acquisition of American Steel & Wire in 1993, the Company's
management sought to build the Company's special bar quality operations using
the rod and wire mill assets acquired from American Steel as a platform. In
addition to building additional rolling mill capacity in Cleveland, the Company
constructed a melt shop in Memphis, Tennessee. The Memphis melt shop facility
was intended to provide lower cost raw materials (high grade, low carbon
billets) for the Cleveland SBQ rod, bar and wire operations. During the
development and expansion of the Cleveland and Memphis facilities, industry
overcapacity and an increase in imported SBQ products created unfavorable
pricing conditions. In August 1999, the Company announced its intention to
divest its SBQ operations in order to focus on its core mini-mill and scrap
operations.
3
<PAGE>
New Projects
The Company follows a continuous program to upgrade and improve its existing
facilities, while at the same time searching for opportunities to add productive
capacity when warranted. In March 1999, the Company commenced the start-up of
its new Cartersville rolling mill. The new Cartersville rolling mill facility is
expected to expand the Company's merchant product offerings and enable the
Company to penetrate new markets.
Operational Management
The Company's strategies for its core mini-mills are to (i) improve its position
as a low-cost producer through continued operating cost reductions; (ii)
optimize capacity utilization at each of its core mini-mill facilities; (iii)
increase production and sales of higher margin merchant products; and (iv)
complete the restructuring plan announced on August 18, 1999.
For management purposes, the Company's continuing rebar and merchant product
mini-mill operations are divided into four strategic business units (SBUs). Each
of the Company's continuing rebar/merchant product SBUs is an "operating
segment" under the criteria established in Financial Accounting Standards Board
(FASB) Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information. However, the continuing SBUs produce essentially the same
products using essentially identical production equipment and techniques and
they sell steel products to the same classes of customers. In addition, their
distribution methods are identical and they operate under the same regulatory
environment. Furthermore, over the long-term, the Company's continuing SBUs are
expected to generate similar long-term average gross margins. Accordingly, the
Company's continuing rebar/merchant product line of business is considered a
single segment for financial reporting purposes.
Steel Manufacturing
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
(i) use more costly raw materials; (ii) consume more energy; (iii) consist of
older and less efficient facilities which are more labor-intensive; and (iv)
employ a larger labor force than the mini-mill industry. In general, mini-mills
service geographic markets and produce a limited line of rebar and merchant
products. 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.
The Company operates mini-mills (electric arc furnace melt shops and finished
product rolling mills) in Birmingham, Alabama; Kankakee, Illinois; and Seattle,
Washington. The Company also operates a rolling mill in Joliet, Illinois, and
has warehouse and distribution facilities in Fontana and Livermore, California;
Baltimore, Maryland; and Ft. Lauderdale, Florida. Through its wholly owned
subsidiary, Birmingham East Coast Holdings, the Company owns 85% of Birmingham
Southeast, a consolidated subsidiary that operates mini-mills in Cartersville,
Georgia and Jackson, Mississippi. The Company also operates SBQ rod, bar and
wire production facilities in Cleveland, Ohio and a SBQ melt shop in Memphis,
Tennessee.
Carbon steel rebar products produced by the Company are sold primarily to
independent fabricators and distributors for use in the construction industry.
Merchant products are sold to fabricators, steel service centers and original
equipment manufacturers for use in general industrial applications. SBQ rod, bar
and wire products are sold primarily to customers in the automotive, fastener,
welding, appliance and aerospace industries.
The Company's mini-mills melt ferrous scrap to produce rebar and merchant steel
products. Production begins with the melting of ferrous scrap in an electric arc
furnace. The molten steel is then funneled
4
<PAGE>
through a continuous caster which produces steel billets - continuous
rectangular strands of steel - which are then cut into predetermined lengths.
Billets are transferred to a rolling mill where they are reheated, passed
through a roughing mill for size reduction, rolled into finished rebar or
merchant products, and cooled. Merchant products then pass through state-of-the-
art straightening and stacking equipment. At the end of the production process,
rebar and merchant steel products pass through automated bundling equipment to
ensure uniform packaging for shipment to customers.
The Company's electric are furnace in Memphis, Tennessee melts high quality
scrap and direct reduced iron (DRI) to produce molten steel that is then poured
into a continuous caster to form a bloom--which is a larger size than a billet.
In a continuous process, blooms are moved from the caster directly to stands
which reduce the blooms to a billet. The bloom cast is essential to achieving
the necessary quality for SBQ products. The Company's SBQ operations in
Cleveland obtain high quality carbon and alloy semi-finished billets from third
parties and from the Memphis melt shop, which are then converted into a variety
of high quality rod, bar and wire products.
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 scrap merchants and is not generally
dependent on any single supplier. In fiscal 1999, scrap costs represented
approximately 45% of the Company's total manufacturing costs at its core 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 because of 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 discontinued SBQ rod, bar and wire
operations is high quality steel billets. Because of the metallurgical
characteristics demanded in the finished product, the Company obtains its
billets only from those suppliers whose billets can meet the required
metallurgical specifications of its customers. The Company manufactures its high
quality rod, bar and wire products using approximately 120 generic grades of
billets. In fiscal 1999, the Company produced approximately 57% of its SBQ
billets requirements at Memphis. The Memphis melt shop uses both high grade
scrap and DRI as feed stock from AIR, the Company's DRI joint venture. The
Company also obtains a portion of its Cleveland billet requirements from its
Cartersville operation and third party suppliers.
The Company consumes large amounts of electricity and natural gas. The Company
purchases electricity from regulated utilities under interruptible service
contracts because the costs of interruptible contracts are generally lower than
alternative arrangements. However, under these high volume industrial contracts,
electricity suppliers may periodically interrupt service during peak demand
periods. Although service interruptions have ordinarily been limited to several
hours and have occurred no more than ten days per year, there can be no
assurance that such interruptions will not be more severe in the future. The
Company also consumes substantial amounts of natural gas. Since deregulation of
the natural gas industry, the
5
<PAGE>
Company has generally obtained natural gas through negotiated contract purchases
of well-head gas, with transportation through local pipeline distribution
networks.
Production Capacity
The table below presents management's estimated melting and rolling mill
capacity, together with actual steel melting and rolling production for fiscal
1999. The capacities presented are management's estimates and are based upon a
normal 168-hour weekly work schedule, assuming an average product mix for each
facility and include the effects of capacity limitations currently impacting
each facility. Production capacities listed below are estimated year-end
capacity levels.
<TABLE>
<CAPTION>
Annual Fiscal Annual Fiscal
Melting 1999 Rolling 1999
Capacity Production Capacity Production
-------- ---------- -------- -----------
(in thousands of tons)
<S> <C> <C> <C> <C>
Continuing core mini-mills:
Birmingham 500 481 550 494
Joliet - - 280 223
Kankakee 800 729 800 503
Seattle 750 544 750 526
Jackson 450 282 400 251
Cartersville 1,000 349 500 152/(1)/
Discontinued SBQ Operations:
Cleveland - - 1,100 157
Memphis 1,000 422 - -
----- ----- ----- ------
4,500 2,807 4,380 2,306
===== ===== ===== ======
</TABLE>
/(1)/ Cartersville rolling production through January 1999 was obtained under
an outsourced tolling agreement with a third party. In March 1999, the Company
began its own rolling operations at Cartersville. Rolling production for 1999
reflects only the initial start-up phase of rolling operations at
Cartersville.
The Company has the capability to produce both rebar and merchant products at
each of its core mini-mills. The conversion from production of rebar to merchant
products is a routine facet of operations at the Company's mini-mill facilities
and no major impediments exist which would preclude changing the product mix to
meet changes in demand.
Production Facilities - Continuing Core Mini-Mills
Birmingham, Alabama
The Birmingham, Alabama facility was the first mini-mill built in the United
States. Since acquisition of the Birmingham facility, the Company has installed
a new electric arc furnace and sequence casting system in the melt shop, a new
reheat furnace, finishing stands, cooling bed and product shear in the rolling
mill as well as a new finished goods storage area. In 1992, the Company
transferred an in-line rolling mill from its idled facility in Norfolk, Virginia
to Birmingham. In 1994, the Company installed finished goods bundling and
transfer equipment at its Birmingham facility. The Birmingham facility produces
primarily rebar and some merchant products.
6
<PAGE>
Cartersville, Georgia
Birmingham Southeast acquired the Cartersville, Georgia facility in December
1996. The facility has a melt shop with a 24 foot, 140 ton Demag AC electric arc
furnace and Demag 6 strand billet caster. Cartersville produces billets for
feedstock to the Cleveland facility. In March 1999, the Company began its own
rolling operations in Cartersville, and now produces a wide range of merchant
products at this facility. The Company currently expects to complete the start-
up of the Cartersville facility in the third quarter of Fiscal 2000.
Kankakee, Illinois
The Kankakee, Illinois facility is located approximately 50 miles south of
Chicago. Since its acquisition in 1981, the Company has renovated the operation
and installed a new melt shop, continuous caster, rolling mill, reheat furnace
and in-line straightening, stacking and bundling equipment. Kankakee enjoys a
favorable geographical proximity to key Midwest markets for merchant products.
This freight cost advantage and Kankakee's state-of-the-art equipment
capabilities are competitive advantages in the Company's strategy to expand
market share of merchant products.
Joliet, Illinois
The Joliet, Illinois facility was acquired with the Company's purchase of
American Steel & Wire Corporation in November 1993. In fiscal 1996, concurrent
with the start-up of the new high quality bar mill in Cleveland (see "Cleveland,
Ohio" below), the Company transferred the operation of the Joliet facility from
the management in Cleveland, Ohio to the operational control of the Kankakee,
Illinois management group. The Company also invested approximately $30 million
to upgrade the rolling mill and enable Joliet to produce coiled and straight
length reinforcing bar, flats, rounds and squares. The Joliet operation consists
of a modernized 2-strand, 19-stand Morgan mill, 3-zone top-fired walking beam
furnace, no-twist finishing and a coil and cut-to-length line. The Joliet
operation obtains its semi-finished steel billet requirements primarily from the
Company's Kankakee facility.
Jackson, Mississippi
The Company originally acquired the Jackson facility in August 1985. In December
1996, upon formation of Birmingham Southeast, the Company contributed the assets
of its Jackson facility to the newly-formed limited liability company.
Birmingham Southeast also owns the facility in Cartersville, Georgia which was
acquired from Atlantic Steel Corporation. The Company, through its Birmingham
East Coast Holdings subsidiary, owns 85% of Birmingham Southeast.
Since acquiring the Jackson operation, the Company has renovated the facilities
and equipment. The Jackson facility includes a melt shop which was completed in
1993 and a modern in-line rolling mill. Installation of automated in-line
straightening and stacking equipment were completed in fiscal 1994. The Jackson
facility produces primarily merchant products including rounds, squares, flats,
strip and angles. The Jackson facility also has the capability to produce rebar.
Seattle, Washington
The Seattle, Washington facility is located adjacent to the Port of Seattle. The
Company began operating in Seattle in 1986 upon the acquisition of a local steel
company, which provided an entry to the West Coast steel markets. In 1991, the
Company purchased the assets of Seattle Steel, Inc., in west Seattle, and
consolidated all of its steel operations to the west Seattle site.
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. In 1993, the Company completed
construction of a new state-of-the-art in-line rolling mill which includes
automated in-line straightening, stacking and bundling equipment designed to
facilitate Seattle's expansion in merchant
7
<PAGE>
product production. The Seattle operation produces rebar and a variety of
merchant products, including rounds, angles, channels, squares, flats and strip.
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 and Kankakee mini-mills.
Production Facilities - Discontinued SBQ Operations
In August 1999, the Company announced its intention to divest its SBQ operations
in order to focus on its core mini-mill and scrap operations.
Memphis, Tennessee
In November 1997, the Company began start-up operations of a SBQ melt shop in
Memphis. The Memphis melt shop was designed to produce 1.0 million tons of high
quality billets per year. The facility consists of an electric arc furnace,
vacuum degassing tank, a ladle metallurgy station, a continuous bloom caster,
and a billet rolling mill. The facility also includes inspection and
conditioning equipment used to analyze billets prior to shipment. The Company
expects to incur an additional $5,000,000 to bring the continuous bloom caster
to designed operational performance by January 2000.
Cleveland, Ohio
The Company's Cleveland, Ohio facilities include a rod mill, a bar mill and a
wire mill. The rod and wire assets were acquired in 1993 when the Company
purchased American Steel & Wire Corporation (ASW).
The Cleveland facilities produce a variety of high quality steel rod, bar and
wire products. The Cleveland operation has achieved QS9000 registration, which
is a quality system requirement established by Chrysler, Ford and General Motors
and is based upon the internationally recognized ISO9000 series of standards.
The Cleveland operation also includes a facility which produces ultra-high
tensile strength specialty wire for use in the U.S. Government's anti-tank
missile guidance systems. The Cleveland plant is the only producer of TOW
missile wire.
Products
Note 15 to the 1999 Consolidated Financial Statements provides information about
net sales for each of the past three years by type of product and by geographic
area. Following is a discussion of each of the Company's principal products and
distribution methods.
Rebar Products
The Company has the capability to produce rebar at each of its continuing core
mini-mill facilities. 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
8
<PAGE>
absorbed by the supplier. Most of the Company's rebar sales are shipped to
customers via common carrier and, to a lesser extent, by rail.
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
fabricator trade association), depict apparent rebar consumption in the United
States from 1989 through 1998. The table also includes rebar shipments by the
Company and its approximate market share percentage for the periods indicated:
<TABLE>
<CAPTION>
Rebar Company Approximate
Consumption Shipments Market
Calendar Year (in tons) (in tons) Share
--------------- ------------- ----------- ------------
<S> <C> <C> <C>
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%
1996 6,071,000 1,288,000 21.2%
1997 6,188,000 1,432,000 23.1%
1998 7,373,000 1,363,000 18.5%
</TABLE>
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 each of its
continuing core mini-mill facilities. Merchant products consist of rounds,
squares, flats, strip, angles and channels. 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
than rebar, 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 generally
produce higher profit margins than rebar products. The Company has installed
modern straightening, stacking and bundling equipment at its mills to strengthen
its competitiveness in merchant markets.
As with rebar, the Company generally ships merchant products to customers by
common carrier or by rail and equalizes freight costs to the nearest competing
mill.
9
<PAGE>
The following data reported by the American Iron and Steel Institute depict
apparent consumption of merchant products in the United States from 1989 through
1998. The table also includes merchant product shipments by the Company and its
approximate market share percentage for the periods indicated:
<TABLE>
<CAPTION>
Merchant
Product Company Approximate
Consumption Shipments Market
Calendar Year (in tons) (in tons) Share
--------------- ------------- ----------- -------------
<S> <C> <C> <C>
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%
1996 10,341,000 520,000 5.0%
1997 10,534,000 925,000 8.8%
1998 11,600,000 909,000 7.8%
</TABLE>
SBQ Rod, Bar and Wire Products
In August 1999, the Company announced its intention to divest its SBQ operations
in order to focus on its core mini-mill and scrap operations. For financial
reporting purposes, the SBQ operations are being treated as discontinued
operations. The following discussion is provided for historical reference
purposes.
The Company's SBQ facilities market high-quality rod, bar and wire products to
customers in the automotive, agricultural, industrial fastener, welding,
appliance and aerospace industries. Because of the flexibility of the Cleveland
facility, the Company produces a wide variety of SBQ products, including cold
heading quality, cold finish quality, cold rolling quality, welding quality,
specialty high carbon quality, industrial quality, bearing quality and wire
products. Approximately 70% of the Company's SBQ shipments are to customers
serving the original equipment and after-market segments of the automotive
industry.
End-uses of the Company's SBQ rod and bar products include 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 the Company is used by customers to produce steel wool pads, brake
pads, golf spikes and fasteners such as bolts, rivets, screws, studs and nuts.
The Company'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, the Company's SBQ products must meet
exacting metallurgical and size tolerance specifications and defect-free surface
characteristics. The Company's marketing and sales strategy is to meet or exceed
customers' requirements for high quality steel rod and wire manufactured to
close tolerances and exacting surface characteristics.
The Company's pricing strategy for SBQ products is generally market driven.
Typically, rapidly responsive market pricing prevails for most customers that
rely on market competition to determine price. The major exception to this is in
the automotive industry, where model-year pricing practices result in fixed
pricing for twelve months into the future price (generally beginning August 1).
This practice provides pricing certainty to automotive industry OEM suppliers.
10
<PAGE>
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.
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 markets primarily with numerous
regional domestic mini-mill companies.
The Company's primary competitors in rod and bar products are divisions of
domestic and foreign integrated steel companies and domestic mini-mill
companies. The Company competes primarily in the high quality end of the rod,
bar and wire markets, differentiating itself from many of its competitors.
Although price is an important competitive factor in the Company's SBQ business,
particularly during recessionary times, the Company believes that its sales are
principally dependent upon product quality, on-time delivery and customer
service. The Company's SBQ marketing and sales activities have generally
emphasized its ability to meet or exceed customers' requirements for high
quality steel rod, bar 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, these 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 the Company.
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.
Employees
Production Facilities
At June 30, 1999, the Company employed 2,127 people at its production
facilities. The Company estimates that approximately 29% of its current employee
compensation in operations 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 1999, hourly employee costs at these facilities were
approximately $29 per hour, including overtime and fringe benefits, which was
competitive with other mini-mills. Approximately 95 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 1999, hourly employee costs at this facility
were approximately $27 per hour, including overtime and fringe benefits. The
Company's other 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 remain good.
Sales and Administrative Personnel
At June 30, 1999, the Company employed 256 sales and administrative personnel,
of which 109 were employed at the Company's corporate office headquarters
located in Birmingham, Alabama and 42 were employed in the discontinued SBQ
business headquarters in Cleveland, Ohio.
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
11
<PAGE>
in complexity and scope, environmental considerations 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.
Changes in federal or state regulations or a discovery of unknown conditions
could require additional substantial expenditures by the Company.
The Company's mini-mills are classified as hazardous waste generators because
they produce and collect certain types of dust containing lead and cadmium. The
Company currently collects and disposes of such wastes at approved landfill
sites or recycling sites through contracts with approved waste disposal and
recycling firms.
The Cleveland 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 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. seq., 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
identified or asserted against ASW.
Executive Officers of the Registrant
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
presented below.
The following table sets forth the name of each executive officer of the
Company, the offices they hold, and their ages as of October 1, 1999.
<TABLE>
<CAPTION>
Name Age Office Held
- ---------------- --- ---------------------------------
<S> <C> <C>
Robert A. Garvey 61 Chairman of the Board and
Chief Executive Officer
Brian F. Hill 53 Chief Operating Officer
Kevin E. Walsh 55 Executive Vice President-
Chief Financial Officer
William R. Lucas 44 Managing Director Southern Region
Jack R. Wheeler 63 Managing Director Northern Region
</TABLE>
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.
12
<PAGE>
Brian F. Hill joined the Company in June 1999 and serves as Chief Operating
Officer. Prior to joining the Company, Mr. Hill spent thirty-one years with
Cargill, Inc., of which fifteen years were spent in its steel and steel-related
businesses, including serving as Executive Vice President of Operations at North
Star Steel.
Kevin E. Walsh joined the Company in July 1998 and serves as Executive Vice
President-Chief Financial Officer. Prior to joining the Company, Mr. Walsh has
served in executive financial positions, most recently as Chief Financial
Officer for Remington Arms Company.
William R. Lucas, Jr. joined the Company in July 1995 and serves as Managing
Director Southern Region. 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.
Jack R. Wheeler joined the Company in November 1992 and serves as Director
Northern Region. Prior to joining the Company, Mr. Wheeler served as Vice
President and Works Manager at SMI Steel Inc. from 1986 to 1992.
Risk Factors
A description of "Risk Factors that May Affect Future Operating Results"
relating to the Company is set forth on Exhibit 99.1 and is incorporated herein
by reference.
ITEM 2. PROPERTIES
The following table lists the Company's real property and production facilities.
Management believes that these facilities are adequate to meet the Company's
current and future commitments.
<TABLE>
<CAPTION>
Building
Square Owned or
Location Acreage Footage Leased
- ----------------------- -------- --------- --------
<S> <C> <C> <C>
Corporate Headquarters:
Birmingham, Alabama - 38,396 Leased
Operating Facilities:
Continuing Operations:
Birmingham, Alabama 26 260,900 Owned (1)
Kankakee, Illinois 222 400,000 Owned
Seattle, Washington 69 736,000 Owned
Jackson, Mississippi 99 323,000 Owned (1)
Cartersville, Georgia 283 367,000 Owned
Ft. Lauderdale, Florida - 29,500 Leased
Discontinued Operations:
Cleveland, Ohio 216 2,041,600 Owned
Memphis, Tennessee 500 184,800 Owned
</TABLE>
(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.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business. Most of the existing known claims
against the Company are covered by insurance, subject to the payment of
deductible amounts by the Company. Management believes that any uninsured or
unindemnified liability resulting from existing litigation will not have a
material adverse effect on the Company's business or financial position.
However, there can be no assurance that insurance, including product liability
insurance, will be available in the future at reasonable rates.
13
<PAGE>
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, 1999 and
1998, 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.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal Year Ended June 30, 1999
First Quarter $12.75 $ 6.44
Second Quarter 7.94 3.50
Third Quarter 5.13 3.88
Fourth Quarter 7.13 3.94
Fiscal Year Ended June 30, 1998
First Quarter $20.56 $15.38
Second Quarter 18.25 14.63
Third Quarter 18.00 15.19
Fourth Quarter 17.38 11.19
</TABLE>
The last sale price of the Common Stock as reported on the New York Stock
Exchange on September 30, 1999 was $7.625. As of September 30, 1999, there were
1,499 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 Consolidated Financial Data" for
information concerning dividends paid by the Company during the past five fiscal
years).
Under the terms of the Company's amended debt agreements (See Note 7 to
Consolidated Financial Statements), dividends and other "restricted payments,"
as defined in the agreements, are limited to the lesser of $750,000 per quarter
or 50% of quarterly income from continuing operations. The Company does not
expect to change its present rate of quarterly dividend payments ($.025 per
share) in the near term.
14
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------------------------------------------
1999 1998 (1) 1997 (1) 1996 (1) 1995 (1)
------------- ------------- ------------- ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 709,876 $ 836,875 $ 667,716 $ 564,254 $ 574,624
Cost of sales:
Other than depreciation
and amortization 568,688 689,347 555,684 488,731 457,473
Depreciation and amortization 40,227 37,954 32,739 29,202 25,355
------------- ------------- ------------- ------------ ------------
Gross profit 100,961 109,574 79,293 46,321 91,796
Pre-operating/start-up costs 12,854 1,305 6,730 13,630 1,337
Selling, general and
administrative expense 36,625 44,214 33,492 28,862 30,108
Interest expense 24,248 17,261 11,906 9,481 6,890
------------- ------------- ------------- ------------ ------------
27,234 46,794 27,165 (5,652) 53,461
Other income, net 9,930 12,794 4,704 3,723 8,067
Loss from equity investments (24,563) (18,326) (1,566) - -
Minority interest in loss of
subsidiary 5,497 1,643 2,347 - -
------------- ------------- ------------- ------------ ------------
Income (loss) from continuing
operations before income taxes 18,098 42,905 32,650 (1,929) 61,528
Provision for (benefit from) income
taxes 14,814 14,960 12,863 (670) 24,610
------------- ------------- ------------- ------------ ------------
Income (loss) from continuing
operations 3,284 27,945 19,787 (1,259) 36,918
Income (loss) from discontinued
operations, net of tax (227,520) (26,316) (5,370) (918) 13,731
------------- ------------- ------------- ------------ ------------
Net income (loss) $ (224,236) $ 1,629 $ 14,417 $ (2,177) $ 50,649
============= ============= ============= ============ ============
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Basic and diluted per share amounts:
Income (loss) from continuing
operations $ 0.11 $ 0.94 $ 0.68 $ (0.04) $ 1.27
Income (loss) on discontinued
operations (7.72) (0.89) (0.18) (0.04) .47
------------- ------------- ------------- ------------ ------------
Net income (loss) $ (7.61) $ 0.05 $ 0.50 $ (0.08) $ 1.74
============= ============= ============= ============ ============
Dividends declared per share $ 0.175 $ 0.40 $ 0.40 $ 0.40 $ 0.40
============= ============= ============= ============ ============
</TABLE>
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------------
1999 1998 (1) 1997 (1) 1996 (1) 1995 (1)
------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 110,434 $ 237,673 $ 228,881 $ 211,596 $ 206,901
Total assets 877,466 1,158,015 1,124,717 865,501 722,077
Long-term debt less current portion 469,135 516,439 485,056 292,500 142,500
Stockholders' equity 230,731 460,607 471,548 448,192 459,719
</TABLE>
(1) The selected consolidated financial data for fiscal 1995 through 1998 has
been restated, as required by generally accepted accounting principles, to
reflect the Company's special bar quality (SBQ) business as discontinued
operations. Refer to Note 2 to the Consolidated Financial Statements.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
Disposal of SBQ Operations
On August 18, 1999, the Company announced a strategic restructuring plan
intended to permit the Company to focus on its core rebar, merchant product and
scrap businesses by disposing of its special bar quality (SBQ) operations. The
Company's SBQ operations include rod, bar and wire rolling mills in Cleveland,
Ohio, a high quality melt shop in Memphis, Tennessee, and a 50% interest in
American Iron Reduction LLC (AIR), a joint venture that supplies raw material to
the Memphis facility. The Company's decision to discontinue its SBQ operations
was attributable to continuing financial and operational challenges which have
required a major and continuing commitment of management and financial resources
and have constrained the Company's financial flexibility while significantly
increasing its debt. The Company expects to sell the SBQ operations by May 2000.
As a result of this decision, the Company recorded a $173.2 million estimated
loss ($5.87 per share) on the sale of the SBQ operations, which included a $56.5
million provision (pre-tax) for estimated losses during the expected disposal
period. These charges are combined with the fiscal 1999 operating losses of the
SBQ division ($54.3 million, net of income tax benefits) and presented as
discontinued operations in the fiscal 1999 financial statements. On a combined
basis, losses from the SBQ operations amounted to $227.5 million ($7.72 per
share), $26.3 million ($.89 per share) and $5.4 million ($.18 per share) in
1999, 1998 and 1997, respectively. The proceeds expected to be realized on the
sale of the SBQ operations are based on management's estimates of the most
likely outcome, considering, among other things, informal appraisals from the
Company's investment bankers and the Company's knowledge of valuations for steel
production assets. The expected operating losses during the disposal period are
based upon the Company's business plan for the SBQ operations. However, the
actual amounts ultimately realized on sale and losses incurred during the
expected disposal period could differ materially from the amounts assumed in
arriving at the losses reflected in the 1999 financial statements. Among other
things, the reserve for operating losses during the expected disposal period
assumes that the Company will continue to operate the SBQ facilities through the
disposal date and that during that period, production and shipment volumes will
improve marginally over fiscal 1999 levels. If the Company decides to curtail or
cease operations before the facilities are sold, actual losses could be
materially different from those provided in the financial statements. In
addition, while management believes that the estimated proceeds from the sale of
the SBQ operations is a reasonable estimate of the enterprise value, there can
be no assurance that such amounts will be realized. To the extent that actual
proceeds or operating losses during the expected disposal period differ from the
estimates that are reflected in the 1999 financial statements, the variance will
be reported in discontinued operations in future periods.
Management expects to use the proceeds from the sale to: (a) settle its
obligations under a lease agreement for equipment at the Memphis facility
(approximately $74 million); (b) pay estimated transaction expenses ($8
million); and (c) retire industrial revenue bonds and other debt specifically
associated with the SBQ assets ($42.2 million). The balance of the proceeds will
be used to pay down a portion of the Company's other long-term debt. (See Notes
2 and 7 to the Consolidated Financial Statements.)
17
<PAGE>
Proxy Contest
On August 13, 1999 the Company announced it had been notified by a dissident
stockholder group that the group intended to propose an alternate slate of nine
directors at the Company's 1999 annual meeting of stockholders. The intentions
of that group are more fully described in the group's Schedule 13D and the
preliminary proxy materials filed by the Company and separately by the dissident
stockholder group. Management estimates that this proxy contest could result in
expenses of approximately $1.5 million to be incurred in the first and second
quarters of fiscal 2000. In addition, the Company has entered into agreements
with its financial advisors and fees payable to such financial advisors, the
amount of which is dependent on the outcome of the proxy contest, could
aggregate an additional, approximately $1.5 to $2.0 million.
Long-Term Debt Amendments
On October 12, 1999 the Company amended its revolving line of credit and Senior
Note agreements to provide for the continuation of the facilities for their
remaining terms. Refer to Note 7 to the Consolidated Financial Statements for
information about the terms and provisions of the amendments. Information is
also provided under the caption "Liquidity and Capital Resources--Financing
Activities" below.
GENERAL
Income from continuing operations for 1999 was $3.3 million, or $.11 per share,
down from $27.9 million, or $.94 per share for 1998. The following table sets
forth, for the years indicated, selected items in the consolidated statements of
operations as a percentage of net sales.
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of sales:
Other than depreciation and amortization 80.1 82.4 83.2
Depreciation and amortization 5.7 4.5 4.9
---- ---- ----
Gross margin 14.2 13.1 11.9
Pre-operating/start-up costs 1.8 0.1 1.0
Selling, general and administrative expense 5.1 5.3 5.0
Interest expense 3.4 2.0 1.8
Other income, net (1.4) (1.4) (0.7)
Loss from equity investments 3.5 2.2 0.2
Minority interest in loss of subsidiary (0.8) (0.2) (0.4)
Provision for income taxes 2.1 1.8 1.9
---- ---- ----
Income from continuing operations 0.5% 3.3% 3.1%
==== ==== ====
</TABLE>
18
<PAGE>
Results From Continuing Operations
The following table sets forth, for the fiscal years indicated, trade shipments,
product mix percentages and average selling prices per ton for the Company's
continuing rebar, merchant and scrap operations:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
Tons % Avg. Tons % Avg. Tons % Avg.
Shipped of Total Selling Shipped of Total Selling Shipped of Total Selling
(000's) Sales Price (000's) Sales Price (000's) Sales Price
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rebar 1,354 56.7% $275 1,432 53.7% $302 1,298 59.7% $300
Merchants 885 37.0% $323 925 34.7% $344 698 32.1% $339
Other 151 6.3% $261 309 11.6% $265 177 8.2% $264
------------------ ------------------ ------------------
Total 2,390 100.0% 2,666 100.0% 2,173 100.0%
================== ================== ==================
</TABLE>
Net Sales
In fiscal 1999, net sales from continuing operations decreased 15.2% to $709.9
million from $836.9 million in fiscal 1998. The decrease resulted from both a
decline in shipment volumes of 10.4% as well as reductions in average selling
prices for rebar and merchant products. The declines in shipments and selling
prices are attributable primarily to unprecedented levels of steel imports
during fiscal 1999 and downward pressure on pricing attributable to lower scrap
costs that prevailed throughout the year. The Company's average selling price
for rebar decreased $27 per ton in 1999 versus 1998 while the average selling
price for merchant products decreased $21 per ton in 1999 versus 1998.
Although average selling prices were lower in fiscal 1999 as compared to fiscal
1998, the Company announced price increases in rebar ($20 per ton) and merchant
products ($15 per ton) effective June 1, 1999. While the market appears
receptive to price increases, imports continue to impact pricing, and therefore
the full impact of the price increases may not be realized immediately.
In fiscal 1998, net sales from continuing operations increased 25.3% from fiscal
1997, reflecting a 22.7% increase in steel shipments and increased selling
prices, particularly for higher margin merchant products.
Cost of Sales
As a percent of net sales, cost of sales (other than depreciation and
amortization) declined to 80.1% in fiscal 1999, compared to 82.4% in 1998. The
decline resulted primarily from lower scrap raw materials costs offset by a
slight increase in conversion costs. At the Company's continuing mini-mill
facilities, the cost to convert scrap to finished steel products increased $5
per ton in fiscal 1999 to reach $128 per ton as compared to $123 per ton in
fiscal 1998. Average scrap raw material costs decreased $31 per ton fiscal 1999,
averaging $102 per ton versus $133 per ton in fiscal 1998.
Depreciation and amortization expense increased 6% in fiscal 1999 to $40.2
million as compared to $38 million in fiscal 1998. The increase is primarily
attributable to the new continuous caster and medium section rolling mill at the
Company's Cartersville, Georgia facility, which began start-up operations in
March 1999.
19
<PAGE>
Cost of sales (other than depreciation and amortization), as a percent of net
sales, decreased slightly to 82.4% in fiscal 1998 from 83.2% in fiscal 1997. The
improvement primarily resulted from increased volumes and lower conversion
costs. The cost per ton to convert scrap to finished steel products decreased to
$123 per ton in fiscal 1998 compared with $126 per ton in fiscal 1997. Scrap raw
material costs remained steady throughout the year and averaged $133 per ton in
fiscal 1998 and 1997.
Depreciation and amortization expense increased 16% in fiscal 1998 compared with
fiscal 1997. The increase was primarily due to the recognition of a full year of
depreciation on the Cartersville, Georgia facility which was acquired during
fiscal 1997 (See Note 12 to Consolidated Financial Statements.)
Pre-operating/Start-up Costs
Pre-operating/start-up costs charged to continuing operations amounted to $12.9
million in fiscal 1999 compared with $1.3 million in fiscal 1998. Both the
current and prior year charges related primarily to pre-operating and excess
costs incurred during the construction and start-up phases of the new continuous
caster and medium section rolling mill at the Company's Cartersville, Georgia
facility.
The Company expects to incur additional start-up expenses related to the
Cartersville caster and rolling mill through the third quarter of fiscal 2000.
Fiscal 1997 pre-operating and start-up costs related to the rolling mill
expansion project at the Company's Joliet, Illinois facility, which began
operations in the third quarter of fiscal 1997, and the modernization of the
melt shop at the Company's Cartersville, Georgia facility.
Selling, General and Administrative Expenses ("SG&A")
SG&A expenses applicable to continuing operations were $36.6 million in fiscal
1999, a decrease of 17.2% from $44.2 million in fiscal 1998. Beginning July 1,
1998, the Company reorganized its executive management, sales and administration
functions to more closely align the organization with the specific needs of each
respective business unit. As part of the realignment, management, sales and
administration personnel were assigned to specific business units and the costs
associated with those personnel became direct expenses of their respective
business units. As a result of this change, SG&A expenses associated with
continuing operations decreased from the prior year, with a corresponding
increase in expenses associated with discontinued operations. Aggregate SG&A
expenses, including those applicable to both continuing and discontinued
operations, decreased by approximately $2 million, reflecting elimination of the
non-recurring information technology charge in 1998 described below.
SG&A expenses were $44.2 million in fiscal 1998, an increase of 32% from $33.5
million in fiscal 1997. The increase in SG&A was primarily due to increased
costs associated with supporting higher sales and additional personnel and
expenses related to the Cartersville facility and the non-recurring IT costs
described above. Fiscal 1998 SG&A expenses also include approximately $2.0
million in non-recurring information technology costs related to a decision to
change software vendors for a major system upgrade.
Interest Expense
Interest expense applicable to continuing operations increased to $24.2 million
in fiscal 1999 compared with $17.3 million in fiscal 1998. The increase in
interest expense was primarily due to increased borrowings on the Company's
revolving credit line during the year. Depressed selling prices and lower
shipment volumes in the Company's SBQ operations reduced the Company's operating
cash flows during the year. These factors, along with capital spending to
complete the Company's capital projects at Cartersville and other facilities
contributed to increased borrowings throughout fiscal 1999. The Company
20
<PAGE>
also amended its debt agreements during the second quarter of fiscal 1999 which,
along with overall increases in market rates, led to an increase in the
Company's average borrowing rate. The Company's average long-term borrowing rate
was 6.79% in fiscal 1999 versus 6.64% in fiscal 1998. In fiscal 1999, the impact
of the increase in total interest costs was offset, in part, by increased
capitalized interest - principally associated with capital spending at
Cartersville. The Company is nearing completion of its capital spending programs
and does not expect significant levels of capitalized interest to continue
during the next fiscal year. The Company expects to experience an increase in
interest expense in fiscal 2000 as a result of amending its long-term debt
agreements - see "Liquidity and Capital Resources - Financing Activities."
Interest expense increased to $17.3 million in fiscal 1998 compared with $11.9
million in fiscal 1997. The increase in interest expense was primarily due to
increased borrowings on the Company's revolving credit line during the year
which were required to fund the Company's capital spending program.
Income Tax
The effective tax rate applicable to continuing operations in fiscal 1999 was
81.9% as compared to 34.9% in fiscal 1998 and 39.4% in fiscal 1997. The 1999
effective tax rate was adversely impacted by the establishment of a $8 million
valuation allowance, principally related to capital loss carryforwards
associated with the $19.3 million write-down of the Company's investment in
Pacific Coast (See Note 3 to Consolidated Financial Statements). Management
believes it is more likely than not that the capital loss carryforwards will not
be realized in future tax returns to reduce taxes payable because those
carryforwards may only be deducted to the extent of future capital gains.
Therefore, a valuation allowance was provided in the 1999 tax provision to
reduce the carrying value of the related deferred tax asset.
The Company's consolidated federal net operating loss for fiscal 1999 was
approximately $60 million which was substantially a result of discontinued
operations. Of this amount, approximately $17 million will be carried back to
reduce income taxes payable for prior periods. Primarily as a result of the net
operating loss carryback, the Company expects to receive a tax refund of
approximately $14 million, during fiscal 2000. The remaining $43 million will be
carried forward and may be used to reduce taxes due in future periods for up to
20 years. Management believes that the Company will generate sufficient taxable
income from continuing operations in future periods to utilize the tax benefit
of the net operating losses prior to their expiration. Other than the
elimination of non-recurring losses from equity investments and start-up costs
at the Company's Cartersville facility, both of which are expected to be
achieved in fiscal 2000, no significant improvements in operating results of
continuing operations are believed to be necessary in order to realize the tax
benefit of the net operating loss carryforwards. However, realization of such
benefits is somewhat dependent upon the Company's ability to complete the
disposition of the SBQ business. If the SBQ business is not sold in the near
term and its operating losses continue at the levels experienced in recent
years, the Company could be required to provide additional valuation allowances
in the future.
In addition, the Company has state net operating loss carryforwards of
approximately $73 million, the majority of which will expire in 15 years. The
Company has provided a valuation allowance of $9.3 million in discontinued
operations for state net operating loss and capital loss carryforwards which
will most likely expire before being utilized. These loss carryforwards reside
in states where the Company's only significant operations are SBQ operations,
which are to be discontinued in fiscal 2000. Therefore, it is unlikely that the
Company could generate sufficient taxable income allocable to those states in
the future to realize the benefit of those loss carryforwards.
21
<PAGE>
Results from Discontinued Operations
Net Sales
Net sales from discontinued operations in fiscal 1999 were $270.4 million, a
decrease of 9.6% from $299.1 million reported in fiscal 1998. The decrease was
primarily the result of decreased average selling prices, shipment volumes,
lower selling prices across product lines and an unfavorable shift in product
mix. In a concerted effort to reduce SBQ inventories during fiscal 1999, the
Company increased production and shipments of lower priced industrial quality
rod and bar products during fiscal 1999. The Company's average selling price for
all special bar quality (SBQ) products was $420 per ton in fiscal 1999, compared
with $451 per ton in fiscal 1998. In fiscal 1999, the SBQ division shipped
654,000 tons of high quality and industrial quality rod, bar and wire as
compared to 662,000 tons in fiscal 1998.
Net sales in fiscal 1998 decreased 3.9% from $311.2 million in fiscal 1997.
Substantially all of the decrease in 1998 net sales was attributable to
declining selling prices. The average selling price for SBQ products was $451
per ton in fiscal 1998, down $13 per ton from $464 per ton in fiscal 1997. In
fiscal 1998, the SBQ operations shipped 662,000 tons of SBQ products compared to
663,000 tons in fiscal 1997.
Cost of Sales
During fiscal 1999, the market price of SBQ product declined precipitously
during the first half of the year. As a result of the Company's efforts to
decrease its investment in inventory, total SBQ inventories declined by $39.6
million during the year. The liquidation of beginning inventories, which were
carried at lower of FIFO cost or market at the beginning of the year
significantly impacted SBQ margins in fiscal 1999. As a percent of net sales,
cost of sales increased to 108.2% in fiscal 1999 from 97.4% in the prior year.
The increase in cost of sales as a percent of net sales was primarily was due to
the decrease in average selling prices and a slight increase in conversion
costs. Conversion cost at the Company's SBQ rolling mill averaged $71 per ton in
fiscal 1999 compared with $68 per ton in fiscal 1998. Average billet cost per
ton increased to $364 in fiscal 1999, up $13 from $351 in fiscal 1998.
Conversion cost at the Company's SBQ facility averaged $68 per ton in fiscal
1998 compared with $69 per ton in fiscal 1997. Average billet cost per ton
declined to $351 in fiscal 1998, down $8 from $359 in fiscal 1997.
Pre-operating/Start-up Costs
Pre-operating/start-up costs from discontinued operations were $37.9 million in
fiscal 1999 compared with $32.9 million for fiscal 1998 and $3.9 million in
1997. Except for approximately $1.5 million in 1997, these costs were incurred
to start-up the Company's Memphis, Tennessee melt shop, which began start-up
operations in November 1997. In March 1999, the Memphis melt shop achieved a
production run rate of 75% of capacity, which represents the operating level
management believes is necessary to sustain break-even financial results for the
Memphis operation. However, the facility was unable to sustain this run rate
during the fourth quarter as a result of equipment problems and power
curtailments. The Company has initiated a program to correct the equipment
problems that are currently preventing the Memphis facility from achieving its
production goals. The program will require capital expenditures of approximately
$5 million, and should enable the Memphis facility to sustain a production level
of at least 75% of capacity by January 2000.
22
<PAGE>
Selling, General and Administrative Expenses ("SG&A")
SG&A expenses were $9.5 million in fiscal 1999, an increase of 114.4% from $4.4
million in fiscal 1998. The increase in SG&A is primarily due to additional
personnel and other expenses related to the additional personnel and expenses at
Memphis and the change as described above in recording of sales salaries,
benefits, and expenses directly to the divisions instead of the corporate
overhead allocation.
SG&A increased 40.2% in fiscal 1998 to $4.4 million from $3.2 million reported
in fiscal 1997. The increase is due to additional personnel and other expenses
related to the Memphis facility that started production in November 1997.
Other Income
In fiscal 1999, operating results of the SBQ operations included a gain of $2.2
million from the sale of real estate in Cleveland, Ohio. The gain was offset by
a one time charge of $2.1 million to terminate a long-term raw materials
purchase commitment with a third party supplier.
Liquidity and Capital Resources
Operating Activities
Net cash provided by operating activities of continuing operations was $122
million in fiscal 1999, compared with $86.4 million in fiscal 1998. Although the
Company's continuing operations experienced a slight improvement in gross margin
during fiscal 1999, cash provided by operating activities increased principally
because of significant improvements in managing accounts receivable and
inventory levels. Days sales outstanding in accounts receivable remained
relatively stable in 1998 and 1999. In an effort to reduce borrowings under the
Company's revolving credit facility, the Company implemented inventory reduction
programs at each of its core mini-mills which were successful in reducing
inventories by $41.9 million during fiscal 1999.
Investing Activities
Net cash flows used in investing activities of continuing operations were $48.8
million in fiscal 1999, compared with $59 million in the prior year.
Expenditures related to capital projects increased to $121.8 million in fiscal
1999, versus $66.6 million in 1998, principally related to the completion of the
mid-section mill and caster projects at Cartersville. The increased capital
expenditures were offset in part from the proceeds of two sale-leaseback
transactions involving equipment at Cartersville. The first involving equipment
with a carrying value of $7.8 million, was completed in December 1998, while the
second, involving equipment with a value of $67.3 million, was completed in June
1999. The Company expects capital expenditures will decrease substantially in
fiscal 2000 to a normalized level of $20 to $30 million because the major
capital improvement program at Cartersville is substantially complete. In fiscal
1998, cash used in investing activities from continuing operations included $30
million in proceeds from the sale of several idled facilities, property, plant
and equipment and a 50% interest in Richmond Steel Recycling Limited. Fiscal
1998 cash used in investing activities also reflected a $15 million investment
in Laclede Steel Company, which was written off in fiscal 1998.
In fiscal 1997, the Company made a $9.25 million investment in Pacific Coast, a
50% owned joint venture established to operate in southern California as a
collector, processor and seller of scrap. On December 27, 1996, Pacific Coast
purchased scrap processing assets from the estate of Hiuka America Corporation
and its affiliates with an annual capacity of approximately 600,000 tons.
Through June 30, 1999 the Company has invested approximately $29.4 million in
Pacific Coast, including loans of approximately $20 million.
23
<PAGE>
During fiscal 1999, the Company continually evaluated its investment in Pacific
Coast in the context of current conditions in the Asian scrap export market as
well as the ability of Pacific Coast to competitively participate in the
domestic scrap market. After carefully reviewing its options, management and the
Board of Directors determined that Pacific Coast was no longer a strategic fit
for the Company's core mini-mill operations and decided not to continue its
support of the operations. The Company then re-evaluated the carrying amount of
its investment in light of the changed circumstances and concluded that it
should be written down in the fourth quarter of fiscal 1999. The resulting $19.3
million provision for loss ($0.65 per share after tax) is reflected in "Loss
from equity investments" within continuing operations in the Consolidated
Statement of Operations.
Pacific Coast is utilizing a leased facility at the Port of Long Beach to export
scrap. In connection with this venture, the Company has guaranteed 50% of
Pacific Coast's obligations under an operating lease that requires Pacific Coast
to pay annual rent of approximately $3.8 million through November 2019 (See Note
3 to the Consolidated Financial Statements).
On November 15, 1996, the Company entered into a Contribution Agreement with
Atlantic Steel Industries, Inc. (Atlantic) and IVACO, Inc., the parent of
Atlantic, pursuant to which the Company and Atlantic formed Birmingham
Southeast, LLC (Birmingham Southeast), a limited liability company owned 85% by
Birmingham East Coast Holdings, a wholly owned subsidiary of the Company, and
15% by a subsidiary of IVACO, Inc. On December 2, 1996, pursuant to the
Contribution Agreement, the Company contributed the assets of its Jackson,
Mississippi facility to Birmingham Southeast and Birmingham Southeast purchased
the assets of Atlantic located in Cartersville, Georgia for $43.3 million in
cash and assumed approximately $44.3 million in liabilities (See Note 12 to the
Consolidated Financial Statements).
In fiscal 1999, cash used in investing activities of discontinued operations was
$20.2 million as compared to $18.7 million in fiscal 1998.
In fiscal 1997, the Company and Georgetown Industries, Inc. (GII), formed
AIR, located in Convent, Louisiana. The joint venture produces direct reduced
iron (DRI), which is used as a substitute for high grade. Construction of the
DRI facility was funded by a $177 million non-recourse project financing
arrangement, proceeds from a $8 million industrial revenue bond and initial
equity investments of $20 million by the venture partners in fiscal 1998. The
Company made additional equity investments of $3.75 million during fiscal 1999
and is contingently obligated to make up to $3.75 million in additional
contributions.
The Company invested approximately $18.9 million in capital projects related to
discontinued operations during fiscal 1999. The Company anticipates additional
capital expenditures of approximately $5 million at Memphis prior to the
disposal of the SBQ operations. Beyond these investments at Memphis, no further
investments in the SBQ operations are currently planned.
Financing Activities
Net cash used in financing activities of continuing operations was $55.7 million
in fiscal 1999, compared with cash provided by financing activities of
continuing operations of $29 million in fiscal 1998. The Company's strategy of
depleting inventory levels, coupled with the completion of the sale/leaseback
transactions at Cartersville, enabled the Company to reduce outstanding
borrowings under its Revolving Credit Agreement by $37.3 million and repay $10
million in short-term notes payable during fiscal 1999. On October 12, 1999, the
Company reduced its quarterly cash dividend from $0.10 per share to $0.025 per
share in response to changing economic conditions in the global steel industry
and to conserve cash.
24
<PAGE>
On January 23, 1997, the Company issued 1,000,000 additional shares of common
stock from treasury in a public offering registered with the Securities and
Exchange Commission. The proceeds of $19.2 million from the offering were used
to partially fund the acquisition of the assets of Atlantic Steel Industries,
Inc. (See Note 12 to the Consolidated Financial Statements).
In fiscal 1997 the Company completed a $26 million, 30 year tax-free bond
financing at Memphis, to finance a portion of the Memphis expansion project.
At June 30, 1999, the Company was not in compliance with the interest coverage
covenants pertaining its $150 million and $130 million Senior Notes, its $300
million Revolving Credit Agreement and letter of credit agreements underlying
its capital lease and industrial revenue bond obligations. On October 12, 1999,
the Company and its lenders executed amendments to the debt and letter of credit
agreements. The amendments waived the pre-existing noncompliances, and modified
the financial and other covenants to provide the Company with additional
flexibility to meet its operating plan without violating the covenants in the
future. The amendments also provide for increased interest rates payable to the
banks and Senior Noteholders, security interests in substantially all of the
Company's assets being granted to the lenders, and certain approval requirements
with respect to the sale of the SBQ division. The Company also agreed to pay
modifications fees of approximately $1.1 million. As a result of the increased
interest rates applicable to the amended debt facilities, the expected debt
levels for fiscal 2000 and the expected reduction in capitalized interest, the
Company expects that total interest expense (continuing operations and
discontinued operations) will increase $8 to $9 million over the fiscal 1999
level of $40.2 million. The Company expects to reflect an extraordinary loss on
extinguishment of debt of approximately $1.3 million, or $0.04 per share,
related to the debt restructuring in its financial results for the second
quarter.
In addition, in the event that the Company is unable to sell the SBQ division by
January 31, 2001, the Company will incur a 100 basis point increase in the
interest rates under the Revolving Credit Agreement and each of the Senior
Notes, which would be reduced to 50 basis points upon a subsequent sale of the
SBQ division.
Based upon the current level of the Company's operations and current industry
conditions, the Company anticipates that it will have sufficient resources to
make all required interest and principal payments under the credit agreement and
Senior Notes through December 15, 2001. However, the Company is required to make
significant principal repayments on December 15, 2001 and, accordingly, may be
required to refinance its obligations under the Revolving Credit Agreement and
Senior Notes on or prior to such date. There can be no assurance that any such
refinancing would be possible at such time, or, if possible, that acceptable
terms could be obtained, particularly in view of the Company's high level of
debt, the restrictive covenants under the financing agreements, the Company's
obligations to AIR (discussed below) and the fact that substantially all of the
Company's assets have been pledged to the banks and Senior Noteholders.
Under the Company's debt agreements, a change in a majority of the Company's
Board of Directors including as a result of a contested proxy solicitation, such
as is being waged by a dissident stockholder group, will give rise, among other
things, to the acceleration of the Company's debt obligations and may, as a
result, have a material adverse effect on the Company, its financial condition
and its operations.
In the event of such a change in control, the Company would be required to make
an offer to prepay its Senior Notes which, if accepted, would obligate the
Company to pay 100% of their face amount ($280 million), plus accrued but unpaid
interest, together with a make-whole amount of approximately $9.1 million. Under
the terms of the Company's Revolving Credit Agreement, such a change in control
would constitute an event of default, pursuant to which the lenders may declare
the full amount of the outstanding principal and interest to be immediately due
and payable. Following a change of control, in the absence of the forbearance or
waiver of its Senior Noteholders and lenders, the Company might have to
refinance its
25
<PAGE>
debt obligations. There can be no assurance that the Company could obtain such
forbearances or waivers or that replacement financing could be obtained at a
reasonable cost or an acceptable term. As of September 30, 1999, the Company had
approximately $217 million in borrowings outstanding under its credit agreement.
Additional constraints on the Company's liquidity could occur as a result of the
Company's obligations to purchase direct reduced iron (DRI) from AIR. Although
the AIR project is financed on a non-recourse basis, both the Company and its
joint venture partner have agreed to purchase AIR's DRI production during the
term of the project financing. Pursuant to the DRI purchase commitment, the
Company has agreed to purchase one-half of the output from the facility each
year, if tendered (up to 600,000 metric tons per year). In addition, during the
fourth quarter of fiscal 1999, AIR defaulted on $176.9 million of long-term
project financing debt. The Company, AIR and the Company's joint venture partner
are currently involved in discussions with AIR's lenders that could affect the
timing or amount of AIR's debt service requirements over the remaining term of
AIR's debt agreements, as well as the Company's obligations to AIR under the DRI
purchase commitment.
Although the Company intends to dispose of its interest in AIR as a part of its
overall plan of disposal for the SBQ division, the Company could remain
obligated to purchase DRI from AIR beyond the disposal date. If the Company is
unable to find a buyer to assume its obligations under the AIR purchase
agreement and future market prices for DRI are less than the price the Company
is obligated to pay, the Company will incur losses on future merchant DRI
activities. On the other hand, if the market price of DRI increases to an amount
that exceeds the price payable under the AIR agreements, the Company could
generate future profits from merchant DRI activities. Such losses or profits
will be reflected in continuing operations in future periods until such time as
the Company is no longer obligated under the AIR agreements. Currently, the
market price of DRI is approximately $30 per ton less than the price the Company
is required to pay under the AIR purchase commitment. Assuming the Company
continues to purchase DRI from AIR at its current level of approximately 300,000
metric tons per year and no change in the market price of DRI, the Company will
absorb approximately $9 million per year in excess DRI costs. The Company is
unable to predict whether, or how long, this situation will continue and thus is
unable to predict the amount of future losses that may be incurred under the AIR
purchase agreement.
In addition, pursuant to the agreements recently entered into with the Senior
Noteholders, the Company is generally restricted from making payments to AIR in
excess of the amounts presently required under its agreements relating to AIR
and may be required, subject to certain exceptions set forth in the agreements
with its Senior Noteholders, to obtain the approval of its Senior Noteholders to
enter into an agreement to terminate or settle any of its obligations relating
to AIR.
In July 1998, the Board authorized a stock repurchase program pursuant to which
the Company may purchase up to 1.0 million shares of its common stock in the
open market at prices not to exceed $20. As of December 24, 1998, the Company
had purchased 476,700 shares of its stock pursuant to this program. The Company
has no present intention to resume repurchase under the authorization in the
near term and is prohibited from repurchasing shares under its amended long-term
debt agreements.
Outlook
The success of the Company in the near term will depend, in large part, on the
Company's ability to (a) minimize additional losses in its SBQ operations during
the disposal period; (b) dispose of the SBQ operations (including its interest
in AIR) within the time frame anticipated; and (c) realize sufficient proceeds
from the sale of the SBQ business to enable the Company to reduce its debt and
thus provide more operational flexibility. However, management's outlook for the
continuing operations, which have proven profitable in recent years remains very
positive. The Company expects to complete a successful start-up of the
Cartersville facility in the third quarter of fiscal 2000 which will expand the
Company's merchant product line and leverage melting capacity throughout the
organization. With continued emphasis on a shift in product mix towards the
higher margin merchant products, the Company expects to be able to improve
operating results at its core mini-mills by increasing volumes, reducing costs
and improving gross margins.
26
<PAGE>
While the Company is confident of its ability to realize the benefits of the
strategic restructuring plan, the level of benefits to be realized could be
affected by a number of factors including, without limitations, (a) the
Company's ability (i) to obtain any consents and approvals which may be required
from its creditors to consummate the sale of the SBQ business, (ii) to find a
strategic buyer or buyers willing to acquire the SBQ division and Pacific Coast
at prices that fairly value the assets, and (iii) to operate the Company as
planned in light of the highly leveraged nature of the Company, and (b) changes
in the condition of the steel industry in the United States.
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 management and disposal. Company management is highly
conscious of these regulations and supports an ongoing program to maintain the
Company's strict adherence to required standards. The Company believes that it
is currently in compliance with all known material and applicable environmental
regulations.
Year 2000
The following Year 2000 discussion is provided in response to the Securities and
Exchange Commission's interpretive statement expressing it's view that public
companies should include detailed discussion of Year 2000 issues in the MD&A
section of their public filing.
The Company has completed the major portions of an organized program that was
started in 1997 to assure the Company's information technology systems and
related infrastructure will be Year 2000 compliant. The Company has divided its
Year 2000 issues into five areas including: (1) business systems at corporate
headquarters, (2) business systems at the Cleveland, Ohio operation, (3)
infrastructure systems at all locations, (4) manufacturing systems at all
locations, and (5) facility and support systems at all locations. (The Company
includes certain systems which might not be considered as IT systems, such as
phone switches and certain safety systems, in the facility and support systems
area of the Year 2000 project). The Company's Year 2000 program includes three
phases: (1) an audit and assessment phase designed to identify Year 2000 issues;
(2) a modification phase designed to correct Year 2000 issues (this phase
includes testing of individual modifications as they are installed); and (3) a
testing phase to test entire systems for Year 2000 compliance after individual
modifications have been installed and tested. A dedicated Year 2000 project
manager has been assigned to this project for over two years. Project teams have
been assembled for each area, specific responsibilities have been identified and
specific time lines have been prepared for the activities to take place within
each area of the project. Senior management receives monthly updates on the
progress against the time lines for each strategic area.
The Company has completed Y2K testing of it's business systems. The Company
completed the audit, assessment, and where required, modifications to its
business systems software in December 1998. The Company then completed
comprehensive testing of the business systems at both the corporate headquarters
and at the Cleveland, Ohio operation in January 1999. The upgraded and Y2K
tested business systems software was placed into daily production usage at both
corporate headquarters and at the Cleveland, Ohio operation in February, 1999.
The Company had completed the second phase of its program (modifications and
testing) for the majority of the infrastructure systems, manufacturing systems,
facility and support systems as of June 30, 1999, leaving six months of
contingency time before the December 31, 1999 deadline for completion of Year
2000 modifications of these systems. Appropriate systems testing will be
conducted during the first quarter of fiscal 2000 and problems which are
identified will then be corrected. Certain minor applications,
27
<PAGE>
including desktop computer software, payroll application operating systems and
hardware, limited manufacturing systems and other ancillary applications
continue to require modification and testing.
Management has determined that the costs for correction of the Year 2000 issues,
including any software and hardware changes (but excluding any hardware systems
that would have been replaced in any event) and the cost of personnel involved
in working on this project, will be less than $3 million. The Company estimates
that 80% of the costs have been spent to date. The Year 2000 upgrades are being
funded out of the normal operating funds, and account for less than 25% of the
Company's IT budget.
The Company's Year 2000 program also included investigation of major vendors'
and customers' Year 2000 readiness. The Company used questionnaires, letters and
protocols to determine its vendors' and customers' Year 2000 readiness. The
Company has contacted, for example, energy and scrap vendors and its phone and
data line service vendors to determine their Year 2000 compliance status. If any
such vendors indicate that they will not be Year 2000 compliant, the Company
will develop contingency plans to address the issue, which may include changing
vendors. In addition, the Company has contacted significant customers to
determine their progress towards Year 2000 compliance and to identify issues, if
any, which might develop because of customers' failure to be prepared for Year
2000 issues. In the event issues are identified, the Company expects to try to
develop procedures to permit the Company to continue to supply the customer
involved despite the Year 2000 issues. The Company has been assured by its key
financial institutions that they are Year 2000 compliant.
The Company is nearing completion of its Y2K compliance project and management
of the Company believes it has an effective program in place to resolve the few
remaining year 2000 issues in a timely manner. In the event that the Company
does not complete the remaining tasks, the Company could experience problems
that could result in the temporary interruption of production at some of the
steel making facilities. In addition, disruptions in the economy generally
resulting from Year 2000 issues could also materially adversely affect the
Company. The Company could be subject to litigation for computer systems product
failure, for example, failure to properly date business records. The amount of
the potential liability and lost revenue cannot be reasonably estimated at this
time.
The Company has completed the development of a Year 2000 contingency plan for
its business systems. The plan involves, among other actions, manual
workarounds, increasing inventories and adjusting staffing strategies.
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 and, to a lesser
extent, the availability of lower-priced foreign steel in the Company's market
channels. 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.
Risk Factors That May Affect Future Results; Forward Looking Statements
This annual report includes forward-looking statements based on our current
expectations and projections about future events, including: market conditions;
future financial performance and potential growth; effect of indebtedness;
future cash sources and requirements, including expected capital expenditures;
28
<PAGE>
competition and production costs; strategic plans, including estimated proceeds
from and the timing of asset sales including the sale of the SBQ division; and
the Company's interests in AIR and Pacific Coast; environmental matters and
liabilities; possible equipment losses; Year 2000 issues; labor relations; and
other matters.
These forward-looking statements are subject to a number of risks and
uncertainties, including those identified in Exhibit 99.1 to this Annual Report
on Form 10-K (which is incorporated herein by reference), which could cause our
actual results to differ materially from historical results or those anticipated
and certain of which are beyond our control. The words "believe," "expect,"
"anticipate" and similar expressions identify forward-looking statements. All
forward-looking statements included in this document are based upon information
available to the Company on the date hereof, and the Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. It is important to
note that the Company's actual results could differ materially from those
described or implied in such forward-looking statements. Moreover, new risk
factors emerge from time to time and it is not possible for the Company to
predict all such risk factors, nor can the Company assess the impact of all such
risk factors on its business or the extent to which any factor, or combination
of factors, may cause actual results to differ materially from those described
or implied in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results.
ITEM 7A. QUANTITATIVE AND QUATLITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Sensitive Instruments
The Company is exposed to market risk from financial instruments that could
occur upon adverse changes in interest rates (principally U.S. treasury and
prime bank rates). In order to manage this risk, the Company attempts to
maintain a balance between fixed and variable rate debt. The Company does not
currently use derivative financial instruments. At June 30, 1999, the Company
had fixed-rate long-term debt with a carrying value of $281.4 million and
variable rate borrowings of $240.1 million outstanding. Assuming a hypothetical
10% adverse change in interest rates with no change in the average or
outstanding amounts of long-term debt, the fair value of the Company's fixed
rate debt would decrease by $10.0 million. (However, the Company does not expect
that those debt obligations could be settled or repurchased in the open market
at the lower amount in the ordinary course of business.) The Company also would
incur an additional $1.3 million in interest expense per year on variable rate
borrowings. These amounts are determined by considering the impact of the
hypothetical change in interest rates on the Company's cost of borrowing. The
analysis does not consider the effects of the reduced level of overall economic
activity that could exist in such an environment. Further, in the event of a
change of such magnitude, management would likely take actions to further
mitigate its exposure to the change. However, due to the uncertainty of the
specific actions that would be taken and their possible effects, the sensitivity
analysis assumes no changes in the Company's financial structure.
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BIRMINGHAM STEEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------
1999 1998
-----------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 935 $ 902
Accounts receivable, net of allowance for doubtful accounts of
$586 in 1999 and $1,370 in 1998 72,047 93,023
Inventories 100,330 142,246
Deferred income taxes 27,318 2,276
Other 24,701 24,710
Net current assets of discontinued operations 45,558 87,133
-----------------------------------------------
Total current assets 270,889 350,290
Property, plant and equipment:
Land and buildings 171,089 136,546
Machinery and equipment 464,531 419,009
Construction in progress 18,469 57,579
-----------------------------------------------
654,089 613,134
Less accumulated depreciation (214,527) (182,132)
-----------------------------------------------
Net property, plant and equipment 439,562 431,002
Excess of cost over net assets acquired 17,769 19,897
Other 17,120 30,071
Deferred income taxes 7,638 -
Net non-current assets of discontinued operations 124,488 326,755
-----------------------------------------------
Total assets $ 877,466 $1,158,015
===============================================
</TABLE>
See accompanying notes.
30
<PAGE>
BIRMINGHAM STEEL CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------
1999 1998
-----------------------------------------------
<S> <C> <C>
Liabilities And Stockholders' Equity
Current Liabilities:
Notes payable and current portion of long-term debt $ 10,000 $ 10,000
Accounts payable 61,144 64,016
Accrued payroll expenses 8,026 10,548
Accrued operating expenses 8,105 8,514
Other current liabilities 16,636 19,539
Allowance for operating losses of discontinued operations 56,544 -
-----------------------------------------------
Total current liabilities 160,455 112,617
Deferred income taxes - 47,922
Deferred liabilities 9,167 6,955
Long-term debt, less current portion 469,135 516,439
Minority interest in subsidiary 7,978 13,475
Stockholders' equity:
Preferred stock, par value $.01; authorized: 5, 000 shares - -
Common stock, par value $.01; authorized: 75,000 shares;
issued: 29,836 in 1999 and 29,780 in 1998 298 298
Additional paid-in capital 329,056 331,859
Treasury stock, 150 and 191 shares in 1999 and 1998,
respectively, at cost (791) (2,929)
Unearned compensation (718) (912)
Retained earnings (deficiency) (97,114) 132,291
-----------------------------------------------
Total stockholders' equity 230,731 460,607
-----------------------------------------------
Total liabilities and stockholders' equity $877,466 $1,158,015
===============================================
</TABLE>
See accompanying notes.
31
<PAGE>
BIRMINGHAM STEEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 709,876 $836,875 $667,716
Cost of sales:
Other than depreciation and amortization 568,688 689,347 555,684
Depreciation and amortization 40,227 37,954 32,739
-----------------------------------------------------------------
Gross profit 100,961 109,574 79,293
Pre-operating/start-up costs 12,854 1,305 6,730
Selling, general and administrative expense 36,625 44,214 33,492
Interest expense 24,248 17,261 11,906
-----------------------------------------------------------------
27,234 46,794 27,165
Other income, net 9,930 12,794 4,704
Loss from equity investments (24,563) (18,326) (1,566)
Minority interest in loss of subsidiary 5,497 1,643 2,347
-----------------------------------------------------------------
Income from continuing operations before income taxes 18,098 42,905 32,650
Provision for income taxes 14,814 14,960 12,863
-----------------------------------------------------------------
Income from continuing operations 3,284 27,945 19,787
Discontinued operations:
Loss from discontinued operations, net of income tax
benefit (54,337) (26,316) (5,370)
Loss on disposal of SBQ business, including estimated
losses during disposal period (net of income tax benefit
of $78,704) (173,183) -- --
-----------------------------------------------------------------
Net income (loss) $(224,236) $ 1,629 $ 14,417
=================================================================
Weighted average shares outstanding 29,481 29,674 29,091
=================================================================
Basic and diluted per share amounts:
Income from continuing operations $ 0.11 $ 0.94 $ 0.68
Loss on discontinued operations (7.72) (0.89) (0.18)
-----------------------------------------------------------------
Net income (loss) $ (7.61) $ 0.05 $ 0.50
=================================================================
</TABLE>
See accompanying notes.
32
<PAGE>
BIRMINGHAM STEEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 3,284 $ 27,945 $ 19,787
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 40,227 37,954 32,739
Provision for doubtful accounts receivable 226 41 83
Deferred income taxes 10,267 742 4,196
Minority interest in loss of subsidiary (5,497) (1,643) (2,347)
Gain on sale of equity interest in subsidiaries, idle (49) (5,354) (1,746)
facilities and equipment
Loss from equity investments 24,563 18,326 1,566
Other 2,168 4,035 2,451
Changes in operating assets and liabilities, net of
effects from business acquisitions:
Accounts receivable 20,750 (221) (14,570)
Inventories 41,916 (7,432) (14,160)
Other current assets (9,391) 596 (14,648)
Accounts payable (2,872) 3,638 4,486
Other accrued liabilities (5,834) 6,730 (20,349)
Deferred liabilities 2,212 1,022 327
--------------------------------------------
Net cash provided by (used in) operating activities of
continuing operations 121,970 86,379 (2,185)
Net cash provided by (used in) operating activities of
discontinued operations 2,923 (37,750) 30,792
--------------------------------------------
Net cash provided by operating activities 124,893 48,629 28,607
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (121,808) (66,615) (20,373)
Proceeds from sale/leaseback 75,104 - -
Payment for business acquisition - - (43,309)
Proceeds from sale of equity investment in subsidiaries,
property, plant and equipment and idle facilities 839 29,832 5,567
Equity investments - (15,016) (9,300)
Increase in other non-current assets (2,958) (7,239) (12,522)
--------------------------------------------
Net cash used in investing activities of continuing
operations (48,823) (59,038) (79,937)
Net cash used in investing activities of discontinued
operations (20,239) (18,700) (180,767)
--------------------------------------------
Net cash used in investing activities (69,062) (77,738) (260,704)
</TABLE>
See accompanying notes.
33
<PAGE>
BIRMINGHAM STEEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings and repayments $ (10,000) $ 10,000 $ -
Proceeds from issuance of long-term debt - 1,500 -
Borrowings under revolving credit facility 1,993,941 2,056,773 771,785
Payments on revolving credit facility (2,031,245) (2,025,390) (579,229)
Stock compensation plan, net 3 358 310
Purchase of treasury stock (3,209) (2,318) -
Issuance of treasury stock - - 19,188
Cash dividends paid (5,169) (11,871) (11,661)
-------------------------------------------
Net cash provided by (used in) financing activities of
continuing operations (55,679) 29,052 200,393
Net cash provided by (used in) financing activities of
discontinued operations (119) - 26,000
Net cash provided by (used in) financing activities (55,798) 29,052 226,393
-------------------------------------------
Net increase (decrease) in cash and cash equivalents 33 (57) (5,704)
Cash and cash equivalents at:
Beginning of year 902 959 6,663
End of year $ 935 $ 902 $ 959
============================================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 35,504 $ 29,231 $ 19,383
Income taxes paid (refunded), net (1,801) 6,132 13,808
</TABLE>
See accompanying notes.
34
<PAGE>
BIRMINGHAM STEEL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended June 30, 1999, 1998, and 1997
----------------------------------------------------------------------------------------------
Common Stock Additional Treasury Stock Retained Total
---------------- Paid-in --------------------- Unearned Earnings Stockholders'
Shares Amount Capital Shares Amount Compensation (Deficiency) Equity
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at June 30, 1996 29,680 $ 297 $331,430 (1,071) $(21,148) $(2,165) $ 139,777 $ 448,191
Options exercised, net of
tax benefit 56 - 359 15 314 (541) - 132
Public offering - - (650) 1,000 19,838 - - 19,188
Reduction of unearned
compensation - - - - - 1,281 - 1,281
Net income - - - - - - 14,417 14,417
Cash dividends declared,
$.40 per share - - - - - - (11,661) (11,661)
---------------------------------------------------------------------------------------------
Balances at June 30, 1997 29,736 297 331,139 (56) (996) (1,425) 142,533 471,548
Options exercised, net of
tax benefit 44 1 720 24 385 (261) - 845
Purchase of treasury stock - - - (159) (2,318) - - (2,318)
Reduction of unearned
compensation - - - - - 774 - 774
Net income - - - - - - 1,629 1,629
Cash dividends declared,
$.40 per share - - - - - - (11,871) (11,871)
---------------------------------------------------------------------------------------------
Balances at June 30, 1998 29,780 298 331,859 (191) (2,929) (912) 132,291 460,607
Options exercised and shares
issued (repurchased) under
stock compensation plans, net 56 - (108) 56 716 (615) - (7)
Purchase of treasury stock - - - (477) (3,209) - - (3,209)
Issuance of treasury shares
to employee benefit plan - - (2,695) 462 4,631 - - 1,936
Reduction of unearned
compensation - - - - - 809 - 809
Net loss - - - - - - (224,236) (224,236)
Cash dividends declared,
$.175 per share - - - - - - (5,169) (5,169)
---------------------------------------------------------------------------------------------
Balances at June 30, 1999 29,836 $ 298 $329,056 (150) $ (791) $ (718) $ (97,114) $ 230,731
=============================================================================================
</TABLE>
See accompanying notes.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999, 1998 and 1997
1. Description of the Business and Significant Accounting Policies
Description of the Business
Birmingham Steel Corporation (the Company) owns and operates facilities in the
mini-mill sector of the steel industry. In addition, the Company owns equity
interests in scrap collection and processing operations. From these facilities,
which are located across the United States and Canada, the Company produces a
variety of steel products including semi-finished steel billets, reinforcing
bars and merchant products such as rounds, flats, squares, strips, angles and
channels. These products are sold primarily to customers in the steel
fabrication, manufacturing and construction business. The Company has regional
warehouse and distribution facilities which sell its finished products.
In addition, the Company's SBQ (special bar quality) line of business, which is
reported in discontinued operations (See Note 2), produces high-quality rod, bar
and wire that is sold primarily to customers in the automotive, agricultural,
industrial fastener, welding, appliance, and aerospace industries in the United
States and Canada.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Equity Method of Accounting
Investments in 50% or less owned affiliates where the Company has substantial
influence over the affiliate are accounted for using the equity method of
accounting. Under the equity method, the investment is carried at cost of
acquisition plus additional investments and advances and the Company's share of
undistributed earnings or losses since acquisition. Reserves are provided where
management determines that the investment or equity in earnings is not
realizable.
Revenue Recognition
Revenue from sales of steel products is recorded at the time the goods are
shipped or when title passes, if later.
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.
Long-lived Assets and Depreciation
The Company recognizes impairment losses on long-lived assets used in
operations, including allocated goodwill, when impairment indicators are present
and the undiscounted cash flows estimated to be generated by those assets are
less than their carrying values. Long-lived assets held for disposal are valued
at the lower of carrying amount or fair value less cost to sell.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Property, plant and equipment are stated at cost, less accumulated depreciation.
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-five 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 of goodwill applicable to continuing operations was approximately
$8,947,000 and $6,819,000 at June 30, 1999 and 1998, respectively. Accumulated
amortization of goodwill applicable to discontinued operations amounted to
$8,932,000 and $7,339,000 at June 30, 1999 and 1998, respectively (See Note 2).
The carrying value of goodwill is reviewed if the facts and circumstances
suggest that it may be impaired. If such review indicates that goodwill will not
be recoverable based upon the undiscounted expected future cash flows over the
remaining amortization period, the Company's carrying value of the goodwill is
reduced by the excess of carrying value over fair value.
Income Taxes
Deferred income taxes are provided for temporary differences between taxable
income and financial reporting income in accordance with FASB Statement 109,
Accounting for Income Taxes.
Earnings per Share
Earnings per share are presented in accordance with FASB Statement No. 128,
Earnings per Share. Basic earnings per share is computed using the weighted
average number of outstanding common shares for the period. Diluted earnings per
share is computed using the weighted average number of outstanding common shares
and any dilutive equivalents. Options to purchase 1,061,000, 827,000 and 544,000
shares of common stock at average prices of $15.89, $17.21, and $16.99 per share
were outstanding at June 30, 1999, 1998 and 1997, respectively, but were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares.
Pre-operating and Start-up Costs
The Company recognizes pre-operating and start-up costs as expense when
incurred. The Company considers a facility to be in "start-up" until it reaches
commercially viable production levels. During the start-up period, costs
incurred in excess of expected normal levels, including non-recurring operating
losses, are classified as pre-operating/start-up costs in the Consolidated
Statements of Operations.
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.
Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (as amended by Statement No. 137, Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133). This pronouncement, which becomes effective in fiscal 2002,
is not expected to have a material effect on the Company's financial position or
results of operations because the Company does not presently use derivatives or
engage in hedging activities.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. Discontinued Operations
On August 18, 1999, the Board of Directors authorized management to sell the
Company's SBQ operations, which includes rod, bar and wire facilities in
Cleveland, Ohio; a high quality melt shop in Memphis, Tennessee; and the
Company's 50% interest in American Iron Reduction, L.L.C. (AIR). The Company's
decision to discontinue its SBQ operations was attributable to continuing
financial and operational challenges which have required a major commitment of
management and financial resources and have constrained the Company's financial
flexibility while significantly increasing its debt. Immediately after the
Board's authorization, the Company formalized its plan of disposal and
authorized an investment banking firm to coordinate the efforts to effect the
sale of the SBQ operations. The Company expects that the sale will be completed
by May 2000. Accordingly, as required by APB Opinion 30 (as interpreted by EITF
95-18) the operating results of the SBQ line of business for fiscal 1999 and all
prior periods presented herein have been restated and reported in discontinued
operations in the accompanying financial statements.
As required by generally accepted accounting principles, the Company recorded a
$173,183,000 estimated loss ($5.87 per share) on the sale of the SBQ operations,
which included a $56,544,000 provision (pre-tax) for estimated losses during the
expected disposal period. These charges are combined with the fiscal 1999
operating losses of the division ($54,337,000, net of income tax benefits) and
presented as discontinued operations in the fiscal 1999 financial statements.
The proceeds expected to be realized on the sale of the SBQ operations and the
expected operating losses during the disposal period are based on management's
estimates of the most likely outcome, considering, among other things, informal
appraisals from the Company's investment bankers and the Company's knowledge of
valuations for steel production assets. However, the actual amounts ultimately
realized on sale and losses incurred during the expected disposal period could
differ materially from the amounts assumed in arriving at the loss on disposal.
To the extent actual proceeds or operating losses during the expected disposal
period differ from the estimates that are reflected in the 1999 financial
statements, the variance will be reported in discontinued operations in future
periods.
Management expects to use the proceeds from the sale to: (a) settle its
obligations under a lease agreement for equipment at the Memphis facility
(approximately $74,000,000); (b) pay estimated transaction expenses
($8,000,000); and (c) retire industrial revenue bonds and other debt
specifically associated with the SBQ assets ($42,224,000). The balance of the
proceeds will be used to pay down a portion of the Company's other long-term
debt.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Operating results of the discontinued SBQ operations were as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Net sales $270,398 $299,144 $311,233
Costs of sales 298,618 291,319 304,331
------------------------------------------------
Gross profit (loss) (28,220) 7,825 6,902
Start-up costs 37,881 32,933 3,904
Selling, general and administrative
expenses 9,501 4,431 3,178
Interest expense 11,016 11,747 8,289
Other income (expense) 1,357 1,174 557
------------------------------------------------
Loss before income taxes (85,261) (40,112) (7,912)
Income tax benefit (30,924) (13,796) (2,542)
------------------------------------------------
Net loss $(54,337) $(26,316) $ (5,370)
================================================
</TABLE>
Start-up costs reflected in discontinued operations primarily represent excess
production costs and other expenses, such as employee training, incurred at the
Memphis facility, which began start-up operations in November 1997. Although the
Memphis facility achieved a break-even production run rate in the month of March
1999, it has been unable to consistently sustain break-even production levels.
Accordingly, its excess production and other start-up costs are shown separately
in start-up costs in the preceding table.
Corporate overhead expenses, historically allocated and charged to the SBQ
operations, were reversed and allocated back to continuing operations because
those expenses were not considered to be directly attributable to discontinued
operations. Expenses allocated back to continuing operations totaled $7,728,000
and $3,627,000 in fiscal 1997 and 1998, respectively. No corporate overhead
expenses were allocated to discontinued operations in 1999. However, beginning
July 1, 1998 the Company reorganized its executive management, sales and
administration functions to more closely align the organization with the
specific needs of each respective business unit. As a part of that realignment,
management, sales, and administrative personnel were assigned to specific
business units, including SBQ, and the costs associated with those personnel
became direct expenses of their respective business units.
Interest expense attributable to discontinued operations includes interest on
industrial revenue bonds and other debt specifically associated with the assets
to be sold plus an allocation of interest on general corporate credit
facilities. Interest on borrowings under the Company's general credit facilities
is allocated to discontinued operations based on the ratio of net assets of the
discontinued operations before long-term debt to total consolidated net assets
before long-term debt, except that the total amount allocated is limited to the
expected reduction in interest expense that will occur upon sale of the SBQ
assets and the use of the sale proceeds to repay debt.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Assets and liabilities of the discontinued SBQ operations have been reflected in
the consolidated balance sheets as current or non-current based on the original
classification of the accounts, except that current liabilities are netted
against current assets and non-current liabilities are netted against non-
current assets. Net non-current assets also reflect a valuation allowance of
$195,342,000 to recognize the estimated loss on disposal. The following is a
summary of assets and liabilities of discontinued operations (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998
--------------------------
<S> <C> <C>
Current assets:
Accounts receivable, net $ 32,414 $ 28,831
Inventories 61,471 101,030
Other 1,303 980
Current liabilities:
Accounts payable (35,190) (28,799)
Other accrued expenses (14,440) (14,909)
--------------------------
Net current assets of discontinued operations $ 45,558 $ 87,133
==========================
Non-current assets:
Property, plant and equipment, net of
accumulated depreciation $ 325,999 $326,493
Goodwill and other non-current assets 23,580 25,320
Investment in American Iron Reduction, LLC 13,889 17,998
Provision for estimated loss on disposal
of discontinued operations (195,342) -
Non-current liabilities:
Long-term debt (42,224) (42,381)
Other non-current liabilities (1,414) (675)
--------------------------
Net non-current assets of discontinued operations $ 124,488 $326,755
==========================
</TABLE>
An accrual for the estimated (pre-tax) losses to be incurred during the expected
disposal period of $56,544,000 is presented separately in the accompanying
consolidated balance sheets for fiscal 1999. Such amount excludes corporate
overhead, but includes approximately $13,800,000 of interest expense, which
represents the amount allocable to the SBQ operations up to the estimated
reduction in consolidated interest expense that is expected to occur upon
receipt of the proceeds from the sale.
There are no material contingent liabilities related to discontinued operations,
such as product or environmental liabilities or litigation, that are expected to
remain with the Company after the disposal of the SBQ business.
American Iron Reduction, L.L.C.
Through June 30, 1999, the Company had made equity investments of $23,750,000 in
AIR, a 50% owned joint venture that operates a direct reduced iron (DRI)
facility in Convent, Louisiana. AIR commenced operations in January 1998. For
financial reporting purposes, AIR is accounted for as an equity method investee.
The Company recognizes its share of operating profits or losses of AIR as a
component of cost of sales because AIR is a captive supplier of raw materials.
Substantially all of the Company's DRI purchases from AIR are used at the
Company's Memphis facility as a substitute for premium, low-residual scrap.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company intends to dispose of its investment in AIR as a part of its plan of
disposal for the SBQ line of business. Accordingly, the Company's net investment
in AIR and its share of AIR's operating results for all periods presented in the
accompanying consolidated financial statements are included in discontinued
operations.
Following is condensed financial information of AIR for the periods indicated
(in thousands):
<TABLE>
<CAPTION>
June 30,
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
Balance Sheet Data:
Current assets $ 23,864 $ 39,431
Non-current assets 199,655 210,446
Current liabilities 8,768 29,019
Long-term debt ($178,908 in default at June 30,
1999) 184,908 184,908
Equity 29,843 35,950
</TABLE>
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
Statement of Operations Data:
Net sales $ 32,455 $ 38,230
Gross profit (loss) 4,603 (61)
Net loss (7,988) (4,020)
</TABLE>
Under the AIR Equity Contribution Agreement, the Company may be obligated to
make additional equity investments in AIR of not more than $3,750,000.
In connection with AIR's project financing agreements, the Company has agreed to
purchase 50% of AIR's annual DRI production, if tendered (up to 600,000 metric
tons) at prices which are equivalent to AIR's total production cost (excluding
depreciation and amortization but including debt service payments under AIR's
project finance obligations). The Company's DRI purchases from AIR amounted to
$43,683,000 (297,000 metric tons) and $24,178,000 (177,000 metric tons) in 1999
and 1998, respectively.
The fixed and determinable portion of the Company's DRI purchase commitment,
representing 50% of AIR's debt service on project finance indebtedness through
August 1, 2026, is scheduled as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year Ending June 30:
2000 $ 3,748
2001 14,712
2002 15,165
2003 15,671
2004 16,257
Thereafter 81,423
--------
$146,976
========
</TABLE>
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The AIR project is financed on a non-recourse basis to the Company and the other
venture partner, although the partners have agreed to purchase one-half of the
output of the facility, if tendered. During the fourth quarter of fiscal 1999,
AIR defaulted on $178,908,000 of non-recourse long-term project finance debt.
The Company, AIR and the other venture partner are currently involved in workout
discussions that could affect the timing or amount of AIR's debt service
requirements over the remaining term of the debt agreements, as well as the
Company's obligations under the DRI purchase agreement.
Although the Company intends to dispose of its interest in AIR as a part of its
overall plan of disposal for the SBQ line of business, the Company could remain
obligated to purchase DRI from AIR beyond the disposal date. If the Company is
unable to find a buyer to assume its obligations under the AIR purchase
agreement and future market prices for DRI are less than the price the Company
is obligated to pay, the Company will incur losses on future merchant DRI
activities. On the other hand, if the market price of DRI increases to an amount
that exceeds the price payable under the AIR agreements, the Company could
generate future profits from merchant DRI activities. Such losses or profits
will be reflected in continuing operations in future periods until such time as
the Company is no longer obligated under the AIR agreements. Currently, the
market price of DRI is less than the price the Company is required to pay under
the AIR agreements. Based on such current market prices, such losses would
aggregate approximately $9,000,000 per year on a pre-tax basis, assuming the
Company continues to purchase DRI at a normalized level of 300,000 metric tons
per year. However, the Company is unable to predict whether, or how long, the
current market pricing will continue and thus is unable to predict the amount of
future losses that may be incurred under the AIR purchase agreement.
Accordingly, no provision for estimated losses on future merchant DRI activities
has been provided in the accompanying financial statements.
3. Investment in Affiliated Companies
On September 24, 1997, the Company purchased approximately 25% of the
outstanding shares of Laclede Steel Company (LCLD), a public company, for
$14,953,000. Through June 30, 1998, the Company accounted for its investment in
LCLD using the equity method. For the period from September 24, 1997 through
June 30, 1998, the Company recognized $2,715,000 in losses on its investment in
LCLD representing its share of LCLD's reported net loss for the period and
amortization of the excess of the purchase price of the LCLD shares over the
Company's proportionate interest in the net assets of LCLD. In June 1998, the
Company determined that the remaining carrying amount of its investment in LCLD
was impaired because, among other things: the market price of LCLD common shares
had declined significantly since the Company made its investment; LCLD had
continued to incur operating losses; and LCLD announced a restructuring plan
that had a material effect on its financial position and future results of
operations. Accordingly, the Company recognized a $12,383,000 impairment loss in
the fourth quarter of fiscal 1998 to reduce the carrying amount of its
investment. The loss is included in Loss from equity investments in the
Consolidated Statements of Operations.
On September 18, 1996, the Company and an affiliate of Mitsui & Co., Ltd. formed
Pacific Coast Recycling, LLC (Pacific Coast), a 50/50 joint venture established
to operate in southern California as a collector, processor and seller of scrap.
Through June 30, 1999, the Company has invested approximately $29,400,000 in
Pacific Coast, including loans of $20,150,000, and has recognized losses of
$4,930,000, $3,144,000, and $1,126,000 in fiscal 1999, 1998 and 1997,
respectively, in applying the equity method. During fiscal 1999, the Company
continually evaluated its investment in Pacific Coast in the context of current
conditions in the Asian scrap export market as well as the ability of Pacific
Coast to competitively participate in the domestic scrap market. After carefully
reviewing its options, management and the Board of Directors determined that
Pacific Coast was no longer a strategic fit for the Company's core mini-mill
operations and decided not to continue its support of the operations. The
Company then re-evaluated the carrying amount of its investment and concluded
that it should be written down in the fourth quarter of fiscal 1999. The
provision for loss of $19,275,000 is reflected in "Loss from equity investments"
within continuing operations in the accompanying Consolidated Statements of
Operations.
The Company has guaranteed 50% of Pacific Coast's obligations under an operating
lease that requires Pacific Coast to pay annual rent of approximately $3,783,000
through November 2019.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company also owns a 50% interest in Richmond Steel Recycling Limited (RSR),
a scrap processing facility located in Richmond, British Columbia, Canada, which
is accounted for using the equity method.
The Company records its share of income and losses in equity investees on a one
month lag. Investments in and advances to equity investees included in
continuing operations have been reflected in other assets in the balance sheet
and are as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998
--------------------------
<S> <C> <C>
Pacific Coast Recycling, LLC, net of provision of
$19,275 in 1999 $ -- $ 23,605
Richmond Steel Recycling Limited 4,015 4,352
--------------------------
$ 4,015 $ 27,957
==========================
</TABLE>
The following condensed financial information of Pacific Coast has been derived
from its financial statements for the periods indicated (data for RSR is not
significant and therefore has not been presented) (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998
--------------------------
<S> <C> <C>
Balance Sheet Data:
Current assets $ 7,325 $13,136
Non-current assets 34,331 36,603
Current liabilities (including advances from the
Company of $10,000 in 1999 and 1998) 24,991 23,618
Non-current liabilities (including advances from the
Company of $10,150 and $10,000 in 1999 and 1998,
respectively) 21,537 21,872
Equity (deficit) (4,872) 4,249
</TABLE>
<TABLE>
<CAPTION>
Period from
September 18,
1996 (inception)
Years Ended June 30, to June 30,
-----------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C>
Statement of Operations Data:
Net sales $37,183 $65,644 $18,720
Gross profit 10,319 15,555 5,553
Net loss (9,122) (7,044) (3,707)
</TABLE>
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. Inventories
Inventories as of June 30 were valued at the lower of cost (first-in, first-out)
or market as summarized in the following table (in thousands):
<TABLE>
<CAPTION>
Continuing Operations Discontinued Operations
---------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------
<S> <C> <C> <C> <C>
Raw materials and mill supplies $ 33,652 $ 45,020 $19,006 $ 16,413
Work-in-progress 13,986 17,833 26,942 66,492
Finished goods 52,692 79,393 15,523 18,125
---------------------------------------------------------
$100,330 $142,246 $61,471 $101,030
=========================================================
</TABLE>
5. Capital Expenditures and Interest Expense
Capital expenditures, capitalized interest on qualifying assets under
construction and total interest incurred for continuing and discontinued
operations were as follows (in thousands):
<TABLE>
<CAPTION>
Continuing Discontinued Consolidated
Operations Operations Total
---------------------------------------------------------
<S> <C> <C> <C>
Capital expenditures:
Fiscal 1999 $121,808 $ 18,869 $140,677
Fiscal 1998 66,615 79,952 146,567
Fiscal 1997 20,373 176,607 196,980
Capitalized interest:
Fiscal 1999 $ 4,345 $ 620 $ 4,965
Fiscal 1998 1,791 4,695 6,486
Fiscal 1997 2,594 6,254 8,848
Total interest incurred:
Fiscal 1999 $ 28,593 $ 11,636 $ 40,229
Fiscal 1998 19,052 16,442 35,494
Fiscal 1997 14,500 14,543 29,043
</TABLE>
At June 30, 1999, the estimated costs to complete authorized projects under
construction amounted to $12,126,000.
6. Short-Term Borrowing Arrangements
The Company has a five year, unsecured Revolving Credit Agreement which provides
for unsecured borrowings of up to $300,000,000 at variable market interest
rates. Approximately $109,332,000 was available under this credit facility at
June 30, 1999.
Under a line of credit arrangement for short-term borrowings, the Company may
borrow up to $20,000,000 with interest at market rates mutually agreed upon by
the Company and the lender. At June 30, 1999, $20,000,000 was available under
this facility.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following information relates to the Company's borrowings under short-term
credit facilities (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------------
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Maximum amount outstanding $20,000 $35,000 $180,374
Average amount outstanding 14,780 9,951 79,956
Weighted average interest rate 5.9% 6.0% 5.8%
</TABLE>
7. Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
---------------------------------------
1999 1998
---------------------------------------
<S> <C> <C>
Continuing Operations:
Senior Notes, $130,000 face amount; interest at 7.83% and 7.28% at
June 30, 1999 and 1998, respectively, due in 2005 $130,000 $130,000
Senior Notes, $150,000 face amount; interest at 7.60% and 7.05% at
June 30, 1999 and 1998, respectively, due in 2002 and 2005 150,000 150,000
$300,000 Revolving line of credit, payable in 2002; weighted average
interest of 6.88% and 6.40%at June 30, 1999 and 1998, respectively,
payable in 2002 186,635 223,939
Capital lease obligations, interest rates principally ranging from 43%
to 45% of bank prime, payable in 1999 and 2001 12,500 12,500
---------------------------------------
479,135 516,439
Less: current portion (10,000) -
---------------------------------------
$469,135 $516,439
=======================================
Discontinued Operations:
Promissory Note, interest at 5.0%, payable in installments through 2008 $ 1,382 $ 1,500
Industrial Revenue Bonds, interest rates principally ranging from 44%
to 45% of bank prime, payable in 2025 and 2026 41,000 41,000
---------------------------------------
42,382 42,500
Less: current portion (158) (119)
---------------------------------------
$ 42,224 $ 42,381
=======================================
</TABLE>
The aggregate fair value of the Company's long-term debt obligations is
approximately $495,067,000 compared to the carrying value of $521,517,000 at
June 30, 1999. The fair value of the Company's fixed rate Senior Notes is
estimated using discounted cash flow analysis, based on the new rates that will
apply to the Senior Notes on the effective date of the amendments described
below. The discounted present value calculation does not include prepayment
penalties that might be paid under the debt agreements and thus prevent the
Company from realizing any of the implied gain.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Future maturities of long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
Continuing Discontinued Consolidated
Operations Operations Total
------------------------------------------------------------------
<S> <C> <C> <C>
Fiscal Year Ending June 30:
2000 $ 10,000 $ 158 $ 10,158
2001 - 99 99
2002 215,135 138 215,273
2003 105,500 145 105,645
2004 29,500 152 29,652
Thereafter 119,000 41,690 160,690
------------------------------------------------------------------
$479,135 $42,382 $521,517
==================================================================
</TABLE>
At June 30, 1999 the Company was not in compliance with the interest coverage
covenants pertaining to its $150,000,000 and $130,000,000 Senior Notes, its
$300,000,000 Revolving Credit Agreement and letter of credit agreements
underlying its capital lease and industrial revenue bond obligations. On October
13, 1999, the Company and its lenders executed amendments to the debt and letter
of credit agreements. Among other things, the lenders and noteholders waived
their right to call the debt as a result of the previously existing violations
and agreed to amend the financial covenants. In return, the Company granted the
lenders a security interest in substantially all assets of the Company and
agreed to pay interest (described below) at higher rates. The Company also
agreed to pay modification fees of approximately $1,100,000.
The new covenants require the Company to achieve varying levels of earnings
before interest, taxes, depreciation and amortization (EBITDA) and fixed charge
coverage ratios. In addition, quarterly dividend and all other restricted
payments, as defined, are limited to the lesser of $750,000 or 50% of income
from continuing operations. The covenants also restrict capital expenditures and
establish minimum tangible net worth requirements. The amended Senior Note and
Revolving Credit Agreements also require the Company to use the net proceeds
from the sale of the SBQ business (See Note 2) to reduce its outstanding
obligations under those agreements. In addition, in the event that the Company
is unable to sell the SBQ division by January 31, 2001, the Company will incur a
100 basis point increase in the interest rates under the Revolving Credit
Agreement and each of the Senior Notes, which would be reduced to 50 basis
points upon a subsequent sale of the SBQ division.
Based upon the current level of the Company's operations and current industry
conditions, the Company anticipates that it will have sufficient resources to
make all required interest and principal payments under the credit agreement and
Senior Notes through December 15, 2001. However, the Company is required to make
significant principal repayments on December 15, 2001 and, accordingly, may be
required to refinance its obligations under the Revolving Credit Agreement and
Senior Notes on or prior to such date. There can be no assurance that any such
refinancing would be possible at such time, or, if possible, that acceptable
terms could be obtained, particularly in view of the Company's high level of
debt, the restrictive covenants under the financing agreements, the Company's
obligations to AIR (See Note 2) and the fact that substantially all of the
Company's assets have been pledged to the banks and Senior Noteholders.
Following is a summary of significant provisions of the amended debt agreements.
Revolving Credit Agreement--As amended, the Revolving Credit Agreement continues
to provide for maximum outstanding borrowings of $300,000,000 until maturity in
March 2002, except that availability will be limited to $250,000,000 in October
1999, $260,000,000 in November 1999 and $270,000,000 in the month of December
1999. Availability under the facility will be reduced when and to the extent
that proceeds from the sale of the SBQ business are applied to the outstanding
balance due at the time of the
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
sale. Interest will continue at variable rates based on either the London
Interbank Offer Rate (LIBOR) or at the lenders' prime rates in effect from time
to time. The spread for LIBOR base rate borrowings under the Revolving Credit
Agreement will increase from 1% at June 30, 1999 to 2.25% for outstanding
borrowings after the effective date of the amendment (2% for LIBOR based
borrowings in excess of $235,000,000). The spread for prime rate borrowings will
increase from .5% at June 30, 1999 to .75% for outstanding borrowings after the
effective date of the amendment (.5% for prime rate borrowings in excess of $235
million).
Senior Notes--The weighted average interest rates on the Senior Notes, which
remain fixed for the terms of the obligations, were increased 2.2% (versus the
rates in effect at June 30, 1999) to 10.03% on the $130,000,000 Senior Notes and
9.8% on the $150,000,000 Senior Notes. Scheduled principal payments on the
Senior Notes were not affected by the amendment, except that a portion of the
net proceeds from the planned sale of the SBQ business must be applied to reduce
the principal. As modified, the present value of the remaining payments due on
the Senior Notes exceeds the present value of the scheduled debt service
payments prior to the modification. Accordingly, for accounting purposes the
modification of the Senior Note obligations will be accounted for as a debt
extinguishment. The Company expects to incur an extraordinary loss on
extinguishment of approximately $1,300,000, or $.04 per share, in its financial
results for the second quarter of fiscal 2000.
Change in Control Provisions--Under the Company's debt agreements, a change in a
majority of the Company's Board of Directors, including as a result of a
contested proxy solicitation, such as is currently being waged by a dissident
shareholder group, could give rise, among other things, to the acceleration of
the Company's debt obligations and may, as a result, have a material adverse
effect on the Company, its financial condition and its operations. In the event
of such a change in control, the Company would be required to make an offer to
prepay its Senior Notes which, if accepted, would obligate the Company to pay
100% of their face amount ($280 million), plus accrued but unpaid interest,
together with a "make-whole" amount of approximately $9.1 million. Under the
terms of the Company's Revolving Credit Agreement, such a change in control
would constitute an event of default, pursuant to which the lenders may declare
the full amount of the outstanding principal and interest to be immediately due
and payable.
Following a change in control, in the absence of the forbearance or waiver from
its Senior Noteholders and lenders the Company might have to refinance its debt
obligations. There can be no assurance that the Company could obtain such
forbearances or waivers or that replacement financing could be obtained at a
reasonable cost or an acceptable term.
In addition, a change in control of a majority of the Board of Directors of the
Company could trigger the payment of approximately $15,441,000 to key officers
and employees under the Company's Executive Severance Plan assuming the
employment of such officers and employees were terminated following such a
change in control.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. Commitments
The Company leases office space and certain production equipment under operating
lease agreements. 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 (in thousands):
<TABLE>
<CAPTION>
Continuing Discontinued Consolidated
Operations Operations Total
-------------------------------------------------
<S> <C> <C> <C>
Fiscal Year Ending June 30,
2000 $12,668 $ 7,274 $ 19,942
2001 12,132 7,063 19,195
2002 12,071 6,897 18,968
2003 11,980 6,791 18,771
2004 11,282 6,706 17,988
Thereafter 36,877 63,033 99,910
-------------------------------------------------
$97,010 $97,764 $194,774
=================================================
</TABLE>
Rental expense under operating lease agreements charged to continuing operations
was $1,931,000, $681,000, and $866,000 in fiscal 1999, 1998 and 1997,
respectively. Rental expense charged to discontinued operations was $7,135,000,
$3,306,000, and $289,000 during those same periods.
The Company has a fifteen year operating lease on production equipment in the
Memphis melt shop. Future minimum lease payments required by the lease are
reflected in the preceding table under discontinued operations. The Company has
options to purchase the equipment both prior to and at the end of the lease for
amounts that are expected to approximate fair market value at the exercise date
of the options. The remaining lease obligation is expected to be either settled
or assumed by the buyer in connection with the disposal of the SBQ operations
(See Note 2).
In fiscal 1999, the Company executed two sale/leaseback transactions with
respect to equipment at the Cartersville facility. Total proceeds from the
sale/leaseback transactions were $75,104,000, which approximated the fair value
of the equipment at the dates of the transactions. The Company has options to
purchase the equipment both prior to and at the end of the lease terms, which
range from eight to ten years, for amounts that are expected to approximate fair
market value at the exercise date of the options.
Under a 1995 contract with Electronic Data Systems (EDS), an information
management and consulting firm, the Company is obligated to pay $4,935,000 per
year through 2005 for information systems development, technical support and
consulting services.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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):
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
Deferred Tax Liabilities:
Tax depreciation in excess of book depreciation $(87,081) $(70,092)
Deferred Tax Assets:
Allowance for loss on disposal of discontinued operations 60,214
Allowance for operating losses of discontinued operations 21,478 -
Federal net operating loss carryforwards 15,144 -
State net operating loss carryforwards 3,742 -
AMT credit carryforwards 7,988 7,455
Deferred compensation 3,339 2,878
Worker's compensation 1,155 1,771
Inventories 2,415 2,118
Equity investments 17,157 4,168
Other, net 6,754 6,056
----------------------------
Gross deferred tax assets 139,386 24,446
Less valuation allowance (17,349) -
----------------------------
Deferred tax assets 122,037 24,446
----------------------------
Net deferred tax asset (liability) $ 34,956 $(45,646)
============================
Balance Sheet Classification:
Current asset $ 27,318 $ 2,276
Non-current asset (liability) 7,638 (47,922)
----------------------------
$ 34,956 $(45,646)
============================
</TABLE>
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The provisions for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------
1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
Continuing operations:
Current:
Federal $ 662 $ 13,234 $ 7,236
State 3,885 984 1,431
----------------------------------------
4,547 14,218 8,667
Deferred:
Federal 12,005 1,126 3,300
State (1,738) (384) 896
----------------------------------------
10,267 742 4,196
----------------------------------------
$ 14,814 $ 14,960 $12,863
========================================
Discontinued operations:
Current $ (18,759) $ (6,801) $(2,689)
Deferred (90,869) (6,995) 147
----------------------------------------
$(109,628) $(13,796) $(2,542)
========================================
</TABLE>
The provisions for income taxes applicable to continuing operations differ from
the statutory tax amounts as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------
1999 1998 1997
----------------------------------------
<S> <C> <C> <C>
Tax at statutory rates during the year $ 6,334 $ 14,588 $11,101
State income taxes, net 459 387 1,512
Amortization of non-deductible goodwill 125 122 158
Valuation allowance for capital loss carryforwards 8,045 - -
Other (149) (137) 92
----------------------------------------
$ 14,814 $ 14,960 $12,863
========================================
</TABLE>
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table reconciles the income tax benefits applicable to
discontinued operations to the federal statutory tax amounts (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Expected tax benefit at statutory rates during the $(118,002) $(13,638) $(2,690)
year
State income taxes, net (9,557) (305) (309)
Non-deductible goodwill 8,583 542 542
Valuation allowance for state net operating loss
carryforwards and capital loss carryforwards not
expected to be realized 9,304 - -
Other 44 (395) (85)
--------------------------------------------------------
$(109,628) $(13,796) $(2,542)
========================================================
</TABLE>
The Company's federal net operating loss for fiscal 1999 was approximately
$60,000,000. Of this amount, $17,000,000 will be carried back to reduce taxes
payable for prior periods. The remaining $43,000,000 will be carried forward,
and may be used to reduce taxes due in future periods for up to 20 years. The
alternative minimum tax credit carryforwards in the preceding table may be
carried forward indefinitely. In addition, the Company has state net operating
loss carryforwards of approximately $73,000,000, the majority of which will
expire in 15 years.
Due primarily to the disallowance of a tax benefit related to capital loss
carryforwards created by the 1999 write off of the Company's investment in
Pacific Coast Recycling, the Company provided a valuation allowance in the tax
provision applicable to continuing operations in the amount of $8,045,000. In
addition, the Company provided a valuation allowance in the tax provision
applicable to discontinued operations in the amount of $9,304,000 related
primarily to state net operating loss carryforwards which will most likely
expire before being utilized, because upon the disposal of the SBQ operations,
the Company does not expect to have continuing operations in states where the
carryforwards reside.
10. Stock Compensation Plans
The Company has four stock compensation plans that provide for the granting of
stock options, stock appreciation rights and restricted stock to officers,
directors and employees. The exercise price of stock option awards issued under
these plans equals or exceeds the market price of the Company's common stock on
the date of grant. Stock options under these plans are exercisable one to five
years after the grant date, usually in annual installments. No stock
appreciation rights have been issued. In addition, the Company maintains a stock
accumulation plan, which provides for the purchase of restricted stock, vesting
in three years, to participants in lieu of a portion of their cash compensation.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The status of the Company's stock compensation plans is summarized below as of
June 30, 1999:
<TABLE>
<CAPTION>
Total Number of Options or Shares
--------------------------------------------------------
Available for Reserved for
Future Grant or Issuance Under
Authorized Purchase the Plan
--------------------------------------------------------
<S> <C> <C> <C>
1986 Stock Option Plan 900,000 -- 134,399
1990 Management Incentive Plan 900,000 83,950 517,000
1995 Stock Accumulation Plan 500,000 341,960 158,040
1996 Director Stock Option Plan 100,000 64,000 36,000
1997 Management Incentive Plan 900,000 29,439 870,561
</TABLE>
The Company records stock-based compensation under the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25) and related Interpretations. An alternative method of accounting exists
under FASB Statement No. 123, Accounting for Stock-Based Compensation, which
requires the use of option valuation models; however, these models were not
developed for use in valuing employee stock compensation awards. Under APB 25,
because the exercise price of the Company's employee stock options equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized for stock options. The Company recognizes
compensation expense on grants of restricted stock and stock grants under the
1995 Stock Accumulation Plan based on the intrinsic value of the stock on the
date of grant amortized over the vesting period. Total compensation expense
recognized for stock-based employee compensation awards was $541,000, $721,000
and $747,000 in 1999, 1998 and 1997, respectively.
As required by Statement 123, the Company has determined pro forma net income
and earnings per share as if it had accounted for its employee stock
compensation awards using the fair value method of that Statement. The fair
value for these awards was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 5.76% 5.38% 6.25%
Dividend yield 2.48% 2.15% 1.96%
Volatility factor 60% 54% 75%
Weighted average expected life:
Stock options 5 years 5 years 5 years
Restricted stock awards 4 years 4 years 4 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock compensation awards have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock compensation awards.
For purposes of pro forma disclosures, the estimated fair value of the stock
compensation awards is amortized to expense over the appropriate vesting period.
The effect on results of operations and earnings per share is not expected to be
indicative of the effects on the results of operations and earnings per share in
future years. The pro forma calculations include stock compensation awards
granted beginning in fiscal
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1996. The Company's pro forma information follows (in thousands except for
earnings per share information):
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------------------
1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
Pro forma:
Income from continuing operations $ 2,815 $27,377 $18,745
Income per share from continuing operations 0.10 0.92 0.64
Net income (loss) (224,705) 1,061 13,375
Net income (loss) per share (7.62) 0.03 0.46
</TABLE>
A summary of the Company's stock option activity, and related information for
the years ended June 30 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Options Price Options Price Options Price
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-
beginning of year 1,009,165 $16.89 851,876 $16.35 445,212 $15.42
Granted 964,000 5.95 258,000 18.50 543,000 16.70
Exercised - - (51,111) 9.45 (35,054) 8.85
Canceled (318,544) 14.23 (49,600) 16.70 (101,282) 16.62
---------- ---------- ---------
Outstanding-end of
year 1,654,621 10.99 1,009,165 16.89 851,876 16.35
========== ========== =========
Exercisable at end
of year 455,463 16.90 445,493 16.04 385,919 15.81
========== ========== =========
Weighted-average
fair value of options
granted during year $ 2.86 $ 8.28 $ 9.71
====== ====== ======
</TABLE>
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Summary information about the Company's stock options outstanding at June 30,
1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted
Average Weighted Number of Weighted
Contractual Average Options Average
Number of Period in Exercise Exercise
Range of Exercise Prices Options Years Price Price
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.31 --$5.25 706,000 9.49 $ 4.82 - -
$9.08 --$11.08 206,400 8.90 9.61 6,000 $ 9.08
$14.08 --$20.00 739,721 5.78 17.18 446,963 16.92
$31.88 2,500 4.72 31.88 2,500 31.88
----------- ----------
$4.31--$31.88 1,654,621 7.75 10.99 455,463 16.90
=========== ==========
</TABLE>
In addition to the stock option activity presented in the preceding table, the
Company granted 61,720, 7,550 and 24,500 shares of restricted stock in 1999,
1998 and 1997, respectively. The weighted average fair value of these awards was
$7.35 in 1999, $15.93 in 1998 and $16.41 in 1997. The Company also issued
60,505, 30,187 and 25,989 shares in 1999, 1998 and 1997, respectively, under the
Stock Accumulation Plan.
11. Deferred Compensation and Employee Benefits
The Company maintains a defined contribution 401(K) plan that covers
substantially all non-union employees. The Company makes both discretionary and
matching contributions to the plan based on employee compensation and
contributions. Company contributions charged to continuing operations amounted
to $3,911,000, $2,911,000 and $2,272,000 in fiscal 1999, 1998 and 1997,
respectively. Discontinued operations includes charges of $866,000, $577,000 and
$662,000 related to the plan for those same periods.
Certain officers and key employees participate in the Executive Retirement and
Compensation Deferral Plan (ERCDP), a non-qualified deferred compensation plan
which allows participants to defer specified percentages of base and bonus pay,
and provides for Company contributions. Under the new ERCDP agreements, the
Company recognizes compensation costs as contributions become vested. Investment
performance gains and losses on each participant's plan account result in
additional compensation costs to the Company. To fund its obligation under this
Plan, the Company has purchased life insurance policies on the covered
employees. The Company's obligations to participants in the Plan are reported in
deferred liabilities.
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 Statements No. 106 or No. 112.
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. Business Acquisition
On November 15, 1996, the Company and Atlantic Steel Industries, Inc. (Atlantic)
formed Birmingham Southeast, LLC (Birmingham Southeast), a limited liability
company owned 85% by the Company and 15% by an affiliate of Atlantic. Upon
formation of Birmingham Southeast on December 2, 1996 the Company contributed
the assets of its Jackson, Mississippi facility to Birmingham Southeast, and
Birmingham Southeast purchased the operating assets of Atlantic located in
Cartersville, Georgia for $43,309,000 in cash and assumed liabilities
approximating $44,257,000. The purchase price of the Cartersville, Georgia
assets was allocated based on the fair value of the assets acquired and
liabilities assumed as follows (in thousands):
<TABLE>
<S> <C>
Current assets $ 31,667
Property, plant and equipment 63,400
Other non-current assets, primarily goodwill 9,964
------------
Total assets acquired 105,031
Fair value of liabilities assumed (44,257)
Minority interest (17,465)
------------
Total purchase price $ 43,309
============
</TABLE>
13. 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 management and disposal. 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.
14. Other Income
In fiscal 1998, the Company sold idle properties and equipment for approximately
$26,900,000 and recognized (pre-tax) gains of approximately $5,200,000. The
Company also received $4,400,000 in refunds from electrode suppliers in both
1999 and 1998 that related to electrodes purchased in prior years. These amounts
are included in "other income, net" from continuing operations in the
Consolidated Statements of Operations.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. Products and Geographic Areas
Net sales to external customers, by product type and geographic area were as
follows for the periods indicated (in thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------
<S> <C> <C> <C>
Continuing Operations:
By Product Class:
Reinforcing bar $386,421 $439,160 $387,683
Merchant products 283,942 316,184 235,390
Semi-finished billets 27,610 70,562 35,197
Strand, mesh, and other 11,903 10,969 9,446
--------------------------------------------------------------------
$709,876 $836,875 $667,716
====================================================================
By Geographic Area
United States $672,034 $778,262 $619,401
Canada 37,440 57,961 47,958
All others 402 652 357
--------------------------------------------------------------------
$709,876 $836,875 $667,716
====================================================================
Discontinued Operations:
By Product Class:
High-quality rod, bar and wire $267,116 $296,774 $309,655
High-quality semi-finished billets 1,955 - -
Other 1,327 2,370 1,578
--------------------------------------------------------------------
$270,398 $299,144 $311,233
====================================================================
By Geographic Area
United States $266,310 $295,326 $308,680
Canada 4,088 3,818 2,553
--------------------------------------------------------------------
$270,398 $299,144 $311,233
====================================================================
</TABLE>
Substantially all of the Company's long-lived tangible assets are located in the
continental United States. Revenues in the preceding table are attributed to
countries based on the location of the customers. No single customer accounted
for 10% or more of consolidated net sales.
16. Shareholder Rights Plan
On January 16, 1996, the Company's Board of Directors adopted a shareholder
rights plan. Under the plan, Rights to purchase stock, at a rate of one Right
for each share of common stock held, were distributed to stockholders of record
on January 19, 1996. The Rights generally become exercisable after a person or
group (i) acquires 10% or more of the Company's outstanding common stock or (ii)
commences a tender offer that would result in such a person or group owning 10%
or more of the Company's common stock. When the Rights first become exercisable,
a holder will be entitled to buy from the Company a unit consisting of one
one-hundredth of a share of Series A Junior Participating Preferred Stock of the
Company at a purchase price of $74. In the event that a person acquires 10% or
more of the Company's common stock, each Right not owned by the 10% or more
stockholder would become exercisable for common stock of the Company having a
market value equal to twice the exercise price of the Right. Alternatively,
after such stock acquisition, if the Company is acquired in a merger or other
business combination or 50% or more of its assets or earning power are sold,
each Right not owned by the 10% or more stockholder would become exercisable for
common stock of the party which has engaged in a transaction with the Company
having a market value equal to twice the exercise price of the Right. Prior to
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the time that a person acquires 10% or more of the Company's common stock, the
Rights are redeemable by the Board of Directors at a price of $.01 per right.
The Rights expire on January 16, 2006, except as otherwise provided in the plan.
57
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited; in thousands, except per share data)
<TABLE>
<CAPTION>
1999 Quarters (1)
----------------------------------------------------
First Second Third Fourth
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 207,502 $ 166,227 $ 152,180 $ 183,967
Gross profit $ 29,048 $ 23,324 $ 19,409 $ 29,180
Pre-operating/start-up costs $ 1,363 $ 1,732 $ 5,837 $ 3,992
Income (loss) from continuing
operations $ 10,926 $ 7,849 $ 1,887 $ (17,378) (3)
Loss from discontinued
operations $ (9,901) $ (12,815) $ (17,518) $ (187,286) (2)
Net income (loss) $ 1,025 $ (4,966) $ (15,631) $ (204,664) (2) (3)
Weighted average shares outstanding 29,488 29,254 29,509 29,674
========= ========= ========== ==========
Basic and diluted per share
amounts:
Income from continuing
operations $ 0.37 $ 0.27 $ 0.06 $ (0.59)
Loss on discontinued operations (0.34) (0.44) (0.59) (6.31)
--------- --------- ---------- ----------
Basic and diluted earnings (loss)
per share $ 0.03 $ (0.17) $ (0.53) $ (6.90)
========= ========= ========== ==========
Cash dividends declared per
share $ 0.100 $ 0.025 $ 0.025 $ 0.025
========= ========= ========== ==========
</TABLE>
58
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited; in thousands, except per share data)
(Continued)
<TABLE>
<CAPTION>
------------------------------------------------------------------
1998 Quarters (1)
------------------------------------------------------------------
First Second Third Fourth
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 216,868 $ 200,320 $ 205,479 $ 214,208
Pre operating/start-up
costs $ 288 $ 122 $ 279 $ 616
Gross profit $ 28,299 $ 24,295 $ 26,693 $ 30,287
Income (loss) from
continuing
operations $ 9,299 $ 8,572 (4) $ 6,092 $ 3,982 (5)
Loss from discontinued
operations $ (2,054) $ (5,795) $ (10,240) $ (8,227)
Net income (loss) $ 7,245 $ 2,777 (4) $ (4,148) $ (4,245)(5)
Weighted average shares
outstanding 29,685 29,710 29,654 29,647
============ =========== ============ ===========
Basic and diluted
per share amounts:
Income from continuing
operations $ 0.31 $ 0.29 $ 0.21 $ 0.13
Loss on discontinued
operations (0.07) (0.20) (0.35) (0.27)
------------ ----------- ------------ -----------
Basic and diluted earnings
(loss) per share $ 0.24 $ 0.09 $ (0.14) $ (0.14)
============ =========== ============ ===========
Cash dividends declared
per share $ 0.10 $ 0.10 $ 0.10 $ 0.10
============ =========== ============ ===========
</TABLE>
(1) The operating results of the SBQ line of business for fiscal 1999 and all
prior periods presented herein have been restated and reported in discontinued
operations. See Note 2 to the Consolidated Financial Statements.
(2) Reflects $173,183 loss on disposal of SBQ line of business, including
estimated losses during the disposal period (net of income tax benefit of
$78,704). See Note 2 to Consolidated Financial Statements
(3) Includes provision for loss of $19,275,000 on the Company's investment in
Pacific Coast Recycling, LLC.
(4) Includes $3,368 of pre-tax gains on sales of idle facilities and equipment.
(5) Includes the effect of (a) impairment loss on the investment in Laclede
Steel Company -$12,383; (b) gain on sale of idle facility in Ballard,
Washington -$1,857; and (c) settlements received from electrode suppliers -
$4,414.
59
<PAGE>
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, 1999 and 1998, 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, 1999. 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. The 1999 and 1998 financial
statements of Pacific Coast Recycling, LLC (a 50% owned joint venture), have
been audited by other auditors whose report, which has been furnished to us,
included an explanatory paragraph describing an uncertainty regarding the
ability of Pacific Coast Recycling, LLC to continue as a going concern. Our
opinion on the 1999 and 1998 consolidated financial statements and schedule,
insofar as it relates to data included for Pacific Coast Recycling, LLC, is
based solely on the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and, for 1999 and 1998, the report of other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Birmingham Steel Corporation at June 30, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1999, 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,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Birmingham, Alabama
September 15, 1999,
except for Note 7, as to
which the date is October 12, 1999
60
<PAGE>
Independent Auditors' Report
The Members
Pacific Coast Recycling, LLC:
We have audited the balance sheets of Pacific Coast Recycling, LLC as of June
30, 1999 and 1998, and the related statements of operations, members' capital
(deficit) and cash flows for the years ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of Pacific Coast Recycling, LLC as
of June 30, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The financial statements have been prepared assuming that Pacific Coast
Recycling, LLC will continue as a going concern. As discussed in note 3 to the
financial statements, the Company has suffered recurring losses from operations,
has a net capital deficiency and as of June 30, 1999, the members have stated
that they will no longer provide letters confirming their continuing financial
support of the Company. These parent companies provide a significant amount of
the operations of the Company as described in note 9 to the financial
statements. These circumstances raise substantial doubt about the entity's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Los Angeles, CA
July 30, 1999
61
<PAGE>
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 in Birmingham Steel Corporation's 1999 Proxy
Statement, 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 in Birmingham Steel Corporation's 1999 Proxy
Statement, 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 in Birmingham Steel Corporation's 1999 Proxy
Statement, 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
Not applicable.
PART IV
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, 1999 and 1998
Consolidated Statements of Operations - Years ended June 30, 1999, 1998 and
1997
Consolidated Statements of Changes in Stockholders' Equity - Years ended June
30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended June 30, 1999, 1998 and
1997
Notes to Consolidated Financial Statements - June 30, 1999, 1998 and 1997
Report of Ernst & Young LLP, Independent Auditors
Independent Auditors Report (KPMG LLP)
62
<PAGE>
ITEM 14 (a) 2. INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule is included in item 14
(d) of this report.
Form 10-K
Schedules Description
- --------- ---------------------------
II 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.
<PAGE>
ITEM 14 (b). REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter ended June 30, 1999.
ITEM 14 (c) EXHIBITS
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 By-laws of the Registrant as amended on August 3, 1999 (incorporated
by reference to Exhibit 3.1 from Current Report on Form 8-K filed
August 11, 1999)
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)
4.1.1 First Amendment to $130,000,000 Senior Note Purchase Agreement dated
October 18, 1996 (to be filed by amendment to this Form 10-K)
4.1.2 Second Amendment to $130,000,000 Senior Note Purchase Agreement dated
December 14, 1998 (incorporated by reference to Exhibit 10.3 from Form
10-Q for quarter ended December 31, 1998)
4.1.3 Waiver and Third Amendment to $130,000,000 Senior Note Purchase
Agreement dated as of October 12, 1999 (to be filed by amendment to
this Form 10-K)
4.1.4 Amended and Restated $130,000,000 Senior Note Purchase Agreement dated
as of October 12, 1999 (to be filed by amendment to this Form 10-K)
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
64
<PAGE>
(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).
4.2.1 Amendment to $150,000,000 Senior Note Purchase Agreement dated
December 14, 1998 (incorporated by reference to Exhibit 10.2 from Form
10-Q for quarter ended December 31, 1998)
4.2.2 Waiver and Second Amendment to $150,000,000 Senior Note Purchase
Agreement dated as of October 12, 1999 (to be filed by amendment to
this Form 10-K)
4.2.3 Amended and Restated $150,000,000 Senior Note Purchase Agreement dated
as of October 12, 1999 (to be filed by amendment to this Form 10-K)
4.3 Letter from Birmingham Steel Corporation to Senior Noteholders dated
October 13, 1999 (to be filed by amendment to this Form 10-K)*
4.4 Shareholder Rights Plan of Registrant (incorporated by reference from
Form 8-K filed January 23, 1996)
4.5 Reimbursement Agreement, dated as of October 1, 1996, between
Birmingham Steel Corporation and PNC Bank, Kentucky, Inc.
(incorporated by reference from Form 10-Q for quarter ended December
31, 1996, exhibit 4.1)
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 Annual Report on Form 10-K for year
ended June 30, 1995, Exhibit 10.3)
10.4 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 Registrant Statement No. 33-945, Exhibit 10.6.3, filed
November 20, 1985)
10.5 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)**
10.6 Restated Birmingham Steel Corporation 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)**
10.7 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)**
10.8 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,
1993, Exhibit 10.12)
10.8.1 Third Amendment to Lease Agreement, dated November 30, 1993, between
Torchmark Development Corporation and Birmingham Steel Corporation
(incorporated by reference from Annual Report on Form 10-K for year
ended June 30, 1997, Exhibit 10.8.1)
10.8.2 Fourth Amendment to Lease Agreement, dated June 13, 1994, between
Torchmark Development Corporation and Birmingham Steel Corporation
(incorporated by reference from Annual Report on Form 10-K for year
ended June 30, 1997, Exhibit 10.8.2)
65
<PAGE>
10.8.3 Fifth Amendment to Lease Agreement, dated September 6, 1995, between
Torchmark Development Corporation and Birmingham Steel Corporation
(incorporated by reference from Annual Report on Form 10-K for year
ended June 30, 1997, Exhibit 10.8.3)
10.8.4 Sixth Amendment to Lease Agreement, dated April 11, 1997, between
Torchmark Development Corporation and Birmingham Steel Corporation
(incorporated by reference from Annual Report on Form 10-K for year
ended June 30, 1997, Exhibit 10.8.4)
10.8.5 Seventh Amendment to Lease Agreement, dated April 11, 1997, between
Torchmark Development Corporation and Birmingham Steel Corporation
(incorporated by reference from Annual Report on Form 10-K for year
ended June 30, 1997, Exhibit 10.8.5)
10.8.6 Eighth Amendment to Lease Agreement, dated April 11, 1997, between
Torchmark Development Corporation and Birmingham Steel Corporation
(incorporated by reference from Annual Report on Form 10-K for the
year ended June 30, 1998, Exhibit 10.8.6)
10.9 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)**
10.10 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)**
10.11 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)**
10.11.1 Amendment to Employment Agreement, dated January 5, 1996 between
Registrant and Robert A. Garvey dated August 10, 1998 (incorporated by
reference from Annual Report on Form 10-K for year ended June 30, 1998
Exhibit 10.11.1)**
10.11.2 Second Amendment to Employment Agreement, dated January 5, 1996
between Registrant and Robert A. Garvey dated September 20, 1999 *, **
10.12 Employment Agreement, dated May 11, 1999, between Registrant and Brian
F. Hill*, **
10.12.1 Amendment to Employment Agreement, dated September 21, 1999, between
Registrant and Brian F. Hill*, **
10.13 Employment Agreement, dated September 20, 1999, between Registrant and
Kevin E. Walsh*, **
10.15 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)**
10.16 Lease Agreement, dated January 7, 1997, between Torchmark Development
Corporation and Birmingham Southeast LLC (incorporated by reference
from Annual Report on Form 10-K for year ended June 30, 1998, Exhibit
10.13)
10.174 Director Stock Option Plan of the Registrant (incorporated by
reference from Form 10-Q for quarter ended September 30, 1996, exhibit
10.1)**
10.18 Director Compensation Plan of the Registrant (to be filed by amendment
to this Form 10-K)**
10.19 Amended and Restated Executive Severance Plan of the Registrant*, **
10.20 Chief Executive Officer Incentive Compensation Plan of the Registrant
(incorporated by reference from Form 10-Q for quarter ended September
30, 1996, exhibit 10.2)**
10.21 Equity Contribution Agreement among American Iron Reduction, L.L.C.,
GS Technologies Operating Co., Inc., Birmingham Steel Corporation and
Nationsbank, N.A., dated August 30, 1996 (incorporated by reference
from Form 10-Q for quarter ended September 30, 1996, exhibit 10.3)
66
<PAGE>
10.22 DRI Purchase Agreement between Birmingham Steel Corporation and
American Iron Reduction, L.L.C., dated as of August 30, 1996
(incorporated by reference from Form 10-Q for quarter ended September
30, 1996, exhibit 10.4)
10.23 Operating Agreement between Birmingham Steel Corporation and Raw
Material Development Co., Ltd., dated as of September 18, 1996
(incorporated by reference from Form 10-Q for quarter ended September
30, 1996, exhibit 10.5)
10.24 Asset Purchase Agreement, dated as of October 31, 1996, among Mitsui &
Co., Ltd., R. Todd Neilson, as Chapter 11 Trustee for the bankruptcy
estate of Hiuka America Corporation, All-Ways Recycling Company, B&D
Auto & Truck Salvage, and Weiner Steel Corporation (incorporated by
reference from Form 10-Q for quarter ended December 31, 1996, exhibit
10.1)
10.25 Contribution Agreement, dated as of November 15, 1996, among IVACO,
Inc., Atlantic Steel Industries, Inc., Birmingham Steel Corporation
and Birmingham Southeast, LLC (incorporated by reference from Current
report on Form 8-K filed December 12, 1996)
10.26 $300 million Credit Agreement, dated as of March 17, 1997 by and among
Birmingham Steel Corporation, as Borrower, the financial institutions
party hereto and their assignees under section 12.5.(d), as Lenders,
PNC Bank, National Association and The Bank of Nova Scotia, as Co-
agents and Nationsbank, N.A. (South), as Agent and as Arranger
(incorporated by reference from Form 10-Q for quarter ended March 31,
1997, exhibit 10.1)
10.26.1 First Amendment to Credit Agreement dated June 23, 1998 (incorporated
by reference to Exhibit 10.2 from Current Report on Form 8-K filed
September 30, 1999)
10.26.2 Second Amendment to Credit Agreement dated September 30, 1998
(incorporated by reference to Exhibit 10.1 from Form 10-Q for quarter
ended December 31, 1998)
10.26.3 Third Amendment to Credit Agreement dated July 27, 1999 (incorporated
by reference to Exhibit 10.4 from Current Report on Form 8-K filed
September 30, 1999)
10.26.4 Fourth Amendment to Credit Agreement dated September 28, 1999
(incorporated by reference to Exhibit 10.5 from Current Report on Form
8-K filed September 30, 1999)
10.26.5 Fifth Amendment to Credit Agreement dated October 12, 1999 (to be
filed by amendment to this Form 10-K)
10.26.6 Collateral Agency and Intercreditor Agreement dated October 12, 1999
(to be filed by amendment to this Form 10-K)
10.27 Executive Retirement and Compensation Deferral Plan of the Registrant
(incorporated by reference from Annual Report on Form 10-K for year
ended June 30, 1998, Exhibit 10.22)**
10.28 1997 Management Incentive Plan of the Registrant (incorporated by
reference from a Registration Statement on Form S-8, Registration No.
333-46771, filed February 24, 1998, Exhibit 4.6).**
22.1 Subsidiaries of the Registrant*
23.1 Consent of Ernst & Young LLP, Independent Auditors*
23.2 Accountants' Consent (KPMG LLP)*
27 Financial Data Schedule*
99.1 Risk Factors that May Affect Future Operating Results*
* Being filed herewith
** Denotes a management contract or compensatory plan or arrangement required to
be filed as an exhibit to this report.
ITEM 14 (d) FINANCIAL STATEMENTS
The list of financial statements and schedules referred to in Items 14(a)(1) and
14(a)(2) is incorporated herein by reference.
67
<PAGE>
BIRMINGHAM STEEL CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance Balance
at Charged to at
Beginning Costs End of
of Year and Expenses Deductions Year
---------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended June 30, 1999:
Deducted from assets accounts:
Allowance for doubtful accounts $1,838 $ 367 $ 998 $ 1,207
Provision for estimated losses for
SBQ division during disposal period - 56,544 - 56,544
Provision for estimated loss on
disposal of discontinued operations - 195,342 - 195,342
-----------------------------------------------------
$1,838 $252,643 $ 126 $253,093
=====================================================
Year Ended June 30, 1998:
Deducted from assets accounts:
Allowance for doubtful accounts $1,797 $ 1,250 $1,209 $ 1,838
-----------------------------------------------------
$1,797 $ 1,250 $1,209 $ 1,838
=====================================================
Year Ended June 30, 1997:
Deducted from assets accounts:
Allowance for doubtful accounts $1,554 $ 543 $ 300 $ 1,797
-----------------------------------------------------
$1,554 $ 543 $ 300 $ 1,797
=====================================================
</TABLE>
68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the Undersigned, thereunto duly authorized.
BIRMINGHAM STEEL CORPORATION
/s/ Robert A. Garvey 10/13/99
- -----------------------------------------------
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.
<TABLE>
<S> <C>
/s/ E. Mandell de Windt 10/13/99 /s/ Robert A. Garvey 10/13/99
- ----------------------------------------------- ----------------------------------------
E. Mandell de Windt Date Robert A. Garvey Date
Chairman - Executive Committee Chairman of the Board, Chief
Director Executive Officer, Director
(Principal Executive Officer)
/s/ Robert D. Kennedy 10/13/99 /s/ C. Stephen Clegg 10/13/99
- ----------------------------------------------- ----------------------------------------
Robert D. Kennedy Date C. Stephen Clegg Date
Director Director
/s/ John H. Roberts 10/13/99 /s/ E. Bradley Jones 10/13/99
- ----------------------------------------------- ----------------------------------------
John H. Roberts Date E. Bradley Jones Date
Director Director
/s/ William J. Cabaniss, Jr. 10/13/99 /s/ Richard de J. Osborne 10/13/99
- ----------------------------------------------- ----------------------------------------
William J. Cabaniss, Jr. Date Richard de J. Osborne Date
Director Director
/s/ Alfred C. DeCrane, Jr. 10/13/99 /s/ Kevin E. Walsh 10/13/99
- ----------------------------------------------- ----------------------------------------
Alfred C. DeCrane, Jr. Date Kevin E. Walsh Date
Director Executive Vice President - Finance
Chief Financial Officer
(Principal Financial Officer and
Accounting Officer)
</TABLE>
69
<PAGE>
EXHIBIT 10.11.2
AMENDMENT TO EMPLOYMENT AGREEMENT
This agreement, dated as of September 20, 1999, is by and between Birmingham
Steel Corporation, a Delaware Corporation (the "Company"), and Robert A. Garvey
(the "Executive") and amends the agreement (the "Employment Agreement") dated
January 5, 1996, as amended as of August 10, 1998, between the Executive and the
Company.
WHEREAS, the Company and the Executive wish to revise and amend the Employment
Agreement in certain respects;
NOW THEREFORE for good and sufficient consideration, the receipt of which is
hereby acknowledged, it is agreed as follows:
1. Upon termination of Executive's employment with the Company for any reason
(including any such termination following the expiration of the Employment
Period or the term of the Employment Agreement), the Company shall provide for
the continued benefit of Executive for the remainder of Executive's life all
benefits equivalent to the benefits provided under the Company's medical, dental
and prescription drug plans, programs or arrangements, whether group or
individual and whether written or unwritten, in which the Executive was entitled
to participate or did participate at any time during the 6-month period prior to
the termination date, such benefits to be continued at the same level and at no
greater cost to Executive than was in effect during such 6-month period;
provided, however, that the coverage hereunder shall be secondary to any
- -------- -------
coverage provided to the Executive from a subsequent employer and, following
attainment by the Executive of age 65, the coverage provided hereunder shall be
secondary to coverage provided to the Executive by Medicare or other public
insurance.
2. The Executive shall participate in the Company's Executive Severance Plan
in accordance with the terms and conditions hereof. In the event the Executive
becomes entitled to severance payments and benefits both under the Executive
Severance Plan and under the Employment Agreement, then the Company shall pay or
provide the Executive (a) the higher of the cash severance payment under the
Executive Severance Plan and the Early Termination Payment or the Special
Termination Payment (as applicable) under the Employment Agreement and (b)
employee benefit continuation for the longer of the periods set forth in the
Executive Severance Plan and the Employment Agreement; provided, however, that
in all cases, the
<PAGE>
provisions of paragraph 1 hereof shall apply with respect to medical, dental and
prescription drug plan coverage continuation following termination of
Executive's employment.
3. All other provisions of the Employment Agreement shall be unchanged and
remain in full force an effect (except for the amendment to the Employment
Agreement dated August 10, 1998 which is hereby superseded).
In witness whereof, the Company has caused this Agreement to be executed by its
duly authorized Director and the Executive has hereunto set his hand as of the
date in year first above written.
___________________________________
Witness:____________________ By:________________________________
Its:_______________________________
Witness:____________________ Executive:__________________________
2
<PAGE>
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT ("Agreement") is made this 11th day of May 1999, between
Birmingham Steel Corporation, a Delaware corporation (the "Company"), and Brian
F. Hill ("Executive").
RECITALS
--------
WHEREAS, the Company desires to employ Executive on the conditions set
forth below, and to obtain from Executive certain covenants and agreements more
fully described below, which covenants and agreements are intended by the
parties to inure to the benefit of the Executive and his heirs or legal
representatives, and the Company and any of its affiliates, subsidiaries,
successors and assigns; and
WHEREAS, Executive will or may be entrusted with confidential and
proprietary business and/or technical information of the Company, trained and
instructed with respect to the Company's business and operations, and met and
developed relationships with the Company's clients and customers; and
WHEREAS, Executive desires to accept such employment, subject to all the
terms and conditions set forth below.
NOW, THEREFORE, in consideration of the foregoing, and in further
consideration of the mutual covenants and agreements set forth below, the
parties, each intending to be legally bound, covenant and agree as follows:
1. Employment. The Company hereby employs Executive and Executive hereby
----------
accepts such employment upon the terms and conditions set forth in this
Agreement.
2. Duties. During the Employment Period (as hereinafter defined), the
------
Executive shall serve as Chief Operating Officer of the Company and with such
duties and responsibilities as are customarily assigned to such position, or
such other duties and responsibilities as may from time to time be assigned to
him by the Board of Directors of the Company (the "Board") or the Chief
Executive Officer of the Company. Executive shall report directly to the Chief
Executive Officer of the Company and shall have executive responsibility for the
operating results of the Company. The Compensation Committee shall review
Executive's performance and duties within one year of the Effective Date of this
Agreement in connection with adding, at the sole discretion of the Committee,
the title and duties as President. Such other duties assigned to Executive
shall be consistent with Executive's basic duties and position as Chief
Operating Officer and will not require Executive to violate any laws. Executive
shall, at all times during employment, devote substantially
<PAGE>
all of his business time, attention, energies, efforts and skills, with
undivided loyalty to the business of the Company, and use his best efforts to
promote the interest and business of the Company. While employed with the
Company, Executive shall not be engaged in any other business activity in
competition with the Company, whether or not such business activity is pursued
for gain, profit or other pecuniary advantage. Such prohibition against engaging
in other business activities shall not preclude Executive from attending to
personal business and investments or from involvement with professional, civic
and charitable organizations, as long as such participation does not interfere
with Executive's duties to the Company.
3. Employment Period. Unless and until this Agreement is terminated
-----------------
pursuant to Section 14 hereof, the Company shall employ the Executive for the
period commencing on June 21, 1999 (the "Effective Date") and ending on the
fifth anniversary of the Effective Date. The term of this Agreement may be
extended as mutually agreed by the parties hereto; provided, however, that the
Company shall notify the Executive at least 180 days prior to the end of the
term, including any extension thereof, of the Company's desire not to extend or
further extend the term of this Agreement. The period during which the
Executive is employed pursuant to this Agreement, including any extension
thereof, shall be referred to as the "Employment Period."
4. Compensation and Related Matters.
--------------------------------
(a) Base Salary. During the Employment Period, the Executive shall
-----------
receive an initial annual base salary (the "Base Salary") of $300,000. The Base
Salary shall be payable in accordance with the Company's regular payroll
practice for its senior executives, as in effect from time to time. Base Salary
shall be reviewed at least annually and shall not be decreased during the term
of this Agreement except commensurate with a reduction in senior executive
salaries generally.
(b) Bonus. During the Employment Period, the Executive shall be
-----
eligible to receive cash bonuses as part of the Company's Management Incentive
Bonus Plan at 50% of Base Salary for achievement of 100% of target goals, with a
maximum bonus of 150% of Base Salary; provided, however, that the Executive
shall receive on or before September 15, 1999 a cash bonus for the 1999 fiscal
year (ending June 30, 1999) equal to $150,000.
(c) Restricted Stock Award. As of the Effective Date, the Company
----------------------
shall grant to Executive eight thousand (8,000) shares of restricted common
stock ("Restricted Shares") pursuant to the terms of the Company's 1997
Management Incentive Plan; provided, however, that one-fourth (1/4) of such
Restricted Shares shall vest in Executive and become nonforfeitable upon each of
the first four anniversaries of the Effective Date.
(d) Executive Retirement and Compensation Deferral Plan. Executive
---------------------------------------------------
shall be entitled to participate in the Company's Executive Retirement and
Compensation Deferral Plan pursuant to the terms and conditions thereof and on
terms at least as favorable as those provided to the Company's senior executives
generally. Executive shall be credited with sufficient years of service with
Cargill Incorporated to allow him to qualify for retirement under the Executive
Retirement and Compensation Deferral Plan upon attainment of age 60.
2
<PAGE>
(e) 401(k) Plan and Stock Accumulation Plan(s). Executive shall be
------------------------------------------
entitled to participate in the Company's 401(k) Plan and the Stock Accumulation
Plan(s) pursuant to the terms and conditions thereof and on terms at least as
favorable as those provided to the Company's executives generally.
(f) Stock Option Plan(s). Executive shall be entitled to participate
--------------------
in the Company's stock option plan(s) pursuant to the terms and conditions
thereof and on terms at least as favorable as those provided to the Company's
executives generally but including options for not less than 50,000 shares in
August of both 2000 and 2001 in accordance with the Company's normal schedule
for granting options; provided, however, that the Company will grant to the
Executive, effective as of the Effective Date, the option to purchase one
hundred thousand (100,000) shares of the Company's common stock (the "Initial
Options") at an option price equal to the closing price quoted on the New York
Stock Exchange on the date of the grant. Such options shall, to the greatest
extent possible, qualify as incentive stock options under Code Section 421,
except that, if permitted by the relevant stock option plan, the options shall
be exercisable for a period of not less than one year after the Executive's
employment ends pursuant to a Termination Without Cause or Resignation for Good
Reason, unless otherwise extended by the Compensation Committee. The Initial
Options shall become exercisable as to 20% of the number of shares of common
stock subject thereto upon each of the first five anniversary dates of the
Effective Date if the Executive remains employed by the Company as of such dates
or as otherwise provided herein.
(g) Welfare Benefit Plans and Fringe Benefits. Executive shall be
-----------------------------------------
entitled to participate in the Company's medical and dental plans, group life,
accidental death and travel accident insurance plans and disability insurance
plans pursuant to the terms and conditions thereof and on terms at least as
favorable as those provided to the Company's executives generally. Nothing in
this Agreement shall preclude the Company or any affiliate of the Company from
terminating or amending any general employee benefit plan or program from time
to time; provided such amendment applies to senior executives generally and does
not reduce any benefits accrued prior to the date of such amendment. Executive
shall be entitled to all fringe benefits that are available to the Company's
executives generally.
(h) Vacation. Executive shall be entitled to twenty (20) days of
--------
vacation during the initial year of employment and each year of full employment
thereafter, exclusive of legal holidays, as long as the scheduling of the
Executive's vacation does not interfere with the Company's normal business
operations.
(i) Initial Employment Bonus. The Company shall pay to Executive a
------------------------
cash bonus of $538,000 payable six (6) months from the Effective Date if
Executive is employed by Company at that time; provided, that should the
Employment Period end prior to the first anniversary of the Effective Date
because of a Termination for Cause or Resignation other than for Good Reason as
defined in Section 14(g), then Executive shall repay to the Company such Initial
Bonus.
(j) Reimbursement of Expenses. Executive may from time to time until
-------------------------
Termination of this Agreement incur various business expenses customarily
incurred by persons holding positions of like responsibility, including, without
limitation, travel, entertainment and
3
<PAGE>
similar expenses incurred for the benefit of the Company. Subject to the
Company's policy regarding the reimbursement of such expenses as in effect from
time to time during the Employment period, the Company shall reimburse the
Executive for such reasonable expenses from time to time and the Executive shall
account for his expenses in accordance with the practices applicable to other
senior executives of the Company.
(k) Reimbursement of Relocation Expenses. The Company shall reimburse
------------------------------------
certain relocation expenses including payment of real estate commissions on the
sale and purchase of his existing and any new residence incurred by Executive in
relocating to Birmingham, Alabama pursuant to the terms and conditions of the
Company's policies therefor and on terms at least as favorable as those provided
to the Company's executives generally.
(l) Executive Severance Plan. The Executive shall, immediately upon
------------------------
his employment, become eligible for and participate in the Company's Executive
Severance Plan, or any successor plan, for the Employment Period.
(m) Miscellaneous Fringe Benefits. During the Employment Period, the
-----------------------------
Company shall pay the Executive an amount equal to the monthly dues incurred by
the Executive for membership in a country club located in the greater
Birmingham, Alabama area, which amount shall be paid in accordance with the
Company's regular payroll practices for its senior executives, as in effect from
time to time. Such amount shall be treated as additional current cash
compensation to the Executive, and shall not be subject to increase over the
initial amount thereof. In addition, the Company shall pay directly or, in the
event the Executive pays, reimburse the Executive, for the initiation fee for
membership in such country club. In the event the initiation fee includes an
equity interest in such country club, the equity interest shall be owned by the
Company.
5. Assignment of Inventions. Executive agrees, without further
------------------------
consideration, that all inventions, discoveries, improvements, trade secrets,
formulas, techniques, processes, and know-how, whether or not patentable or
subject to any copyright and/or trade secret laws, or whether or not reduced to
practice, conceived or learned during employment, either alone or jointly with
others (all of which will be collectively referred to hereinafter as
"Inventions"), which result in any way or to any extent from the current or
proposed business activities of the Company or from the use of the Company's
time, premises or property are hereby assigned to, and constitute the exclusive
property of, the Company. Executive understands that the obligations imposed by
this paragraph apply without regard to whether an idea for an Invention occurs
on the job, at home, or elsewhere, and agrees to disclose all Inventions
promptly and completely to the Company. Executive agrees to assist, during and
after employment, without charge, but at the Company's expense, in the
preparation, execution and delivery of any documents which may be necessary or
desirable in the Company's opinion to perfect the right, title and interest of
the Company to any Inventions, and to assist in any proceedings which may be
necessary or desirable in the Company's opinion to perfect the Company's right
and title to and interest in any Invention. Executive further agrees to
disclose immediately to the Company every Invention that Executive may make or
conceive, either alone or jointly with others, within one year after termination
of employment for any reason with the Company, if and to the extent the
Invention results from any work for the Company, any use of the
4
<PAGE>
Company's premises or property, or any use of the Company's Confidential
Information (as hereinafter defined in Section 7).
6. Return of the Company's Property. Executive agrees that all
--------------------------------
memoranda, notes, records, drawings, forms, computer software or listings,
business records, manuals, and any and all other documents, materials or
tangible objects made, prepared or created by Executive during the period and/or
within the scope of employment, or made available to Executive by the Company
during employment, shall be delivered to the Company upon termination of
employment, or at any other time upon the Company's request.
7. Non-disclosure. Executive recognizes that his position with the
--------------
Company is one of trust and confidence, and by reason of such employment,
Executive will or may have or has had access to confidential and proprietary
business and/or technical information. Such confidential and proprietary
business or technical information includes, for example, but without limitation,
trade secrets, processes, formulae, data, algorithms, source code, object code,
know-how, improvements, inventions, techniques, marketing plans and strategies,
and information concerning customers or vendors which the Company has taken
reasonable steps to protect the confidentiality thereof (all of which is
collectively referred to in this Agreement as "Confidential Information").
Executive agrees to use his best efforts to protect this Confidential
Information, and shall not, either during or anytime after employment, directly
or indirectly, use for his benefit or for the benefit of another, or disclose to
any third party, person, firm, or corporation, any Confidential Information
without the Company's prior written consent.
8. Non-solicitation of Employees. During employment and for twenty-four
-----------------------------
(24) months after either a voluntary or involuntary termination of employment,
Executive agrees that he will not directly, either individually or as a
stockholder, director, officer, consultant, independent contractor, employee,
agent, member or otherwise of or through any corporation, partnership,
association, joint venture, firm, individual or otherwise or in any other
capacity (i) solicit for employment any employee of the Company, or (ii) attempt
to induce or influence any person to leave the Company's employment.
9. Non-solicitation of Customers. Executive acknowledges and agrees that
-----------------------------
all persons for or to whom the Company has, at any time during the Employment
Period, sold, leased, provided, and/or distributed goods and/or services are and
shall be construed as the customers (hereinafter "Customers") of the Company for
purposes of this Agreement. Executive agrees that he will not in any way,
directly or indirectly, during employment or within twenty-four (24) consecutive
months after either a voluntary or involuntary employment termination either
individually or as a stockholder, director, officer, consultant, independent
contractor, employee, agent, member or otherwise of or through any corporation,
partnership, association, joint venture, firm, individual or otherwise or in any
other capacity contact, solicit or do business, directly or indirectly, with any
Customer of the Company in competition with the business of the Company or any
of its subsidiaries, affiliates, successors or assigns. The above twenty-four
(24) month period shall be extended by any period of time during which Executive
is in default or breach of the covenants contained in this paragraph.
5
<PAGE>
10. Covenant Not to Compete. Executive hereby covenants and agrees that
-----------------------
he will not, while employed with the Company and for a period of twenty-four
(24) consecutive months immediately following termination of employment for any
reason, directly or indirectly, either individually or as a stockholder,
director, officer, consultant, independent contractor, employee, agent, member
or otherwise of or through any corporation, partnership, association, joint
venture, firm, individual or otherwise, or in any other capacity compete,
directly or indirectly, with or in the business of the Company or any of its
subsidiaries, affiliates, successors or assigns in any geographic area in which
the Company or any of its subsidiaries or affiliates does business; provided,
however, that nothing contained in this Section 10 shall preclude Executive from
owning one percent (1%) or less of any publicly traded company or owning any
portion of an entity which derives less than five percent (5%) of its revenues
from business that is competitive with the Company. Nothing herein shall
preclude the Executive from holding shares of Cargill Incorporated which the
Executive shall acquire in the future as a result of exercising stock options
for the purchase of stock of Cargill Incorporated provided such options were
granted to Executive prior to the Effective Date. Executive agrees that the
above twenty-four (24) month period shall be extended by any period of time
during which Executive is in default or breach of the covenants contained in
this paragraph.
11. Remedy for Breach. Both the Company and Executive agree that in the
-----------------
event Executive shall, without the written consent of the Company, violate those
covenants of non-disclosure, non-solicitation and non-competition contained in
paragraphs 7, 8, 9 and 10 above, then the Company shall be entitled, if it so
elects, to institute and prosecute proceedings in any court of competent
jurisdiction to enforce the specific performance of this Agreement by Executive
or to enjoin Executive from committing any violations of any of the provisions
of this Agreement, or from performing services for any such other person, firm,
partnership or corporation during the period contracted for in this Agreement,
without the necessity of showing actual damage or furnishing a bond or other
security; provided, however, that nothing contained in this Agreement shall be
construed as prohibiting the Company from pursuing any other remedy available to
it for such breach, including the recovery of damages from Executive. If the
Company breaches any of its obligations to the Executive following his voluntary
or involuntary termination of employment under paragraphs 14(c) through (f),
then the covenants of non-disclosure, non-solicitation and non-competition
contained in paragraphs 7, 8, 9 and 10 above shall immediately become void and
of no effect; provided that, the Executive had delivered to Company, within
thirty (30) days of such breach, written notice describing in detail such breach
and the Company has not cured such breach within thirty (30) days thereafter.
12. Arbitration. Any claim or controversy between the parties to this
-----------
Agreement which arises out of or relates to this Agreement, the business of the
Company, Executive's employment with the Company, or any other relationship
between Executive and the Company, including, but not limited to, any claim that
the Executive has been discriminated against in violation of Title VII of the
Civil Rights Act of 1964, the Civil Rights Act of 1866, the Civil Rights Act of
1991, the Age Discrimination in Employment Act, the Rehabilitation Act of 1973,
the Americans with Disabilities Act, the Employee Retirement Income Security Act
of 1974 or any other federal or state law, including, without limitation, any
state or federal common law, shall be resolved exclusively by arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association as in effect on the Effective Date of this Agreement, and judgment
upon an award
6
<PAGE>
rendered by the arbitrator or arbitrators may be entered in any court having
jurisdiction thereof, except that neither the Company or Executive may compel
arbitration over disputes or controversies arising out of an alleged breach by
Executive of those covenants of non-disclosure, non-solicitation, and/or
non-competition contained in paragraphs 7, 8, 9 and 10 above. In deciding any
claim or controversy between the parties and rendering an award, the arbitrator
or arbitrators shall determine the rights and obligations of the parties
according to the substantive and procedural laws of the State of Alabama. Any
arbitration proceedings shall be held in Birmingham, Alabama, or in such other
place as may be selected by mutual agreement of the parties. All costs of the
arbitration, including, without limitation, all fees paid to the arbitrator or
arbitrators, shall be paid by the Company. The arbitrator(s) shall have the
authority to award any relief available in law or equity, pursuant to the
underlying legal claim or claims, as would be available to Executive had he
brought suit in court.
13. Reasonableness Acknowledgment. The parties have carefully read this
-----------------------------
Agreement and have given and do now give careful consideration to the restraints
imposed by this Agreement and are in full accord as to their necessity for the
reasonable and proper protection of the Company's business. Executive agrees and
declares that each and every restraint imposed by this Agreement is reasonable
with respect to subject matter, time period, and geographical area. Irrespective
of the manner of any employment termination, the restraints imposed by this
Agreement shall be operative during their full time periods. Executive further
acknowledges that he has been given an opportunity to thoroughly read and review
this Agreement.
14. Termination of Employment.
-------------------------
(a) Termination of the Employment Period. Unless the parties mutually
------------------------------------
agree to extend the term of this Agreement, the Employment Period shall end upon
the earliest to occur of (i) a termination of the Executive's employment on
account of the Executive's death or Disability, (ii) a Termination for Cause,
(iii) a Termination Without Cause, (iv) a Resignation by Executive for Good
Reason, (v) a Resignation by Executive other than for Good Reason, or (vi) the
fifth anniversary of the Effective Date.
(b) Benefits Payable Upon Termination for Cause or Resignation Other
----------------------------------------------------------------
than for Good Reason. In the event of the Company's Termination for Cause or a
- --------------------
Resignation by the Executive other than for Good Reason, the Company shall pay
to Executive in cash in a single lump sum as soon as practicable, but in no
event more than thirty (30) days following the end of the Employment Period the
aggregate of the Earned Salary and all accrued vacation of Executive through the
end of the Employment Period. Vested Benefits shall be payable in accordance
with the terms of the plan, policy, practice, program, contract or agreement
under which such benefits have been awarded or accrued except as otherwise
expressly modified by this Agreement. The Company shall have no further
obligations to Executive.
(c) Benefits Payable Upon Death or Disability of Executive.
-------------------------------------------------------
(i) Upon the Termination of this Agreement as a result of the
Executive's death or Disability preventing further employment, the Company shall
pay to Executive or, in the event of Executive's death, to the Executive's named
Beneficiary or the estate of Executive, in a
7
<PAGE>
single lump sum cash payment as soon as practicable, but in no event more than
thirty (30) days following the end of the Employment Period, the aggregate of
(A) Executive's Earned Salary and all accrued vacation of Executive through the
date of Termination; (B) Executive's Base Salary for the twelve (12) month
period immediately following such date of Termination; and (C) an amount equal
to the pro rata portion of the target bonus for which the Executive would have
been eligible with respect to the period between the first day of the fiscal
year in which the death or Disability occurs and the last day of the period
specified in subparagraph (B) above (regardless of whether such target bonus has
been achieved or whether conditions of such target bonus are actually
fulfilled). In addition, the Executive, or the estate of the Executive, shall be
100% vested with respect to the restricted stock and stock options referenced in
Sections 4(c) and 4(f) hereof. Vested Benefits shall be payable in accordance
with the terms of the plan, policy, practice, program, contract or agreement
under which such benefits have been awarded or accrued except as otherwise
expressly modified by this Agreement.
(ii) Whenever compensation is payable to the Executive hereunder
during a period in which he has a Disability preventing employment, and such
Disability preventing employment would (except for the provisions hereof)
entitle the Executive to Disability income or salary continuation payments from
the Company according to the terms of any plan or program maintained or
established by the Company during the Employment Term, the Disability income or
salary continuation paid to the Executive pursuant to any such plan or program
shall be considered a portion of the payment to be made to the Executive
pursuant to this Paragraph and shall not be in addition hereto. If Disability
income is payable directly to the Executive by a third party under the terms of
a policy paid for by the Company, the amounts paid to the Executive by such
third party shall be considered a portion of the payment to be made to the
Executive pursuant to this Paragraph and shall not be in addition hereto.
(d) Benefits Payable Upon Termination Without Cause. If the Company
-----------------------------------------------
effectuates a Termination Without Cause, then the Executive shall be entitled to
receive the greater of (i) the amount that would be received if the Company
continued to pay the Executive's then Base Salary and an amount equal to the
target bonus (paid in accordance with the timing of payments to other executives
generally) for which the Executive would have been eligible (regardless of
whether such target bonus has been achieved or whether conditions of such target
bonus are actually fulfilled) until the fifth anniversary of the Effective Date
or (ii) that amount, if any, payable to Executive pursuant to the terms and
conditions of the Company's Executive Severance Plan. It is understood and
agreed that Executive shall not be eligible to receive both the continuation of
Base Salary for the remaining term of this Agreement and severance benefits
under the Company's Executive Severance Plan or other severance policies upon a
Termination Without Cause. The Company shall continue at its own expense the
benefits described in Section 4(g) to Executive and/or Executive's family until
the fifth anniversary of the Effective Date; provided, however, that the
Executive's participation in the Company's welfare benefit plans shall cease on
any earlier date that the Executive becomes eligible for comparable welfare
benefits from a subsequent employer. In the event that the Company is prevented
by law or by the terms of any insurance policy from including the Executive in
an employee benefit plan or program, the Company shall pay the Executive the
cost of obtaining comparable or alternative or individual coverage elsewhere,
provided such costs shall be limited to 150% of the costs of coverage under the
Company's plan for comparable coverage.
8
<PAGE>
In addition, the Executive, or the estate of the Executive, shall be 100% vested
with respect to the restricted stock and stock options referenced in Sections
4(c) and 4(f) hereof. Notwithstanding any other provision to the contrary
contained in this Agreement, in the event of a Termination Without Cause, a
twelve (12) month period shall be substituted for the twenty-four (24) month
periods referenced in the Non-Solicitation and Covenant Not to Compete
provisions of Paragraphs 8, 9 and 10 hereof.
(e) Benefits Payable Upon Resignation for Good Reason. If the
-------------------------------------------------
Executive effectuates a Resignation for Good Reason within two years from the
Effective Date, the Company shall pay to Executive in a single lump sum cash
payment as soon as practicable, but in no event more than thirty (30) days
following the end of the Employment Period, the Executive's Earned Salary and
all accrued vacation of Executive through the date of Termination and the
Company shall continue to pay in accordance with the Company's normal payroll
practices amounts equal to the aggregate of (i) Executive's Base Salary for the
twenty-four (24) month period immediately following such date of Termination and
(ii) an amount equal to a pro rata portion of the target bonus for which the
Executive would have been eligible with respect to such twenty-four (24) month
period (regardless of whether such target bonus has been achieved or whether
conditions of such target bonus are actually fulfilled). In addition, Executive
shall be 100% vested with respect to the restricted stock and stock options
referenced in Section 4(c) and (f) hereof upon a Resignation for Good Reason
within two years from the Effective Date.
(f) Nonrenewal of Agreement. If the Company does not extend or further
-----------------------
extend the term of this Agreement for any reason, the Company shall pay to
Executive in accordance with the Company's normal payroll practices amounts
equal to the aggregate of (i) Executive's Base Salary for a minimum period of
six (6) months immediately following the end of the Employment Period and (ii)
an amount equal to a pro-rata portion of the target bonus for which Executive
would have been eligible with respect to the period of payment of Base Salary
under clause (i) above following such a nonrenewal (regardless of whether such
target bonus has been achieved or whether conditions of such target bonus are
actually fulfilled). Notwithstanding any other provision to the contrary
contained in this Agreement, in the event of a nonrenewal of this Agreement, a
period equal to the period for which payments are made under clause (i) above
shall be substituted for the twenty-four (24) month periods referenced in the
Non-Solicitation and Covenant Not to Compete provisions of Paragraphs 8, 9 and
10 hereof.
(g) Definitions. For purposes of this Agreement, the following
-----------
capitalized terms are defined as follows:
"Disability" shall be deemed the reason for the termination of the
Executive's employment, if, as a result of the Executive's incapacity, due to a
physical or mental impairment that substantially limits one or more major life
activities and renders Executive unable to perform the essential functions of
his position as Chief Operating Officer with or without reasonable
accommodation. In the event of "Disability" without "Disability preventing
employment," the Executive shall be entitled to compete with other applicants
for assignment to another vacant position. "Disability preventing employment"
shall mean a Disability that prevents the Executive from performing any vacant
position with the Company either with or without reasonable accommodation.
9
<PAGE>
"Earned Salary" means any Base Salary earned, but unpaid, for services
rendered to the Company on or prior to the date on which the Employment Period
ends pursuant to Paragraph 14(a).
"Good Reason" means, without Executive's written consent: (i) any reduction
in Executive's Base Salary, target bonus or the number of paid vacation days
(other than as part of a general reduction in any such amounts for executives
generally); (ii) any material reduction in the perquisites and other benefits to
Executive (other than as part of a general reduction in such amounts for
executives generally); (iii) assignment of duties materially inconsistent with
Executive's position with the Company, or any material adverse change in
Executive's authority, responsibilities, title or position with the Company;
(iv) the breach of the Company of a material provision of this Agreement; or (v)
the Company's failure to obtain an assignment of this Agreement to a successor
under Section 15 hereof. The parties acknowledge that the Company's failure to
designate Executive as President shall not constitute "Good Reason" for purposes
of this Agreement.
"Resignation" means a termination of the Executive's employment by the
Executive. Executive must give at least thirty (30) days prior written notice to
the Company of his resignation.
"Termination for Cause" means a termination of the Executive's employment
by the Company in the good faith judgment of the Company due to (i) the
Executive's conviction of any felony or (ii) the Executive's (A) failure to
perform the duties assigned to him by the Board or failure to carry out any
directive of the Board (other than by reason of death, illness or incapacity or
following Resignation with Good Reason), (B) failure to conduct himself in an
ethical manner, (C) conviction of any misdemeanor involving fraud or dishonesty
or material breach of any provision of this Agreement either of which has had
(or is expected to have) a material adverse effect on the business of the
Company or its subsidiaries, or (D) willful fraud or wilful misappropriation of
funds or property of the Company; provided that, with respect to the events
described in clauses (ii)(A) and (B) above, the Company had delivered to
Executive, within thirty (30) days of such failure, written notice describing in
detail the failure and the Executive has not cured such failure within thirty
(30) days thereafter.
"Termination Without Cause" means any termination of the Executive's
employment by the Company other than a Termination for Cause. Neither the
Executive's death nor Disability shall give rise to a Termination Without Cause.
"Vested Benefits" means amounts which are vested or which the Executive is
otherwise entitled to receive under the terms of or in accordance with any plan,
policy, practice or program of, or any contract or agreement with, the Company
or any of its subsidiaries, at or subsequent to the date of his termination
without regard to the performance by the Executive of further services or the
resolution of a contingency.
(h) Full Discharge of the Company's Obligations. The amounts payable
-------------------------------------------
to the Executive pursuant to this Paragraph 14 following termination of his
employment (including amounts payable with respect to Vested Benefits) shall be
in full and complete satisfaction of the Executive's rights under this Agreement
and any other claims he may have in respect of his employment by the Company or
any of its subsidiaries. Such amounts shall constitute liquidated
10
<PAGE>
damages with respect to any and all such rights and claims and, upon the
Executive's receipt of such amounts, the Company shall be released and
discharged from any and all liability to the Executive in connection with this
Agreement or otherwise in connection with the Executive's employment with the
Company and its subsidiaries.
15. Survival and Assignment. Executive understands that certain of the
-----------------------
covenants and obligations imposed by this Agreement shall survive the
termination of Executive's employment with the Company regardless of the manner
of any employment termination. The parties acknowledge and understand that the
privileges, benefits, and obligations of this Agreement shall inure to the
benefit of and be binding on the Executive's heirs and legal representatives,
and are intended to inure to the benefit of all corporate affiliates,
subsidiaries, successors and assigns of the Company.
16. Beneficiary. If Executive dies prior to receiving all of the amounts
-----------
payable to him in accordance with the terms of this Agreement, such amounts
shall be paid to one or more beneficiaries (each, a "Beneficiary") designated by
-----------
Executive in writing to the Company during his lifetime, or if no such
Beneficiary is designated, to Executive's estate. Executive, without the consent
of any prior Beneficiary, may change his designation of Beneficiary or
Beneficiaries at any time or from time to time by submitting to the Company a
new designation in writing.
17. Waiver. Executive agrees that any failure on the part of the Company
------
to demand rigid adherence to one or more of the provisions of this Agreement, on
one or more occasions, shall not be construed as a waiver, estoppel, or release,
nor shall any such failure ever deprive the Company of the right to insist upon
strict compliance.
18. Severability. If for any reason any paragraph, section, portion or
------------
provision of this Agreement shall be held by a court or other tribunal to be
invalid or unenforceable, it is agreed by both parties that such a holding shall
not affect the enforceability of any other paragraph, section, portion or
provision of this Agreement. The parties further agree that a court may modify
any provision of this Agreement rather than hold the provision invalid or
unenforceable to effectuate the provision's intent to the fullest extent
possible.
19. Attorney's Fees. The Company shall pay to the law firm of Lindquist &
---------------
Vennum, P.L.L.P.; Minneapolis, Minnesota, all reasonable attorneys's fees and
expenses up to $10,000 incurred by Executive in connection with its
representation of Executive in the preparation and negotiation of this
Agreement. If any party to this Agreement breaches or violates any of the terms
of this Agreement, then that party shall pay to the non-defaulting party all of
the non-defaulting party's costs and expenses, including attorney's fees,
incurred by that party in enforcing the terms of this Agreement.
20. Indemnification. The Company will indemnify the Executive in
---------------
accordance with the Company's by-laws and the Executive shall be entitled to the
protection of any insurance policies the Company may elect to maintain generally
for the benefit of its directors and officers.
11
<PAGE>
21. Governing Law. The parties acknowledge and agree that the principal
-------------
place of business of the Company is located in the State of Alabama, and that
this Agreement shall be considered to have been made in Alabama, and the laws
applicable in the State of Alabama shall govern this Agreement without regard to
the place of Executive's execution of the Agreement or performance.
22. Notices. All notices and other communications required or permitted
-------
hereunder or necessary or convenient herewith shall be in writing and shall be
deemed given only when received. Unless changed by a written notification, the
addresses for the parties are as follows:
If to the Company:
-----------------
Birmingham Steel Corporation
1000 Urban Center Drive, Suite 300
Birmingham, Alabama 35242
Attention: Chief Executive Officer
If to the Executive:
-------------------
Brian F. Hill
5507 Butternut Circle
Minnetonka, Minnesota 55343
With a copy to:
--------------
Edward J. Wegerson
Lindquist & Vennum, P.L.L.P.
4200 IDS Center
Minneapolis, Minnesota 55402
23. Entire Agreement. This Agreement supersedes all prior Agreements and
----------------
understandings between the parties with respect to the matters covered herein,
and may not be changed or terminated orally, and no change, termination or
attempted waiver of any of the provisions hereof shall be binding unless in a
writing, signed by an authorized officer or representative of the party against
whom the same is sought to be enforced.
24. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed to be an original and all of which together will
constitute one and the same instrument.
12
<PAGE>
IN WITNESS WHEREOF, Executive and the Company have caused this Agreement to
be executed, both intending to be fully and legally bound.
NOTICE TO EXECUTIVE
-------------------
This Agreement affects important rights. Do not sign this Agreement unless you
have read it carefully, and are satisfied that you understand it completely.
EXECUTIVE:
Witness:______________________ _____________________________________________
(Signature)
Dated:________________________ Brian F. Hill
---------------------------------------------
COMPANY:
BIRMINGHAM STEEL CORPORATION
Witness:______________________ By:__________________________________________
Dated:________________________ Its:_________________________________________
13
<PAGE>
EXHIBIT 10.12.1
AMENDMENT TO
------------
EMPLOYMENT AGREEMENT
--------------------
THIS AMENDMENT ("Amendment") between Birmingham Steel Corporation, a
Delaware corporation ("Company"), and Brian F. Hill ("Executive"), and amends
the Employment Agreement between the Company and Executive dated June 21, 1999
("Agreement"), as set forth below.
RECITALS
--------
WHEREAS, the Company employs Executive on the conditions set forth in the
Agreement and a separate letter agreement dated June 21, 1999; and
WHEREAS, the Company desire to modify the Agreement to provide additional
incentives to the Executive to remain employed with the Company and to provide
additional security under the Executive's Agreement in the event of a Change in
Control, as defined in the Executive Severance Plan adopted by the Company
effective July 1, 1997 and amended effective September 2,1999 ("ESP");
NOW, THEREFORE, in consideration of the foregoing, and in further
consideration for Executive's extraordinary efforts to date during these
uncertain times, for Executive's continued efforts, in time, energy and
commitment, on behalf of the Company, and to reduce Executive's personal
distraction and avoid his potential departure from the Company to the detriment
of the Company and its stockholders arising from the possibility of a change in
management, the parties, each intending to be legally bound, covenant and agree
as follows:
1. No later than the earliest of December 21, 1999, a termination without
Cause, resignation for Good Reason, ten business days prior to the next
meeting of the shareholders of the Company if there is a proxy contest for
the election of a majority of directors of the Board (whether or not such
contest is successful) or immediately prior to the appointment of a new
Chief Executive Officer, the Company shall pay Executive the $538,000 cash
bonus described in Section 4(i) of the Agreement. In the event of
Executive's termination without Cause, resignation with Good Reason, a
Change in Control, or a change in the chief executive officer of the
Company (other than the appointment of Executive as such), the obligation
of Executive to repay the cash bonus described in Section 4(i) of the
Agreement shall be void and of no force and effect; provided however, that
the obligations of the Executive and the reduction in such amount as set
forth in the first paragraph of that certain letter dated June 21, 1999
shall remain in effect.
2. A new second sentence shall be added to Section 14(e) to read as follows:
"Notwithstanding anything herein to the contrary, in the event of
Executive's Resignation for Good Reason following a Change in Control,
Executive will be entitled to the higher of the amount determined under
clauses (i) and (ii) above and that amount, if any, payable to Executive
pursuant to the terms and conditions of the Company's Executive Severance
Plan."
1
<PAGE>
3. Upon a Change in Control, the definition of Good Reason in Section 14(g) of
the Agreement shall be replaced in its entirety with the definition of Good
Reason set forth in Section 2.11 of the ESP.
4. Upon a Change in Control, a Termination for Cause under Section 14(g) of
the Agreement shall, for purposes of the Agreement, mean a termination
which would constitute a termination for Substantial Cause under the ESP.
5. After a Change in Control, any benefits payable under Section 14 of the
Agreement upon either a termination without Cause or resignation for Good
Reason shall be paid in a single lump sum within thirty days of termination
or resignation.
6. After a Change in Control, in the event of Executive's termination without
Cause or resignation for Good Reason, Sections 9 (nonsolicitation of
customers) and 10 (covenant not to noncompete) of the Agreement shall be
void and not enforceable against Executive.
7. For purposes of this Amendment and the Agreement, the definition of "Change
in Control" shall be as set forth in Section 2.3 of the ESP.
8. Except as modified herein, the Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, Executive and the Company have caused this Amendment to
be executed, both intending to be fully and legally bound.
EXECUTIVE:
Witness: /s/ Philip L. Oakes /s/ Brian F. Hill
------------------- -----------------
Dated: September 21, 1999 Brian F. Hill
------------------ -------------
COMPANY:
BIRMINGHAM STEEL CORPORATION
Witness: /s/ Barbara C. Howell By: /s/ Robert A. Garvey
--------------------- ---------------------
Dated: September 21, 1999 Its: Chairman & CEO
------------------ --------------
2
<PAGE>
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT ("Agreement") is made this 20th day of September, 1999,
between Birmingham Steel Corporation, a Delaware corporation (the "Company"),
and Kevin E. Walsh ("Executive").
RECITALS
--------
WHEREAS, the Company desires to continue to employ Executive on the
conditions set forth below, and to obtain from Executive certain covenants and
agreements more fully described below, which covenants and agreements are
intended by the parties to inure to the benefit of the Executive and his heirs
or legal representatives, and the Company and any of its affiliates,
subsidiaries, successors and assigns; and
WHEREAS, Executive will or may be entrusted with confidential and
proprietary business and/or technical information of the Company, trained and
instructed with respect to the Company's business and operations, and met and
developed relationships with the Company's clients and customers; and
WHEREAS, Executive desires to accept such continued employment, subject to
all the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the foregoing, and in further
consideration of the mutual covenants and agreements set forth below, the
parties, each intending to be legally bound, covenant and agree as follows:
1. Employment. The Company hereby agrees to continue to employ
----------
Executive, and Executive hereby accepts such continued employment upon the terms
and conditions set forth in this Agreement.
2. Duties. During the Employment Period (as hereinafter defined), the
------
Executive shall serve as Executive Vice President and Chief Financial Officer of
the Company (or such other position as shall be agreed by Executive) and with
such duties and responsibilities as are customarily assigned to such position,
and such other duties and responsibilities as may from time to time be assigned
to him by the Board of Directors of the Company (the "Board") or the Chief
Executive Officer of the Company; provided that such other duties assigned to
Executive shall be consistent with Executive's basic duties and position as
Executive Vice President and Chief Financial Officer and will not require
Executive to violate any laws. Executive shall report directly to the Chief
Executive Officer of the Company. Executive shall, at all times during
employment, devote substantially all of his business time, attention, energies,
efforts and skills, with
<PAGE>
undivided loyalty to the business of the Company, and use his best efforts to
promote the interest and business of the Company. While employed with the
Company, Executive shall not be engaged in any other business activity in
competition with the Company, whether or not such business activity is pursued
for gain, profit or other pecuniary advantage. Such prohibition against engaging
in other business activities shall not preclude Executive from attending to
personal business and investments or from involvement with professional, civic
and charitable organizations, as long as such participation does not interfere
with Executive's duties to the Company. Notwithstanding the foregoing,
Executive shall not be precluded from serving with prior approval of the
Company, on the Board of Directors of other companies or trade organizations.
3. Employment Period. Unless and until this Agreement is terminated
-----------------
pursuant to Paragraph 11 hereof, the Company shall employ the Executive for the
period commencing on September 20, 1999 (the "Effective Date") and ending on the
fifth anniversary of the Effective Date. The term of this Agreement may be
extended as mutually agreed by the parties hereto; provided, however, that the
-------- -------
Company shall notify the Executive at least 180 days prior to the end of the
term, including any extension thereof, of the Company's desire not to extend or
further extend the term of this Agreement. The period during which the
Executive is employed pursuant to this Agreement, including any extension
thereof, shall be referred to as the "Employment Period."
4. Compensation and Related Matters.
--------------------------------
(a) Base Salary. The annual base salary payed to the Executive under
-----------
this Paragraph 4, as the same may be increased from time to time, shall
hereinafter be referred to as the "Base Salary." During the Employment Period,
the Executive shall receive an initial annual base salary of $275,000. The Base
Salary shall be payable in accordance with the Company's regular payroll
practice for its senior executives, as in effect from time to time. Base Salary
shall be reviewed at least annually and Executive considered for any increase in
Base Salary as the Company may determine to be appropriate, but Base Salary
shall not be decreased during the term of this Agreement except (prior to a
Change in Control of the Company only) commensurate with a reduction in senior
executive salaries generally.
(b) Bonus. During the Employment Period, the Executive shall be
-----
eligible to receive cash bonuses as part of the Company's Management Incentive
Bonus Plan as in effect on the date of this Agreement (or such other plan or
arrangement as shall be generally made available to senior executives) at 50% of
Base Salary for achievement of 100% of target goals.
2
<PAGE>
(c) Executive Retirement and Compensation Deferral Plan. Executive
---------------------------------------------------
shall be entitled to participate in the Company's Executive Retirement and
Compensation Deferral Plan pursuant to the terms and conditions thereof and on
terms at least as favorable as those provided to the Company's executives
generally.
(d) 401(k) Plan and Stock Accumulation Plan(s). Executive shall be
------------------------------------------
entitled to participate in the Company's 401(k) Plan and the Stock Accumulation
Plan(s) pursuant to the terms and conditions thereof and on terms at least as
favorable as those provided to the Company's executives generally.
(e) Stock Option Plan(s). Executive shall be entitled to participate
--------------------
in the Company's stock option plan(s) pursuant to the terms and conditions
thereof (including any terms and conditions of such plan relating to the
accelerated vesting of stock options upon a Change in Control) and on terms at
least as favorable as those provided to the Company's executives generally.
(f) Welfare Benefit Plans and Fringe Benefits. Executive shall be
-----------------------------------------
entitled to participate in the Company's medical and dental plans, group life,
accidental death and travel accident insurance plans and disability insurance
plans pursuant to the terms and conditions thereof and on terms at least as
favorable as those provided to the Company's executives generally. Nothing in
this Agreement shall preclude the Company or any affiliate of the Company from
terminating or amending any general employee benefit plan or program from time
to time; provided such amendment applies to senior executives generally and does
not reduce any benefits accrued prior to the date of such amendment. Executive
shall be entitled to all fringe benefits that are available to the Company's
executives generally.
(g) Vacation. Executive shall be entitled to twenty-five (25) days
--------
of vacation during the initial year of employment and each year of full
employment thereafter, exclusive of legal holidays, as long as the scheduling of
the Executive's vacation does not interfere with the Company's normal business
operations.
(h) Reimbursement of Expenses. Executive may from time to time until
-------------------------
Termination of this Agreement incur various business expenses customarily
incurred by persons holding positions of like responsibility, including, without
limitation, travel, entertainment and similar expenses incurred for the benefit
of the Company. Subject to the Company's policy regarding the reimbursement of
such expenses as in effect from time to time during the Employment period, the
Company shall reimburse the Executive for such reasonable expenses from time to
time, and the Executive shall
3
<PAGE>
account for his expenses in accordance with the practices applicable to other
senior executives of the Company.
(i) Relocation; Reimbursement of Relocation Expenses. The Executive
------------------------------------------------
shall relocate to the Birmingham, Alabama area no later than September 1, 2000.
The Company shall reimburse certain relocation expenses including payment of
real estate commissions on the sale and purchase of his existing and any new
residence incurred by Executive in relocating to the Birmingham, Alabama area
pursuant to the terms and conditions of the Company's policies therefore and on
terms at least as favorable as those provided to the Company's executives
generally. Until such time that the Executive relocates to the Birmingham,
Alabama area, or until September 1, 2000, whichever is earlier, the Company will
pay the Executive $2,000 per month for temporary living accommodations in the
Birmingham, Alabama area. In addition, the provisions of the second bulleted
paragraph of that certain letter to you from Phil Oakes, dated July 9, 1998
shall continue to apply.
(j) Executive Severance Plan. The Executive shall be eligible for
------------------------
and participate in the Company's Executive Severance Plan, or any successor
plan, for the Employment Period.
(k) Miscellaneous Fringe Benefits. During the Employment Period, the
-----------------------------
Company shall pay the Executive an amount equal to the monthly dues incurred by
the Executive for membership in a country club located in the greater
Birmingham, Alabama area, which amount shall be paid in accordance with the
Company's regular payroll practices for its senior executives, as in effect from
time to time. Such amount shall be treated as additional current cash
compensation to the Executive, and shall not be subject to increase over the
initial amount thereof. In addition, the Company shall pay directly or, in the
event the Executive pays, reimburse the Executive, for the initiation fee for
membership in such country club. In the event the initiation fee includes an
equity interest in such country club, the equity interest shall be owned by the
Company.
(l) Tax Preparation Advice. Executive shall be entitled to receive
----------------------
tax preparation and counseling advice on terms at least as favorable as those
provided to the Company's executives generally.
5. Assignment of Inventions. Executive agrees, without further
------------------------
consideration, that all inventions, discoveries, improvements, trade secrets,
formulas, techniques, processes, and know-how, whether or not patentable or
subject to any copyright and/or trade secret laws, or whether or not reduced to
practice, conceived or learned during employment, either alone or jointly with
others (all of which will be collectively referred
4
<PAGE>
to hereinafter as "Inventions"), which result in any way or to any extent from
the current or proposed business activities of the Company or from the use of
the Company's time, premises or property are hereby assigned to, and constitute
the exclusive property of, the Company. Executive understands that the
obligations imposed by this Paragraph 5 apply without regard to whether an idea
for an Invention occurs on the job, at home, or elsewhere, and agrees to
disclose all Inventions promptly and completely to the Company. Executive
agrees to assist, during and after employment, without charge, but at the
Company's expense, in the preparation, execution and delivery of any documents
which may be necessary or desirable in the Company's opinion to perfect the
right, title and interest of the Company to any Inventions, and to assist in any
proceedings which may be necessary or desirable in the Company's opinion to
perfect the Company's right and title to and interest in any Invention.
Executive further agrees to disclose immediately to the Company every Invention
that Executive may make or conceive, either alone or jointly with others, within
one year after termination of employment for any reason with the Company, if and
to the extent the Invention results from any work for the Company, any use of
the Company's premises or property, or any use of the Company's Confidential
Information (as hereinafter defined in Paragraph 7).
6. Return of the Company's Property. Executive agrees that all
--------------------------------
memoranda, notes, records, drawings, forms, computer software or listings,
business records, manuals, and any and all other documents, materials or
tangible objects made, prepared or created by Executive during the period and/or
within the scope of employment, or made available to Executive by the Company
during employment, shall be delivered to the Company upon termination of
employment, or at any other time upon the Company's request; provided, however
that personal items such as Rolodexes and correspondence and other items of a
personal nature shall be excluded from this provision.
7. Non-disclosure. Executive recognizes that his position with the
--------------
Company is one of trust and confidence, and, by reason of such employment,
Executive will or may have or has had access to confidential and proprietary
business and/or technical information. Such confidential and proprietary
business or technical information includes, for example, but without limitation,
trade secrets, processes, formulae, data, algorithms, source code, object code,
know-how, improvements, inventions, techniques, marketing plans and strategies,
and information concerning customers or vendors of which the Company has taken
reasonable steps to protect the confidentiality thereof (all of which is
collectively referred to in this Agreement as "Confidential Information").
Executive agrees to use his best efforts to protect this Confidential
Information, and shall not, either during or anytime after employment, directly
or indirectly, use for his benefit or for the benefit of another, or disclose to
any third party, person, firm, or corporation, any Confidential Information
without the Company's prior written consent unless such
5
<PAGE>
Confidential Information (other than by reason of Executive's breach of this
Paragraph 7) has been previously disclosed to the public, is in the public
domain, or is otherwise generally known or available in the Company's industry.
8. Non-solicitation of Employees. During employment and for twenty-four
-----------------------------
(24) months after either a voluntary or involuntary termination of employment,
Executive agrees that he will not directly, either individually or as a
stockholder, director, officer, consultant, independent contractor, employee,
agent, member or otherwise of or through any corporation, partnership,
association, joint venture, firm, individual or otherwise or in any other
capacity (i) solicit for employment any employee of the Company, or (ii) attempt
to induce or influence any person to leave the Company's employment.
9. Arbitration. Any claim or controversy between the parties to this
-----------
Agreement which arises out of or relates to this Agreement, the business of the
Company, Executive's employment with the Company, or any other relationship
between Executive and the Company, including, but not limited to, any claim that
the Executive has been discriminated against in violation of Title VII of the
Civil Rights Act of 1964, the Civil Rights Act of 1866, the Civil Rights Act of
1991, the Age Discrimination in Employment Act, the Rehabilitation Act of 1973,
the Americans with Disabilities Act, the Employee Retirement Income Security Act
of 1974 or any other federal or state law, including, without limitation, any
state or federal common law, shall be resolved exclusively by arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association as in effect on the Effective Date of this Agreement, and judgment
upon an award rendered by the arbitrator or arbitrators may be entered in any
court having jurisdiction thereof, except that neither the Company nor Executive
may compel arbitration over disputes or controversies arising out of an alleged
breach by Executive of those covenants of non-disclosure and non-solicitation
contained in Paragraphs 7 and 8 above. In deciding any claim or controversy
between the parties and rendering an award, the arbitrator or arbitrators shall
determine the rights and obligations of the parties according to the substantive
and procedural laws of the State of Alabama. Any arbitration proceedings shall
be held in Birmingham, Alabama, or in such other place as may be selected by
mutual agreement of the parties. All costs of the arbitration, including,
without limitation, all fees paid to the arbitrator or arbitrators, shall be
paid by the Company. The arbitrator(s) shall have the authority to award any
relief available in law or equity, pursuant to the underlying legal claim or
claims, as would be available to Executive had he brought suit in court.
10. Reasonableness Acknowledgment. The parties have carefully read this
-----------------------------
Agreement and have given and do now give careful consideration to the restraints
imposed by this Agreement and are in full accord as to their necessity for the
reasonable
6
<PAGE>
and proper protection of the Company's business. Executive agrees and declares
that each and every restraint imposed by this Agreement is reasonable with
respect to subject matter, time period and geographical area. Irrespective of
the manner of any employment termination, the restraints imposed by this
Agreement shall be operative during their full time periods. Executive further
acknowledges that he has been given an opportunity to thoroughly read and review
this Agreement.
11. Termination of Employment
-------------------------
(a) Termination of Employment Period. Unless the parties mutually
--------------------------------
agree to extend the term of this Agreement, the Employment Period shall end upon
the earliest to occur of (i) a termination of the Executive's employment on
account of the Executive's death or Disability, (ii) a Termination for Cause,
(iii) a Termination Without Cause, (iv) a Resignation by Executive for Good
Reason, (v) a Resignation by Executive other than for Good Reason, or (vi) the
fifth anniversary of the Effective Date.
(b) Benefits Payable Upon Termination for Cause or Resignation Other
----------------------------------------------------------------
than for Good Reason. In the event of the Company's Termination for Cause or a
- --------------------
Resignation by the Executive other than for Good Reason, the Company shall pay
to the Executive in cash in a single lump sum as soon as practicable, but in no
event more than thirty (30) days following the end of the Employment Period the
aggregate of the Earned Salary and all accrued vacation of Executive through the
end of the Employment Period. Vested Benefits shall be payable in accordance
with the terms of the plan, policy, practice, program, contract or agreement
under which such benefits have been awarded or accrued except as otherwise
expressly modified by this Agreement. The Company shall have no further
obligations to Executive.
(c) Benefits Payable Upon Death or Disability of Executive.
------------------------------------------------------
(i) Upon the Termination of this Agreement as a result of the
Executive's death or Disability preventing further employment, the Company shall
pay to Executive or, in the event of Executive's death, to the Executive's named
Beneficiary or the estate of Executive, in a single lump sum cash payment as
soon as practicable, but in no event more than thirty (30) days following the
end of the Employment Period, the aggregate of (A) Executive's Earned Salary and
any other amounts of compensation, including, but not limited to, bonuses earned
but unpaid for prior years and all accrued vacation of Executive through the
date of Termination; (B) Executive's Base Salary for the twelve (12) month
period immediately following such date of Termination; and (C) an amount equal
to the pro rata portion of the target bonus for which the Executive would have
been eligible with respect to the period between the first day of the fiscal
year in
7
<PAGE>
which the death or Disability occurs and the last day of the period specified in
subparagraph (B) above (regardless of whether such target bonus has been
achieved or whether conditions of such target bonus are actually fulfilled). In
addition, the Executive, or the estate of the Executive, shall be 100% vested
with respect to all restricted stock and stock options held by the Executive.
Vested Benefits shall be payable in accordance with the terms of the plan,
policy, practice, program, contract or agreement under which such benefits have
been awarded or accrued except as otherwise expressly modified by this
Agreement.
(ii) Whenever compensation is payable to the Executive hereunder
during a period in which he has a Disability preventing employment, and such
Disability preventing employment would (except for the provisions hereof)
entitle the Executive to Disability income or salary continuation payments from
the Company according to the terms of any plan or program maintained or
established by the Company during the Employment Term, the Disability income or
salary continuation paid to the Executive pursuant to any such plan or program
shall be considered a portion of the payment to be made to the Executive
pursuant to this Paragraph and shall not be in addition hereto. If Disability
income is payable directly to the Executive by a third party under the terms of
a policy paid for by the Company, the amounts paid to the Executive by such
third party shall be considered a portion of the payment to be made to the
Executive pursuant to this Paragraph and shall not be in addition hereto.
(d) Benefits Payable Upon Termination Without Cause. If the Company
-----------------------------------------------
effectuates a Termination Without Cause, then the Company shall pay to the
Executive in a single lump sum cash payment as soon as practicable, but in no
event more than thirty (30) days after such Termination Without Cause, the
greater of (i) the amount that would be received if the Company continued to pay
the Executive's then Base Salary and bonus (assuming each annual bonus would
have been equal to his target bonus for the year of termination) until the third
anniversary of the date of Termination or (ii) that amount, if any, payable to
Executive pursuant to the terms and conditions of the Company's Executive
Severance Plan. It is understood and agreed that the foregoing means that the
Executive shall not be eligible to receive both the lump sum payment referred to
herein and severance benefits under the Company's Executive Severance Plan or
other severance policies upon a Termination Without Cause. In addition to the
payment described in the first sentence of this Paragraph 11(d), the Company
shall pay to the Executive his Earned Salary and any other amounts of
compensation, including, but not limited to, bonuses earned but unpaid for prior
years and all accrued vacation of Executive through the date of Termination
Without Cause. The Company shall continue at its own expense the benefits
described in Paragraph 4(f) to Executive and/or Executive's family until the
later of third anniversary of the date of Termination and, if applicable, the
8
<PAGE>
date the benefit continuation provided for under the Executive Severance Plan
terminates; provided, however, that the Executive's participation in the
-------- -------
Company's welfare benefit plans shall cease on any earlier date that the
Executive becomes eligible for comparable welfare benefits from a subsequent
employer. In the event that the Company is prevented by law or by the terms of
any insurance policy from including the Executive in an employee benefit plan or
program, the Company shall pay the Executive the cost of obtaining comparable or
alternative or individual coverage elsewhere, provided such costs shall be
limited to 150% of the costs of coverage under the Company's plan for comparable
coverage.
(e) Benefits Payable Upon Resignation for Good Reason. If the
-------------------------------------------------
Executive effectuates a Resignation for Good Reason within two years from the
Effective Date, then the Company (i) shall pay to the Executive in a single lump
sum cash payment as soon as practicable, but in no event more than thirty (30)
days following the end of the Employment Period, the Executive's Earned Salary
and all accrued vacation of Executive through the date of Termination and (ii)
shall continue to pay to the Executive, in accordance with the Company's normal
payroll practices, (x) the Executive's Base Salary for the thirty-six (36) month
period immediately following such date of Termination and (y) bonuses (at the
time such bonuses are otherwise payable but assuming each annual bonus would
have been equal to his target bonus for the year of termination) with respect to
such thirty-six (36) month period; provided, however, in the event of the
Executive's Resignation for Good Reason following a Change of Control, the
Executive shall be entitled to receive the amounts set forth in clause (ii)
above in a single lump sum cash payment within thirty days following the date of
Termination; and provided, further, that in such case the Executive will be
entitled to the higher of the amount determined under clause (ii) above and that
amount, if any, payable to Executive pursuant to the terms and conditions of the
Company's Executive Severance Plan. It is understood and agreed that the
foregoing means that the Executive shall not be eligible to receive both the
lump sum payment referred to herein and severance benefits under the Company's
Executive Severance Plan or other severance policies upon a Resignation for Good
Reason.
(f) Nonrenewal of Agreement. If the Company does not extend or
-----------------------
further extend the term of this Agreement for any reason, the Company shall pay
to Executive in accordance with the Company's normal payroll practices amounts
equal to the aggregate of (i) Executive's Base Salary for a minimum period of
six (6) months immediately following the end of the Employment Period and (ii)
bonuses with respect to the period of payment of Base Salary under clause (i)
above following such a nonrenewal (assuming each annual bonus would have been
equal to his target bonus for the last year of the Employment Period).
9
<PAGE>
(g) Definitions. For purposes of this Agreement, the following
-----------
capitalized terms are defined as follows:
"Change in Control" shall have the meaning set forth in the Company's
Executive Severance Plan.
"Disability" shall be deemed the reason for the termination of the
Executive's employment, if, as a result of the Executive's incapacity, due to
physical or mental illness, the Executive shall have been absent from the full-
time performance of the Executive's duties with the Company for a period of six
(6) consecutive months, the Company shall have given the Executive a notice of
termination for Disability, and, within thirty (30) days after such notice is
given, the Executive shall not have returned to the full-time performance of the
Executive's duties.
"Earned Salary" means any Base Salary earned, but unpaid, for services
rendered to the Company on or prior to the date on which the Employment Period
ends pursuant to Paragraph 11(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Good Reason" means, prior to a Change in Control, without Executive's
written consent: (i) any reduction in Executive's Base Salary, target bonus or
the number of paid vacation days (other than as part of a general reduction in
any such amounts for executives generally); (ii) any material reduction in the
perquisites and other benefits to Executive (other than as part of a general
reduction in such amounts for executives generally); (iii) assignment of duties
materially inconsistent with Executive's position with the Company, or any
material adverse change in Executive's authority, responsibilities, title or
position with the Company; (iv) the breach by the Company of a material
provision of this Agreement; or (v) the Company's failure to obtain an
assignment of this Agreement to a successor under Paragraph 12 hereof.
"Good Reason", following a Change in Control, shall have the meaning set
forth in the Company's Executive Severance Plan.
"Resignation" means a termination of the Executive's employment by the
Executive. Executive must give at least thirty (30) days prior written notice
to the Company of his resignation.
"Termination for Cause" means, prior to a Change in Control, any
termination of the Executive's employment by the Company in the good faith
judgment of the Company
10
<PAGE>
due to (i) the Executive's conviction of any felony or (ii) the Executive's (A)
failure to perform the duties assigned to him by the Board or the Chief
Executive Officer of the Company or failure to carry out any directive of the
Board or the Chief Executive Officer of the Company (other than by reason of
death, illness or incapacity or following Resignation with Good Reason), (B)
failure to conduct himself in an ethical manner, (C) conviction of any
misdemeanor involving fraud or dishonesty or material breach of any provision of
this Agreement either of which has had (or is expected to have) a material
adverse effect on the business of the Company or its subsidiaries, or (D)
willful fraud or wilful misappropriation of funds or property of the Company;
provided that, with respect to the events described in clauses (ii)(A) and (B)
- --------
above, the Company had delivered to Executive, within thirty (30) days of such
failure, written notice describing in detail the failure and the Executive has
not cured such failure within thirty (30) days thereafter.
"Termination for Cause" means, following a Change in Control, any
termination of the Executive's employment by the Company which would constitute
an effective "termination for Substantial Cause" of the Executive under the
Company's Executive Severance Plan.
"Termination Without Cause" means any termination of the Executive's
employment by the Company other than a Termination for Cause. Neither the
Executive's death nor Disability shall give rise to a Termination Without Cause.
"Vested Benefits" means amounts which are vested or which the Executive is
otherwise entitled to receive under the terms of or in accordance with any plan,
policy, practice or program of, or any contract or agreement with, the Company
or any of its subsidiaries, at or subsequent to the date of his termination
without regard to the performance by the Executive of further services or the
resolution of a contingency.
(h) Full Discharge of the Company's Obligations. The amounts payable
-------------------------------------------
to the Executive pursuant to this Paragraph 11 following termination of his
employment (including amounts payable with respect to Vested Benefits) shall be
in full and complete satisfaction of the Executive's rights under this Agreement
and any other claims he may have in respect of his employment by the Company or
any of its subsidiaries. Such amounts shall constitute liquidated damages with
respect to any and all such rights and claims and, upon the Executive's receipt
of such amounts, the Company shall be released and discharged from any and all
liability to the Executive in connection with this Agreement or otherwise in
connection with the Executive's employment with the Company and its
subsidiaries.
11
<PAGE>
12. Survival and Assignment. Executive understands that certain of the
-----------------------
covenants and obligations imposed by this Agreement shall survive the
termination of Executive's employment with the Company regardless of the manner
of any employment termination. The parties acknowledge and understand that the
privileges, benefits and obligations of this Agreement shall inure to the
benefit of and be binding on the Executive's heirs and legal representatives,
and are intended to inure to the benefit of all corporate affiliates,
subsidiaries, successors and assigns of the Company.
13. Beneficiary. If Executive dies prior to receiving all of the amounts
-----------
payable to him in accordance with the terms of this Agreement, such amounts
shall be paid to one or more beneficiaries (each, a "Beneficiary") designated by
Executive in writing to the Company during his lifetime, or if no such
Beneficiary is designated, to Executive's estate. Executive, without the consent
of any prior Beneficiary, may change his designation of Beneficiary or
Beneficiaries at any time or from time to time by submitting to the Company a
new designation in writing.
14. Waiver. Executive agrees that any failure on the part of the Company
------
to demand rigid adherence to one or more of the provisions of this Agreement, on
one or more occasions, shall not be construed as a waiver, estoppel, or release,
nor shall any such failure ever deprive the Company of the right to insist upon
strict compliance.
15. Severability. If for any reason any paragraph, section, portion or
------------
provision of this Agreement shall be held by a court or other tribunal to be
invalid or unenforceable, it is agreed by both parties that such a holding shall
not affect the enforceability of any other paragraph, section, portion or
provision of this Agreement. The parties further agree that a court may modify
any provision of this Agreement rather than hold the provision invalid or
unenforceable to effectuate the provision's intent to the fullest extent
possible.
16. Attorney's Fees. The Company shall pay to the law firm of Bleakley
---------------
Platt & Schmidt, LLP, Greenwich, Connecticut, all reasonable attorney's fees and
expenses up to $10,000 incurred by the Executive in connection with its
representation of the Executive in the preparation and negotiation of this
Agreement. If any party to this Agreement breaches or violates any of the terms
of this Agreement, then that party shall pay to the non-defaulting party all of
the non-defaulting party's costs and expenses, including attorney's fees,
incurred by that party in enforcing the terms of this Agreement.
17. Indemnification. The Company will indemnify the Executive in
---------------
accordance with the Company's by-laws, and the Executive shall be entitled to
the protection
12
<PAGE>
of any insurance policies the Company may elect to maintain generally for the
benefit of its directors and officers.
18. Governing Law. The parties acknowledge and agree that the principal
-------------
place of business of the Company is located in the State of Alabama, and that
this Agreement shall be considered to have been made in Alabama, and the laws
applicable in the State of Alabama shall govern this Agreement without regard to
the place of Executive's execution of the Agreement or performance.
19. Notices. All notices and other communications required or permitted
-------
hereunder or necessary or convenient herewith shall be in writing and shall be
deemed given only when received. Unless changed by a written notification, the
addresses for the parties are as follows:
If to the Company:
-----------------
Birmingham Steel Corporation
1000 Urban Center Drive, Suite 300
Birmingham, Alabama 35242
Attention: Chief Executive Officer
With a Copy to:
Williams Shanks, Jr.
Balch & Bingham
1901 Sixth Avenue North, Suite 2600
Birmingham, Alabama 35203
If to the Executive:
-------------------
Kevin E. Walsh
64 Governors Lane
Princeton, New Jersey 08540-3671
With a Copy to:
John J. Ferguson, Esq.
Bleakley Platt & Schmidt, LLP
66 Field Point Road
Greenwich, CT 06830
13
<PAGE>
20. Entire Agreement. This Agreement supersedes all prior Agreements and
----------------
understandings between the parties with respect to the matters covered herein,
and may not be changed or terminated orally, and no change, termination or
attempted waiver of any of the provisions hereof shall be binding unless in a
writing, signed by an authorized officer or representative of the party against
whom the same is sought to be enforced.
21. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed to be an original and all of which together will
constitute one and the same instrument.
[The remainder of this page is intentionally left blank.]
14
<PAGE>
IN WITNESS WHEREOF, Executive and the Company have caused this Agreement to
be executed, both intending to be fully and legally bound.
NOTICE TO EXECUTIVE
-------------------
This Agreement affects important rights. Do not sign this Agreement unless you
have read it carefully, and are satisfied that you understand it completely.
EXECUTIVE:
BIRMINGHAM STEEL CORPORATION
By:
Its:
15
<PAGE>
EXHIBIT 10.19
BIRMINGHAM STEEL CORPORATION
EXECUTIVE SEVERANCE PLAN
(AMENDED AND RESTATED AS OF SEPTEMBER 2, 1999)
ARTICLE I
PURPOSE OF PLAN
The name of this plan is the Birmingham Steel Corporation Executive
Severance Plan (the "Severance Plan"). The Severance Plan's purpose is to
enable Birmingham Steel Corporation (the "Company") to attract and retain
officers and other key employees by providing Severance Plan Participants
additional assurance of fair treatment and compensation in the event of a Change
in Control of the Company. After a Change in Control, the Severance Plan
provides Participants lump-sum severance payments and limited continuation
coverage under certain welfare benefit plans sponsored by the Company in order
to reduce the inevitable personal distractions and allow Severance Plan
Participants to focus their time and energy on business-related concerns. The
Severance Plan shall have no effect prior to a Change in Control of the Company
and no benefits shall be provided under this Severance Plan for employment
terminations or other events occurring prior to a Change in Control of the
Company.
ARTICLE II
DEFINITIONS
For purposes of this Severance Plan, the following terms shall be defined
as set forth
below:
2.1 "Affiliate" means any corporation (other than a Subsidiary),
partnership, joint venture or any other entity in which the Company owns,
directly or indirectly, at least a 10 percent beneficial ownership interest.
2.2 "Board of Directors" means the Board of Directors of the Company.
2.3 "Change in Control" means the happening of any of the following:
(a) when any "person", as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Company or a Subsidiary or any
Company employee benefit plan (including its trustee)), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly of securities of the Company representing fifteen
percent (15%) or more of the combined voting power of the Company's then
outstanding securities;
<PAGE>
(b) when, during any period of two consecutive years or less during
the existence of the Severance Plan, individuals who, at the beginning of
such period, constituted the Board of Directors, together with any new
directors (other than a director whose initial assumption of office is in
connection with an actual or threatened contest, including but not limited
to a proxy or consent solicitation, relating to the election of directors
of the Company or a settlement of such contest or consent solicitation)
elected or nominated by at least two-thirds of the individuals who were
directors at the beginning of such period or whose election or nomination
was previously so approved, cease, for any reason other than death, to
constitute at least a majority thereof; or
(c) the consummation of a transaction requiring stockholder approval
for the acquisition of the Company by an entity other than the Company or a
Subsidiary through purchase of assets, or by merger, or otherwise.
2.4 "Code" means the Internal Revenue Code of 1986, as it may from time to
time be amended or supplemented.
2.5 "Compensation Committee" means the Compensation and Stock Option
Committee of the Board of Directors.
2.6 "Company" means Birmingham Steel Corporation, a Delaware corporation,
and any successor to substantially all of its business and/or assets which
executes and delivers the agreement provided for in Section 8.1 or which
otherwise becomes bound by all the terms and provisions of this Severance Plan
by operation of law. If a Participant is employed by a Subsidiary or Affiliate
of the Company, references to the Company with respect to such Participant
shall, unless the context otherwise requires, mean the Company or the employing
Subsidiary or Affiliate.
2.7 "Disability" means total or permanent disability as determined under
the Company's long term disability program as from time to time in effect.
2.8 "Employee" means any person (including any officer or director)
employed by the Company on a full-time salaried basis.
2.9 "ERISA" means the Employee Retirement Income Security Act of 1974, as
it may from time to time be amended or supplemented.
2.10 "Exchange Act" means the Securities Exchange Act of 1934, as it may
from time to time be amended or supplemented.
2.11 "Good Reason," when used with reference to a termination by a
Participant of his or her employment with the Company after a Change in Control
and during the Severance
2
<PAGE>
Period, means a good faith determination by the Participant that any of the
following acts or omissions has occurred:
(a) except in connection with a bona fide lateral transfer or
promotion, without the Participant's express written consent, the
assignment to such Participant of any duties materially inconsistent with
such Participant's position, duties, responsibilities (including reporting
responsibilities) and status with the Company immediately prior to a Change
in Control, or a change in such Participant's title or office from that in
effect immediately prior to a Change in Control, or any removal of such
Participant from or any failure to reelect such Participant to any of such
positions, except in connection with the termination of such
Participant's employment by the Company for Substantial Cause or for
Disability or by the Participant other than for Good Reason;
(b) a reduction by the Company of the Participant's salary as in
effect immediately prior to a Change in Control, or as the same may be
increased from time to time, or the failure by the Company to increase such
base salary not later than the anniversary date of such Participant's last
salary increase during each year in the Severance Period (or, if such
Participant did not receive a salary increase during the 12 months
immediately preceding such Change in Control, not later than one month
after such Change in Control and on the anniversary date of the date of
that increase) by an amount that at least equals, on a percentage basis, 75
% of the average annual percentage increase in base salary for all
Participants during the 12 months immediately preceding the date on which
such Participant's salary is required to be increased hereunder;
(c) without the Participant's express written consent, a change in
the Participant's principal work location to a location more than 25 miles
from such Participant's principal work location immediately prior to a
Change in Control, except for required travel on the Company's business to
an extent substantially consistent with such Participant's business travel
obligations, if any, immediately prior to a Change in Control;
(d) the Company's (i) failure to continue in effect any benefit or
compensation plan, management incentive or bonus plan, performance share
plan, longterm incentive plan, defined contribution or defined benefit
pension plan, life insurance plan, health and accident plan or disability
plan or any other employee benefit plan, program or arrangement (including,
without limitation, "employee benefit plans" within the meaning of Section
3(3) of ERISA in which the Participant was participating immediately prior
to a Change in Control (or substitute plans, programs or arrangements
providing the Participant with substantially similar benefits); (ii) taking
of any action, or failure to take any action, which could (A) adversely
affect such Participant's participation in, or materially reduce such
Participant's benefits under, such plans, programs or arrangements taken as
a whole, (B) materially adversely affect the basis for computing benefits
under any of such plans, programs or arrangements or (C) deprive such
Participant of any material fringe benefit enjoyed by such Participant
immediately prior to a Change in Control; or (iii)
3
<PAGE>
failure to provide such Participant with the number of paid vacation days
to which such Participant was entitled immediately prior to a Change in
Control;
(e) the failure by the Company to pay the Participant any portion of
such Participant's current compensation, or any portion of such
Participant's compensation deferred under any plan, agreement or
arrangement of or with the Company, within seven days of the date such
compensation is due;
(f) the failure by the Company to obtain an assumption of the
obligation of the Company under this Severance Plan by any successor to the
Company; or
(g) any purported termination of the Participant's employment by the
Company which is not effected pursuant to the requirements of this
Severance Plan.
2.12 "Participant" means an individual entitled to be treated as such
pursuant to Section 3.1.
2.13 "Severance Period" means the period defined in Section 3.2.
2.14 "Severance Plan" shall mean the Birmingham Steel Corporation Executive
Severance Plan as set forth herein and as hereafter amended from time to time.
2.15 "Subsidiary" means any corporation, the majority of the outstanding
voting stock of which is owned, directly or indirectly, by the Company.
2.16 "Substantial Cause," when used in connection with the termination of a
Participant's employment by the Company after a Change in Control and during
the Severance Period, means a felony conviction of a Participant or the failure
of a Participant to contest prosecution for a felony, or a Participant's willful
misconduct or willful dishonesty, any of which is materially harmful to the
business or reputation of the Company or any subsidiary or affiliate of the
Company. For purposes of this definition, no act, or failure to act, on the
Participant's part shall be considered "willful" unless done, or omitted to be
done, by such Participant not in good faith and without reasonable belief that
such Participant's action or omission was in the best interests of the Company.
2.17 "Termination Date" means, with respect to a Participant, the effective
date of the termination of such Participant's employment as provided in Sections
4.1 and 4.2.
2.18 "Without Substantial Cause" means, when used in connection with the
termination of a Participant's employment by the Company after a Change in
Control and during the Severance Period, any termination of employment of such
Participant by the Company which is not a termination of employment for
Substantial Cause or for Disability.
4
<PAGE>
ARTICLE III
APPLICATION OF SEVERANCE PLAN
3.1 Participation. The individuals entitled to participate in the
-------------
Severance Plan (each, a "Participant") shall be the key members of management of
the Company designated as Participants for purposes of this Severance Plan on
Annex A hereto, which designation may be modified by the Board of Directors from
time to time, and whose participation as a Participant has not been terminated
pursuant to this Section 3.1. From time to time, at least every 12 months, the
Compensation Committee shall review the individuals classified as Participants
and make recommendations to the Board of Directors for designation of additional
Participants and for termination of participation of individuals, as
appropriate. The Board of Directors may terminate the participation of any
person (individually whether or not such person was individually designated or
included as part of a group of Employees designated as Participants by the Board
of Directors) as a Participant for purposes of this Severance Plan at any time
and for any reason (and any person duly terminated as a Participant shall cease
to be a Participant for all purposes under this Severance Plan), effective one
month following the delivery to such person of a written notice of such
termination; provided, however, that the Board of Directors may not terminate
any Participant as aforesaid following a Change in Control, and, provided
further, that, if the Board of Directors elects to terminate this Severance Plan
prior to a Change in Control, general notice to such effect may be published or
posted by the Company in lieu of a written notice to each Participant.
3.2 Severance Period. This Severance Plan shall apply only to a
----------------
termination of employment of a Participant pursuant to a written notice of
termination or intent to terminate given during a period (the "Severance
Period") commencing on the date immediately preceding the date of a Change in
Control and terminating on the second anniversary of the date of the Change in
Control. This Severance Plan shall have no effect prior to a Change in Control
of the Company and no benefits shall be provided under this Severance Plan for
any terminations occurring prior to a Change in Control of the Company.
ARTICLE IV
TERMINATION OF PARTICIPANTS
4.1 Termination of Employment of Participants by the Company During the
-------------------------------------------------------------------
Severance Period.
- ----------------
(a) Participation under this Severance Plan shall not be construed as
creating any contract of employment between the Company and any Participant
or interfering with the right of the Company to discharge or retire any
Participant either before or after a Change
5
<PAGE>
in Control of the Company. During the Severance Period following a Change
in Control, the Company shall have the right to terminate a Participant's
employment hereunder for Substantial Cause, for Disability or Without
Substantial Cause by following the procedures hereinafter specified.
(b) Termination of a Participant's employment for Disability shall
become effective 30 business days after a notice of intent to terminate
such Participant's employment, specifying Disability as the basis for such
termination, is given to such Participant by the chief executive officer
(or by the Compensation Committee in the case of the chief executive
officer) (such effective date being referred to as such Participant's
"Termination Date").
(c) Termination of a Participant for Substantial Cause shall be
effective ten business days after the Participant is given notice thereof
by the Compensation Committee (such effective date being referred to as
such Participant's "Termination Date") specifying in detail the particulars
of such Participant's conduct found to justify such termination for
Substantial Cause, provided such conduct has not been cured (if possible)
within such ten-day period. Notwithstanding the foregoing, a Participant
shall not be deemed to have been terminated for Substantial Cause unless
and until there shall have been delivered to the Participant a copy of a
resolution duly adopted by the affirmative vote of not less than three-
quarters (3/4) of the entire membership of the Board of Directors at a
meeting of the Board of Directors (after reasonable notice to the
Participant and an opportunity for the Participant, together with his or
her counsel, to be heard before the Board of Directors), finding that in
the good faith opinion of the Board of Directors the Participant was guilty
of conduct constituting Substantial Cause and specifying the particulars
thereof in detail. Any purported termination of a Participant for
Substantial Cause which is not implemented in accordance with the terms of
this Severance Plan (including the failure to obtain the requisite vote of
the Board of Directors referred to herein) shall be considered a
termination of such Participant by the Company Without Substantial Cause.
(d) The Company shall have the absolute right to terminate a
Participant's employment Without Substantial Cause at any time.
Termination of a Participant's employment Without Substantial Cause shall
be effective five business days after the Secretary of the Company gives to
such Participant notice thereof (such effective date being referred to as
such Participant's "Termination Date"), specifying that such termination
is Without Substantial Cause.
(e) Upon a termination of a Participant's employment for Substantial
Cause or for Disability, such Participant shall have no right to receive
any compensation or benefits hereunder except for compensation and benefits
accrued to such Participant as of such Participant's Termination Date.
Upon a termination of a Participant's employment Without Substantial Cause,
such Participant shall be entitled to receive the benefits
6
<PAGE>
provided in Section 5.1. Nothing in this Severance Plan shall be construed
as eliminating or restricting any benefits which a disabled employee would
be entitled to under any disability plan maintained by the Company and in
effect at the time of termination of a Participant's employment for
Disability.
4.2 Termination of Employment by Participant During Severance Period.
----------------------------------------------------------------
During the Severance Period following a Change in Control of the Company, a
Participant shall be entitled to terminate his or her employment with the
Company and to receive the benefits provided in Section 5.1 if, and only if,
such termination is for Good Reason. A Participant shall give the Company
notice of voluntary termination of employment, which notice need specify only
such Participant's desire to terminate his or her employment and, if such
termination is for Good Reason, set forth in reasonable detail the facts and
circumstances claimed by such Participant to constitute Good Reason.
Termination of employment by a Participant pursuant to this Section 4.2 shall be
effective five business days after such Participant gives notice thereof to the
Company (such effective date being referred to as such Participant's
"Termination Date").
ARTICLE V
BENEFITS
5.1 Benefits Upon Termination in Certain Circumstances. During the
--------------------------------------------------
Severance Period following a Change in Control of the Company, a Participant
whose employment is terminated by the Company Without Substantial Cause pursuant
to Section 4.1(d) or who terminates his or her employment for Good Reason
pursuant to Section 4.2, but under no other circumstances, shall be entitled to
receive the following payments and benefits:
(a) The Company shall pay to the Participant, not later than the
Termination Date, a lump sum cash amount equal to the sum of (i) the full
base salary earned by such Participant through the Termination Date and
unpaid at the Termination Date, calculated at the highest rate of base
salary in effect at any time during the 12 months immediately preceding the
Termination Date, (ii) the amount of any base salary attributable to
accrued but unused vacation, (iii) any annualized bonus under any bonus
plan, contract or custom of the Company accrued to such Participant through
the Termination Date and unpaid at the Termination Date, except for any
amount payable under any incentive compensation plan sponsored by the
Company, which shall be payable in accordance with the terms of such Plan,
plus (iv) all other amounts earned or accrued, if any, by such Participant
and unpaid at the Termination Date.
(b) The Company shall pay to each Participant, not later than the
Termination Date, a lump sum cash amount equal to a multiple of the amount
of such Participant's annual compensation. The multiple applicable to a
particular Participant shall be the number "two" or "three", as set forth
opposite the Participant's name on Annex A hereto.
7
<PAGE>
The term "annual compensation" for purposes of this Section 5.1(b) shall
mean the sum of (1) the highest annual rate of salary in effect for the
Participant during the twelve-month period ending on the Participant's
termination of employment, plus (2) the Participant's target bonus for the
year in which occurs the Participant's termination of employment.
(c) The Company shall maintain in full force and effect for the
Participant's continued benefit all life insurance, accidental death and
dismemberment insurance, medical, dental and prescription drug plans,
programs or arrangements, whether group or individual, in which such
Participant was entitled to participate at any time during the 12-month
period prior to the Termination Date, until the earliest to occur of (i) a
number of years equal to the multiple applicable to the Participant for
purposes of Section 5.1(b) above; (ii) such Participant's death (provided
that benefits payable to such Participant's beneficiaries shall not
terminate upon such Participant's death); or (iii) with respect to any
particular plan, program or arrangement, the date such Participant is
afforded a comparable benefit at a comparable cost to such Participant by
a subsequent employer. In the event that such Participant's participation
in any such plan, program or arrangement of the Company is prohibited, the
Company shall arrange to provide such Participant with benefits
substantially similar to those which such Participant is entitled to
receive under such plan, program or arrangement for such period.
(d) The Participant shall not be required to mitigate the amount of
any payment or benefit provided for in this Section 5 by seeking other
employment or otherwise.
(e) Except as expressly provided in Section 5(c)(iii), the amount of
any payment or benefit provided for in this Section 5 shall not be reduced
by any compensation, benefits or other amounts paid to or earned by the
Participant as the result of employment with another employer after the
Termination Date or otherwise.
5.2 Limitation on Benefits.
-----------------------
(a) Notwithstanding any other provisions of this Severance Plan, in
the event that any payment or benefit received or to be received by a
Participant in connection with a Change in Control or the termination of
the Participant's employment (whether pursuant to the terms of this
Severance Plan or any other plan, arrangement or agreement with the
Company, any person, entity or group whose actions result in a Change in
Control or any affiliate of the Company or such person, entity or group)
(all such payments and benefits being hereinafter called "Total Payments")
would be subject (in whole or part), to the excise tax under Section 4999
of the Code (the "Excise Tax"), then the cash severance payments under
Section 5.1(b) of this Severance Plan shall first be reduced and,
thereafter, the continuation of benefits under Section 5.1(c) of this
Severance Plan shall be reduced, to the extent necessary so that no portion
of the Total Payments is subject to the Excise Tax, but only if (1) the net
amount of such Total Payments, as so reduced (and
8
<PAGE>
after subtracting the net amount of federal, state and local income taxes
on such reduced Total Payments), is greater than or equal to (2) the net
amount of such Total Payments without such reduction (but after subtracting
the net amount of federal, state and local income taxes on such Total
Payments and the amount of Excise Tax to which the Participant would be
subject in respect of such unreduced Total Payments); provided, however,
-------- -------
that the Participant may elect to have the benefit continuation reduced (or
eliminated) prior to any reduction of the cash severance payments.
(b) All determinations under Section 5.2(a) above shall be made by
the accounting firm which was, immediately prior to Change in Control, the
Company's independent auditor, which determination shall be conclusive.
5.3 Payment Obligations Absolute. The Company's obligation to pay a
----------------------------
Participant the amounts provided for hereunder shall be absolute and
unconditional and shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Company may have against such Participant or anyone else. In the event of
the Company's failure to pay any amounts provided for hereunder on a timely
basis, interest shall accrue on such unpaid amounts at an annual rate equal to
the prime rate in effect on the required payment date plus four percentage
points.
ARTICLE VI
CLAIMS PROCEDURES
6.1 Claims Procedure. Claims for benefits under the Severance Plan shall
----------------
be filed in writing with the Compensation Committee. Written notice of the
disposition of a claim shall be furnished to the claimant within 30 days after
the application is filed. In the event the claim is denied, the reasons for the
denial shall be specifically set forth in the notice in language calculated to
be understood by the claimant, pertinent provisions of the Severance Plan shall
be cited, and, where appropriate, an explanation as to how the claimant can
perfect the claim will be provided; provided, however, that in the event of a
-------- -------
claim for benefits based upon a termination for Good Reason, such claim shall be
denied by the Compensation Committee only if it determines that, under the
particular facts and circumstances, the Participant did not make a good faith
determination that an act or omission constituting Good Reason occurred. In
addition, the claimant shall be furnished with an explanation of the Severance
Plan's claims review procedure.
6.2 Claims Review Procedure. Any Employee, former Employee, or
-----------------------
Beneficiary of either, who has been denied a benefit by a decision of the
Compensation Committee pursuant to Section 6.1 shall be entitled to request the
Compensation Committee to give further consideration to his or her claim by
filing with the Compensation Committee (on a form which may be obtained from the
Compensation Committee) a request for a hearing. Such request, together with a
written statement of the reasons why the claimant believes his or her claim
should be allowed, shall be filed with the Compensation Committee no later than
30 days after receipt of the written
9
<PAGE>
notification provided for in Section 6.1. The Compensation Committee shall then
conduct a hearing within the next 30 days, at which the claimant may be
represented by an attorney or any other representative of his or her choosing
and at which the claimant shall have an opportunity to submit written and oral
evidence and arguments in support of his or her claim. At the hearing (or prior
thereto upon 5 business days written notice to the Compensation Committee) the
claimant or his or her representative shall have an opportunity to review all
documents in the possession of the Compensation Committee which are pertinent to
the claim at issue and its disallowance. Either the claimant or the Compensation
Committee may cause a court reporter to attend the hearing and record the
proceedings. In such event, a complete written transcript of the proceedings
shall be furnished to both parties by the court reporter. The full expense of
any such court reporter and such transcripts shall be borne by the Company. A
final decision as to the allowance of the claim shall be made by the
Compensation Committee within 45 days of receipt of the appeal. Such
communication shall be written in a manner calculated to be understood by the
claimant and shall include specific reasons for the decision and specific
references to the pertinent Plan provisions on which the decision is based.
6.3 Arbitration.
-----------
(a) Any controversy relating to a claim arising out of or relating to
this Severance Plan, including, but not limited to, claims for benefits due
under this Severance Plan, claims for the enforcement of ERISA, claims
based on the federal common law of ERISA, claims alleging discriminatory
discharge under ERISA, claims based on state law, and assigned claims
relating to this Severance Plan shall be settled by arbitration in
accordance with the then current Employee Benefit Claims Arbitration Rules
of the American Arbitration Association (the "AAA") or any successor rules
which are hereby incorporated into the Severance Plan by this reference;
provided, however, both the Company and the Participant shall have the
right at any time to seek equitable relief in court without submitting the
issue to arbitration.
(b) Neither the Participant (or his or her beneficiary) nor the
Company shall be required to submit any such claim or controversy to
arbitration until the Participant (or his or her beneficiary) has first
exhausted the Severance Plan's internal appeals procedures set forth in
Section 6.2. However, if the Participant (or his or her beneficiary) and
the Company agree to do so, they may submit the claim or controversy to
arbitration at any point during the processing of the dispute.
(c) The Company will bear all costs of an arbitration, including
expenses such as pre-hearing discovery, travel, experts' fees, accountants'
fees, and attorney's fees except as otherwise provided herein. The decision
of the arbitrator shall be final and binding on all parties, and judgment
on the arbitrator's award may be entered in any court of competent
jurisdiction.
10
<PAGE>
(d) If there is a dispute as to whether a claim is subject to
arbitration, the arbitrator shall decide that issue. The claim must be
filed with the AAA within the applicable statute of limitations period. The
arbitrator shall issue a written determination sufficient to ensure
consistent application of the Severance Plan in the future.
(e) Any arbitration will be conducted in accordance with the
following provisions not withstanding the Rules of the AAA. The
arbitration will take place in a neutral location within the metropolitan
area in which the Participant was or is employed by the Company. The
arbitrator will be selected from the attorney members of the Commercial
Panel of the AAA who reside in the metropolitan area where the arbitration
will take place and have at least 5 years of ERISA experience. If an
arbitrator meeting such qualifications is unavailable, the arbitrator will
be selected from the attorney members of the National Panel of Employee
Benefit Claims Arbitrators established by the AAA.
(f) In any such arbitration, each party shall be entitled to
discovery of any other party as provided by the Federal Rules of Civil
Procedure then in effect; provided, however, that discovery shall be
limited to a period of 60 days. The arbitrator may make orders and issue
subpoenas as necessary. The arbitrator shall apply ERISA, as construed in
the federal Circuit in which the arbitration takes place, to the
interpretation of the Plan and the Federal Arbitration Act to the
interpretation of this arbitration provision.
(g) Either party has the right to arrange for a stenographic record
to be made of the proceedings, which stenographic record shall be the
official record. Either party may make an offer of judgment at any time in
accordance with the procedures of Rule 68 (or its successor) of the Federal
Rules of Civil Procedure. The existence of such an offer is not admissible
in any proceeding. Arbitration is the exclusive remedy for any dispute
between the parties other than equitable relief which either party may seek
through the court system.
ARTICLE VII
ADMINISTRATION
The Severance Plan shall be administered by or at the direction of the
Compensation Committee. The Compensation Committee is responsible for the
general administration and management of the Severance Plan and shall have all
powers and duties necessary to fulfill its responsibilities.
11
<PAGE>
ARTICLE VIII
GENERAL PROVISIONS
8.1 Successors. This Severance Plan shall be binding upon any successor
----------
(whether direct or indirect, by purchase, merger, consolidation, liquidation or
otherwise) to all or substantially all of the business and/or assets of the
Company. Additionally, the Company shall require any such successor expressly to
agree to assume all of the obligations of the Company under this Severance Plan
upon or prior to such succession taking place. Failure of the Company to obtain
such agreement upon or prior to any such succession shall be a breach of this
Severance Plan and shall constitute Good Reason for a Participant to terminate
such Participant's employment with the Company under this Severance Plan. With
respect to any such failure to assume the obligations hereunder, the date on
which any such succession becomes effective shall be deemed the Termination
Date.
8.2 No Assignment by Participants. Each Participant's rights hereunder
-----------------------------
are personal, and no Participant may assign or transfer any part of such
Participant's rights or duties hereunder, or any compensation due to such
Participant hereunder, to any other person, except that this Severance Plan
shall inure to the benefit of and be enforceable by such Participant's personal
or legal representatives, executors, administrators, heirs, distributees,
devisees, legatees or beneficiaries.
8.3 Termination and Amendments. The Board of Directors may terminate this
--------------------------
Severance Plan at any time prior to a Change in Control, or terminate the
participation of any Participant in the Severance Plan in accordance with
Section 3.1, and may amend or modify this Severance Plan at any time, provided
that no such amendment or modification effective after a Change in Control shall
be effective as to any person who is a Participant at the time of such amendment
or modification except if such Participant shall consent thereto in writing.
8.4 Severability. If any term or provision of this Severance Plan or the
------------
application thereof to any person or circumstance shall to any extent be invalid
or unenforceable, the remainder of this Severance Plan or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable shall not be affected thereby, and each term
and provision of this Severance Plan shall be valid and enforceable to the
fullest extent permitted by law.
8.5 Governing Law. This Severance Plan is a welfare benefit plan subject
-------------
to ERISA and it shall be interpreted, administered, and enforced in accordance
with that law. To the extent that state law is applicable, the statutes and
common law of the State of Delaware (excluding its choice of law statutes and
common law) shall apply.
8.6 Payroll and Withholding Taxes. The Company may withhold from any
-----------------------------
amounts payable to a Participant hereunder all federal, state or other taxes
that the Company shall reasonably determine are required to be withheld pursuant
to any applicable law or regulation.
12
<PAGE>
8.7 Funding. This Severance Plan shall be unfunded. Benefits under this
-------
Severance Plan shall be paid from the general assets of the Company. The Company
may establish a trust pursuant to a trust agreement and make contributions
thereto for the purpose of assisting the Company in meeting its obligations
hereunder. Any such trust agreement shall contain procedures to the following
effect:
(a) In the event of the insolvency of the Company, the trust fund
will be available to pay the claims of any creditor of the Company to whom
a distribution may be made in accordance with state and federal bankruptcy
laws. The Company shall be deemed to be "insolvent" if the Company is
subject to a pending proceeding as a debtor under the Federal Bankruptcy
Code (or any successor federal statute) or any state bankruptcy code. In
the event the Company becomes insolvent, the Board of Directors and chief
executive officer of the Company shall notify the trustee of the event as
soon as practicable. Upon receipt of such notice, or if the trustee
receives other written allegations of the Company's insolvency, the trustee
shall cease making payments of benefits from the trust fund, shall hold the
trust fund for the benefit of the Company's creditors, and shall take such
steps that are necessary to determine within 30 days whether the Company is
insolvent. In the case of the trustee's actual knowledge of or other
determination of the Company's insolvency, the trustee will deliver assets
of the trust fund to satisfy claims of the Company's creditors as directed
by a court of competent jurisdiction.
(b) The trustee shall resume payments of benefits under the trust
agreement only after the trustee has determined that the Company is not
insolvent (or is no longer insolvent, if the trustee had previously
determined the Company to be insolvent) or upon receipt of an order of a
court of competent jurisdiction requiring such payment. If the trustee
discontinues payment of benefits pursuant to clause (a), above, and
subsequently resumes such payment, the first payment on account of a
Participant following such discontinuance shall include an aggregate amount
equal to the difference between the payments which would have been made on
account of such Participant by the Company during any such period of
discontinuance, plus interest on such amount at a rate equivalent to the
net rate of return earned by the trust fund during the period of such
discontinuance.
8.8 Coordination with Other Contracts. At any time prior to a Change in
---------------------------------
Control, the Board of Directors may determine that payments to a participant
under this Severance Plan to which the Participant may be entitled by reason of
the termination of employment of such Participant by the Company pursuant to
Section 4.1(d) or by such Participant pursuant to Section 4.2 shall be in lieu
of any payments under any other contract between such Participant and the
Company. As a condition of receiving payments hereunder, a Participant with a
contract with the Company that provides similar benefits and who has been
covered by such Board of Directors' determination must elect to receive payments
hereunder by executing a waiver of any rights that such Participant may have to
recover payments under such other contract as a result of any such termination.
13
<PAGE>
8.9 Sale of Assets, Transfers and Continuation of Employment. A
--------------------------------------------------------
Participant who in connection with the sale of any portion of the assets of the
Company is offered employment with the purchaser of such assets (i) without any
gap in business days between employment by the Company and employment by such
purchaser; (ii) in a substantially equivalent category or grade level with
substantially equivalent duties; (iii) at a location not more than 25 miles from
his or her employment location immediately prior to a Change in Control; (iv) at
a base salary not less than the base salary of the Participant immediately prior
to a Change in Control; (v) with incentive compensation and benefits, including
paid vacation days, substantially equivalent to those received by the
Participant immediately prior to a Change in Control and (vi) under conditions
of good faith by the Purchaser, including assumption of the Company's
obligations with respect to such Participant under this Severance Plan, shall
not receive any payments or benefits under this Severance Plan unless such
Participant's employment is terminated during the Severance Period following a
Change in Control of the Company by such purchaser pursuant to Section 4.1(d) or
by the Participant for Good Reason pursuant to Section 4.2. A transfer from the
Company or from a Subsidiary or Affiliate to another Subsidiary or Affiliate of
the Company or to the Company shall not by itself constitute a termination of
employment.
8.10 Indemnification. To the extent permitted by applicable law and in
---------------
addition to any other indemnities or insurance provided by the Company, the
Company shall indemnify and hold harmless its (and its Affiliates' or
Subsidiaries') current and former officers, directors, and employees against all
expenses, liabilities, and claims (including legal fees incurred to defend
against such liabilities and claims) arising out of their discharge in good
faith of their administrative and fiduciary responsibilities with respect to
the Severance Plan. Expenses and liabilities arising out of willful misconduct
will not be covered under this indemnity.
8.11 Legal Fees. The Company shall promptly reimburse a person for all
----------
legal, accounting and other fees and expenses (including travel expenses)
reasonably incurred in bringing a challenge in good faith (whether through
arbitration, litigation or making a claim for benefits hereunder) to obtain or
enforce any right or benefit provided hereunder or in defending in good faith
(whether in arbitration, litigation or otherwise as contemplated by this
Severance Plan) a claim of termination for Substantial Cause.
ARTICLE IX
EFFECTIVE DATE OF SEVERANCE PLAN
The Severance Plan shall be effective as of July 1, 1997, and was adopted
by the Board of Directors on August 29, 1997.
14
<PAGE>
BIRMINGHAM STEEL CORPORATION
EXECUTIVE SEVERANCE PLAN
Annex A
-------
Participant Multiple
- ----------- --------
Blake, Mike - General Manager, Cleveland 2
Downey, Gary - General Manager, Jackson 2
Garrett, John D. -Vice President, Finance & Control 3
Garvey, Robert - Chairman of the Board & CEO 3
Hill, Brian F. - Chief Operating Officer 3
Lepp, Raymond - Managing Director, Western Region 3
Lucas, William - Managing Director, Southern Region 3
McArdle, J. Thomas - Vice President & General Manager 3
Oakes, Philip L. - Vice President, Human Resources 3
Ohm, John - Vice President & General Manager 3
Olden, Harold - General Manager, Memphis 2
Pecher, Catherine W. - Vice President & Corporate Secretary 3
Richardson III, Charles E. - General Counsel 3
Walsh, Kevin - Chief Financial Officer 3
Wheeler, Jack - Managing Director, Northern Region 3
White, W. Joel - Vice President, Information Technology 2
Wilson, Robert G. - Vice President, Business Development 2
15
<PAGE>
Exhibit 22.1
BIRMINGHAM STEEL CORPORATION
SUBSIDIARIES OF THE REGISTRANT
AS OF JUNE 30, 1999
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
Birmingham East Coast Holdings, a Delaware corporation
Birmingham Southeast, LLC, a Delaware corporation
Midwest Holdings, Inc., a Delaware corporation
Cumberland Recyclers, LLC, a Delaware corporation
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, 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 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; (v) in the Registration Statement (Form S-8 No.
33-51080) pertaining to the Birmingham Steel Corporation 1992 Non-Union
Employee's Stock Option Plan; (vi) in the Registration Statement (Form S-8 No.
33-64069) pertaining to the Birmingham Steel Corporation 1995 Stock Accumulation
Plan; (vii) in the Registration Statement (Form S-8 No. 333-34291) pertaining to
the Birmingham Steel Corporation 1996 Director Stock Option Plan; and (viii) in
the Registration Statement (Form S-8 No. 333-46771) pertaining to the Birmingham
Steel Corporation 1997 Management Incentive Plan of our report dated September
15, 1999, except for Note 7, as to which the date is October 12, 1999, 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, 1999.
/s/ Ernst & Young LLP
Birmingham, Alabama
October 12, 1999
<PAGE>
Exhibit 23.2
The Members
Pacific Coast Recycling, LLC:
We consent to the incorporation by reference in the registration statements
(No.'s 33-16648, 33-23563, 33-30848, 33-41595, 33-51080, 33-64069, 333-34291 and
333-46771) on Forms S-8 of Birmingham Steel Corporation of our report dated July
30, 1999, with respect to the balance sheets of Pacific Coast Recycling LLC as
of June 30, 1999 and 1998 and the related statements of operations, members'
capital (deficit) and cash flows for the years then ended, which report appears
in the Form 10-K of Birmingham Steel Corporation dated June 30, 1999.
/s/KPMG LLP
Los Angeles, California
October 11, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1998 JUN-30-1997
<PERIOD-START> JUL-01-1998 JUL-01-1997 JUL-01-1996
<PERIOD-END> JUN-30-1999 JUN-30-1998 JUN-30-1997
<CASH> 935 902 959
<SECURITIES> 0 0 0
<RECEIVABLES> 72,047 93,023 92,843
<ALLOWANCES> 586 1,259 487
<INVENTORY> 100,330 142,246 134,813
<CURRENT-ASSETS> 270,889 350,290 321,592
<PP&E> 654,089 613,134 574,789
<DEPRECIATION> 214,527 182,132 150,353
<TOTAL-ASSETS> 877,466 1,158,014 1,124,717
<CURRENT-LIABILITIES> 160,455 112,617 92,710
<BONDS> 12,500 12,500 12,500
0 0 0
0 0 0
<COMMON> 298 298 298
<OTHER-SE> 230,433 460,309 471,250
<TOTAL-LIABILITY-AND-EQUITY> 877,466 1,158,014 1,124,717
<SALES> 709,876 836,875 667,716
<TOTAL-REVENUES> 709,876 836,875 667,716
<CGS> 608,915 727,301 588,423
<TOTAL-COSTS> 608,915 727,301 588,423
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 12,854 1,305 6,730
<INTEREST-EXPENSE> 24,248 17,261 11,906
<INCOME-PRETAX> 18,098 42,905 32,650
<INCOME-TAX> 14,814 14,960 12,863
<INCOME-CONTINUING> 3,284 27,945 19,787
<DISCONTINUED> (227,520) (26,316) (5,370)
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (224,236) 1,629 14,417
<EPS-BASIC> (7.61) 0.05 0.50
<EPS-DILUTED> (7.61) 0.05 0.50
</TABLE>
<PAGE>
Exhibit 99.1
Risk Factors that May Affect Future Operating Results
Certain statements contained in our public filings, press releases and other
documents and materials as well as certain statements in written or oral
statements made by us or on our behalf are forward-looking statements based on
our current expectations and projections about future events, including: market
conditions; future financial performance and potential growth; effect of
indebtedness including restrictive covenants and asset pledges; future cash
sources and requirements, including expected capital expenditures; competition
and production costs; strategic plans, including estimated proceeds from and the
timing of asset sales, including the sale of the SBQ division; potential
acquisitions; environmental matters and liabilities; possible equipment losses;
Year 2000 issues; labor relations; and other matters. These forward-looking
statements are subject to a number of risks and uncertainties, including those
discussed below, which could cause our actual results to differ materially from
historical results or those anticipated and certain of which are beyond our
control.
The words "believe," "expect," "anticipate" and similar expressions identify
forward-looking statements. All forward-looking statements included in this
document are based upon information available to the Company on the date hereof,
and the Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. It is important to note that the Company's actual results
could differ materially from those described or implied in such forward-looking
statements. Moreover, new risk factors emerge from time to time and it is not
possible for the Company to predict all such risk factors, nor can the Company
assess the impact of all such risk factors on its business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those described or implied in any forward-looking statements.
Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements as a prediction of actual results. The risks
included here are not exhaustive. Other sections of this report may describe
additional factors that could adversely impact the Company's business and
financial performance.
Investors should also be aware that while the Company does, from time to time,
communicate with securities analysts, it is against our policy to disclose to
them any material non-public information or other confidential commercial
information. Accordingly, investors should not assume that the Company agrees
with any statement or report issued by any analyst irrespective of the content
of the statement or report. Furthermore, the Company has a policy against
issuing or confirming financial forecasts or projections issued by others. Thus,
to the extent that reports issued by securities analysts contain any
projections, forecasts or opinions, such reports are not the Company's
responsibility.
Among the factors that could cause actual results to differ materially are the
factors detailed below. In addition, readers should consider the risk factors
described from time to time in other Company reports filed with the Securities
and Exchange Commission.
Weak Market Conditions; High Imports
The Company operates in the steel industry, an industry that is vulnerable to
unpredictable economic cycles. A downturn in the economy or in the Company's
markets could have an adverse effect on the Company's performance. The Company
produces some products which are subject to competition from foreign imports.
Fluctuations in exchange rates or a decline in foreign economic conditions may
adversely affect the Company's performance.
Beginning in fiscal 1998, an economic downturn in Asia led to an excess
worldwide supply of steel products. Although demand for steel products in the
United States is strong, excess worldwide supply has created precarious
conditions in the U.S. steel industry, particularly with respect to price and
volumes. The Company's results are currently being impacted by disturbed
economic conditions in other countries creating a dramatic increase in steel
imports in the U.S. Until such time as the U.S. government intervenes with trade
sanctions or the foreign economic situation improves, the Company's performance
will continue to be adversely impacted by the import situation.
<PAGE>
The Company seeks to spread its sales across the reinforcing bar and merchant
product markets to reduce the Company's vulnerability to an economic downturn in
any one product market. The Company's performance, however, can still be
materially affected by changes in demand for any one of its product lines and by
changes in the economic condition of certain key industries such as construction
and manufacturing. In the past, the Company has sought additional product and
market diversification with its SBQ products. In August 1999, the Company
announced a strategic restructuring as part of which it plans to divest its SBQ
operations in order to focus on its core mini-mill and scrap operations.
Divestiture of the SBQ operations will eliminate some product and market
diversification, leaving the Company with increased exposure to fluctuations in
the rebar and merchant product markets.
Effect of Substantial Indebtedness on Operations and Liquidity
The Company has a significant amount of indebtedness. At June 30, 1999, the
Company's consolidated indebtedness (excluding unused commitments) was $522
million, and it had additional borrowing capacity of approximately $129 million.
The Company's ability to comply with the terms of its credit agreement and its
other debt obligations, to make cash payments with respect to the Company's debt
obligations and to refinance any of such debt obligations will depend on the
Company's future performance. The Company's future performance is subject to
prevailing economic and competitive conditions and certain financial, business
and other factors beyond the Company's control. Having a high degree of leverage
has significant consequences for the Company. For instance, high leverage might
impair the Company's ability to obtain additional financing for acquisitions,
capital expenditures, working capital or general corporate purposes. In
addition, a substantial portion of the Company's cash flow from operations is
used to pay principal and interest on the Company's borrowings. This use of cash
flows reduces the funds available for the Company's operations and other
purposes, including capital spending. Some of the Company's borrowings are and
will continue to be at variable rates of interest, which creates exposure to the
risk of increased interest rates. Finally, the Company may be substantially more
leveraged than some of its competitors. This may place the Company at a relative
competitive disadvantage and may make it more vulnerable to a downturn in
general economic conditions, a slowdown in the Company's business or changing
market conditions and regulations.
Restrictive Covenants; Pledge of Assets
The terms of the Company's credit agreement and agreements with the Senior
Noteholders require the Company to satisfy certain financial tests and to comply
with certain other restrictive covenants. Covenants in the Company's debt
obligations restrict the Company's ability to incur additional indebtedness,
dispose of certain assets and make capital expenditures. The covenants also
restrict the Company's other corporate activities. The Company's ability to
comply with these covenants may be affected by events beyond the Company's
control, including economic, financial and industry conditions. There can be no
assurance that the Company will be able to satisfy or comply with the financial
tests and covenants contained in such agreements. Failure to do so may result in
a default under the Company's credit arrangements. If any such default were not
remedied within the applicable grace period, if any, the lenders under such
agreements would be entitled to declare the amounts outstanding thereunder due
and payable. In addition, the Company's obligations under the credit agreement
and agreements with the Senior Noteholders are secured by substantially all of
the assets of the Company and its subsidiaries. Accordingly, if an event of
default were to occur, the banks and Senior Noteholders could have a priority
claim on substantially all of the assets of the Company.
Need to Refinance Indebtedness
Based upon the current level of the Company's operations and current industry
conditions, the Company anticipates that it will have sufficient resources to
make all required interest and principal payments under the credit agreement and
Senior Notes through December 15, 2001. However, the Company is required to make
significant principal repayments on December 15, 2002 and may be required to
refinance its obligations under the credit agreement and Senior Notes prior to
such time. There can be no assurance that any such refinancing would be possible
at such time, or if possible, that acceptable terms could be obtained.
<PAGE>
In the event of a refinancing of the Senior Notes or a required partial
prepayment thereof as a result of the sale of the SBQ division, the Company is
required to pay the Senior Noteholders an additional "make whole" payment
intended to compensate the Senior Noteholders for any losses on reinvestment of
proceeds incurred by them as a result of the prepayment.
Effect of Change in Control
Under the Company's debt agreements, a change in a majority of the Company's
Board of Directors as a result of a contested proxy solicitation, as is being
waged by The United Group, could give rise, among other things, to the
Exhibit 99.1 acceleration of the Company's debt obligations and may, as a
result, have a material adverse effect on the Company, its financial condition
and its operations. There can be no assurance that the majority of the Company's
Board of Directors will not change as a result of the contested proxy
solicitation.
In the event of such a change in control, the Company would be required to make
an offer to prepay its Senior Notes which, if accepted, would obligate the
Company to pay 100% of their face amount ($280 million), plus accrued but unpaid
interest, together with a make-whole amount of approximately $9.1 million. Under
the terms of the Company's Revolving Credit Agreement, such a change in control
would constitute an event of default, pursuant to which the lenders may declare
the full amount of the outstanding principal and interest to be immediately due
and payable. As of September 30, 1999, the Company had approximately $217
million in borrowings outstanding under its credit agreement.
In the event of such a change in control, the Company would be required to
obtain the forbearance or waiver of its noteholders and lenders or, in the
alternative, refinance its debt obligations. There can be no assurance that the
Company would be able to obtain such forbearances or waivers or to refinance its
debt obligations at such time and on acceptable terms.
In addition, a change in a majority of the Board of Directors of the Company may
trigger the vesting of certain rights and benefits of certain officers and
employees of the Company and thereby cause the Company to incur compensation
expenses and other obligations which, prior to such time, may have only been
contingent and otherwise unvested obligations. Currently, management estimates a
change in control may trigger such expenses and obligations amounting to
approximately $15.5 million.
Highly Competitive Markets; Production Costs
The Company's markets are highly competitive, and are also fragmented both
geographically and by product. As a result, the Company faces numerous regional
or specialized competitors, many of which are well established in their markets.
In addition, some of the Company's competitors are divisions of larger companies
with potentially greater financial and other resources than the Company's own.
Taken together, the competitive forces present in the Company's markets can
impair its operating margins.
The cost of scrap is the largest element in the cost of the Company's finished
rebar and merchant products. The Company purchases most of its scrap on a short-
term basis. Changes in the price of scrap can significantly affect the Company's
profitability. Changes in other raw material prices can also influence the
Company's profitability.
Energy costs are also a significant factor influencing the Company's results.
Current reforms in the electric utility industry at the state and federal level
are expected to lower energy costs in the long run. However, numerous utilities
and political groups are contesting these reforms and states are approaching the
reforms in different fashions. The possibility exists, therefore, that the
Company could be exposed to energy costs which are less favorable than those
available to its competitors. Such a situation could materially affect the
Company's performance. Further, the partial deregulation of certain energy
markets now in effect may lead to significant price increases that would
adversely affect the Company's performance.
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Prices for some of the Company's products are positively affected by the
influence of trade sanctions or restrictions imposed on the Company's foreign
competitors. Changes in these sanctions or restrictions or their enforcement
could adversely affect the Company's results.
SBQ Operations
Because of a number of factors primarily related to management and workforce
turnover and equipment design issues, the Company's SBQ melt shop in Memphis,
Tennessee has operated at less than a commercially viable production level.
Failure to sustain a commercially viable production run rate, continued delays
or other start-up issues in this project could materially adversely affect the
Company's future results. While in start-up operations, the melt shop may
experience "learning curve" and other problems which may adversely affect the
Company's financial performance. The Company is in the process of divesting its
SBQ operations. However, the SBQ operations have not been profitable and delays
in divestiture may cause the Company to suffer greater than expected losses or
costs associated with the discontinued SBQ operations.
Until the Memphis melt shop begins producing at acceptable levels and costs, the
Company's SBQ division will continue to purchase some of its steel billets from
third parties. The cost of these steel billets is a significant portion of the
cost of the SBQ division's finished products. Thus, the performance of this
division, and in turn, the performance of the Company, can be materially
affected by changes in the price of the steel billets it buys from third
parties.
Additional Risks Relating to Divestiture of SBQ Division
Under the credit agreement and agreement with the Senior Noteholders, the
Company will incur a 100 basis point interest rate increase with respect to its
indebtedness if the SBQ division is not sold by January 31, 2001. Such interest
rate penalty would be reduced to 50 basis points if the SBQ division were sold
subsequent to such date.
In addition, the Company will be obligated to repay indebtedness with the
proceeds of the sale of the SBQ division. Also, the sale of the SBQ division
under certain circumstances is subject to the approval of the banks under the
credit agreement and the Senior Noteholders.
As reflected in the charge taken by the Company in connection with its decision
to divest the SBQ division, the Company expects to receive sales proceeds from
the disposition of such assets equal to less than the historical book value of
the assets. There can be no assurance that the ultimate sales price will not
result in additional charges to earnings. The proceeds expected to be realized
on the sale of the SBQ operations are based on management's estimates of the
most likely outcome, considering, among other things, informal appraisals from
the Company's investment bankers and the Company's knowledge of valuations for
steel production assets. The expected operating losses during the disposal
period are based upon the Company's business plan for the SBQ operations.
However, the actual amounts ultimately realized on sale and losses incurred
during the expected disposal period could differ materially from the amounts
assumed in arriving at the losses reflected in the 1999 financial statements.
Among other things, the reserve for operating losses during the expected
disposal period assumes that the Company will continue to operate the SBQ
facilities through the disposal date and that during that period, production and
shipment volumes will improve marginally over fiscal 1999 levels. If the Company
decides to curtail or cease operations before the facilities are sold, actual
losses could be materially different from those provided in the financial
statements. In addition, while management believes that the estimated proceeds
from the sale of the SBQ operations is a reasonable estimate of the enterprise
value, there can be no assurance that such amounts will be realized. To the
extent that actual proceeds or operating losses during the expected disposal
period differ from the estimates that are reflected in the 1999 financial
statements, the variance will be reported in discontinued operations in future
periods.
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Risks Relating to Future Acquisitions; Start-up Expenses
The Company is constantly engaged in the process of evaluating new opportunities
to strengthen its long-term business and financial prospects. From time to time,
this process may lead the Company to make strategic investments, such as
acquisitions and joint ventures, which have the potential to improve the
Company's position in the markets in which it currently competes, as well as new
markets it may choose to enter. In connection with these investments, the
Company may incur, either directly or indirectly, start-up expenses, losses and
other charges that may have a material affect on the Company's financial
performance. Moreover, acquisitions involve numerous other risks, including
difficulties in assimilating acquired assets or operations, diversion of
management's attention from other business concerns and departure of key
employees or customers of acquired businesses.
There is no assurance the Company can successfully identify acquisitions in the
future, and even if the Company can identify acquisition opportunities,
completing such acquisitions may result in new issuances of the Company's stock
that may be dilutive to current owners; increases in the Company's debt and
contingent liabilities; and additional amortization expenses related to goodwill
and other intangible assets. Any of these risks could materially adversely
affect the Company's profitability. Moreover, even if acquisitions are
successfully completed and integrated, there is no assurance that such
acquisitions will have a positive impact on the Company's business or operating
results.
The Company began start-up operations of a new mid section rolling mill at its
Cartersville facility in March 1999. Results in fiscal 1999 reflect pre-
operating and start-up losses associated with this project, and fiscal year 2000
results will continue to reflect such losses. Unexpected increases in the amount
of pre-operating and start-up losses could negatively impact the Company's
financial performance.
Legal Proceedings
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business. Most of the existing known claims
against the Company are covered by insurance, subject to the payment of
deductible amounts by the Company. Management believes that any uninsured or
unindemnified liability resulting from existing litigation will not have a
material adverse effect on the Company's business or financial position.
However, there can be no assurance that insurance, including product liability
insurance, will be available in the future at reasonable rates.
Environmental Matters and Liabilities
The Company operates in an industry subject to numerous environmental
regulations, including regulations relating to air emissions, wastewater
discharges and the handling and disposal of solid and hazardous wastes. Changes
in environmental regulations or in the interpretation or manner of enforcement
of environmental regulations could materially affect the Company's performance.
The Company is not currently planning or performing any environmental
remediations. However, some of the Company's facilities have been in operation
for many years and if the need to perform an environmental remediation should
arise, costs could be substantial. Depending upon the nature and location of the
problem, insurance coverage may or may not cover some or all of the costs
associated with the remediation.
Destruction or Loss of Equipment
The Company's economic performance, like most manufacturing companies, is
vulnerable to a catastrophe that disables one or more of its manufacturing
facilities and to major equipment failure. Depending upon the nature of the
catastrophe or equipment failure, available insurance may or may not cover a
loss resulting from such a catastrophe or equipment failure and the loss
resulting from such a catastrophe or equipment failure could materially affect
the Company's earnings.
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Other Matters
Under the terms of the Company's amended debt agreements (See Note 7 to
Consolidated Financial Statements), dividends and other "restricted payments,"
as defined in the agreements, are limited to the lesser of $750,000 per quarter
or 50% of quarterly income from continuing operations through March 2002. The
Company does not expect to change its present rate of quarterly dividend
payments ($.025 per share) in the near term.
Year 2000 Issue
The Company is nearing completion of its Y2K compliance project and management
of the Company believes it has an effective program in place to resolve the few
remaining year 2000 issues in a timely manner. In the event that the Company
does not complete the remaining tasks, the Company could experience problems
that could result in the temporary interruption of production at some of the
steel making facilities. In addition, disruptions in the economy generally
resulting from Year 2000 issues could also materially adversely affect the
Company. The Company could be subject to litigation for computer systems product
failure, for example, failure to properly date business records. The amount of
the potential liability and lost revenue cannot be reasonably estimated at this
time.
These risk factors include the inability of the Company to complete the plans
and modification that it has identified, the failure of software vendors to
deliver the upgrades and repairs to which they have committed, the wide variety
of information technology systems and components, both hardware and software,
that must be evaluated and the large number of vendors and customers with which
the Company interacts. The Company's assessment of the effects of Year 2000 on
the Company are based, in part, upon information received from third parties
upon which the Company reasonably relied must be considered as a risk factor
that might affect the Company's Year 2000 efforts. The Company is attempting to
reduce the risks by utilizing an organized approach, extensive testing, and
allowance of ample contingency time to address issues identified by tests.
Labor Relations
The Company believes its labor relations are generally good. Almost the entire
work force is non-union and the Company has never suffered a strike or other
labor related work stoppage. If this situation changes, the Company's
performance could suffer material adverse effects.
Obligation to AIR
In fiscal 1997, the Company and Georgetown Industries, Inc. (GII) formed
American Iron Reduction, LLC, (AIR) located in Convent, Louisiana. The joint
venture produces direct reduced iron (DRI), which is used as a substitute for
high grade scrap. Construction of the DRI facility was funded by a $176.9
million non-recourse project financing arrangement, proceeds from a $8 million
industrial revenue bond and initial equity investments of $20 million by the
venture partners in fiscal 1998. Although the project is financed on a non-
recourse basis, both the Company and GII have agreed to purchase AIR's DRI
production during the term of the project financing. Pursuant to the DRI
purchase commitment, the Company has agreed to purchase one-half of the output
from the facility each year, if tendered (up to 600,000 metric tons per year).
In addition during the fourth quarter of fiscal 1999, AIR defaulted on $178.9
million of long-term project finance debt. The Company, AIR and the other
venture partner are currently involved in discussions with AIR's lenders that
could affect the timing or amount of AIR's debt service requirements over the
remaining term of the debt agreements, as well as the Company's obligations to
AIR.
Although the Company intends to dispose of its interest in AIR as a part of its
overall plan of disposal for the SBQ division, the Company could remain
obligated to purchase DRI from AIR beyond the disposal date. If the Company is
unable to find a buyer to assume its obligations under the AIR purchase
agreement and future market prices for DRI are less than the price the Company
is obligated to pay, the Company will incur losses on future merchant DRI
activities. On the other hand, if the market price of DRI increases to an amount
that exceeds the price payable under the AIR agreements, the Company could
generate future profits from merchant DRI activities. Such losses or profits
will be reflected in continuing operations in future periods until such time as
the Company is no longer obligated under the AIR purchase commitment. Currently,
the market price of DRI is approximately $30
<PAGE>
per ton less than the price the Company is required to pay under the AIR
purchase commitment. Assuming the Company continues to purchase DRI from AIR at
its current level of approximately 300,000 metric tons per year and no change in
the market price of DRI, the Company will absorb approximately $9 million per
year in excess DRI costs. The Company is unable to predict whether, or how long,
this situation will continue and thus is unable to predict the amount of future
losses that may be incurred under the AIR purchase agreement.
In addition, pursuant to the agreements recently entered into with the Senior
Noteholders, the Company is generally restricted from making payments to AIR in
excess of the amounts presently required under its agreements relating to AIR
and may be required, subject to certain exceptions set forth in the agreements
with its Senior Noteholders, to obtain the approval of its Senior Noteholders to
enter into an agreement to terminate or settle any of its obligations relating
to AIR.
