<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 1994
REGISTRATION NO. 33-72486
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------
BAYOU STEEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 3312 72-1125783
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL(I.R.S. EMPLOYER IDENTI-
JURISDICTION OF CLASSIFICATION CODE NUMBER) FICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
RIVER ROAD
P.O. BOX 5000
LAPLACE, LOUISIANA 70069
(504) 652-4900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
RICHARD J. GONZALEZ
VICE PRESIDENT, TREASURER
AND CHIEF FINANCIAL OFFICER
BAYOU STEEL CORPORATION
RIVER ROAD
P.O. BOX 5000
LAPLACE, LOUISIANA 70069
(504) 652-4900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
RORY A. GREISS GARY L. SELLERS
KAYE, SCHOLER, FIERMAN, SIMPSON THACHER & BARTLETT
HAYS & HANDLER 425 LEXINGTON AVENUE
425 PARK AVENUE NEW YORK, NEW YORK 10017
NEW YORK, NEW YORK 10022 (212) 455-2000
(212) 836-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933,
check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION ACTING
PURSUANT TO SAID SECTION 8(A) MAY DETERMINE.
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<PAGE>
BAYOU STEEL CORPORATION
CROSS-REFERENCE SHEET SHOWING LOCATION IN THE PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS ON FORM S-1 REGISTRATION STATEMENT
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
----------------------- ---------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus................ Cover of the Registration Statement;
Cross Reference Sheet; and Outside
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus............... Inside Front and Outside Back Cover
Pages of Prospectus
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges........................... Prospectus Summary; Investment
Considerations; and Selected
Financial Data
4. Use of Proceeds.................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price.... Underwriting
6. Dilution........................... *
7. Selling Security Holders........... *
8. Plan of Distribution............... Outside Front Cover Page of
Prospectus; and Underwriting
9. Description of Securities to be
Registered........................ Outside Front Cover Page of
Prospectus; Prospectus Summary; and
Description of the First Mortgage
Notes
10. Interests of Named Experts and
Counsel........................... *
11. Information With Respect to the
Registrant........................ Cover of the Registration Statement;
Prospectus Summary; Investment
Considerations; Capitalization;
Selected Financial Data;
Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business;
Management; Principal Stockholders;
Certain Related Party Transactions;
Description of the First Mortgage
Notes; Description of Certain
Indebtedness; and Financial
Statements
12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities................... *
</TABLE>
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* Not Applicable
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated January 31, 1994
BAYOU STEEL CORPORATION
$75,000,000
% FIRST MORTGAGE NOTES DUE 2001
Bayou Steel Corporation (the "Company") is offering (the "Offering")
$75,000,000 aggregate principal amount of % First Mortgage Notes due 2001 (the
"First Mortgage Notes"). Interest on the First Mortgage Notes is payable semi-
annually on 15 and 15 of each year, commencing 15, 1994, at the
rate of % per annum. The First Mortgage Notes are redeemable, in whole or in
part, at the option of the Company on and after 15, 1998, at the
redemption prices set forth herein, plus accrued interest.
The First Mortgage Notes will rank pari passu in right of payment with all
senior Indebtedness (as defined herein) of the Company, including obligations
of the Company arising in connection with the Credit Facility (as defined
herein), and will rank senior to all subordinated Indebtedness of the Company.
After giving effect to the Offering, as of December 31, 1993, the Company had
approximately $1.3 million of total Indebtedness in addition to the First
Mortgage Notes, all of which would rank pari passu with the First Mortgage
Notes. The First Mortgage Notes will be secured by a first priority security
interest, subject to certain exceptions, in substantially all unencumbered
existing and future real and personal property, fixtures, machinery and
equipment (including certain operating equipment classified as inventory) of
the Company and the proceeds thereof, whether existing or hereafter acquired,
but excluding inventory and accounts receivable.
In the event of a Change of Control (as defined herein), the Company is
obligated to make an offer to purchase all outstanding First Mortgage Notes
from the holders thereof (the "Holders") at a redemption price of 101% of the
principal amount thereof plus accrued interest. Under certain circumstances,
the Company is obligated to apply the net cash proceeds of asset sales to the
purchase of substitute property for use in the Company's business or to make
offers to purchase a portion (calculated as set forth herein) of the First
Mortgage Notes at a redemption price of 100% of the principal amount thereof
plus accrued interest with the net cash proceeds from such asset sales.
--------------------------------
SEE "INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED
WITH AN INVESTMENT IN THE FIRST MORTGAGE NOTES.
--------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
--------------------------------
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC (/1/) DISCOUNT (/2/) COMPANY (/1/) (/3/)
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- -
<S> <C> <C> <C>
PER FIRST MORTGAGE NOTE % % %
TOTAL $ $ $
</TABLE>
(1)Plus accrued interest, if any, from , 1994.
(2) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3)Before deducting expenses payable by the Company estimated at $ .
--------------------------------
The First Mortgage Notes are offered by Chemical Securities Inc. (the
"Underwriter"), subject to prior sale, when, as and if issued by the Company
and accepted by the Underwriter, and subject to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that the delivery of the
First Mortgage Notes will be made in book-entry form through the facilities of
The Depository Trust Company on or about , 1994.
CHEMICAL SECURITIES INC.
The date of this Prospectus is February , 1994
<PAGE>
[Graphics to appear here.]
2
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE FIRST MORTGAGE
NOTES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
----------------
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed by the Company with the Securities and Exchange Commission
may be inspected and copied at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549, and at the following regional offices of the Commission: 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such materials can be
obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at prescribed
rates. In addition, reports, proxy statements and other information concerning
the Company may be inspected at the offices of the American Stock Exchange, on
which shares of the Company's Class A Common Stock are listed, at 86 Trinity
Place, New York, New York.
The Company has filed with the Commission a Registration Statement on Form S-
1 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the securities offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
items of which are contained in schedules and exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to such exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. The Registration Statement,
including the exhibits thereto, may be inspected and copied in the manner and
at the sources described above.
----------------
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
See "Investment Considerations" for certain factors that should be considered
in connection with an investment in the First Mortgage Notes offered hereby.
Unless the context otherwise requires, all references to "the Company" mean the
Company and its subsidiaries and all references to a fiscal year refer to the
fiscal year of the Company which ends September 30 (for example, references to
"fiscal 1993" mean the fiscal year ended September 30, 1993).
THE COMPANY
The Company is a leading producer of light structural steel products. The
Company owns and operates a steel minimill strategically located on the
Mississippi River in LaPlace, Louisiana, 35 miles northwest of New Orleans. The
minimill, constructed at a cost of $243 million in 1981, is one of the most
modern facilities in the world in its product line and utilizes state-of-the-
art equipment and technology. The Company produces a variety of light
structural steel products including angles, flats, channels, standard beams and
wide-flange beams (collectively, "shapes"). The shapes produced by the Company
have a wide range of commercial and industrial applications, including the
construction and manufacturing of petrochemical plants, barges and light ships,
railcars, trucks and trailers, rack systems, tunnel and mine support products,
joists, sign and guardrail posts for highways, power and radio transmission
towers, and bridges. The Company sells its products to approximately 600
customers, most of which are steel service centers, in 44 states, Canada,
Mexico and overseas. The Company also sells excess billets (which have not been
rolled into shapes) on a worldwide basis to other steel producers for their own
rolling or forging applications. In fiscal 1993, the Company sold 403,274 tons
of shapes and 59,604 tons of billets.
According to the American Iron and Steel Institute ("AISI"), the domestic
market demand for all structural steel shape products in 1992 was 5.1 million
tons. The Company estimates that its share of the total domestic shapes market
was approximately 8% in 1992. The Company believes that its share of the light
structural steel shapes market (the primary market in which the Company
competes) is much higher, and that it is one of the five largest producers of
light structural steel shapes in the U.S.
The term "minimill" refers to a relatively low-cost steel production facility
which uses steel scrap, rather than iron ore, as its basic raw material. In
general, minimills recycle scrap using electric arc furnaces, continuous
casters and rolling mills. The Company's minimill, which was owned and operated
by Voest-Alpine A.G. (a state-owned Austrian industrial company) ("Voest-
Alpine") until it was purchased by the Company in September 1986, includes a
Krupp computer-controlled, electric arc furnace utilizing water-cooled
sidewalls and roofs, two Voest-Alpine four-strand continuous casters, a
computer supervised, Italimpianti reheat furnace and a 15-stand Danieli rolling
mill (a second Krupp furnace is currently not in operation, but is available
for additional production).
The Company's steelmaking facility, which includes a deep-water dock, is
strategically located on the Mississippi River, which the Company believes
gives it certain transportation cost advantages because it can ship its product
by barge, the least costly method of transportation in the steel industry. In
addition, the Company operates three inventory stocking warehouses in Chicago,
Tulsa and Pittsburgh which supplement its operations in Louisiana. These
facilities, each of which includes an inland waterway dock, enable the Company
to significantly increase its marketing territory by providing storage capacity
for its finished products in three additional markets and by allowing the
Company to meet customer demand far from its minimill facility on a timely
basis. The Company believes that the location of its minimill on the
Mississippi River, and its network of inland waterway warehouses, enable it to
access markets for its products that would otherwise be unavailable to the
Company.
4
<PAGE>
The Company believes that the Mississippi River location of its minimill also
gives it advantages over other minimills in the purchase of steel scrap, which
accounts for nearly 42% of total production costs. The Company is able to
efficiently transport scrap from suppliers throughout the inland waterway
system and through the Gulf of Mexico, permitting it to take advantage of scrap
purchasing opportunities far from its minimill facility, and to protect itself
from supply imbalances that develop from time to time in specific local
markets. In addition, unlike most other minimills, the Company, through its own
scrap purchasing staff, buys scrap directly from scrap dealers and contractors
rather than through brokers. The Company believes that its enhanced knowledge
of scrap market conditions gained by being directly involved in scrap
procurement on a daily basis, coupled with management's long experience in
metals recycling markets, gives the Company a competitive advantage.
In March 1993, following the expiration of its existing labor contract, the
United Steelworkers of America Local 9121 (the "Union") initiated a strike
against the Company after the Company and the Union failed to reach agreement
on a new labor contract. The Company is negotiating a settlement agreement with
the National Labor Relations Board ("NLRB") with respect to unfair labor
practice charges filed by the Union. The Company is currently operating at full
capacity, utilizing a combination of temporary replacement workers, Union
employees who have returned to work and salaried employees, and since July 1993
overall production and productivity have been near pre-strike levels. The
Company believes it can maintain and continue to improve its current production
and productivity levels even if the strike continues indefinitely.
During the initial phases of the strike, however, the Company had to curtail
its operations (which resulted in reduced production of approximately 27,000
tons in the melt shop and approximately 30,000 tons in the rolling mill, higher
fixed costs per ton produced during such period, higher per ton conversion
costs--the cost of converting raw materials into shapes--and lost sales due to
lower inventory levels resulting from reduced production) and productivity was
impacted by retraining of new employees and higher consumption of materials for
several months, all of which adversely affected the Company's profitability,
particularly in the early weeks of the strike. As of December 31, 1993, the
Company has incurred approximately $3.6 million in out-of-pocket costs for
security, legal matters and other services related to the strike ($2.5 million
of which was incurred during the first three months of the strike). Although
uncertainties inherent in strikes generally make it impossible to predict the
duration or ultimate cost of the strike to the Company, the Company expects
that future strike-related costs will not exceed $100,000 per month.
The Company's principal operating strategy is to improve operating results by
reducing costs and increasing sales of higher margin shape products. The
Company believes that it can lower its labor costs by as much as $7 per ton
from fiscal 1993 levels by making operational changes and operating the
minimill with fewer workers. The Company began to implement many operational
changes in fiscal 1993, but their impact is not fully reflected in fiscal 1993
results since these changes were implemented over the course of the year. In
connection with the foregoing, the Company recently increased its melt shop
operations by changing from three to four shifts (and by operating seven days a
week rather than six) as part of its cost savings program. Labor costs per ton
in fiscal 1993 also were somewhat distorted by the effects of the strike, which
resulted in periods of lower production and productivity, periods of
substantially increased overtime and the Company's need to temporarily use
outside contractors.
In addition, if the Company is able to implement the proposals in its last
contract offer to the Union, the Company would realize an additional savings in
average labor costs of approximately $2 per ton, primarily through benefit cost
reductions. The Company also expects to achieve further labor productivity
gains when its proposed incentive compensation plan is put into effect.
Although the Company believes it will be able to implement its basic proposals
in some form, there can be no assurance that such proposals will be accepted by
the Union or that the proposals can be implemented.
The Company also intends to implement a two-year, $8.6 million capital
expenditure program upon completion of the Offering to reduce its production
and operating costs and increase its rolling mill capacity.
5
<PAGE>
The principal elements of this program are (i) an automobile shredder to enable
the Company to shred car bodies on-site and reduce scrap costs, (ii) a steel
straightener to improve production capacity in the rolling mill, (iii) an off-
line sawing system and conveyor to further improve production capacity in the
rolling mill, (iv) a second overhead crane to reduce product changeover time in
the rolling mill and (v) a shipping bay rail spur to reduce the handling of
finished products. The Company believes that these capital projects, when fully
implemented, would result in annual operating cost savings of approximately
$7.10 per ton.
The Company believes that the aggregate annual operating cost savings
resulting from its labor initiatives and proposed capital expenditure program,
when fully implemented, would approximate $6.5 million. Although these savings
estimates are based upon historical data and assumptions that management
believes are reasonable, there can be no assurance that the Company will be
able to achieve these cost savings. Furthermore, these anticipated cost savings
could be offset by increases in raw material costs (the largest component of
which is the cost of scrap), recessionary conditions in the steel industry,
decreased demand for the Company's products, oversupply of shape products and
competition, each of which have had, or in the future could have, a material
impact on the Company's costs.
THE OFFERING
Securities..............
$75,000,000 aggregate principal amount of % First
Mortgage Notes due 2001.
Interest Payment Dates.. Interest will accrue from the date of issuance and
will be payable semi-annually on each 15 and
15, commencing 15, 1994.
Optional Redemption.....
The First Mortgage Notes will be redeemable, in whole
or in part, at any time on and after 15, 1998,
initially at % of their principal amount, plus ac-
crued interest to the date of redemption, and declin-
ing ratably to par at maturity.
Ranking................. The First Mortgage Notes will rank pari passu in
right of payment with any existing and future senior
Indebtedness of the Company, including obligations of
the Company arising in connection with the Credit Fa-
cility, and will rank senior to all subordinated In-
debtedness of the Company.
Security................ As security for the First Mortgage Notes, the Company
will grant a first priority security interest, sub-
ject to certain exceptions, in substantially all un-
encumbered existing and future real and personal
property, fixtures, machinery and equipment (includ-
ing certain operating equipment classified as inven-
tory) and the proceeds thereof, whether existing or
hereafter acquired. The Credit Facility and a pur-
chase money facility relating to the Tulsa stocking
location are secured by a lien on the inventory and
accounts receivable of the Company.
Change of Control.......
In the event of a Change of Control, Holders will
have the right to require the Company to purchase all
First Mortgage Notes then outstanding at a purchase
price equal to 101% of the principal amount thereof,
plus accrued interest to the date of repurchase.
6
<PAGE>
Change of Control generally means that control of the
Company (whether through stock ownership or control
of the Company's assets) is held by persons other
than controlling persons of the Company as of the
date of the Indenture.
A Change of Control could constitute a default under
the Credit Facility. If a Change of Control were to
occur, the Company might be unable to repay all of
its obligations under the Credit Facility, to pur-
chase all of the First Mortgage Notes tendered and to
repay other indebtedness that may become payable upon
the occurrence of a Change of Control.
Asset Sale Offers.......
The net cash proceeds of sales or other dispositions
of Collateral (as defined herein) by the Company
shall become subject to the lien of the Indenture and
the Security Documents. In the event the net cash
proceeds of asset sales (excluding the sale of cer-
tain obsolete assets) equal or exceed $5 million, the
Company shall elect, within six months of such date,
to either apply such net cash proceeds to the acqui-
sition of assets that, upon purchase, shall become
subject to the lien of the Security Documents if the
net cash proceeds represent Collateral Proceeds, or
to make offers to purchase a portion (calculated as
set forth herein) of the First Mortgage Notes at a
purchase price equal to 100% of the principal amount
thereof, plus accrued interest to the date of repur-
chase. Notwithstanding the foregoing, the Company and
its Subsidiaries, in the aggregate, shall be permit-
ted to retain $1,000,000 of the net cash proceeds
from asset sales.
Covenants............... The Indenture under which the First Mortgage Notes
will be issued will contain certain restrictive cove-
nants that, among other things, will limit the abil-
ity of the Company to incur additional indebtedness;
create liens; make certain restricted payments; en-
gage in certain transactions with affiliates; engage
in sale and leaseback transactions; dispose of as-
sets; issue preferred stock of its subsidiaries;
transfer assets to its subsidiaries; enter into
agreements that restrict the ability of its subsidi-
aries to make dividends and distributions; engage in
mergers, consolidations and transfers of substan-
tially all of the Company's assets; make certain in-
vestments, loans and advances; and create non-re-
course subsidiaries.
For a more detailed description of the First Mortgage Notes, see "Description
of the First Mortgage Notes."
USE OF PROCEEDS
The net proceeds of this Offering will be used for the repayment of
outstanding indebtedness, implementation of capital projects and general
working capital purposes. See "Use of Proceeds."
INVESTMENT CONSIDERATIONS
Prospective investors should carefully consider the matters set forth under
"Investment Considerations."
7
<PAGE>
Set forth below is summary financial information for the Company since 1987,
the Company's first full year of operations following the acquisition of the
Company from Voest-Alpine.
SUMMARY FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT RATIO AND PER TON DATA)
<TABLE>
<CAPTION>
AS OF AND FOR YEARS ENDED SEPTEMBER 30,
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1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales.............. $136,008 $119,772 $131,271(1) $183,563 $208,962 $189,849 $134,729
Cost of Sales.......... 128,033 109,116 124,436 170,998 187,132 152,148 117,997
-------- -------- -------- -------- -------- -------- --------
Gross Profit........... 7,975 10,656 6,835 12,565 21,830 37,701 16,732
Selling, General and
Administrative........ 3,986 4,071 4,125 4,582 4,323 4,409 4,249
Non-Production Strike
Expenses.............. 3,162(2) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating Income....... 827 6,585 2,710 7,983 17,507 33,292 12,484
Interest Expense....... (8,261) (8,977) (8,821) (9,514) (11,131) (9,639) (9,445)
Interest Income........ 193 486 638 1,850 1,540 649 61
Miscellaneous.......... 502 554 902 1,380(3) 421 (734) 88
-------- -------- -------- -------- -------- -------- --------
Income (Loss) Before
Taxes................. (6,739) (1,352) (4,571) 1,699 8,337 23,568 3,188
Provision (Benefit) for
Income Taxes.......... -- -- -- (116) 281 237 --
-------- -------- -------- -------- -------- -------- --------
Income (Loss) Before
Cumulative Effect of
Accounting Change and
Extraordinary Gain.... (6,739) (1,352) (4,571) 1,815 8,056 23,331 3,188
Cumulative Effect on
Prior Years of
Accounting Change..... -- -- -- (1,572) -- -- --
Extraordinary Gain..... 585 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net Income (Loss)...... $ (6,154) $ (1,352) $ (4,571) $ 243 $ 8,056 $ 23,331(4) $ 3,188(4)
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working Capital........ $ 32,389 $ 57,167 $ 57,532 $ 64,386 $ 77,266 $ 74,478 $ 34,142
Total Assets........... 138,280 149,381 148,669 162,411 165,518 162,098 110,867
Total Debt............. 54,817 62,057 62,355 67,440 66,364 66,021 61,020
Stockholders' Equity... $ 61,231 $ 67,385 $ 68,737 $ 73,308 $ 73,064 $ 65,008 $ 274
OTHER PERTINENT DATA:
EBITDA:
Actual(5).............. $ 6,530 $ 11,448 $ 7,415 $ 11,767 $ 21,548 $ 36,071 $ 15,348
Adjusted............... 9,694(6) 11,047(7) 8,503(7) 14,324(7) 21,548 36,071 15,348
Ratio of Earnings to
Fixed Charges(8)...... 0.22(9) 0.85(9) 0.49(9) 1.15 1.66 3.28 1.32
Ratio of EBITDA to Net
Interest Expense...... 0.80 1.33 0.88 1.50 2.14 3.92 1.64
Ratio of Adjusted
EBITDA to Net Interest
Expense............... 1.18 1.28 1.01 1.83 2.14 3.92 1.64
Ratio of EBITDA to
Proforma Interest
Expense............... 0.80
Ratio of Adjusted
EBITDA to Pro Forma
Net Interest Expense.. 1.19(10)
Sources and Uses of Cash Flow:
Net Cash (Used in)
Provided by
Operations............ (867) 3,659 5,614 11,559 (1,866) 15,743 (5,601)
Net Cash (Used in)
Provided by Investing
Activities............ (3,184) (3,235) (7,374) (11,519) (9,001) (9,728) (3,795)
Net Cash (Used in)
Provided by Financing
Activities............ (6,580) (299) (5,126) 1,087 211 21,320 2,786
Net Tons Shipped:
Shapes................. 403,274 372,943 381,069 411,660 425,376 504,228 405,425
Billets................ 59,604 31,962 43,557(1) 216,790 247,815 93,645 102,361
Average Selling Price
Per Ton:
Shapes................. $ 300 $ 296 $ 307 $ 320 $ 345 $ 333 $ 271
Billets................ 209 204 210 226 235 216 200
Capital Expenditures... $ 3,184 $ 3,235 $ 7,374 $ 11,519 $ 9,001 $ 9,728 $ 3,795
Depreciation and
Amortization.......... $ 4,616 $ 4,309 $ 3,803 $ 3,976 $ 3,620 $ 3,513 $ 2,776
Average Number of
Employees............. 455(11) 495 547 654 685 673 636
Tons Shipped Per
Employee.............. 1,017 818 776 961 983 888 798
</TABLE>
(footnotes on following page)
8
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
FIRST QUARTER
ENDED DECEMBER
31,
--------------------
1993 1992
-------- --------
<S> <C> <C>
INCOME STATEMENT DATA:
Net Sales............................................... $ 36,778 $ 31,833
Cost of Sales........................................... 34,558 28,199
-------- --------
Gross Profit............................................ 2,220 3,634
Selling, General and Administrative..................... 890 1,081
Non-Production Strike Expenses.......................... 399(2) --
-------- --------
Operating Income........................................ 931 2,554
Interest Expense........................................ (1,885) (2,225)
Interest Income......................................... 20 52
Miscellaneous........................................... (40) (35)
-------- --------
Income (Loss) Before Taxes.............................. (973) 347
Provision (Benefit) for Income Taxes.................... -- --
-------- --------
Income (Loss) Before Cumulative Effect of Accounting
Change and Extraordinary Gain.......................... (973) 347
Cumulative Effect on Prior Years of Accounting Change... -- --
Extraordinary Gain...................................... -- 755
-------- --------
Net Income (Loss)....................................... $ (973) $ 1,102
======== ========
BALANCE SHEET DATA:
Working Capital......................................... $ 31,198 $ 53,874
Total Assets............................................ 142,411 142,431
Total Debt.............................................. 56,144 57,514
Stockholders' Equity.................................... $ 60,258 $ 68,487
</TABLE>
- --------
(1) In fiscal 1991 the Company decided to reduce its melting capacity by
discontinuing the operation of one of its two electric furnaces and
ceasing the practice of exporting large quantities of billets. In prior
years, billet sales contributed small margins; however, the margins on
billets sales virtually disappeared as a result of worldwide market
conditions in late 1990. The Company believes its decision to stop
producing large quantities of billets for export resulted in a decline in
sales of approximately $40 million.
(2) In the first quarter of fiscal 1994 and in fiscal 1993, Non-Production
Strike Expenses includes $0.4 million and $3.2 million, respectively, in
expenses for security, legal matters and other services related to the
strike.
(3) In fiscal 1990, Miscellaneous includes income in connection with a
favorable settlement of a lawsuit for $1.3 million.
(4) In fiscal 1988 and 1987, income applicable to common shares after
accretion and dividends accrued on preferred stock was $19.8 million and
$0.5 million, respectively.
(5) EBITDA represents earnings before interest, taxes, depreciation and
amortization, and is calculated as net income plus interest, taxes,
depreciation and amortization. EBITDA provides additional information for
determining the Company's ability to meet debt service requirements.
EBITDA does not represent and should not be considered as an alternative
to net income, any other measure of performance as determined by generally
accepted accounting principles, as an indicator of operating performance
or as an alternative to cash flows from operating, investing or financing
activities as a measure of liquidity. Each of the Indenture and the Credit
Facility include covenants that are identical to the Ratio of EBITDA to
Net Interest Expense and restrict the Company's level of indebtedness. See
"Description of the First Mortgage Notes--Certain Covenants--Limitations
on Indebtedness" and "Description of Certain Indebtedness--Credit
Facility." See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of liquidity and
operating results.
9
<PAGE>
(6) The adjustment to fiscal 1993 EBITDA relates to production and non-
production strike expenses, as well as an extraordinary gain. First,
reduced production affected the fixed charge component of the inventory
produced during the initial phases of the strike. Since the Company
produced approximately 27,000 fewer tons in the melt shop and
approximately 30,000 fewer tons in the rolling mill than it normally
produced in comparable prior periods, the cost of each ton of inventory
produced during that period included a higher amount of fixed costs. As
the inventory produced during this period was sold, the allocation of
fixed charges to the cost of that inventory resulted in higher cost of
sales for fiscal 1993 of $1.2 million, which increased cost has been
eliminated in the Adjusted EBITDA. This adjustment does not reflect
increased consumption of materials during the period of training new
employees nor does it reflect lost sales attributable to a lack of
inventory caused by the temporary decrease in production, both of which
the Company believes were significant. Second, the Company incurred $3.2
million in Non-Production Strike Expenses in fiscal 1993. The Company has
eliminated $2.6 million of the $3.2 million of Non-Production Strike
Expenses in the Adjusted EBITDA. The Company has not eliminated $0.6
million of Non-Production Strike Expenses which represents the recurring
portion of such expenses for the six-month period commencing April 1, 1993
(approximately the date of the strike's commencement) at the rate of
$100,000 per month. Third, the Company's extraordinary gain of $0.6
million (which arose principally from the repurchase of the Company's
Senior Secured Notes due 1998 at favorable prices) has similarly been
eliminated in the Adjusted EBITDA.
(7) The adjustment relates to the write-down to market of various shape
inventories and costs associated with remedying customer complaints
related to products with rust. The rust problem was eliminated in 1992
with the construction of the Company's warehouse and by the implementation
of certain product spraying techniques. In fiscal 1992, 1991 and 1990, the
adjustments to EBITDA for the rust problem were ($0.4) million, $1.1
million, and $1.0 million, respectively. The adjustments to fiscal 1992,
1991 and 1990 EBITDA do not include the effect on EBITDA of lost sales due
to surface rust, which the Company believes was significant. In fiscal
1990, the adjustment to EBITDA includes the elimination of the $1.6
million charge relating to Cumulative Effect on Prior Years of Accounting
Change.
(8) For purposes of computing the ratio of earnings to fixed charges (a)
earnings consist of income before the cumulative effect of an accounting
change, and income taxes plus fixed charges (excluding capitalized
interest) and (b) fixed charges consist of interest expense, including
capitalized interest, and amortization of debt expense.
(9) In fiscal 1993, 1992 and 1991, earnings were inadequate to cover fixed
charges by $6.9 million, $1.5 million, and $4.8 million, respectively.
(10) The ratio of Adjusted EBITDA to Pro Forma Net Interest Expense has been
calculated assuming the completion of the Offering and the application of
the proceeds therefrom on the first day of fiscal 1993 and at an assumed
interest rate of 11%. The effect on earnings or net income of a 1/8
percent variance in the interest rate would be approximately $94,000.
(11) In fiscal 1993, the Company utilized approximately 60 outside contractors
working for six months who were not employees of the Company but which are
included in the weighted average number of employees.
10
<PAGE>
INVESTMENT CONSIDERATIONS
In addition to the other information set forth in this Prospectus,
prospective investors should carefully consider the following information in
evaluating the Company and its business before making an investment in the
First Mortgage Notes.
LEVERAGE; CERTAIN RESTRICTIONS; DEFICIENCY OF EARNINGS TO FIXED CHARGES
The Company currently has, and after the Offering will continue to have, a
substantial amount of long-term debt in relation to stockholders' equity. As of
September 30, 1993, the Company had total debt of $54.8 million compared to
$62.1 million as of September 30, 1992. The Company repurchased $11.1 million
of its Senior Secured Notes due 1998 (the "14.75% Notes") during fiscal 1993.
After giving effect to the Offering and the use of proceeds therefrom, the
Company will have $ million of total debt, including the $75 million
aggregate principal amount of the First Mortgage Notes. For the first quarter
of fiscal 1994 and the comparable period in fiscal 1993, and for fiscal 1993,
the Company's total interest expense was $1.9 million, $2.2 million and $8.3
million, respectively, and is not expected to materially change after giving
effect to the Offering and the application of the proceeds therefrom. For the
first quarter of fiscal 1994, the Company's earnings were insufficient to cover
fixed charges by $1.0 million as compared to earnings being sufficient to cover
fixed charges by $0.3 million in the comparable period in fiscal 1993. For
fiscal 1993, 1992 and 1991, the Company's earnings were insufficient to cover
fixed charges by $6.9 million, $1.5 million and $4.8 million, respectively. On
a pro forma basis for the first quarter of 1994 and for fiscal 1993, assuming
the completion of the Offering (at an assumed interest rate of 11%) on the
first day of such period and the application of the proceeds of the Offering
applied on the first day of such period, fixed charges would have been in
excess of earnings by $1.2 million and $6.8 million, respectively. The
Company's ability to make interest payments on and to repay the principal of
the First Mortgage Notes will depend upon the Company's ability to generate
cash sufficient to meet such required payments or to refinance its debt. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Company's level of indebtedness, together with the restrictive covenants
included in the Indenture, the Credit Facility and one of the Company's
mortgages, may have the effect of limiting the Company's ability to incur
additional indebtedness, sell assets or acquire other entities, and may
otherwise limit the operational and financial flexibility of the Company. The
effect of these restrictions may be to place the Company at a competitive
disadvantage in relation to less leveraged competitors.
The Company's access to working capital lines under the Credit Facility is
dependent on the Company's compliance with certain financial and other
covenants, including, among others, an interest expense coverage ratio test,
which, if breached, could result in the termination of the commitments of the
lenders under the Credit Facility or a default, and possible acceleration, with
respect to the amounts due thereunder. During fiscal 1994 and the first quarter
of fiscal 1995, the Interest Expense Coverage Ratio (as defined herein)
covenant contained in the Credit Facility is applied solely on the results for
the prior quarter. Thus, a single event which has a negative impact on the
Company's earnings in a particular quarter could result in a default under the
Credit Facility even if the longer term effects of such event or condition were
insignificant. Under the Credit Facility, the Interest Expense Coverage Ratio
for the quarter ending September 30, 1994 is 1.25 to 1.00 and becomes
increasingly more restrictive for the quarters thereafter. For the quarter
ended December 31, 1993, the Company's Interest Expense Coverage Ratio on a pro
forma basis (assuming completion of the Offering) would have been 1.15 to 1.00.
The Company is currently in compliance with all of the financial covenants
under the Credit Facility entered into in November 1993. The loans made under
the Credit Facility are floating rate obligations and, consequently, the
interest rates thereunder may be revised upward or downward depending on
movements in the relevant funding option. See "Description of Certain
Indebtedness--Credit Facility."
EFFECTS OF THE STRIKE
In March 1993, following the expiration of their existing labor contract, the
Union initiated a strike against the Company. For approximately six weeks after
the strike began, the Company operated at approximately 50% of capacity. The
Company has since resumed operating at full capacity (with a combination of
temporary replacement workers, Union employees who have returned to work and
salaried employees), and production and productivity since July 1993 have been
near pre-strike levels. The Company
11
<PAGE>
believes it can maintain and continue to improve its current production and
productivity levels even if the strike continues indefinitely. While the
Company has incurred approximately $3.6 million in strike-related expenses as
of December 31, 1993 ($2.5 million of which was incurred during the first three
months of the strike), it expects that future strike-related costs will not
exceed $100,000 per month, although uncertainties inherent in strikes generally
make it impossible to predict the duration or ultimate cost of the strike to
the Company. There can be no assurance that the Company will be able to
continue to increase production and improve productivity or that the Company
will not incur significant strike-related costs again if the strike continues
indefinitely.
The Union has filed charges against the Company with the regional office of
the NLRB alleging a number of unfair labor practices in connection with
negotiations with the Union. These charges have been amended a number of times
to include additional alleged unfair labor practices. The Company is
negotiating a settlement agreement with the NLRB which proposes to settle most
of these charges. Although the Company does not expect a settlement agreement
to require the Company to admit any violations of the National Labor Relations
Act (the "NLRA"), the Company does expect that any settlement agreement will
require the Company to post, for a period of sixty days, a notice which will
recite the protections afforded employees pursuant to the NLRA, and have the
Company make affirmative statements that it will refrain from taking certain
actions which would infringe those employee rights, including that the Company
will not take certain of the actions alleged in the unfair labor practice
charges, that it will, on request, bargain collectively and in good faith with
the Union, and accord all eligible striking employees, upon their unconditional
offer to return to work, immediate and full reinstatement to their former jobs
or substantially equivalent jobs without loss of seniority. A settlement
agreement is not expected to cover two separate charges filed on December 30,
1993 and January 14, 1994, respectively. These outstanding charges include
allegations that the Company bargained in bad faith by not reducing to writing
a specific alleged agreement concerning job security for those employees
adversely affected by contracting out proposals of the Company, that it failed
to provide certain employee safety and health documents, and that the Company
denied the Union access to the minimill. The Company believes that it possesses
meritorious defenses to such unfair labor practice charges. A settlement
agreement, or a finding by the NLRB that the Company engaged in unfair labor
practices with respect to any charges not covered by a settlement agreement,
may result in the strengthening of the strikers' commitment to their
negotiating position, the work stoppage and the corporate campaign. Any
hardening of the strikers' positions could affect the length of the strike and
the resolution of the labor contract disputes. A settlement agreement or an
adverse decision by the NLRB on the outstanding charges could also delay and
impair the Company's labor initiatives because the Company would be unable to
implement all or part of its last proposed labor agreement until it returned to
the bargaining process and remedied the unfair labor practices, and until such
time as either an agreement with the Union was ratified or impasse in the
bargaining process was reached. The determination of impasse is strictly
dependent on the facts of each individual case. The Company has not made a
determination that it is at impasse and any such determination would be subject
to review by the NLRB. If the Company were to implement its last proposed labor
agreement and the NLRB were to subsequently find that the Company had engaged
in unfair labor practices, the Company would be liable to make employees
economically whole with respect to those labor agreement provisions that
adversely affected such workers since the Company could not have been at
impasse if it were found to have bargained in bad faith.
Under current Federal labor law, a company is not subject to back-pay
liabilities even if the NLRB determines that the company has engaged in an
unfair labor practice, unless the company has failed to reemploy striking
workers who have made an unconditional offer to return to work. The Company has
not hired permanent replacements for the striking workers and could let the
striking workers return to their jobs if the workers make an unconditional
offer to return to work. If the striking workers were to make such an
unconditional offer and resume their jobs, the Company's operations could be
temporarily disrupted as those workers are absorbed back into the work force.
Although the Company does not believe that any disruption from the introduction
of returning workers would be lengthy, the Company cannot predict how long any
such disruption could last.
In August 1993 the Union announced a corporate campaign designed to bring
pressure on the Company from individuals and institutions with direct financial
or other interests in the Company. Although the
12
<PAGE>
Company believes the corporate campaign has not had, and is not expected to
have, an effect on its operations, the potential impact of such a campaign is
difficult to assess. See "Business--Strike and Impact Upon the Company."
RECENT LOSSES
The Company reported net losses of $6.2 million for fiscal 1993, $1.4 million
for fiscal 1992 and $4.6 million for fiscal 1991. These net losses are
primarily due to recessionary declines in demand for and the selling prices of
shapes, customer resistance to surface rust on the Company's product (which
affected fiscal 1990 to 1992 results) and the recent labor strike by the Union
(which affected fiscal 1993 results). The Company reported a loss of $1.0
million for the first quarter of fiscal 1994, compared to net income before
extraordinary gain of $0.3 million for the first quarter of fiscal 1993, as a
result of shape prices lagging the increases in the price of scrap. The Company
has net operating loss carryforwards ("NOLs") totalling $310 million which will
expire in varying amounts through fiscal 2008. In addition, the Company has
$30.2 million of future tax benefits attributable to its tax benefit transfer
lease (the "Tax Lease Agreement") which may, to the extent of taxable income in
the year such tax benefit is produced, be utilized prior to the NOLs. Although
the Company believes it will be profitable in the future and will be able to
realize the benefit of a portion of the NOLs, under the method of accounting
for income taxes for financial reporting purposes adopted by the Company in the
first quarter of fiscal 1994, the Company has established a valuation allowance
for all of these net deferred tax assets due to its cumulative losses in recent
years. The Company believes that a combination of economic recovery, the
elimination of the surface rust problem, and the diminishing impact of the
strike will improve the Company's results of operations; however, there can be
no assurance that the Company will return to profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DECLINING STEEL SALES
From fiscal 1989 through fiscal 1992, the Company experienced year to year
decreases in net sales. In fiscal 1991 the Company decided to reduce its
melting capacity by discontinuing the operation of one of its two electric
furnaces and ceasing the practice of exporting large quantities of billets. In
prior years, billet sales contributed small margins; however, the margins on
billet sales virtually disappeared as a result of worldwide market conditions
in late 1990. The Company's decision to stop producing billets for export
resulted in a decline in sales of approximately $40 million. The idled electric
furnace affords the Company significant additional melting capacity in the
event the Company improves or expands its rolling mill operations or the
Company elects to re-enter the billet market as a major producer; however, the
Company has no immediate plans to do so.
Shape shipments and selling prices decreased from 1989 through 1992.
Shipments decreased due to the decline in the economy and customer resistance
to excessive surface rust on the Company's products. In addition to the effect
of a declining economy, selling prices also fell in response to declining scrap
prices (the principal raw material used by the Company), and as a result of
discounts offered by the Company to sell products that had excessive surface
rust. Due to an improving economy and the Company's elimination of excessive
surface rust from its products, shape shipments improved in fiscal 1993. Shape
shipments increased 11.5% in the first fiscal quarter of fiscal 1994 compared
to the same period of fiscal 1993. If a declining trend were to resume, the
Company's results of operations, liquidity and capital resources would be
adversely affected, particularly if the Company were unable to offset the
decrease in sales with scrap and operating cost reductions. Furthermore, since
the Company's plans to reduce its costs through labor savings and capital
expenditures are partly dependent on increased levels of production, a decline
in steel sales could affect the Company's ability to fully realize such cost
savings. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Sales."
CYCLICAL INDUSTRY AND SENSITIVITY TO ECONOMIC CONDITIONS
The demand for steel is cyclical in nature and is sensitive to trends in
commercial and industrial construction and general economic conditions. In
addition, excess production in the structural steel industry has resulted in
pressure on industry profit margins. Future economic downturns may adversely
affect the Company.
13
<PAGE>
COMPETITION
The Company competes with a number of domestic minimills in each of its four
stocking locations. The domestic minimill steel industry is characterized by
vigorous competition with respect to price, quality and service, as well as
competition to achieve technological advancements that would allow a minimill
to produce higher quality products or lower its production costs. In addition,
excess production capacity in the domestic minimill steel industry has resulted
in competitive product pricing and continued pressures on industry profit
margins. As of the date of this Prospectus, the domestic minimill steel
industry's capacity utilization rate is approximately 90%. The high fixed costs
of operating a steel minimill encourage minimill operators to maintain high
levels of output, regardless of levels of demand, which exacerbates the
pressures on industry profit margins. Several domestic minimills which are
competitors of the Company have financial resources substantially greater than
those available to the Company.
The domestic steel industry has historically faced significant competition
from foreign steel producers, particularly in the 1980's when exchange rates
and the domestic demand for steel products made the United States an attractive
market for such producers. Although domestic minimills have experienced little
competition from foreign producers in recent years due to the cost
competitiveness of domestic minimills, there can be no assurance that foreign
competition will not increase in the future, which could adversely affect the
Company's operating results. See "Business--Competition."
VOLATILITY IN RAW MATERIAL COSTS AND FLUCTUATIONS IN ENERGY COSTS
The market for steel scrap, the principal raw material used in the Company's
operations, is highly competitive and subject to price volatility influenced by
periodic shortages (due to increased demand by foreign and domestic users),
freight costs, speculation by scrap brokers and other market conditions largely
beyond the Company's control. Although the domestic minimill industry attempts
to maintain its profit margin by increasing the price of its finished products
in response to fluctuations in scrap costs, increases in the prices of finished
products often do not fully compensate for such scrap price increases and
generally lag several months behind increases in steel scrap prices, thereby
restricting the ability of minimill producers to recover higher raw material
costs. While the Company was able to increase shape prices several times during
fiscal 1993 and the first quarter of fiscal 1994, these price increases still
lagged the increases in scrap prices. For fiscal 1993, metal margin (the
difference between shape selling price and scrap cost) was at its lowest level
since fiscal 1986. The Company has not experienced any improvement in metal
margin in early fiscal 1994 as scrap prices have continued to increase. During
periods of declining steel prices, declines in scrap prices may not be as
significant as declines in steel prices and, likewise, a decline in scrap
prices may cause a decline in shape and billet prices. See "Business--Raw
Materials."
The Company's manufacturing process consumes large amounts of electricity and
natural gas. A significant increase in the Company's electricity costs or in
the price of natural gas would have an adverse impact on the Company's cost
structure. The Company's energy costs, including electricity and natural gas,
increased by $2.0 million in fiscal 1993 compared to fiscal 1992, but are
expected to increase by approximately $0.6 million in fiscal 1994 compared to
fiscal 1993. The Company's operating results would be adversely affected to the
extent it is unable to pass such higher energy costs on to its customers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Other Comments--Inflation" and "Business--Energy."
ABSENCE OF A PUBLIC MARKET FOR THE FIRST MORTGAGE NOTES
The First Mortgage Notes comprise a new issue of securities for which there
is currently no market. The Underwriter has informed the Company that it
currently intends to make a market in the First Mortgage Notes. However, the
Underwriter is not obligated to do so, and any such market making may be
discontinued at any time without notice. If the First Mortgage Notes are traded
after their initial issuance, they may trade at a discount from their initial
offering price, depending upon prevailing interest rates, the market for
similar securities, the performance of the Company and other factors.
Therefore, no assurance can be given as to whether an active trading market
will develop or be maintained for the First Mortgage Notes or at what prices
the First Mortgage Notes will trade.
14
<PAGE>
CERTAIN LIMITATIONS ON THE SECURITY FOR THE FIRST MORTGAGE NOTES
The First Mortgage Notes will be secured by a first priority security
interest, subject to certain exceptions, in substantially all unencumbered
existing and future real and personal property, fixtures, machinery and
equipment (including certain operating equipment classified as inventory) of
the Company and the proceeds thereof, whether existing or hereafter acquired,
but excluding inventory and accounts receivable which have been pledged to
secure the Credit Facility and a purchase money facility relating to the Tulsa
stocking location (the "Collateral"). No appraisals of any of the Collateral
have been prepared by or on behalf of the Company. At December 31, 1993, the
net book value of the Collateral was approximately $80.4 million. There can be
no assurance that the proceeds of any sale of the Collateral pursuant to the
Indenture and the Security Documents following an acceleration after an Event
of Default under the Indenture would be sufficient with respect to amounts owed
with respect to the First Mortgage Notes. By its nature, some or all of the
Collateral will be illiquid and may have no readily ascertainable market value.
Accordingly, there can be no assurance that the Collateral will be able to be
sold in a short period of time, even if it is saleable. In addition, the
ability of the Collateral Agent to realize upon the Collateral may be subject
to certain bankruptcy law and fraudulent conveyance limitations in the event of
a bankruptcy. See "Description of the First Mortgage Notes--Security" and "--
Certain Bankruptcy Limitations." In addition, the Trustee for the First
Mortgage Notes will enter into an intercreditor agreement with Chemical Bank,
the agent for the lenders under the Credit Facility, that may delay the sale of
the property subject to the lien of the Indenture and the Security Documents in
order to permit the orderly sale of the property securing the Credit Facility
and the purchase money facility relating to the Tulsa stocking location.
Certain of the Company's property comprising the Collateral under the
Security Documents is subject to the Tax Lease Agreement. Pursuant to the Tax
Lease Agreement, the Company effectively transferred in 1981 the Federal income
tax benefits normally associated with the ownership of such property to an
unaffiliated third party. Pursuant to a separate agreement, the Trustee under
the Indenture (i) will release the Federal income tax ownership of such
property from the security interest and lien created by the Indenture and the
Security Documents until the expiration of the Tax Lease Agreement in 1996,
(ii) will agree to take or refrain from taking certain actions in an attempt to
ensure that any disposition upon a foreclosure of the property would not
constitute a "disqualifying event" within the meaning of the regulations
promulgated under the applicable section of the Internal Revenue Code as in
effect prior to the enactment of the Tax Equity and Fiscal Responsibility Act
of 1982 (the "Old Code") and (iii) will agree that subsequent transferees shall
be required to consent to similar limitations. As a consequence, the Tax Lease
Agreement and such release agreement may have the effect of reducing the value
of the property, restricting the number of persons eligible to purchase the
property and delaying the sale of the property if it were to be sold in a
foreclosure proceeding. The Tax Lease Agreement expires on November 11, 1996.
Voest-Alpine International Corporation ("V.A.I.C."), a wholly-owned subsidiary
of Voest-Alpine, through its ownership of Class C Common Stock, and Howard M.
Meyers, through his voting control of the Class B Common Stock, each have the
right to prevent certain transactions affecting the Collateral, including,
among others, liquidation, certain mergers and the sale of the assets subject
to the Tax Lease Agreement which, in each case, could result in the loss of tax
benefits by the unaffiliated third party under the Tax Lease Agreement. See
"Certain Related Party Transactions--Tax Benefit Transfer Lease Agreement" and
"Description of the First Mortgage Notes."
LIMITATIONS ON ABILITY TO PURCHASE THE FIRST MORTGAGE NOTES FOLLOWING A CHANGE
OF CONTROL
A Change of Control could constitute a default under the Credit Facility. If
a Change of Control were to occur, the Company might be unable to repay all of
its obligations under the Credit Facility, to purchase all of the First
Mortgage Notes tendered and to repay other indebtedness that may become payable
upon the occurrence of a Change of Control. See "Description of the First
Mortgage Notes--Change of Control."
COST OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
The Company is subject to various Federal, state and local laws and
regulations, including, among others, the Clean Air Act, the 1990 amendments to
the Clean Air Act (the "1990 Amendments"), the Resource Conservation and
Recovery Act, the Clean Water Act and the Louisiana Environmental Quality Act,
and the regulations promulgated in connection therewith, concerning the
discharge of contaminants
15
<PAGE>
which may be emitted into the air and discharged into the waterways, and the
disposal of solid and/or hazardous waste such as electric arc furnace dust. The
Company has spent substantial amounts to comply with these requirements, and
the 1990 Amendments may require significant additional expenditures for air
pollution control.
The Company's minimill is classified, in the same manner as similar steel
mills in the industry, as generating hazardous waste due to the production of
dust that contains lead, cadmium and chromium in the melting operation. In the
event of a release of a hazardous substance generated by the Company, the
Company could be potentially responsible for the remediation of contamination
associated with such a release.
In the past, the Company's operations in some respects have not met all of
the applicable standards promulgated pursuant to such environmental laws and
regulations. Although the Company believes that it is presently in compliance
in all material respects with the requirements of all relevant governmental
agencies in respect of environmental matters, there can be no assurance that
environmental requirements will not change in the future or that the Company
will not incur significant costs in the future to comply with such
requirements. See "Business--Environmental Matters."
VOTING CONTROL
Bayou Steel Properties Limited ("BSPL"), formerly RSR Steel Corporation, owns
100% of the Class B Common Stock of the Company and currently has the voting
power to elect approximately 60% of the Company's Board of Directors, entitling
BSPL to elect four of the seven directors on the Board of Directors, and to
cast a maximum of 60% of the votes on all other matters, subject to certain
class voting rights in favor of the holders of Class C Common Stock. Howard M.
Meyers, Chairman of the Board and Chief Executive Officer of the Company, owns
a majority of the common stock of BSPL and thus, through BSPL, controls the
Company. As a result of this voting power, the holder of the Class B Common
Stock can determine or significantly influence the outcome of various matters
submitted to stockholders for approval, including, among others, mergers, sales
and acquisitions involving the issuance of additional shares of the Company's
capital stock. The Board of Directors of the Company has approved the merger of
BSPL with and into the Company pursuant to which the number of shares of the
Company's Class B Common Stock currently held by BSPL will be issued to the
shareholders of BSPL in the same proportion as they currently hold the shares
of BSPL. The merger is subject to stockholder approval. See "Principal
Stockholders."
USE OF PROCEEDS
The net proceeds from the sale of the First Mortgage Notes offered hereby are
estimated at approximately $72.8 million. The Company intends to apply the net
proceeds from the sale of the First Mortgage Notes as follows: (i)
approximately $55.8 million to redeem or defease the $48.9 million principal
amount of 14.75% Notes outstanding (which bear interest at a rate of 14.75% per
annum with a final principal installment due March 15, 1998) including the
premium of approximately $4.0 million and interest of approximately $3.0
million thereon; (ii) approximately $4.9 million to pay borrowings under the
Credit Facility (which are floating rate obligations and bear interest at a
rate of 5.26% per annum as of December 31, 1993 and mature on November 30,
1996); (iii) to implement a two-year, $8.6 million capital expenditure program;
and (iv) the remainder for general corporate purposes, including working
capital, other capital improvements and possible acquisitions. The Company has
from time to time considered acquisitions of other businesses and may in the
future continue to explore acquisition opportunities. However, the Company is
not presently engaged in negotiations regarding any acquisition. Until used for
the purposes set forth in clause (iv), the Company will invest the remaining
net proceeds in short-term, interest-bearing securities. $39.9 million
principal amount of the 14.75% Notes outstanding will be redeemed shortly after
the date of this Offering; the remaining $9.0 million principal payment will be
redeemed at a scheduled mandatory redemption date in March 1994. All of the
14.75% Notes outstanding will be legally defeased upon consummation of the sale
of the First Mortgage Notes offered hereby.
As set forth in clause (iii) above, the Company intends to use $8.6 million
of the proceeds of the Offering to implement the construction of the following
projects over the next two years: (a) an automobile shredder, (b) a steel
straightener, (c) an off-line sawing system and conveyor, (d) a second overhead
crane and (e) a shipping bay rail spur. For a more detailed description of the
Company's capital expenditure program, see "Business--Strategy--Capital
Improvements."
16
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents, current
maturities of long-term debt and capitalization of the Company as of September
30, 1993, and as adjusted to reflect the sale of the First Mortgage Notes
offered hereby and the application of the net proceeds as described under "Use
of Proceeds." This information should be read in conjunction with the Company's
Financial Statements and Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................. $ 518(1) $ 14,639
======== ========
Current maturities:
14.75% Notes........................................ $ 9,000(2) $ 0
Revolving credit facility........................... 4,000(3) 0
Other notes payable................................. 282(4) 282
-------- --------
Total current maturities.......................... $ 13,282 $ 282
======== ========
Long-term debt, less current maturities:
First Mortgage Notes................................ $ 0 $ 75,000
14.75% Notes........................................ 39,900(2) 0
Other notes payable................................. 1,635(4) 1,635
-------- --------
Total long-term debt.............................. $ 41,535 $ 76,635
-------- --------
Stockholders' equity:
Common stock, $.01 par value--
Class A, 24,271,127 authorized and 10,613,380
outstanding....................................... $ 106 $ 106
Class B, 4,302,347 authorized and 2,271,127
outstanding....................................... 23 23
Class C, 100 authorized and outstanding............ 0 0
-------- --------
Total common stock................................ $ 129 $ 129
Paid-in capital....................................... 44,891 44,891
Retained earnings..................................... 16,212 10,181(5)
-------- --------
Total stockholders' equity.......................... $ 61,231 $ 55,201
-------- --------
Total Capitalization.................................. $102,766 $131,836
======== ========
</TABLE>
- --------
(1) As of December 31, 1993, the Company had $3.1 million of cash.
(2) As of December 31, 1993, there were $48.9 million of the 14.75% Notes
outstanding, of which $39.9 million was classified as long-term debt.
During fiscal 1993, the Company repurchased $11.1 million principal amount
of 14.75% Notes at an aggregate cost of $10.4 million.
(3) The Credit Facility provides for a revolving credit commitment until
November 30, 1996 in the amount of $30.0 million. As of December 31, 1993,
$5.9 million was outstanding under the Credit Facility.
(4) As of December 31, 1993, outstanding amounts under other notes payable
(current and long-term) was $1.3 million.
(5) The reduction in retained earnings reflects the $3.99 million prepayment
cost to redeem $39.9 million of the 14.75% Notes, the write-off of the $1.0
million unamortized debt issuance costs related thereto and $1.0 million of
interest charges relating to the 14.75% Notes.
17
<PAGE>
SELECTED FINANCIAL DATA
Set forth below is selected financial information for the Company since 1987,
the Company's first full year of operations following the acquisition of the
Company from Voest-Alpine. The following selected financial data is qualified
by reference to and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Company's Financial Statements and Notes thereto included elsewhere herein. The
financial data as of and for each of the years in the seven-year period ended
September 30, 1993 have been derived from the Company's audited Financial
Statements. The financial data for interim periods presented have been derived
from financial statements which are unaudited. Results for the interim periods
are not necessarily indicative of results for a full year.
<TABLE>
<CAPTION>
AS OF AND FOR YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT RATIO AND PER TON DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales.............. $136,008 $119,772 $131,271(1) $183,563 $208,962 $189,849 $134,729
Cost of Sales.......... 128,033 109,116 124,436 170,998 187,132 152,148 117,997
-------- -------- -------- -------- -------- -------- --------
Gross Profit........... 7,975 10,656 6,835 12,565 21,830 37,701 16,732
Selling, General and
Administrative........ 3,986 4,071 4,125 4,582 4,323 4,409 4,249
Non-Production Strike
Expenses.............. 3,162(2) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating Income....... 827 6,585 2,710 7,983 17,507 33,292 12,484
Interest Expense....... (8,261) (8,977) (8,821) (9,514) (11,131) (9,639) (9,445)
Interest Income........ 193 486 638 1,850 1,540 649 61
Miscellaneous.......... 502 554 902 1,380(3) 421 (734) 88
-------- -------- -------- -------- -------- -------- --------
Income (Loss) Before
Taxes................. (6,739) (1,352) (4,571) 1,699 8,337 23,568 3,188
Provision (Benefit) for
Income Taxes.......... -- -- -- (116) 281 237 --
-------- -------- -------- -------- -------- -------- --------
Income (Loss) Before
Cumulative Effect of
Accounting Change and
Extraordinary Gain.... (6,739) (1,352) (4,571) 1,815 8,056 23,331 3,188
Cumulative Effect on
Prior Years of
Accounting Change..... -- -- -- (1,572) -- -- --
Extraordinary Gain..... 585 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net Income (Loss)...... $ (6,154) $ (1,352) $ (4,571) $ 243 $ 8,056 $ 23,331(4) $ 3,188(4)
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working Capital........ $ 32,389 $ 57,167 $ 57,532 $ 64,386 $ 77,266 $ 74,478 $ 34,142
Total Assets........... 138,280 149,381 148,669 162,411 165,518 162,098 110,867
Total Debt............. 54,817 62,057 62,355 67,440 66,364 66,021 61,020
Stockholders' Equity... $ 61,231 $ 67,385 $ 68,737 $ 73,308 $ 73,064 $ 65,008 $ 274
OTHER PERTINENT DATA:
EBITDA:
Actual(5).............. $ 6,530 $ 11,448 $ 7,415 $ 11,767 $ 21,548 $ 36,071 $ 15,348
Adjusted............... 9,694(6) 11,047(7) 8,503(7) 14,324(7) 21,548 36,071 15,348
Ratio of Earnings to
Fixed Charges(8)...... 0.22(9) 0.85(9) 0.49(9) 1.15 1.66 3.28 1.32
Ratio of EBITDA to Net
Interest Expense...... 0.80 1.33 0.88 1.50 2.14 3.92 1.64
Ratio of Adjusted
EBITDA to Net Interest
Expense............... 1.18 1.28 1.01 1.83 2.14 3.92 1.64
Ratio of EBITDA to
Proforma Interest
Expense............... 0.80
Ratio of Adjusted
EBITDA to Pro Forma
Net Interest Expense.. 1.19(10)
Sources and Uses of
Cash Flows:
Net Cash (Used in)
Provided by
Operations............ (867) 3,659 5,614 11,559 (1,866) 15,743 (5,601)
Net Cash (Used in)
Investing Activities.. (3,184) (3,235) (7,374) (11,519) (9,001) (9,728) (3,795)
Net Cash (Used in)
Provided by Financing
Activities............ (6,580) (299) (5,126) 1,087 211 21,320 2,786
Net Tons Shipped:
Shapes................. 403,274 372,943 381,069 411,660 425,376 504,228 405,425
Billets................ 59,604 31,962 43,557(1) 216,790 247,815 93,645 102,361
Average Selling Price
Per Ton:
Shapes................. $ 300 $ 296 $ 307 $ 320 $ 345 $ 333 $ 271
Billets................ 209 204 210 226 235 216 200
Capital Expenditures... $ 3,184 $ 3,235 $ 7,374 $ 11,519 $ 9,001 $ 9,728 $ 3,795
Depreciation and
Amortization.......... $ 4,616 $ 4,309 $ 3,803 $ 3,976 $ 3,620 $ 3,513 $ 2,776
Average Number of
Employees............. 455(11) 495 547 654 685 673 636
Tons Shipped Per
Employee.............. 1,017 818 776 961 983 888 798
</TABLE>
(footnotes on following page)
18
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
FIRST QUARTER
ENDED DECEMBER
31,
--------------------
1993 1992
-------- --------
<S> <C> <C>
INCOME STATEMENT DATA:
Net Sales............................................... $ 36,778 $ 31,833
Cost of Sales........................................... 34,558 28,199
-------- --------
Gross Profit............................................ 2,220 3,634
Selling, General and Administrative..................... 890 1,081
Non-Production Strike Expenses.......................... 399(2) --
-------- --------
Operating Income........................................ 931 2,554
Interest Expense........................................ (1,885) (2,225)
Interest Income......................................... 20 52
Miscellaneous........................................... (40) (35)
-------- --------
Income (Loss) Before Taxes.............................. (973) 347
Provision (Benefit) for Income Taxes.................... -- --
-------- --------
Income (Loss) Before Cumulative Effect of Accounting
Change and Extraordinary Gain.......................... (973) 347
Cumulative Effect on Prior Years of Accounting Change... -- --
Extraordinary Gain...................................... -- 755
-------- --------
Net Income (Loss)....................................... $ (973) $ 1,102
======== ========
BALANCE SHEET DATA:
Working Capital......................................... $ 31,198 $ 53,874
Total Assets............................................ 142,411 142,431
Total Debt.............................................. 56,144 57,514
Stockholders' Equity.................................... $ 60,258 $ 68,487
</TABLE>
- --------
(1) In fiscal 1991 the Company decided to reduce its melting capacity by
discontinuing the operation of one of its two electric furnaces and
ceasing the practice of exporting large quantities of billets. In prior
years, billet sales contributed small margins; however, the margins on
billets sales virtually disappeared as a result of worldwide market
conditions in late 1990. The Company believes its decision to stop
producing large quantities of billets for export resulted in a decline in
sales of approximately $40 million.
(2) In the first quarter of fiscal 1994 and in fiscal 1993, Non-Production
Strike Expenses includes $0.4 million and $3.2 million, respectively, in
expenses for security, legal matters and other services related to the
strike.
(3) In fiscal 1990, Miscellaneous includes income in connection with a
favorable settlement of a lawsuit for $1.3 million.
(4) In fiscal 1988 and 1987, income applicable to common shares after
accretion and dividends accrued on preferred stock was $19.8 million and
$0.5 million, respectively.
(5) EBITDA represents earnings before interest, taxes, depreciation and
amortization, and is calculated as net income plus interest, taxes,
depreciation and amortization. EBITDA provides additional information for
determining the Company's ability to meet debt service requirements.
EBITDA does not represent and should not be considered as an alternative
to net income, any other measure of performance as determined by generally
accepted accounting principles, as an indicator of operating performance
or as an alternative to cash flows from operating, investing or financing
activities as a measure of liquidity. Each of the Indenture and the Credit
Facility include covenants that are identical to the Ratio of EBITDA to
Net Interest Expense and restrict the Company's level of indebtedness. See
"Description of the First Mortgage Notes--Certain Covenants--Limitations
on Indebtedness" and "Description of Certain Indebtedness--Credit
Facility." See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of liquidity and
operating results.
(6) The adjustment to fiscal 1993 EBITDA relates to production and non-
production strike expenses, as well as an extraordinary gain. First,
reduced production affected the fixed charge component of the inventory
produced during the initial phases of the strike. Since the Company
produced approximately
19
<PAGE>
27,000 fewer tons in the melt shop and approximately 30,000 fewer tons in
the rolling mill than it normally produced in comparable prior periods, the
cost of each ton of inventory produced during that period included a higher
amount of fixed costs. As the inventory produced during this period was
sold, the allocation of fixed charges to the cost of that inventory resulted
in higher cost of sales for fiscal 1993 of $1.2 million, which increased
cost has been eliminated in the Adjusted EBITDA. This adjustment does not
reflect increased consumption of materials during the period of training new
employees nor does it reflect lost sales attributable to a lack of inventory
caused by the temporary decrease in production, both of which the Company
believes were significant. Second, the Company incurred $3.2 million in Non-
Production Strike Expenses in fiscal 1993. The Company has eliminated $2.6
million of the $3.2 million of Non-Production Strike Expenses in the
Adjusted EBITDA. The Company has not eliminated $0.6 million of Non-
Production Strike Expenses which represents the recurring portion of such
expenses for the six-month period commencing April 1, 1993 (approximately
the date of the strike's commencement) at the rate of $100,000 per month.
Third, the Company's extraordinary gain of $0.6 million (which arose
principally from the repurchase of the Company's 14.75% Notes at favorable
prices) has similarly been eliminated in Adjusted EBITDA.
(7) The adjustment relates to the write-down to market of various shape
inventories and costs associated with remedying customer complaints
related to products with rust. The rust problem was eliminated in 1992
with the construction of the Company's warehouse and by the implementation
of certain product spraying techniques. In fiscal 1992, 1991 and 1990, the
adjustments to EBITDA for the rust problem were ($0.4) million, $1.1
million, and $1.0 million, respectively. The adjustments to fiscal 1992,
1991 and 1990 EBITDA do not include the effect on EBITDA of lost sales due
to surface rust, which the Company believes was significant. In fiscal
1990, the adjustment to EBITDA includes the elimination of the $1.6
million charge relating to Cumulative Effect on Prior Years of Accounting
Change.
(8) For purposes of computing the ratio of earnings to fixed charges (a)
earnings consist of income before the cumulative effect of an accounting
change, and income taxes plus fixed charges (excluding capitalized
interest) and (b) fixed charges consist of interest expense, including
capitalized interest, and amortization of debt expense.
(9) In fiscal 1993, 1992 and 1991, earnings were inadequate to cover fixed
charges by $6.9 million, $1.5 million, and $4.8 million, respectively.
(10) The ratio of Adjusted EBITDA to Pro Forma Net Interest Expense has been
calculated assuming the completion of the Offering and the application of
the proceeds therefrom on the first day of fiscal 1993 and at an assumed
interest rate of 11%. The effect on earnings or net income of a 1/8
percent variance in the interest rate would be approximately $94,000.
(11) In fiscal 1993, the Company utilized approximately 60 outside contractors
working for six months who were not employees of the Company but which are
included in the weighted average number of employees.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
FIRST QUARTER FISCAL 1994 COMPARED TO FIRST QUARTER FISCAL 1993
The Company's net sales increased by 15.5% in the first quarter of fiscal
1994 as compared to the first quarter of fiscal 1993 due primarily to an 11.5%
increase in shape shipments. Nonetheless, the Company's results were affected
by a reduction in the metal margin for the period. Metal margin is the spread
between the selling price of the Company's products and the cost of scrap
metal, the Company's principal raw material. The average shape metal margin was
$14 per ton lower in the first quarter of fiscal 1994 than the comparable prior
year quarter. Consequently, the Company reported a net loss of $1.0 million in
the first quarter of fiscal 1994 and $0.3 million net income before
extraordinary gain in the comparable prior year quarter. The $14 decline in
average shape metal margin since the first quarter of fiscal 1993 is the result
of rapid increases in the price of scrap metal, which the Company was unable to
offset completely with price increases in its finished steel products. By the
end of the first quarter of fiscal 1994, however, the Company had implemented
price increases to increase the metal margin by $6 per ton over the average
metal margin for the first quarter of fiscal 1994. As a result of the price
increases that occurred in the first quarter of fiscal 1994, the metal margin
was close to the Company's ten-year historical average. The Company's
conversion costs--the cost of converting scrap metal into finished products--
decreased by $6 per ton in the first quarter of fiscal 1994 compared to the
same period of fiscal 1993. Non-production strike expenses, which related to
security and legal expenses associated with the strike, amounted to $0.4
million in the first quarter in fiscal 1994.
The following table sets forth shipment and sales data for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED DECEMBER
31,
----------------
1993 1992
-------- -------
<S> <C> <C>
Shape Shipment Tons........................................ 103,168 92,487
Average Shape Selling Price Per Ton........................ $ 321 $ 295
Billet Shipment Tons....................................... 13,375 18,488
Average Billet Selling Price Per Ton....................... $ 224 $ 202
Net Sales (in thousands)................................... $ 36,778 $31,833
</TABLE>
SALES
Net sales increased in the first quarter of fiscal 1994 by 15.5% compared to
the same period of fiscal 1993. The increases were the result of increasing
shape shipments and prices.
Shapes. The 11.5% increase in shape shipments in the first quarter of fiscal
1994 compared to the same period of fiscal 1993 is attributable to an improving
economy and improved product mix and availability. Export shipments accounted
for 6.8% and 7.1% of shape sales in the first quarters of fiscal 1994 and 1993,
respectively. The first quarter is normally the slowest shipping period.
Backlog of orders at December 31, 1993 is 42% higher than a year earlier.
Shape prices increased by 8.8% in the first quarter of fiscal 1994 compared
to the same period of fiscal 1993. These higher prices were primarily in
response to sharp increases in raw material costs; however, the price increases
only partially offset the raw material increases. While the Company was able to
increase shape prices several times during the most recent fiscal quarter, the
shape price increases lagged the increases in scrap prices. However, by
December 31, 1993 the increases in selling prices exceeded the scrap price
increases during the quarter by $2 per ton. The Company's efforts to replenish
the inventories used during the early stage of the strike had a positive impact
on price realization. The Company has announced another price increase
effective February 1, 1994 of $10 per ton. Although it is uncertain that this
increase will be accepted in the market, several competitors have supported the
proposed increase.
21
<PAGE>
Billets. Shipments of billets, the Company's semi-finished product, decreased
5,113 tons in the first quarter period of fiscal 1994 compared to the same
period of fiscal 1993 due to lack of availability of billets for sale. More
billets were used in the Company's rolling mill due to higher production
levels, resulting in fewer billets available for customers. The overall selling
price of billets increased in the first quarter of fiscal 1994 compared to the
same period of fiscal 1993 by 10.9%, or $22 per ton, due to increasing raw
material costs. However, the average billet metal margin was $18 per ton lower
in the first quarter of fiscal 1994 than the comparable quarter in fiscal 1993.
Since billet prices for a major billet customer are related to prior month's
scrap prices, the Company expects margins to improve once scrap prices
stabilize or decrease.
COST OF SALES
The major component of cost of sales is scrap. In the first quarter of fiscal
1994, average steel scrap cost was approximately $40 per ton higher than
average steel scrap cost for the first quarter of fiscal 1993. Increases in
foreign and domestic demand, due to an improving economy and increased steel
mill utilization, caused the scrap prices to increase. The average shape metal
margin for the first quarter of fiscal 1994 was $14 per ton lower than the same
period of fiscal 1993.
Another significant portion of cost of sales is conversion costs, which
include labor, energy, maintenance materials and supplies used to convert raw
materials into billets and billets into shapes. Conversion costs per ton in the
first quarter of fiscal 1994 compared to the same period of fiscal 1993
decreased by $6 per ton. The primary decrease in conversion costs was due to
the reduced per ton fixed costs resulting from increased production. In the
first quarter of fiscal 1993, the Company's melt shop was operating six days
per week. In the first quarter of fiscal 1994, the Company's melt shop was
operating seven days per week. The Company's productivity in the first quarter
of fiscal 1994 was 98% and 108% of the prior year comparable quarter in the
melt shop and rolling mill, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses decreased by 17.6% or $191,000
in the first quarter of fiscal 1994 compared to the first period of fiscal 1993
due to reductions in collection expenses, travel, legal and consulting fees.
NON-PRODUCTION STRIKE EXPENSES
Strike related expenses were $399,000 for the first quarter of fiscal 1994.
December strike expenses were $79,000. Given the same level of strike related
activity, the Company expects that future strike-related costs will not exceed
$100,000 per month in subsequent periods. Most of these expenses are directed
towards legal and security costs.
OTHER INCOME (EXPENSE)
Interest expense decreased in the first quarter of fiscal 1994 compared to
the same periods of fiscal 1993 due to the Company purchasing $11.1 million of
its 14.75% Notes in fiscal 1993. The Company accrued interest on the remainder
of the 14.75% Notes in the first quarter of fiscal 1994 at a rate of 14.75%. In
the first quarter of fiscal 1993, interest was accrued at a rate of 15.29%
which was subsequently adjusted down to an annual rate of 14.75%. Interest
income decreased in the first quarter of fiscal 1994 compared to the same
period of fiscal 1993 due to lower cash balances and lower interest rates on
investments. Miscellaneous expenses were approximately the same in both
quarters.
NET LOSS
The net loss of $1.0 million for the first quarter of fiscal 1994 was
primarily due to the increases in shape selling prices lagging behind the
increases in scrap cost, and, to a lesser extent, the non-production strike
expenses. By the end of the first quarter, increases in shape prices exceeded
the increases in scrap prices which occurred during the quarter; however, the
metal margin is still lower than the prior year comparable quarter.
22
<PAGE>
FISCAL 1993, 1992 AND 1991 YEAR TO YEAR COMPARISONS
The Company reported a net loss of $6.2 million in fiscal 1993. The 1993 net
loss was primarily caused by the strike and by sharp increases in scrap costs.
The strike has adversely affected the Company in four ways. First, as of
November 30, 1993, the Company has incurred approximately $3.5 million in out-
of-pocket expenses for security, legal, and other services related to the
strike ($2.5 million of which was incurred during the first three months of the
strike). Second, a reduction in production of approximately 27,000 tons in the
melt shop and approximately 30,000 tons in the rolling mill during the initial
phases of the strike resulted in higher fixed costs per ton produced during
that period. As the inventory produced during this period was sold, the
allocation of fixed charges to the cost of that inventory resulted in higher
cost of sales for fiscal 1993 of $1.2 million. Third, the impact of training
new employees affected productivity and led to higher consumption of materials
for several months. Fourth, reduced production during the early weeks of the
strike resulted in lost sales due to reduced inventory levels. The increase in
scrap costs during the year was only partially offset by increases in selling
prices, resulting in reduced metal margins.
In fiscal 1992, the net loss of $1.4 million was $3.2 million less than the
loss incurred in fiscal 1991. This improvement, despite fewer shipments and
lower selling prices, was accomplished by a reduction in operating costs per
ton.
The following table sets forth shipment and sales data for the fiscal years
indicated.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Shape Shipment Tons.................................. 403,274 372,943 381,069
Average Shape Selling Price Per Ton.................. $300 $296 $307
Billet Shipment Tons................................. 59,604 31,962 43,557
Average Billet Selling Price Per Ton................. $209 $204 $210
Net Sales (in thousands)............................. $136,008 $119,772 $131,271
</TABLE>
SALES
Net sales increased in fiscal 1993 compared to fiscal 1992 due to an increase
in shipments and selling prices for both shapes and billets, whereas net sales
decreased in fiscal 1992 compared to fiscal 1991 for the same reasons.
Shapes. In 1993, the improvement in domestic shape shipments was mainly due
to an improving economy and the Company's efforts to recapture market share
which had been lost in prior years due to the presence of excessive surface
rust on the Company's products. The Company lost some sales in fiscal 1993 due
to a temporary disruption in shipments out of LaPlace and the stocking
locations and curtailed production due to the strike. Despite these factors,
the Company's total shipments increased in fiscal 1993 compared to fiscal 1992.
Export shape shipments in fiscal 1993 were 11.1% of shape shipments as compared
to 9.7% for the previous year. Export shipments to Canada and the Far East
improved while shipments to Mexico declined. Even though there were extreme
pressures on prices in the form of rebates and discounting, the average selling
price for the Company's shape products rose approximately $4 per ton in fiscal
1993. These higher prices were primarily in response to sharp increases in raw
material costs; however, the price increases only partially offset the raw
material increases. The Company anticipates a slight improvement in the economy
in fiscal 1994 which should result in increased sales. In 1992, the prevailing
recessionary conditions, decreased demand, and the reluctance of steel mills to
reduce rolling capacity, caused an oversupply of shape products relative to
demand, resulting in continued competitive pricing and reductions in shipments.
Even though demand for shape products was weak, the Company continued to
improve its position with customers because of the improved surface condition
of its products; however, the Company did not completely regain in fiscal 1992
the market share it lost in fiscal 1991 and fiscal 1990. Export shape shipments
were 9.7% of shape shipments in fiscal 1992 and 10% in fiscal 1991.
23
<PAGE>
Billets. In fiscal 1990, foreign governments resumed the practice of heavily
subsidizing their steel-making industries, precipitating a sharp decline in
worldwide billet prices as foreign steel-making companies produced more billets
for export. Unable to sell billets at acceptable margins, the Company curtailed
excess billet production by discontinuing the operation of one of its two
furnaces. Since that time, the Company has increased the productivity of its
one-furnace melt shop, including a 7% increase in 1993. As a result of this
increased productivity, the Company was able to take advantage of several
seasonal export opportunities in the last half of fiscal 1991 and the first
half of fiscal 1992. In fiscal 1993, the Company increased shipped tons of
billets by 86% as compared to fiscal 1992. The average selling price of billets
improved in fiscal 1993 compared to fiscal 1992 due to an increase in domestic
shipments, which carry a higher selling price than export shipments, and
increasing raw material prices which were partially passed on to billet
customers. In fiscal 1994, the Company will continue to ship billets on a
supply contract or on an occasional and selective basis to domestic and export
customers.
COST OF SALES
Cost of sales was 94.1% of sales in fiscal 1993 compared to 91.1% in fiscal
1992 and 94.8% in fiscal 1991. The significant decrease in fiscal 1992 compared
to fiscal 1991 was due to lower scrap costs and conversion costs (the cost of
converting raw materials into shapes). The cost of sales increase in fiscal
1993 compared to fiscal 1992 was primarily due to increases in the same two
factors. Also contributing to the increase in cost of sales as a percentage of
sales were higher per ton production costs caused by the curtailment of
operations during the initial phases of the strike and higher costs for
electricity, natural gas and electrodes.
The major component of cost of sales is scrap. In fiscal 1992, scrap cost
decreased 8.4% compared to fiscal 1991, but shape prices dropped $2 per ton
more than scrap prices, reducing margins. In the first quarter of fiscal 1993,
scrap prices bottomed out and began rising sharply over the remainder of the
fiscal year. Scrap costs increased an average of 14.6% in fiscal 1993 compared
to fiscal 1992. Overall, in fiscal 1993, scrap cost per ton increased $10 more
than the increase in the shape selling prices, further reducing margins. For
fiscal 1993, the average metal margin was 4.0% below the average metal margin
in fiscal 1992.
Another significant portion of cost of sales is conversion costs, which
include the labor, energy, maintenance material, and supplies used to convert
raw materials into billets and billets into shapes. Conversion costs per ton,
which include fixed and variable costs, decreased 9.0% in fiscal 1992 compared
to fiscal 1991, but increased by 3.0% in fiscal 1993 compared to fiscal 1992.
The decrease in conversion costs per ton for fiscal 1992 was due to the
Company's cost reduction efforts. The Company reduced conversion costs by
operating at a higher level of capacity, implementing capital improvements,
reducing overhead, and renegotiating several major supply contracts. Also,
during the later part of fiscal 1992, the rolling mill operation went from a
six day per week operation to operating at full capacity without additional
staff.
The increase in per ton conversion costs in fiscal 1993 was due to the strike
and increased energy costs. The inability to operate at full capacity during
the initial phases of the strike resulted in reduced production of
approximately 27,000 tons in the melt shop and approximately 30,000 tons in the
rolling mill. As a result, each ton produced during this period included a
higher level of fixed costs than in comparable periods. Conversion costs per
ton also increased due to overtime wages paid to workers as a result of reduced
staffing and training new employees during the strike period. The Company
believes that, without the effect of the strike, conversion costs per ton would
have declined in fiscal 1993 compared to fiscal 1992. Compared to fiscal 1992,
the price of the fuel adjustment component of power increased 28% and the
prices of natural gas and electrodes increased 32% and 9%, respectively,
further increasing conversion costs. Increased consumption of certain supplies
and materials, particularly as new employees were trained, also contributed to
higher per ton conversion costs. The Company is currently operating at full
capacity and since July 1993 overall production and productivity have been near
pre-strike levels. With only a slight improvement in the economy expected in
fiscal 1994, the Company will continue to emphasize cost reductions to be
achieved through operating efficiencies and capital projects.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were relatively stable for
fiscal 1993, 1992, and 1991.
NON-PRODUCTION STRIKE EXPENSES
In fiscal 1993, the Company incurred $3.2 million ($2.5 million of which was
incurred during the first three months of the strike) of non-production strike
expenses, such as legal, security, and other services during the strike. The
Company expects that future strike-related costs will not exceed $100,000 per
month. See "Investment Considerations--Effect of the Strike" and "Business--
Strike and Impact Upon the Company."
INTEREST EXPENSE & MISCELLANEOUS
Interest expense decreased in fiscal 1993 compared to fiscal 1992 by $0.7
million as the Company purchased $11.1 million aggregate principal of its
14.75% Notes at a purchase price of $10.4 million. Interest expense for fiscal
1992 and 1991 was relatively stable.
Interest income decreased in fiscal 1993 compared to fiscal 1992 and did not
significantly change in fiscal 1992 compared to fiscal 1991. In fiscal 1993,
the Company had less cash to invest following its purchases of the 14.75% Notes
and interest rates were lower compared to fiscal 1992.
Miscellaneous income in fiscal 1993 and 1992 was approximately $0.5 million.
Miscellaneous income in fiscal 1991 of $0.9 million included a favorable
adjustment due to the execution of a renewal contract with the State of
Louisiana to abate state franchise taxes and state sales and use taxes. The
agreement applied retroactively to the prior fiscal year.
INCOME TAX
The Company has not incurred income tax expense for fiscal 1993, 1992 and
1991 due to a net loss in each of these years. See "--Other Comments."
NET LOSS
The net loss increased by $4.8 million in fiscal 1993 compared to fiscal
1992. The primary reasons for the increase are strike-related matters, lower
average metal margin and higher prices for energy compared to fiscal 1992.
The net loss in fiscal 1992 decreased by $3.2 million from fiscal 1991 due to
reductions in per ton conversion costs resulting from operational improvements.
Cost of goods sold as a percentage of sales was 91.1% in fiscal 1992 compared
to 94.8% in fiscal 1991 largely due to lower scrap costs and conversion costs.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased by $1.2 million to $31.2 million in the first
quarter of fiscal 1994. Working capital decreased by $24.8 million to $32.4
million in fiscal 1993. The decrease in fiscal 1993 was due to the
reclassification of $9.0 million of the 14.75% Notes from long-term debt to a
current liability, the decrease in inventories as a result of reduced
production during the strike and reductions in cash caused by the purchase of
$11.1 million in principal of the 14.75% Notes, offset partially by an increase
of $6.2 million in receivables.
In the first three months of fiscal 1994, cash flow from operations increased
by $2.2 million. The increase was due to the decrease in accounts receivable
due to collection of sales from September 1993 which were higher than December
1993 (normally the slowest shipment month in the year). Accounts payable
increased by $1.5 million due to extending payment terms of selected vendors.
This was partially offset by an increase in inventories. The Company has been
rebuilding its inventories, which were depleted due to lower production in the
early phases of the strike, to normal operating levels. In addition, the
Company expects inventories to
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increase in the second fiscal quarter of 1994. A two-week planned shutdown of
the production facilities late in the third quarter will reduce inventories by
$4 to $5 million. Net cash used in operations was $0.9 million in fiscal 1993
mainly due to the net loss and the increase in receivables. The increase in
receivables was primarily due to the increased billet and shape sales in August
and September 1993 as compared to the prior year. This was partially offset by
the decrease in inventories and increase in accounts payable. Despite higher
accounts receivable at year end, based on a better aging profile of the
Company's outstanding accounts and reductions in the number of accounts older
than 60 days, the Company's allowance for doubtful accounts has decreased
compared to prior periods.
Capital expenditures amounted to $0.4 million and $3.2 million in the first
quarter of fiscal 1994 and in fiscal year 1993, respectively. These
expenditures were used for minor upgrades to the plant and major maintenance
projects. The Company intends to implement a two-year, $8.6 million capital
expenditure program.
Cash from financing activities of $0.8 million in the first three months of
fiscal 1994 was due to short-term borrowings from the line of credit of $1.9
million. This was partially offset by principal payments on a mortgage and
increases in other assets due to expenses for the amended and restated line of
credit and the First Mortgage Notes. Cash flow from financing activities
decreased cash by $6.6 million in fiscal 1993 due to a purchase of $11.1
million aggregate principal amount of the 14.75% Notes for $10.4 million. This
was partially offset by $4.0 million of short-term borrowings.
On November 23, 1993, the Company entered into an amendment and restatement
of the Credit Facility, which is a three-year line of credit that permits loans
to be made to the Company thereunder, on a secured basis, of up to $30 million.
As of December 31, 1993, there was $5.9 million borrowed under the Credit
Facility. Interest rates under the Credit Facility are prime plus 1% or LIBOR
plus 2% at the Company's option. The Company's Credit Facility contains certain
covenants, such as the Interest Expense Coverage Ratio, which become more
restrictive over time. Under the Credit Facility, the Interest Expense Coverage
Ratio for the quarter ending September 30, 1994 is 1.25 to 1.00 and becomes
increasingly more restrictive for the quarters thereafter. For the quarter
ended December 31, 1993, the Company's Interest Expense Coverage Ratio on a pro
forma basis (assuming completion of the Offering) would have been 1.15 to 1.00.
In the event of a default under the Credit Facility, the Company would not be
permitted to borrow under the Credit Facility and the lenders thereunder may
accelerate payment of all amounts then outstanding and terminate their
commitments. A default under the Credit Facility may cause a default under the
Indenture. However, the Company believes that its normal operations, coupled
with continuing operating improvements, will be sufficient to satisfy these
covenants, although there can be no assurance that other events will not occur
that will affect the Company's ability to satisfy such covenants. See
"Description of Certain Indebtedness--Credit Facility." The Company will use
the proceeds of this Offering to defease and redeem the $48.9 million of
outstanding 14.75% Notes and repay the then outstanding loans under the Credit
Facility. The Company believes that current cash balances, internally generated
funds, the Credit Facility and additional purchase money mortgages will provide
adequate funds for the Company's operating requirements. In addition, the
Indenture contains a covenant which restricts the Company's ability to incur
additional indebtedness. Under the Indenture, the Company may not incur
additional indebtedness unless its EBITDA Ratio would be greater than 2.00 to
1.00 after giving effect to such incurrence. See "Description of the First
Mortgage Notes--Certain Covenants--Limitations on Indebtedness."
There are no financial obligations with respect to post-employment or post-
retirement benefits.
OTHER COMMENTS
ENVIRONMENTAL MATTERS
See "Business--Environmental Matters" and "Investment Considerations--Cost of
Compliance with Environmental Regulations" for a description of the Company's
environmental matters.
26
<PAGE>
STRIKE
See "Business--Strike and Impact Upon the Company" and "Investment
Considerations--Effects of the Strike" for a description of the strike.
INFLATION
The Company is subject to increases in the cost of energy, supplies, salaries
and benefits, additives, alloy and scrap due to inflation. Shape prices are
influenced by supply, which varies with steel mill capacity and utilization,
and market demand.
ACCOUNTING FOR INCOME TAXES
The Company has $310 million of NOLs to offset against regular taxes. The
NOLs expire in varying amounts through fiscal 2008. A substantial portion of
the available NOLs, approximately $200 million, expires by fiscal 2000. In
addition, the Company has $30.2 million of future tax benefits attributable to
the Tax Lease Agreement which expires in 1996 (see Note 8 to the Financial
Statements) and which may, to the extent of taxable income in the year such tax
benefit is produced, be utilized prior to the NOLs. Even though management
believes the Company will be profitable in the future and will be able to
utilize a portion of the NOLs, management does not believe that it is likely
that all of the NOLs will be utilized. In February 1992, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("FAS 109"), which will require the
Company to change its method of accounting for income taxes for financial
reporting purposes for the fiscal year beginning October 1, 1993. FAS 109
requires, among other things, recognition of future tax benefits, subject to a
valuation allowance based on the likelihood of realizing such benefits.
Preliminary calculations indicate that deferred tax assets of approximately
$118 million (NOLs and other temporary timing differences multiplied by the
federal income tax rate) and deferred tax liabilities of approximately $8
million will be recorded upon adoption of FAS 109 in fiscal 1994. However, in
recording these deferred assets, FAS 109 requires the Company to determine
whether it is "more-likely-than-not" that the Company will realize such
benefits and that all negative and positive evidence be considered (with more
weight given to evidence that is "objective and verifiable") in making the
determination. FAS 109 indicates that "forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses in recent years"; therefore, the Company has determined that
it will be required by the provisions of FAS 109 to establish a valuation
allowance for all of the recorded net deferred tax assets at the time the
standard is adopted. In view of the fact that this determination was based
primarily on historical losses with no regard for the impact of proposed
capital expenditures and business plans, future favorable adjustments to the
valuation allowance may be required if and when circumstances change and the
Company returns to profitability. Adoption of FAS 109 will have no material
adverse impact on income for financial reporting or tax purposes.
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<PAGE>
QUARTERLY RESULTS
The following table provides certain summary financial information for the
eight quarters of fiscal 1993 and 1992:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED FISCAL YEAR ENDED SEPTEMBER 30, 1993 FISCAL YEAR ENDED SEPTEMBER 30, 1992
DECEMBER 31, ----------------------------------------------------- ----------------------------------------------
1993 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTE
------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT RATIO AND PER TON DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales........ $36,778 $ 36,282 $ 34,485(1) $ 33,408(1) $ 31,833 $ 30,474 $ 31,050 $29,037 $29,211
Gross Profit..... 2,220 1,556(2) 745(2) 2,040(2) 3,634 2,893 2,618 2,759 2,386
Net Income
(Loss).......... (973) (1,481) (4,078) (1,697) 1,102 203 (504) (352) (699)
Gross Profit
Margin.......... 6.0% 4.3% 2.2% 6.1% 11.4% 9.5% 8.4% 9.5% 8.2%
Net Tons Shipped:
Shapes.......... 103,168 100,494 105,541 104,752 92,487 95,195 97,318 95,560 84,871
Billets......... 13,375 20,493 13,129 7,494 18,488 7,133 9,387 1,465 13,979
------- -------- -------- -------- -------- -------- -------- ------- -------
Total............ 116,543 120,987 118,670 112,246 110,975 102,328 106,705 97,025 98,850
Average Selling
Price per Ton:
Shapes.......... $ 321 $ 311 $ 297 $ 298 $ 295 $ 297 $ 294 $ 292 $ 301
Billets......... 224 214 210 207 202 210 204 218 199
- --------
(1) The Company believes that it lost approximately 27,000 tons of production
in the melt shop and approximately 30,000 tons of production in the rolling
mill and some sales during the second and third quarters due to the strike.
(2) The Company believes that the strike significantly impacted its operating
results in the second, third and fourth quarters of fiscal 1993.
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<PAGE>
BUSINESS
GENERAL
The Company is a leading producer of light structural steel products. The
Company owns and operates a steel minimill strategically located on the
Mississippi River in LaPlace, Louisiana, 35 miles northwest of New Orleans. The
minimill, constructed at a cost of $243 million in 1981, is one of the most
modern facilities in the world in its product line and utilizes state-of-the-
art equipment and technology. The Company produces a variety of shapes,
including angles, flats, channels, standard beams and wide flange beams. The
shapes produced by the Company have a wide range of commercial and industrial
applications, including the construction and manufacturing of petrochemical
plants, barges and light ships, railcars, trucks and trailers, rack systems,
tunnel and mine support products, joists, sign and guardrail posts for
highways, power and radio transmission towers, and bridges. The Company sells
its products to approximately 600 customers, most of which are steel service
centers, in 44 states, Canada, Mexico and overseas. The Company also sells
excess billets (which have not been rolled into shapes) on a worldwide basis to
other steel producers for their own rolling or forging applications. In fiscal
1993, the Company sold 403,274 tons of shapes and 59,604 tons of billets.
According to the AISI, the domestic market demand for all structural steel
shapes products in 1992 was 5.1 million tons. The Company estimates that its
share of the total domestic shapes market was approximately 8% in 1992. The
Company also believes that its share of the light structural steel shapes
market (the primary market in which the Company competes) is much higher, and
that it is one of the five largest producers of light structural steel shapes
in the U.S.
The term "minimill" refers to a relatively low-cost steel production facility
which uses steel scrap, rather than iron ore, as its basic raw material. In
general, minimills recycle scrap using electric arc furnaces, continuous
casters and rolling mills. The Company's minimill, which was owned and operated
by Voest-Alpine until it was purchased by the Company in September 1986,
includes a Krupp computer-controlled, electric arc furnace utilizing water-
cooled sidewalls and roofs, two Voest-Alpine four-strand continuous casters, a
computer supervised, Italimpianti reheat furnace and a 15-stand Danieli rolling
mill (a second Krupp furnace is currently not in operation, but is available
for additional production).
In August 1988, the Company completed an initial public offering of its Class
A Common Stock which shares are traded on the American Stock Exchange. The
Company was incorporated under the laws of the State of Louisiana in 1979 and
was reincorporated in Delaware in 1988 in connection with its public offering.
The address of the Company's principal place of business is River Road, P.O.
Box 5000, LaPlace, Louisiana 70069 and its telephone number is (504) 652-4900.
MANUFACTURING PROCESS AND FACILITIES
In its production process, the Company uses steel scrap which is received by
barge, rail, and truck, and then stored in a scrap receiving yard. The scrap is
transported to the Company's melt shop by rail car or truck and loaded into its
furnace. The steel scrap is melted with electricity in a 75-ton capacity
electric arc furnace which heats the scrap to approximately 3100(degrees)F.
During the scrap melting and refining process, impurities are removed from the
molten steel. After the scrap reaches a molten state, it is poured from the
furnace into ladles, where adjustments of alloying elements and carbon are made
to obtain the desired chemistry. The ladles of steel are then transported to
one of two four-strand continuous casters in which the molten steel is
solidified in water-cooled molds. The casters produce long strands of steel
which are cut by torch into billets and moved to a cooling bed and marked for
identification. After cooling, the billets are transferred to the rolling mill
for further processing. In the rolling mill, the billets are reheated in a
walking beam furnace with recuperative burners. Once the billets are heated to
approximately 2000(degrees)F, they are rolled through up to fifteen mill stands
which mold the billets into the dimensions and sizes of the finished products.
The heated finished shapes are placed on a cooling bed and then straightened
and cut into the appropriate
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<PAGE>
customer lengths. The shapes are sprayed to prevent surface rust and then
bundled into 2 1/2- to 5-ton stacks and placed in a climate controlled
warehouse where they are subsequently shipped to the Company's stocking
locations via barge, or to customers directly via truck, rail, or barge.
The Company is currently able, using only one of its two furnaces, to produce
more billets than it can consume in its rolling mill. Prior to 1991, the
Company operated both of its furnaces and produced a much greater tonnage of
billets for sale in the billet market than it currently produces. The Company
discontinued this practice in 1991 due to declining margins on such products
and has been operating only one of its two furnaces since then. The Company
believes that it could restart its other furnace with an expenditure of less
than $1 million. As a result, the Company believes that it has significant
additional capacity to produce more billets if conditions in the worldwide
billet market improve or if the Company obtains additional rolling mill
capacity.
PRODUCTS
Finished Steel. The Company produces a variety of light structural steel
products (including angles, flats, channels, standard beams and wide-flange
beams) that are collectively referred to as "shapes." The Company currently
produces and sells shapes in the forms of equal leg angles (2"x 2" through
6"x 6"), unequal leg angles (4"x 3" through 7"x 4"), channels (3" through 8"),
flats (3" through 8"), standard beams (3" through 6"), and wide flange beams
(4" through 8"). The shapes produced by the Company have a wide range of
commercial and industrial applications, including the construction and
manufacturing of petrochemical plants, barges and light ships, railcars, trucks
and trailers, rack systems, tunnel and mine support products, joists, sign and
guardrail posts for highways, power and radio transmission towers, and bridges.
The Company's shapes are produced to various national specifications, such as
those set by the American Society for Testing and Materials ("ASTM"). In
addition, the Company is one of a few minimills that is approved by the
American Bureau of Shipping ("ABS") and certified for nuclear applications. The
Company's products are also certified for state highway and bridge structures.
The Company is currently in the approval process for ISO-9000 certification,
the new international steel standard.
The Company's shape products are distinguishable from bar mill products which
include hot rolled bars, cold finished bars and reinforcing bars. The
manufacture of structural steel products is generally more labor intensive and
technically demanding than the manufacture of steel bar mill products.
Semi-finished Steel. The Company sells its excess billets on a worldwide
basis to other steel producers for their own rolling or forging applications.
The billets are sold both domestically and worldwide through supply contracts
or on an occasional and selective basis. During fiscal 1993, the Company
produced in excess of 25 grades and 5 sizes (120 mm to 200 mm square or
rectangle) of billets.
CUSTOMERS
The Company has approximately 600 customers in 44 states, Canada, Mexico and
overseas. The majority of the Company's shape products (approximately 74% in
fiscal 1993) are sold to steel service centers, while the remainder are sold to
original equipment manufacturers (approximately 15% in fiscal 1993) and export
customers (approximately 11% in fiscal 1993). Steel service centers purchase
nearly 30% of all carbon industrial steel products produced in the United
States. Steel service centers warehouse steel products from various minimills
and integrated mills and sell combinations of products from different mills to
their customers. Some steel service centers also provide additional labor
intensive value added services such as fabricating, cutting or selling steel by
the piece rather than by the bundle.
In fiscal 1993, the Company's top ten customers accounted for approximately
30% of total sales, and no one customer accounted for more than 6% of total
sales. The Company believes that it is not dependent on any customer and that
it could, over time, replace lost sales attributable to any one customer.
30
<PAGE>
DISTRIBUTION
The Company's steelmaking facility, which includes a deep-water dock, is
strategically located on the Mississippi River, which the Company believes
gives it transportation cost advantages because it can ship its product by
barge, the least costly method of transportation in the steel industry.
Furthermore, the Company operates three inventory stocking warehouses in
Chicago, Tulsa and Pittsburgh, which supplement its operations in Louisiana.
These facilities, each of which includes an inland waterway dock, enable the
Company to significantly increase its marketing territory by providing storage
capacity for its finished products in three additional markets and by allowing
the Company to meet customer demand far from its minimill facility on a timely
basis. The Company believes that the location of its minimill on the
Mississippi River, and its network of inland waterway warehouses, enable it to
access markets for its products that would otherwise be unavailable to the
Company.
The Company's deep-water dock at its manufacturing facility enables the
Company to load vessels or ocean-going barges for overseas shipments, giving
the Company low cost access to overseas markets. Since the minimill is only 35
miles from the Port of New Orleans, smaller quantities of shapes or billets can
be shipped overseas on cargo ships from that port. In addition, the Company
makes rail shipments to some customers, primarily those on the West Coast and
in Mexico. Relative to its domestic competitors, the Company believes it has a
$25 per ton or more freight cost advantage over land-locked minimills in
serving the export market. This advantage permits the Company to compete with
foreign minimills in certain export markets.
The Company believes that the elimination of current duties in Canada and
Mexico as a result of the passage of the North American Free Trade Agreement
("NAFTA") will increase the competitiveness of the Company's products compared
to locally produced products in such countries. During fiscal 1993 and 1992,
2.9% and 3.4%, respectively, of the Company's tons shipped were exported to
Canada and Mexico. There can be no assurance, however, that there will be an
increase in the Company's shipments to Canada and Mexico as a result of the
passage of NAFTA.
MARKETS AND SALES
According to the AISI, the domestic market demand for all structural steel
shape products in 1992 was 5.1 million tons. The Company estimates that its
share of the total domestic shapes market was approximately 8% in 1992. The
Company believes that its share of the light structural steel shapes market
(the primary market in which the Company competes) is much higher, and that it
is one of the five largest producers in this market of light structural steel
shapes in the U.S.
The Company's shape products are sold domestically and in Canada, Mexico and
overseas on the basis of price, availability, quality and service. The Company
maintains a real-time computer information system, which tracks prices offered
by competitors, as well as freight rates from its customers to both the
Company's stocking locations and the nearest competitive facilities. In
addition, the Company maintains a full product assortment at its stocking
locations to ensure availability of its product and operates on a predetermined
production schedule that is provided to customers to assist customers in
scheduling their purchases.
Although sales of shapes tend to be slower during the winter months due to
the impact of winter weather on construction and transportation, and during the
late summer due to planned plant shutdowns of end-users, seasonality has not
been a material factor in the Company's business. The Company's backlog of
unfilled cancelable purchase orders for shapes, which typically are filled in
approximately three months, totaled $24.3 million as of September 30, 1993 as
compared to $14.3 million as of September 30, 1992. As of December 31, 1993,
the Company's backlog totaled $25.2 million.
The level of billet sales to third parties is dependent on the Company's
internal billet requirements and worldwide market conditions, which may vary
greatly from year to year. In the past three fiscal years, shipments of billets
to third parties have ranged from 8% to 13% of the Company's total tonnage
sales, as compared to 35% in fiscal 1990. The Company is currently able, using
only one of its two furnaces, to produce
31
<PAGE>
more billets than it can consume in its rolling mill. Prior to 1991, the
Company operated both of its furnaces and produced a much greater tonnage of
billets for sale in the billet market than it currently produces. The Company
discontinued this practice in 1991 in response to a decision by foreign
governments to resume the practice of heavily subsidizing their steel-making
industries. This decision precipitated a sharp decline in worldwide billet
prices, as foreign steel-making companies produced more billets for export. Due
to current margins, the Company has chosen to sell its excess billets through
supply contracts or on an occasional and selective basis. If the market for
billets were to improve, the Company could increase its billet production by
restarting its idled second furnace.
STRATEGY
The Company's principal operating strategy is to improve operating results by
reducing labor costs and increasing sales of higher margin shape products. In
addition, upon completion of the Offering the Company intends to implement a
two-year, $8.6 million capital expenditure program to reduce its production
costs and increase its rolling mill capacity. The Company may also consider
strategic acquisitions which complement or expand the Company's current
operations, such as businesses engaged in the metals field or recycling
operations.
Operating Efficiencies. The Company believes that it can lower its labor
costs by as much as $7 per ton from fiscal 1993 levels by making
operational changes and operating the minimill with fewer workers. The
Company began to implement many operational changes in fiscal 1993, but
their impact is not fully reflected in fiscal 1993 results since these
changes were implemented over the course of the year. In connection with
the foregoing, the Company recently increased its melt shop operations by
changing from three to four shifts (and by operating seven days a week
rather than six) as part of its cost savings program. Labor costs per ton
in fiscal 1993 also were somewhat distorted by the effects of the strike,
which resulted in periods of lower production and productivity, periods of
substantially increased overtime and the Company's need to temporarily use
outside contractors.
The Company also believes that the adoption of a labor contract
comparable to its last proposal to the Union would reduce labor costs an
additional $2 per ton. If implemented, the Company believes the proposed
contract would reduce the Company's benefit costs by approximately $750,000
annually through employee contributions for health and dental coverage and
the benefits of a proposed managed care program (which would still provide
comprehensive benefits to employees). The Company has also proposed several
changes which would reduce the quantity of overtime. For instance, the
Company has proposed that it be given the right to buy back certain
vacation time of employees. Flexibility in using contractors and
supervisors, another element of the proposed contract, would also
contribute to lowering costs.
Moreover, the Company believes that its labor costs per ton can be
reduced even further through the adoption of its proposed incentive
compensation plan. The incentive plan, which is similar to incentive plans
employed by other minimills which have achieved lower labor costs per ton
than the Company, would compensate production workers and supervisors for
improvements in productivity, with the costs of the incentive payments
offset by the benefits of increased productivity. This improved
productivity would have the additional benefit of reducing per ton
conversion costs. Due to the continuing strike, the Company may be
precluded from implementing any or all of its labor initiatives. See "--
Strike and Impact Upon the Company--Unfair Labor Practice Charge and--
Status of Negotiations."
In the event the Company is able to sustain the labor cost savings
already achieved through operational changes implemented in fiscal 1993,
the Company achieves its anticipated labor cost savings and the Company
implements its additional labor initiatives, the Company believes that its
labor costs per ton will be comparable to those of the Company's leading
competitors. However, no assurance can be given that the ultimate labor
contract will permit the Company to realize significant labor cost savings.
The Company has committed to developing a Total Quality Management work
culture. Through extensive training and individual development efforts, the
Company will attempt to reinforce its basic
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<PAGE>
values of employee improvement, teamwork, and increased individual
accountability. The Company believes that the workforce, through this
program, will have an impact in achieving operational and productivity
improvements. The Total Quality Management program does not involve the
terms and conditions of the workplace and is therefore not subject to the
collective bargaining process. As a result, the Company has begun
implementing the Total Quality Management Program with its supervisory
personnel and intends to begin implementing the program with the remainder
of its workforce in the near-term.
Capital Improvements. From fiscal 1987 through fiscal 1993, the Company
spent an aggregate of approximately $48 million on capital projects. Most
of these expenditures were directed toward establishing its stocking
location distribution system, establishing a controlled warehouse
environment to minimize surface rust, extending its product line by adding
equipment to roll wide-flange beams and complying with changing
environmental regulations.
In contrast to prior years, capital expenditures in the next three years
will primarily be directed toward efficiency and cost reduction within its
manufacturing facility. In addition to normal maintenance programs, the
Company intends to implement a two-year, $8.6 million capital expenditure
program to reduce its production and operating costs and increase its
rolling mill capacity. The principal elements of this program are (i) an
automobile shredder to enable the Company to shred car bodies on-site and
reduce scrap costs, (ii) a steel straightener to improve production
capacity in the rolling mill, (iii) an off-line sawing system and conveyor
to further improve production capacity in the rolling mill, (iv) a second
overhead crane to reduce product changeover time in the rolling mill and
(v) a shipping bay rail spur to reduce the handling of finished products.
The Company believes that these capital projects, when fully implemented,
would result in annual operating cost savings of approximately $7.10 per
ton.
The following table summarizes the capital expenditures and estimated
production cost savings (excluding depreciation and additional interest
expense) associated with the Company's capital expenditure program.
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED
TOTAL PRODUCTION
ESTIMATED COST
CAPITAL ANNUAL SAVINGS
PROJECT EXPENDITURE SAVINGS(1) (PER TON)(2)
------- ------------ ------------ -------------
(IN MILLIONS, EXCEPT PER TON AMOUNTS)
<S> <C> <C> <C>
Automobile Shredder...... $ 4.2 $ 1.7 $ 3.70
Steel Straightener....... 1.9 0.7 1.50
Off-Line Sawing
System/Conveyor......... 1.3 0.5 1.10
Overhead Crane........... 0.6 0.2 0.40
Shipping Bay Rail Spur... 0.6 0.2 0.40
------------ ------------ -------------
Total.................. $ 8.6 $ 3.3 $ 7.10
============ ============ =============
</TABLE>
- --------
(1) Assumes production and sales of 433,000 tons of shapes and 30,000 tons of
billets, for an aggregate of 463,000 tons. In fiscal 1993, the Company
produced and sold 462,878 tons, which included 403,274 tons of shapes and
59,604 tons of billets. The annual savings include increases in gross
profits relating to a shift to higher margin shape sales. The assumption
does not include any increased production that might result from
implementation of the Company's capital expenditure projects.
(2) Estimated cost savings per ton are based on certain estimates of historical
operating data. Estimated savings related to the automobile shredder may
vary depending on fluctuations in the market price for scrap.
Automobile Shredder. The proposed automobile shredder, which would
operate at the LaPlace site, would enable the Company to prepare car bodies
and sheet material into shredded material ready for the melting process,
thereby providing the Company with shredded scrap at a lower cost than it
33
<PAGE>
currently procures such scrap. In addition, the Company believes that the
automobile shredder would produce scrap of a consistently higher quality
than purchased shredded scrap. The Company believes that on-site
preparation of scrap would enhance the efficiency of the dock in handling
finished goods since fewer shipments of scrap by barge would arrive. The
Company estimates that the purchase and installation of the on-site
shredder would require $4.2 million of capital expenditures. Assuming
production and sales levels of 463,000 tons per year, the estimated annual
cost savings will be approximately $1.7 million or $3.70 per ton.
Steel Straightener. The proposed steel straightener would replace the
Company's existing steel straightener and would contain enhanced features
which would allow it to operate more rapidly, thereby eliminating the
bottleneck caused by the existing straightener in the rolling mill. The
steel straightener, together with the off-line sawing system and conveyor,
would expand the capacity of the rolling mill and permit the production of
light bar shape products (2"x2" angles), which historically are products
with a strong demand, but which the Company previously dropped from its
production schedule due to the rolling mill's inability to produce such
products efficiently. The Company estimates that the purchase and
installation of the steel straightener would require $1.9 million of
capital expenditures. Assuming production and sales levels of 463,000 tons
per year, the estimated annual cost savings relating to the steel
straightener will be approximately $0.7 million or $1.50 per ton.
Off-Line Sawing System and Conveyor. The proposed off-line sawing system
would allow the rolling mill to operate more rapidly by removing the
bottleneck that currently exists when shape products are cut into lengths
less than 40 feet. The off-line sawing system will include a conveyor to
move shapes from the last rolling mill operation to shipping bays. The off-
line sawing system and conveyor, together with the steel straightener,
would expand the capacity of the rolling mill and permit the production of
light bar shape products. The Company estimates that the purchase and
installation of the off-line sawing system and conveyor would require $1.3
million of capital expenditures. Assuming production and sales levels of
463,000 tons per year, the estimated annual cost savings relating to the
off-line sawing system and conveyor will be approximately $0.5 million or
$1.10 per ton.
Overhead Crane. The proposed overhead crane, along with the existing
overhead crane in the rolling mill, would allow both product changeovers
and routine maintenance to occur simultaneously, thereby reducing
changeover time between production runs. The Company estimates that the
purchase and installation of an additional overhead crane would require
capital expenditures of $0.6 million. Assuming production and sales levels
of 463,000 tons per year, the estimated annual cost savings will be
approximately $0.2 million or $0.40 per ton.
Shipping Bay Rail Spur. The proposed rail spur in the shipping bay would
move finished products from the Company's warehouse to the rail lines
adjacent to the minimill without loading and unloading such products into
and from trucks. The Company believes that its labor costs and operating
and capital costs of mobile equipment would be reduced by installation of
the shipping bay rail spur, as well as reduce damage to its finished
products. The Company estimates that the installation of the shipping bay
rail spur would require $0.6 million of capital expenditures. Assuming
production and sales levels of 463,000 tons per year, the estimated annual
costs savings will be approximately $0.2 million or $0.40 per ton.
Other Projects. The Company is currently evaluating the construction of a
rail system that would permit the movement of scrap from the Company's
deep-water dock, which is located approximately 500 yards from the
minimill, to the scrap inventory area and the movement of finished goods
from the warehouse to the dock without loading and unloading the scrap and
finished goods into and from trucks. The Company believes that its labor
costs, contracted services, truck and crane rentals and fuel requirements
would be reduced by the implementation of the rail system. After
preliminary review, the Company estimates that construction of the rail
system would require $11.0 million of capital expenditures. The Company
will continue to analyze the feasibility and potential cost savings of this
project. In addition, the Company is considering modification of the
furnace shell and tapping hole to increase productivity and reduce
consumption of refractory material. The Company is currently
34
<PAGE>
considering various designs for such modifications. After preliminary
review, the Company estimates that it may be able to effect such
modifications for less than $1.0 million of capital expenditures. The
Company believes that the potential cost savings of such project could be
significant relative to the capital expenditures required.
Since the estimated operating cost savings from the Company's expected
operating efficiencies and planned capital improvements are based upon a number
of assumptions, estimated operating cost savings are not necessarily indicative
of the Company's expected financial performance and increases in the cost of
raw materials and other conversion costs may offset any operating cost savings
to cause actual results to vary significantly. There can be no assurance that
the ultimate labor contract will permit the Company to realize significant
labor cost savings. In addition, although the Company believes its assumptions
with respect to its planned capital expenditure program to be reasonable, there
can be no assurance that the estimated production cost savings of the Company's
capital expenditure program will actually be achieved, sufficient demand for
structural steel products will exist for the additional capacity, or other
difficulties will not be encountered in completing the capital expenditure
program, or that the projects can be installed or constructed at the estimated
prices.
Acquisition Program and Tax Benefits. The Company may, from time to time,
seek strategic acquisitions in order to accelerate its growth, focusing on
businesses which complement or expand the Company's current operations, such as
businesses in the metals field or involving recycling operations. The Company
is not presently engaged in negotiations with respect to any acquisition. As of
September 30, 1993, the Company had approximately $310 million of NOLs which
could be used to offset taxable earnings of the Company, including the earnings
of acquired entities, subject to certain limitations imposed by the Internal
Revenue Code of 1986, as amended (the "Tax Code"). See "Investment
Considerations--Recent Losses," "Certain Related Party Transactions--Tax
Benefit Transfer Lease Agreement and Release Agreement" and the Notes to the
Financial Statements.
COMPETITION
The Company's location on the Mississippi River, as well as its stocking
locations in three additional regions of the country, provide it with access to
vast markets in the eastern, midwestern, southern, and central portions of the
United States. As a result, the Company competes in the shape market with
several major domestic minimills in each of these regions. Depending on the
region and product, the Company competes with, among others, Nucor Corporation,
Structural Metals, Inc., North Star Steel Co., Northwestern Steel and Wire
Company, and Lake Ontario Steel Corporation. The Company does not currently
compete with minimills producing flat rolled or rebar products, nor does it
compete with any domestic integrated steel producers.
Foreign steel producers historically have not competed significantly with the
Company in the domestic market for shape sales due to higher freight costs in
the relatively low priced shape market. Foreign competition could increase,
however, as a result of changes in currency exchange rates and increased steel
subsidies by foreign governments.
The Company is currently able, using only one of its two furnaces, to produce
more billets than it can consume in its rolling mill. Prior to 1991, the
Company operated both of its furnaces and produced a much greater tonnage of
billets for sale in the billet market than it currently produces. The Company
discontinued this practice in 1991 in response to a decision by foreign
governments to resume the practice of heavily subsidizing their steel-making
industries. This decision precipitated a sharp decline in worldwide billet
prices, as foreign steel-making companies produced more billets for export. Due
to current margins, the Company has chosen to sell its excess billets on a
supply contract or on an occasional and selective basis. Since most steel
companies produce billets, the Company competes with steel companies that may
also have an excess billet supply at any particular time.
35
<PAGE>
RAW MATERIALS
The Company's major raw material is steel scrap, which is generated
principally from industrial, automotive, demolition, railroad and other scrap
sources and is primarily purchased directly by the Company in the open market
through a large number of steel scrap dealers. The Company is able to
efficiently transport scrap from suppliers throughout the inland waterway
system and through the Gulf of Mexico, permitting it to take advantage of scrap
purchasing opportunities far from its minimill, and to protect itself from
supply imbalances that develop from time to time in specific local markets. In
addition, unlike many other minimills, the Company, through its own scrap
purchasing staff, buys scrap directly from scrap dealers and contractors rather
than through brokers. The Company believes that its enhanced knowledge of scrap
market conditions gained by being directly involved in scrap procurement on a
daily basis, coupled with management's long experience in metals recycling
markets, gives the Company a competitive advantage. The Company does not
currently depend upon any single supplier for its scrap. The Company, on
average, maintains a 25-day inventory of steel scrap.
The Company has initiated a program of buying directly from local scrap
peddlers and small dealers for cash. Through this program, the Company has
procured approximately 20% of its scrap at prices lower than those of large
scrap dealers.
The cost of steel scrap is subject to market forces, including demand by
other steel producers. The cost of steel scrap to the Company can vary
significantly, and product prices generally cannot be adjusted in the short-
term to recover large increases in steel scrap costs. Over longer periods of
time, however, product prices and steel scrap prices have tended to move in the
same direction.
The long-term demand for steel scrap and its importance to the domestic steel
industry may be expected to increase as steel makers continue to expand steel
scrap-based electric arc furnace capacity. For the foreseeable future, however,
the Company believes that supplies of steel scrap will continue to be available
in sufficient quantities at competitive prices. In addition, a number of
technologies exist for the processing of iron ore into forms which may be
substituted for steel scrap in electric arc furnace-based steelmaking. Such
forms include direct-reduced iron, iron carbide and hot-briquetted iron. While
such forms may not be cost competitive with steel scrap at present, a sustained
increase in the price of steel scrap could result in increased implementation
of these alternative technologies.
In addition to steel scrap, the Company consumes smaller quantities of
additives, alloys and flux ("AAF"), a substantial portion of which is imported
through the Port of New Orleans. As a result of its proximity to the port, the
Company believes it has a freight advantage over competitors when procuring
alloys. The Company does not currently depend upon a single supplier for its
AAF requirements.
The Company has not experienced any shortages or significant delays in
delivery of these materials. The Company believes that an adequate supply of
raw materials will continue to be available.
ENERGY
The Company's manufacturing process consumes large amounts of electrical
energy. The Company purchases its electrical service needs from Louisiana Power
and Light ("LPL") pursuant to a contract originally executed in 1980 and
extended in 1991 for a five year period. The base contract is supplemented to
provide lower cost off-peak power and known maximums in higher cost firm demand
power. In addition, the Company receives discounted peak power rates in return
for LPL's right to periodically curtail service during periods of peak demand.
These curtailments are generally limited to a few hours and during the last
several years have had negligible impact on operations. Although the
supplemental contract with LPL expires February 1, 1996, the Company has no
reason to believe that this contract will not be renewed upon substantially
similar terms. To a lesser extent, the Company's manufacturing facility
consumes quantities of natural gas. The Company purchases its natural gas on a
month-to-month basis from a variety of suppliers. Due to the effect of a fuel
adjustment provision in the contract with LPL and price increases in natural
gas,
36
<PAGE>
the Company's energy expense increased by $2.0 million in fiscal 1993 compared
to fiscal 1992. Historically, the Company has been adequately supplied with
electricity and natural gas and does not anticipate any curtailment in its
operations resulting from energy shortages.
The Company believes that its utility rates are very competitive in the
domestic minimill steel industry. As one of LPL's largest customers, the
Company is able to obtain competitive rates from LPL.
ENVIRONMENTAL MATTERS
The Company is subject to various Federal, state and local laws and
regulations, including, among others, the Clean Air Act, the 1990 amendments to
the Clean Air Act (the "1990 Amendments"), the Resource Conservation and
Recovery Act, the Clean Water Act and the Louisiana Environmental Quality Act,
and the regulations promulgated in connection therewith, concerning the
discharge of contaminants which may be emitted into the air and discharged into
the waterways, and the disposal of solid and/or hazardous waste such as
electric arc furnace dust.
In addition, in the event of a release of a hazardous substance generated by
the Company, the Company could be potentially responsible for the remediation
of contamination associated with such a release. In the last five years, the
only environmental penalty assessed to the Company was a fine in the amount of
$43,000 levied in 1989 in conjunction with a Hazardous Waste Compliance Order
issued by the Louisiana Department of Environmental Quality with respect to
hazardous waste management violations. At this time, the Company is in
compliance in all material respects with applicable environmental requirements.
The Company has a full-time compliance officer who is responsible for
monitoring the Company's procedures for compliance with such rules and
regulations. The Company does not anticipate any substantial increase in its
costs for environmental remediation or that such costs will have a material
adverse effect on the Company's competitive position, operations or financial
condition. The Company has proposed a sampling plan to the Louisiana Department
of Environmental Quality to analyze the contents of two storm-water retention
ponds at the LaPlace minimill in connection with plans to close the ponds.
Depending upon the results of such sampling, some level of clean-up may be
appropriate; however, the Company does not anticipate that such expenditures,
if needed, would be material.
The Company's minimill is classified, in the same manner as similar steel
mills in the industry, as generating hazardous waste due to the production of
dust that contains lead, cadmium and chromium. The Resource Conservation and
Recovery Act regulates the management of such emission dust from electric arc
furnaces. The Company currently collects the dust resulting from its melting
operation through an emissions control system and disposes of it through an
approved waste recycling firm. The dust disposal costs were approximately $1.5
million in fiscal 1993, and are estimated to be approximately the same for
fiscal 1994. In fiscal 1990, a small quantity of dust containing very low
emissions of radioactive material inadvertently entered the scrap stream on one
occasion. All of the dust containing such material was captured by the
emissions control system and is being held pending decision as to appropriate
disposal. The Company has estimated that the ultimate cost of disposal of such
dust will be approximately $500,000.
The Company's future expenditures for installation of environmental control
facilities are difficult to predict. Environmental legislation, regulations and
related administrative policies are constantly changing. Environmental issues
are also subject to differing interpretations by the regulated community, the
regulating authorities and the courts. Consequently, it is difficult to
forecast expenditures needed to comply with future regulations, such as those
forthcoming as a result of the 1990 Amendments. Comprehensive regulations
applicable to the Company have yet to be promulgated under the authority of the
1990 Amendments. Therefore, at this time, the Company cannot estimate those
costs associated with compliance and the effect the upcoming regulations will
have on the Company's competitive position, operations or financial condition.
In fiscal 1994, the Company intends to spend approximately $300,000 on various
environmental capital projects, including those related to the 1990 Amendments.
37
<PAGE>
STRIKE AND IMPACT UPON THE COMPANY
General. The Company's six-year labor contract with the Union expired on
February 28, 1993. On March 21, 1993, after three short contract extensions,
the Union initiated a strike by its 338 bargaining unit employees after the
parties failed to reach agreement on a new labor contract due to differences on
economic issues. Initially, the Company had to curtail its operations (for six
weeks the Company operated at 50% capacity), which resulted in reduced
production, higher per ton conversion costs and lost sales, all of which
adversely affected the Company's profitability, particularly in the early weeks
of the strike.
During its negotiations with the Union, the Company developed a strategic
contingency plan to maintain continued operation of the plant in the event of a
work stoppage. As a result of such planning, the Company was able to avoid
complete suspension of operations by operating the minimill with fewer workers
and by utilizing a combination of temporary replacement workers, Union
employees who returned to work and salaried employees. As a result of such
measures, the Company is currently operating at full capacity and since July
1993 overall production and productivity have been near pre-strike levels.
As of December 31, 1993, the Company has incurred approximately $3.6 million
in out-of-pocket costs for security, legal matters and other services related
to the strike ($2.5 million of which was incurred during the first three months
of the strike). Although uncertainties inherent in the strike generally make it
impossible to predict the duration or ultimate cost of the strike to the
Company, the Company expects that future strike-related costs will not exceed
$100,000 per month.
Injunction. The Company obtained an injunction from a Louisiana state court
on April 1, 1993 imposing constraints on the number of picketers and regulating
conduct on the picket line. As a result of violations of the injunction, the
Company has obtained contempt orders against the violators, as well as
additional injunctive relief to further regulate picketing activity. Assault
and battery charges have been filed against several striking Union members, as
well as non-striking Company employees. Access to the minimill has been
generally unimpaired since the injunction was issued (with the exception of a
court imposed 90-second per vehicle waiting time) and the Company has been
allowed by the court to open additional gates to its facility. The injunctive
relief has also permitted the Company to significantly reduce its out-of-pocket
expenses for security and housing of temporary replacement workers.
Unfair Labor Practice Charge. On May 4, 1993, the Union filed unfair labor
practice charges against the Company with the regional office of the NLRB,
which charges were amended on May 20, 1993 and July 15, 1993 to contain twenty-
two specific allegations, including allegations that the Company had failed to
provide the Union with a fully developed incentive plan, that the Company
maintained its position that the incentive plan (which could be unilaterally
changed), would not be subject to the arbitration and grievance procedure and
that the Company had made regressive offers prior to the strike. The Union is
seeking a finding that the Company negotiated in bad faith which, under the
NLRA, could convert the strike from an "economic" strike to an "unfair labor
practice" strike. If the Company were found to have engaged in an "unfair labor
practice" strike, the Company would be precluded from hiring permanent
replacement workers and from declaring an impasse. If the Company were to hire
permanent replacement workers or declare an impasse prior to the time of such
decision, the NLRB could reverse such actions. Furthermore, if the strike was
deemed an "unfair labor practice" strike and the Company refused to re-employ
striking workers who made an unconditional offer to return to work, the Company
could be subject to exposure for back-pay.
The Company is negotiating a settlement agreement with the NLRB which
proposes to settle most of these charges. Although the Company does not expect
a settlement agreement to require the Company to admit any violations of the
NLRA, the Company does expect that any settlement agreement will require the
Company to post, for a period of sixty days, a notice which will recite the
protections afforded employees pursuant to the NLRA, and have the Company make
affirmative statements that it will refrain from taking certain actions which
would infringe those employee rights, including that the Company will not take
certain
38
<PAGE>
of the actions alleged in the unfair labor practice charges, that it will, on
request, bargain collectively and in good faith with the Union, and accord all
eligible striking employees, upon their unconditional offer to return to work,
immediate and full reinstatement to their former jobs or substantially
equivalent jobs without loss of seniority. A settlement agreement is not
expected to cover two separate charges filed on December 30, 1993 and January
14, 1994, respectively. These outstanding charges include allegations that the
Company bargained in bad faith by not reducing to writing a specific alleged
agreement concerning job security for those employees adversely affected by
contracting out proposals of the Company, that it failed to provide certain
employee safety and health documents, and that the Company denied the Union
access to the minimill. The Company believes that it possesses meritorious
defenses to such unfair labor practice charges. A settlement agreement, or a
finding by the NLRB that the Company engaged in unfair labor practices with
respect to any charges not covered by a settlement agreement, may result in the
strengthening of the strikers' commitment to their negotiating position, the
work stoppage and the corporate campaign. Any hardening of the strikers'
positions could affect the length of the strike and the resolution of the labor
contract disputes. A settlement agreement or an adverse decision by the NLRB on
the outstanding charges could also delay and impair the Company's labor
initiatives because the Company would be unable to implement all or part of its
last proposed labor agreement until it returned to the bargaining process and
remedied the unfair labor practices, and until such time as either an agreement
with the Union was ratified or impasse in the bargaining process was reached.
The Company does not expect a settlement agreement or an adverse decision by
the NLRB on the outstanding charges to have a material long-term effect on the
Company. Since the Company has not hired permanent replacement workers, the
Company would not be liable for any back-pay under any settlement agreement or
in the event that the NLRB reached an adverse decision with respect to the
outstanding charges. In addition, if the striking workers made an unconditional
offer to return to work, it is expected that disruptions to the Company's
business caused by the return of such workers would be temporary.
Status of Negotiations. Union and Company representatives have continued to
hold negotiating meetings since March 21, 1993 in attempts to reach a
resolution of the outstanding issues. However, no progress has been made since
August 11, 1993. The Company made a contract proposal to the Union on November
22, 1993 which was rejected by the Union. The NLRA provides that a company, in
the absence of unfair labor practices in connection with the negotiations, may
implement all or individual parts of its last labor agreement proposal in the
event that the bargaining process reaches impasse. The determination of impasse
is strictly dependent on the facts of each individual case. The Company has not
made a determination that it is at an impasse and any such determination would
be subject to review by the NLRB. If the Company were to implement its last
proposed labor agreement and the NLRB were to subsequently find that the
Company had engaged in unfair labor practices, the Company would be liable to
make the employees economically whole with respect to those labor agreement
provisions that adversely affected such workers since the Company could not
have been at impasse if it were found to have bargained in bad faith.
While the Company and the Union currently remain apart on several issues with
respect to the proposed labor contract, the Company believes that the following
issues are significant in reaching agreement on a new labor contract:
Health Benefits. The Company has proposed a managed health care plan
which would require employees to contribute $20 per week to the plan for
family coverage. In addition, any future increases in the cost of the plan
would be shared equally by the Company and employees. The Union
alternatively has proposed that employees be required to contribute only
$6.92 per week, that employees bear no responsibility for future increases
in the cost of the plan and that the obligation to make contributions not
become effective until three years from the date of adoption of the
contract.
Incentive Plan. The Company has proposed an incentive plan and profit
sharing plan for its employees as the primary basis for increases in
compensation, the components of which would be subject
39
<PAGE>
to change at the discretion of the Company. The Union is proposing that
these plans be subject to the grievance and arbitration procedure under the
contract (and therefore not subject to amendment at the Company's
discretion).
Contract Labor. The Company has proposed a provision granting the Company
the right to utilize contract labor and outside contractors, although no
employee directly affected would be terminated or suffer a loss of pay rate
as a result of using contract labor. The Union is seeking a more
restrictive provision limiting the Company's ability to utilize such
contractors.
Bargaining Unit Work. The Company has proposed reduced limitations on
non-bargaining unit employees, primarily supervisors, from performing
bargaining unit work. The Union's proposal maintains past restrictions
contained in the expired contract, in addition to more severe penalties in
the event of future violations.
Union Representatives. The Company and the Union disagree as to which
party should be responsible for the compensation of union representatives
for the performance of Union duties during Company hours.
Picket Line Misconduct. The Company maintains that it has a right to
subject picketers who have engaged in picket line misconduct (meeting the
criteria established by the NLRB as behavior not protected by the NLRA) to
disciplinary action, including termination of employment. The Union demands
that all striking employees, even those who have engaged in such
misconduct, be returned to their positions at the cessation of the strike.
Corporate Campaign. In August 1993 the Union announced a corporate campaign
designed to bring pressure on the Company from individuals and institutions
with direct financial or other interests in the Company. Although the Company
believes the corporate campaign has not had, and is not expected to have, an
effect on its operations, the potential impact of such a campaign is difficult
to assess.
EMPLOYEES
As of September 30, 1992, the Company had 491 employees, of whom 153 were
salaried office, supervisory, and sales personnel, and 338 were hourly
employees. 20 salaried non-exempt employees and 329 hourly employees were
covered by a collective bargaining contract which expired on February 28, 1993
between the Company and the Union. 9 hourly employees are covered by a
collective bargaining contract which expires on July 31, 1994 between the
Company and the Union. As of December 31, 1993, the Company had 418 non-
striking employees, of whom 148 were salaried office, supervisory, and sales
personnel, and 270 were hourly employees. As of December 31, 1993, the Company
had utilized 196 temporary replacement workers to perform certain of the
services of striking workers. Of the original 337 bargaining unit employees, 98
have returned to work, nine have resigned and 230 remain on strike.
The strike has not prevented the Company from committing to develop a Total
Quality Management work culture, which is a managerial philosophy that
encourages employee participation, employee empowerment, teamwork and increased
individual accountability. The Company intends to accomplish this through
extensive training and individual development efforts. The Total Quality
Management program does not involve the terms and conditions of the workplace
and is therefore not subject to the collective bargaining process. As a result,
the Company has begun implementing the Total Quality Management Program with
its supervisory personnel and intends to begin implementing the program with
the remainder of its workforce in the near-term.
PROPERTIES
The Company's principal operating properties are listed in the table below.
The Company believes that its properties and warehouse facilities are suitable
and adequate to meet its needs and that the size of its warehouse facilities is
sufficient to store the level of inventory necessary to support its level of
distribution.
40
<PAGE>
<TABLE>
<CAPTION>
LOCATION PROPERTY
-------- --------
<S> <C>
LaPlace, Louisiana Approximately 287 acres of land, including a melt
shop, rolling mill, related equipment, a new 75,000
square foot warehouse, and dock facilities situated
on state-leased waterbottom in the Mississippi Riv-
er.
Chicago, Illinois Approximately 7 acres of land, a dock on the Calumet
River and buildings, including a recently renovated
100,000 square foot warehouse.
Tulsa, Oklahoma 63,500 square foot warehouse facility with a dock on
the Arkansas River system. Located on land under a
long-term lease. The original term of the lease is
from April 1, 1989 through March 31, 1999; the Com-
pany has two 10-year renewal options through March
31, 2019.
Pittsburgh, Pennsylvania 112,000 square foot leased warehouse facility with a
dock on the Ohio River. The original term of the
lease was from January 1, 1987 through June 30,
1992; the Company is in the first of three 5-year
renewal options through June 30, 2007.
Knoxville, Tennessee Approximately 25 acres of undeveloped land along the
Tennessee River, available for future use as a
stocking location.
</TABLE>
LEGAL PROCEEDINGS
See "--Strike and Impact Upon the Company" for a description of the NLRB
proceedings. The Company is not involved in any pending legal proceedings which
involve claims for damages exceeding 10% of its current assets. The Company is
not a party to any material pending litigation which, if decided adversely,
would have a significant impact on the business, income, assets or operation of
the Company, and the Company is not aware of any material threatened litigation
which might involve the Company.
41
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------------------------------------
<S> <C> <C>
Howard M. Meyers...................... 51 Director, Chairman of the Board,
President, and Chief Executive
Officer
Jerry M. Pitts........................ 42 Executive Vice President and Chief
Operating Officer
Richard J. Gonzalez................... 46 Vice President, Treasurer, and Chief
Financial Officer
Rodger A. Malehorn.................... 51 Vice President of Commercial
Operations
Timothy R. Postlewait................. 43 Vice President of Plant Operations
Henry S. Vasquez...................... 43 Vice President of Human Resources
John A. Canning, Jr. ................. 49 Director
Lawrence E. Golub..................... 34 Director
Melvyn N. Klein....................... 52 Director
Albert P. Lospinoso................... 57 Director
Alan J. Patricof...................... 59 Director
Stanley S. Shuman..................... 58 Director
</TABLE>
All of the directors, except Alan J. Patricof, served from September 5, 1986
through July 19, 1988 as directors of Bayou Steel Corporation (of LaPlace) (the
Company's predecessor), and thereafter as a director of the Company. Alan J.
Patricof has been a director since February 21, 1991.
BUSINESS BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
Howard M. Meyers has been a director, Chairman of the Board, President and
Chief Executive Officer of the Company since September 5, 1986. He has also
been a director, Chairman of the Board, Chief Executive Officer and President
of Quexco Incorporated ("Quexco") since 1984. Quexco, through its wholly-owned
subsidiary, RSR Corporation ("RSR"), is a privately owned, non-ferrous metals
recycle smelting and refining company located in Dallas, Texas. Mr. Meyers has
also been President and a director of BSPL since its inception. Mr. Meyers is a
former co-president and current member of the Board of Directors of the
Institute of Scrap Recycling Industries Inc. He also serves on the Boards of
Directors of the Steel Manufacturers Association and the Lead Industries
Association. Mr. Meyers was formerly employed as a scrap metal buyer at AMAX
Copper Corporation.
Jerry M. Pitts was elected Executive Vice President and Chief Operating
Officer of the Company on June 7, 1991. He had been Executive General Manager
of the Company since July 1, 1987 and has worked in the steel industry since
1974. From 1986 to 1987, he served the Company as General Manager of
Operations; from 1984 to 1986, he was Superintendent of Melting Operations; and
from 1980 to 1984, he was General Foreman of Melting. Mr. Pitts worked in
various management capacities related to production and process engineering at
U.S. Steel Corporation from 1974 to 1980.
Richard J. Gonzalez was elected Vice President, Treasurer, and Chief
Financial Officer of the Company on June 7, 1991. He had been General Manager,
Finance of the Company since July 1, 1987. He has served the Company since
October 1983 in the capacities of Data Processing Manager and Assistant to the
Vice President of Finance and Controller. From 1982 to 1983, he was Vice
President and Chief Financial Officer of Jimco, Incorporated. Prior to that,
Mr. Gonzalez was a Manager in the Consulting Division of the accounting firm of
Arthur Andersen & Co. for nine years. Mr. Gonzalez is a certified public
accountant.
Rodger A. Malehorn was elected Vice President of Commercial Operations of the
Company on June 7, 1991. He had been General Manager, Commercial Operations
since July 1, 1987. Mr. Malehorn has served in management-level positions with
the Company related to raw material supply, trades purchasing and billet
42
<PAGE>
sales since April 1, 1984. From 1981 to 1984, he was Vice President and General
Manager of Louisiana Scrap Metal Inc. Prior to that, Mr. Malehorn worked for
Luria Brothers & Co., Inc., a scrap recycling operation, for three years and
Lukens Steel Company for thirteen years in various management positions
relating to melt shop operations.
Timothy R. Postlewait was elected Vice President of Plant Operations of the
Company on June 7, 1991. He had been General Manager, Plant Operations of the
Company since July 1, 1987. He has served in management positions with the
Company as Superintendent, Melt Shop Operations from 1986 to 1987 and
Superintendent, Quality Assurance from 1981 to 1986. From 1977 to 1981, Mr.
Postlewait worked in management positions with Chaparral Steel Company, and
from 1972 to 1977, he worked with United Nuclear Corporation as a Senior
Engineer.
Henry S. Vasquez was elected Vice President of Human Resources of the Company
on September 24, 1992 after joining the Company on April 27, 1992. He had been
employed in various executive Human Resource positions with Lyondell
Petrochemical Co. from April 1989 to April 1992; with Frito Lay Company from
August 1983 to April 1989; with Hydril Co. from May 1977 to August 1983; and
with Stanco Industries from April 1975 to May 1977.
John A. Canning, Jr. has been President of Madison Dearborn Partners Inc.,
which is the management company for a private equity investment fund, Madison
Dearborn Capital Partners L.P., and a limited partnership, Madison Dearborn
Advisers, L.P., which provides venture capital advisory services to First
Chicago Corporation since January 1993. For more than five years prior to that,
Mr. Canning was President of First Capital Corporation of Chicago and First
Chicago Investment Corporation, both subsidiaries of First Chicago Corporation,
engaged in venture capital projects. He is a director of Tyco Toys, Inc. and
the Interlake Corporation.
Lawrence E. Golub has been a Managing Director of Bankers Trust Company in
New York, New York since September 1993. From September 1992 to August 1993,
Mr. Golub was a White House Fellow. Mr. Golub was Managing Director of
Wasserstein Perella Capital Markets from February 1990 to August 1992 and an
officer of Allen & Company Incorporated, an investment banking firm, from 1984
to February 1990. He is Chairman of Mosholu Preservation Corporation.
Melvyn N. Klein has been, for more than the past five years, a practicing
attorney and private investor in Corpus Christi, Texas. He has been a Director
of Quexco since 1984. He is the sole shareholder, sole director and the
President of JAKK Holding Corporation, a General Partner of GKH Partners, L.P.,
which is the sole General Partner of GKH Investments, L.P., an investment fund;
President of Rockwood Holding Company; and a director of Itel Corporation,
American Medical International, Inc., Santa Fe Energy Resources and Savoy
Pictures Entertainment, Inc.
Albert P. Lospinoso has been the President of RSR since July 1992 and is a
director of RSR and Quexco. For more than five years prior to that, he was the
Executive Vice President, Chief Operating Officer and a director of RSR and its
predecessor companies.
Alan J. Patricof has been, for more than five years, Chairman of Patricof &
Co. Ventures, Inc. (formerly Alan Patricof Associates, Inc.), a venture capital
firm. He is also a director of Cellular Communications, Inc., Cellular
International, Cellular Communications of Puerto Rico, Creative Biomolecules,
Datascope Corporation, Harman International Industries, Inc. and Ocom
Corporation.
Stanley S. Shuman has been, for more than the past five years, Executive Vice
President, Managing Director and member of the executive committee of Allen &
Company Incorporated. He is a director of The News Corporation Limited, Hudson
General Corporation, Global Asset Management, U.S.A., Sesac Inc. and Knight
Corp.
There are no family relationships among the directors and executive officers
of the Company.
The Company pays each outside director $30,000 per year, payable in quarterly
installments, for serving as a director, plus expenses, for each meeting of the
Board of Directors that a director attends. The Company does not compensate
directors who are officers of the Company for services as directors. Mr. Meyers
is the only director who is an officer of the Company.
43
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation received by the Company's
Chief Executive Officer and the four other most highly-compensated executive
officers for fiscal years 1993, 1992, and 1991.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
(A)
NAME AND (I)
PRINCIPAL (B) (C) (D) ALL OTHER
POSITION YEAR SALARY BONUS(1) COMPENSATION(2)(3)
--------- ---- -------- -------- ------------------
<S> <C> <C> <C> <C>
Howard M. Meyers..................... 1993 $437,990 $ -0- $ -0-
Chairman, Chief Executive 1992 435,041 -0- -0-
Officer, and President 1991 420,053 -0- -0-
Jerry M. Pitts....................... 1993 225,000 9,750 1,316
Executive Vice President and 1992 225,000 9,750 1,702
Chief Operating Officer 1991 210,417 9,750 1,312
Timothy R. Postlewait................ 1993 150,000 6,000 1,560
Vice President of 1992 150,000 6,000 1,560
Plant Operations 1991 148,250 6,000 875
Richard J. Gonzalez.................. 1993 147,000 5,313 1,462
Vice President, Treasurer, 1992 147,000 5,313 1,498
and Chief Financial Officer 1991 143,249 5,313 875
Rodger A. Malehorn................... 1993 120,000 5,313 1,253
Vice President of 1992 120,000 5,313 1,253
Commercial Operations 1991 120,000 5,313 700
</TABLE>
- --------
(1) Bonus includes incentive compensation paid pursuant to the Company's
Incentive Compensation Plan and reflects awards made in 1988, half of which
was paid in 1989 and the remainder of which was paid from 1990 to 1993. No
awards were made in fiscal 1993, 1992 or 1991. See "Employee Benefit
Plans--Incentive Compensation Plan."
(2) Includes amounts contributed by the Company to the Company's Savings Plan
in respect of matching contributions. See "Employee Benefit Plans--Savings
Plan." Also includes the dollar value of term life insurance premiums paid
by the Company for the benefit of these officers. The value of this premium
is approximately $125 for each officer per year.
(3) The aggregate amount of non-cash compensation received by each such
executive officer did not exceed the lesser of $50,000 or 10% of the total
of annual salary and bonus reported for the named executive officer.
EMPLOYEE BENEFIT PLANS
Savings Plan
The Bayou Steel Corporation Savings Plan (the "Savings Plan") was adopted,
effective March 1, 1991 and is intended to qualify for approval under Sections
401 and 410 through 417 of the Tax Code and comply with the provisions of the
Employee Retirement Income Security Act of 1974, as amended. The Savings Plan
is designed to allow all eligible employees to accumulate savings for
retirement.
Employees of the Company eligible to participate in the Savings Plan are
those employees who are at least age 21, have completed one year of service,
and are not employed under a collective bargaining agreement. Savings Plan
participation is voluntary. To join the Savings Plan, an eligible employee must
agree to defer from 1% to 15% of the employee's total pay, subject to annual
limitations imposed by the Tax Code;
44
<PAGE>
the deferral amount is then invested in his or her Savings Plan account. The
Company may make matching discretionary contributions to the employee's
account. In 1993 the Company matched 25% of the employee's deferred amount up
to 4% of total pay contributed in respect of each participant's payroll
deferral election.
Under the Savings Plan, assets are held in a trust fund (the "Trust Fund") by
an independent trustee appointed by the Company. The Trust Fund has been
divided into four investment funds, to which an employee may periodically make
allocations of existing account balances and future contributions. All of the
discretionary Company contributions are invested by the Trustee in the purchase
on the open market of the Company's Class A Common Stock.
Participants are always 100% vested in the contributions made as a result of
their payroll deferral elections. A participant's interest in his Company
matching contributions is based upon a graded vesting schedule and is fully
vested after six years of service.
Retirement Plan
The following table specifies the estimated annual benefits upon retirement
under the Retirement Plan to eligible employees of the Company of various
levels of average annual compensation and for the years of service
classifications specified:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE ANNUAL --------------------------------------------------------------
COMPENSATION 10 20 30 45
-------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
$ 20,000 $1,200 $2,400 $3,600 $3,600
50,000 4,360 8,730 13,090 13,090
100,000 9,860 19,730 29,590 29,590
150,000 15,360 30,730 46,090 46,090
200,000 20,860 41,730 62,590 62,590
250,000 24,810 49,610 74,420 74,420
300,000 24,810 49,610 74,420 74,420
</TABLE>
The Company has adopted the Bayou Steel Corporation Retirement Plan (the
"Retirement Plan") and will file a request for approval by the Internal Revenue
Service. The Retirement Plan became effective October 1, 1991. The Retirement
Plan is a defined benefit plan for eligible employees of the Company not
covered by a collective bargaining agreement (the Company adopted a separate
retirement plan for Union employees that also became effective October 1,
1991). Employees are automatically eligible to participate on the October 1 or
April 1 following the completion of one year of service. Service before the
effective date of the Retirement Plan is credited to participants for purposes
of retirement benefit calculation. Contributions to the Retirement Plan are
provided solely from the Company contributions; employees are unable to make
contributions. A participant's benefits under the Retirement Plan are vested
after five years of service. Under the terms of the Retirement Plan the monthly
retirement benefits of a participant payable at the participant's normal
retirement date are equal to (i) .6% of average monthly compensation,
multiplied by years of credited service (not to exceed 30 years), plus (ii) .5%
of that portion, if any, of average monthly compensation which is in excess of
the participant's average social security taxable wage base, multiplied by
years of credited service (not to exceed 30 years). Normal retirement under the
Retirement Plan is age 65 with at least five years of service. The Tax Code
limits the amount of annual compensation that may be counted for the purpose of
calculating pension benefits, as well as the annual pension benefits that may
be paid, under the Retirement Plan. For 1993, these amounts are $235,840 and
$115,641, respectively. The Retirement Plan also limits the amount of annual
compensation that may be counted for the purpose of calculating pension
benefits to $250,000.
45
<PAGE>
The figures for estimated annual retirement benefits are computed on a
straight life annuity basis and are payable to an employee who attains age 65
in 1993 and are exclusive of retirement benefits from Social Security.
Earnings of executive officers included in the Summary Compensation Table,
for purposes of calculating pension benefits, approximate the aggregate amounts
shown in the columns (c) and (d) of such Summary Compensation Table, except for
Mr. Meyers whose earnings for purposes of such calculation are subject to the
$250,000 limitation discussed above.
The years of credited service under the Retirement Plan as of October 1, 1993
for each of the five most highly compensated officers of the Company are:
Howard M. Meyers, 7.1 years; Jerry M. Pitts, 12.8 years; Richard J. Gonzalez,
10 years; Rodger A. Malehorn, 9.5 years; and Timothy R. Postlewait, 12.3 years.
Incentive Compensation Plan
The Company has instituted an Incentive Compensation Plan (the "ICP") to
provide incentives for the attainment of corporate financial objectives to
those key employees of the Company (including all executive officers, except
Mr. Meyers), as selected by the ICP's Administrative Committee, who have the
responsibility and authority to affect the operating results of the Company.
Each year the Board of Directors may, in its sole discretion, cause to be
credited to the ICP any amount not to exceed fifty percent of the aggregate of
the base salaries of the participants in the ICP for such year. The
Administrative Committee, composed of one or all of the Company's officers,
including Howard M. Meyers, as appointed by the Compensation Committee,
determines the amounts awarded to each participant based on quantitative
measures of performance relating to financial or other indicators of
performance for the Company and achievement of measurable individual goals of
participants established prior to the commencement of each year. One-half of a
participant's award is paid in the February following the year to which the
award relates. The balance of such award is divided into fourths and paid to
each participant during the February of each of the four years next succeeding
the year in which the initial payment was made. If a participant is not
employed by the Company on February 1 following the year to which an award
relates or on the February 1 of any of the succeeding four years, such
participant shall forfeit all awards or installments thereof which have been
accrued but not actually paid. No awards have been made since 1988.
1991 Plan
On February 21, 1992 the stockholders of the Company approved the 1991
Employees' Stock Option Plan (the "1991 Plan") for the purpose of attracting
and retaining key employees including officers, managers and supervisory
employees. The Board of Directors has authorized the reservation of 600,000
shares of Class A Common Stock of the Company for issuance in accordance with
the 1991 Plan. Shares of Class A Common Stock to be issued under the provisions
of the 1991 Plan may be issued by the Company from its authorized and unissued
shares of Class A Common Stock or from shares of treasury stock held by the
Company. (There are presently no such treasury shares.) The 1991 Plan is
administered by the Company's Board of Directors or a committee appointed by
the Board comprised of three disinterested persons. The Board or the committee,
as the case may be, is referred to as the "Administrator."
The Administrator of the 1991 Plan, at its sole discretion, designates such
options granted under the 1991 Plan as (a) "Incentive Stock Options" as defined
in Section 422 of the Tax Code, (b) other stock options subject to the terms
and conditions set forth in the 1991 Plan ("Nonqualified Stock Options"), or
(c) any combination of Incentive Stock Options and Nonqualified Stock Options.
In the event that a portion of an option cannot be exercised as an Incentive
Stock Option by reason of the limitation contained in Section 422(d) of the Tax
Code (which limits the treatment as Incentive Stock Options during any calendar
year to those options, which, when they become exercisable, entitle the holder
to purchase stock having a fair market value of not more than $100,000), such
portion shall be treated as a Nonqualified Stock Option.
46
<PAGE>
Options granted under the 1991 Plan may not be exercised more than ten years
from the date such option is granted, or earlier than six months from the date
such option is granted. Within such limitations, the Administrator of the 1991
Plan will establish the time or times at which options may be exercised and
whether all of the options may be exercisable at one time or in increments over
time.
The exercise price of any option granted under the 1991 Plan is the closing
price of the Company's Class A Common Stock on the American Stock Exchange on
the day the option is granted. The Administrator may in its discretion set such
other exercise price for Nonqualified Stock Options as it may deem appropriate.
Upon exercise, the price is payable in cash, or if the Administrator deems
appropriate, in shares of Class A Common Stock of the Company valued at fair
market value. At the discretion of the Administrator, the Company may loan
funds to an optionee in connection with the exercise of options. The initial
term of any loan under the 1991 Plan cannot exceed five years, but any such
loan may be renewable at the discretion of the Administrator. All such loans
must comply with the applicable regulations of the Board of Governors of the
Federal Reserve Board or any other governmental agency having jurisdiction over
the Company.
Options may not be exercised unless the optionee has been an employee of the
Company or its subsidiaries at all times from the date of grant of the option
to the date of exercise, unless the option is exercised within the time periods
specified in the 1991 Plan after employment is terminated by reason of
retirement, disability, death or other reason otherwise than for cause. No
option is transferable by the optionee except by will or by the laws of descent
and distribution.
The 1991 Plan may be modified, amended, or terminated by the Board of
Directors, except no such action, without the approval of stockholders, may (a)
increase the total amount of Class A Common Stock on which options may be
granted, (b) change the manner of determining the option price, or (c) change
the class of employees eligible to receive options; and no such action may
affect any option previously granted under the 1991 Plan without the consent of
the then holder of the option.
As of September 30, 1993, no options have been granted under the 1991 Plan.
There are no prior stock option plans.
EMPLOYMENT ARRANGEMENT
Howard M. Meyers serves as Chief Executive Officer of the Company and in
connection therewith has signed a letter agreement dated July 26, 1988,
containing a provision included in his prior employment agreement (which has
terminated in accordance with its terms), which provides that all steel-related
acquisition activities undertaken by Mr. Meyers must be through the Company and
that all other acquisition activities undertaken by Mr. Meyers must be through
the Company to the extent required by any fiduciary duty of Mr. Meyers as a
direct or indirect controlling shareholder and/or director of the Company,
giving effect to the principles embodied in the legal doctrine of "corporate
opportunity," which requires that directors, officers and other persons with a
fiduciary duty towards a corporation not appropriate for their own benefit and
advantage a business opportunity properly belonging to the corporation.
The compensation payable to Mr. Meyers for all services performed on behalf
of the Company in any capacity is limited by the terms of the letter agreement
and a Stock Purchase Agreement, dated as of August 28, 1986, between the
Company and certain original purchasers of the Company's Class A Common Stock
which provides that Mr. Meyers may not earn more than the greater of (x)
$350,000 multiplied by a fraction the numerator of which is the consumer price
index with respect to the December immediately preceding the year in question
and the denominator of which is the consumer price index for December 1985 or
(y) 2% of the Company's pretax net income earned in the previous fiscal year
(or 1% if Mr. Meyers is no longer both the Chairman and Chief Executive Officer
of the Company with substantial day-to-day managerial responsibilities).
47
<PAGE>
The Company's Second Restated Certificate of Incorporation provides that the
Class B Common Stock which Mr. Meyers controls through his ownership interest
in BSPL, loses its power to control the Company if Mr. Meyers resigns, retires,
is permanently disabled or is removed for cause as Chief Executive Officer of
the Company, or if 1,362,676 shares (as adjusted) of Class B Common Stock have
been converted into Class A Common Stock.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of December 31, 1993
with respect to the beneficial ownership of each class of Common Stock of the
Company by (a) each person known by the Company to own beneficially more than
5% of the Class A, Class B or Class C Common Stock of the Company, (b) each
director or officer of the Company, and (c) all directors and officers of the
Company as a group.
Except as to certain matters on which holders of the Class B Common Stock and
the holders of the Class C Common Stock have class voting rights, the holders
of the Class A Common Stock, together with the holders of the Class C Common
Stock, are entitled to one vote per share and in the aggregate 40% of the votes
eligible to be cast for all matters other than the election of directors. The
holders of the Class B Common Stock are entitled to 60% of the votes eligible
to be cast for all matters other than the election of directors. Certain
transactions, such as the sale or acquisition of assets that exceed 20% of the
Company's consolidated net worth (as determined in accordance with the
Company's certificate of incorporation) require the consent of stockholders
representing 80% of the votes that may be cast. In addition, the Class B Common
Stock and the Class C Common Stock have voting rights that enable each class to
block certain corporate actions which could result in liability to Voest-Alpine
and V.A.I.C. under the Tax Lease Agreement or to the Company and Howard M.
Meyers under certain indemnities in favor of Voest-Alpine and V.A.I.C. entered
into at the time of the acquisition of the Company from Voest-Alpine and
V.A.I.C. See "Certain Related Party Transactions--Tax Benefit Transfer Lease
Agreement and Release Agreement."
The holders of the Class A Common Stock have the right to elect, as a class,
that number of directors which represents 40% of the number of directors then
comprising the Board of Directors and the holders of the Class B Common Stock
have the right to elect, as a class, that number of directors which represents
60% of the number of directors then comprising the Board of Directors. Except
as set forth below, the holders of the Class C Common Stock are not entitled to
elect directors. So long as the Class A Common Stock is listed on the American
Stock Exchange, if the number of shares of Class B Common Stock outstanding is
less than 12.5% of the aggregate number of outstanding shares of Common Stock,
the holders of the Class A Common Stock will, in addition to the voting rights
discussed above, be entitled to vote as a class with the Class B Common Stock
for the election of the remaining 60% of the Board of Directors, with the
holders of the Class A Common Stock entitled to one vote per share and the
holders of the Class B Common Stock entitled to ten votes per share. In the
event that Howard M. Meyers is no longer Chief Executive Officer of the Company
or more than 1,362,676 shares (as adjusted) of Class B Common Stock have been
converted into Class A Common Stock, the holders of the Class A, Class B and
Class C Common Stock will vote together, as a single class, in the election of
directors and will be entitled to one vote per share. The holders of Class B
Common Stock have the option to convert all or any portion of their shares of
Class B Common Stock into shares of Class A Common Stock at any time at the
rate of one share of Class A Common Stock for one share of Class B Common
Stock.
With certain limited exceptions, in the absence of the full approval of the
Board of Directors of the Company and the delivery of an opinion of counsel to
the effect that the Company will not lose the benefits of its NOLs, until
December 31, 2003, transfers of shares of Class A Common Stock or Class B
Common Stock shall be null and void insofar as such transaction would cause the
transferee to attain 5% ownership of the fair market value of the Company's
Class A Common Stock or if such transferee owned Class A or Class B Common
Stock with a fair market value equal to 5% or more of the fair market value of
the Company's Class A Common Stock. In addition, except for transfers to or for
the benefit of direct or indirect beneficial
48
<PAGE>
owners of Class B Common Stock, or the immediate family thereof, or
transactions approved by the holders of 75% of the then outstanding Class A
Common Stock, shares of Class B Common Stock are transferable only upon
conversion of such shares into shares of Class A Common Stock. Moreover,
pursuant to an agreement executed between the Company, BSPL and Howard M.
Meyers immediately prior to the 1988 public offering of the Class A Common
Stock, if any entity acquires within a four-year period a percentage of the
voting power of BSPL in excess of 50% (the "Percentage"), such entity shall
agree to purchase through a public tender offer a number of shares of Class A
Common Stock equal to the total number of outstanding shares of Class A Common
Stock multiplied by the Percentage, subject to certain exceptions.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
TITLE AS OF DECEMBER 31, 1993
OF DIRECTORS, EXECUTIVE ---------------------------
CLASS OFFICERS, AND 5% STOCKHOLDERS AMOUNT PERCENTAGE
----- ----------------------------- ------------- -------------
<C> <S> <C> <C>
A First Capital 1,755,000 16.54
Corporation of Chicago.
#3 First National Place
Suite 1330
Chicago, IL 60602
A Stanley S. Shuman(1).... 817,880 7.69
711 Fifth Avenue
New York, NY 10022
A Alan J. Patricof(2)..... 739,059 6.97
445 Park Avenue
New York, NY 10022
A How & Company........... 600,000 5.65
c/o The Northern Trust
Co.
P.O. Box 92303
Chicago, IL 60675-0002
A Allen & Company Holding, 522,528 4.92
Inc.(1) ...............
711 Fifth Avenue
New York, NY 10022-4207
A Howard M. Meyers(3)..... 300,000 2.82
1111 W. Mockingbird
Lane
Dallas, TX 75247
A John A. Canning, Jr.(4). 195,000 1.83
#3 First National Plaza
Suite 1330
Chicago, IL 60670
A Lawrence E. Golub....... 80,800 .76
2101 Connecticut Ave.
N.W.
Apt. 73
Washington, D.C. 20008
A Melvin N. Klein......... 60,000 .56
1940 First City Bank
Tower
Corpus Christi, TX
78477
A Albert P. Lospinoso..... 10,000 .09
1111 W. Mockingbird
Lane
Dallas, TX 75247
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
TITLE AS OF DECEMBER 31, 1993
OF DIRECTORS, EXECUTIVE ---------------------------
CLASS OFFICERS, AND 5% STOCKHOLDERS AMOUNT PERCENTAGE
----- ----------------------------- ------------- -------------
<C> <S> <C> <C>
A Jerry M. Pitts............................ 1,521 *
P.O. Box 5000
LaPlace, LA 70069-1156
A Timothy R. Postlewait..................... 1,073 *
P.O. Box 5000
LaPlace, LA 70069-1156
A Richard J Gonzalez........................ 1,021 *
P.O. Box 5000
LaPlace, LA 70069-1156
A Rodger A. Malehorn........................ 861 *
P.O. Box 5000
LaPlace, LA 70069-1156
A Henry S. Vasquez.......................... 0 *
P.O. Box 5000
LaPlace, LA 70069-1156
A All directors and officers as a group (12 2,207,215 20.79
persons).................................
B Bayou Steel Properties Limited(3)......... 2,271,127 100.00
B Howard M. Meyers(3)(5).................... 2,271,127 100.00
1111 W. Mockingbird Lane
Dallas, TX 75247
B Melvyn N. Klein(3)........................ 62,910 2.77
1940 First City Bank Tower
Corpus Christi, TX 78477
B Allen & Company Incorporated(3)........... 47,239 2.08
711 Fifth Avenue
New York NY 10022
B Stanley S. Shuman(3)...................... 26,572 1.17
711 Fifth Avenue
New York, NY 10022
B Albert Lospinoso(3)....................... 17,261 .76
1111 W. Mockingbird Lane
Dallas, TX 75247
C Voest-Alpine International Corporation(6). 100 100.00
</TABLE>
- --------
* Less than .01 percent.
(1) Includes 522,528 shares of Class A Common Stock owned by Allen & Company
Holding, Inc., which owns all of the outstanding shares of Allen & Company
Incorporated; Mr. Shuman is an Executive Vice President and Managing
Director of Allen & Company Incorporated. Mr. Shuman disclaims beneficial
ownership of such shares. Includes an aggregate of 60,000 shares of Class A
Common Stock owned by trusts for the benefit of Mr. Shuman's children, of
which Mr. Shuman disclaims beneficial ownership. Mr. Shuman has no voting
or investment power, shared or otherwise, in the foregoing shares.
(2) Includes 520,500 shares of Class A Common Stock owned by a partnership of
which Mr. Patricof is a general partner and an aggregate of 216,000 shares
of Class A Common Stock held by two corporations to which a third
corporation, of which Mr. Patricof is Chairman, serves as investment
advisor, and as to
50
<PAGE>
which Mr. Patricof disclaims beneficial ownership. Mr. Patricof has sole
voting and investment power with respect to 2,559 shares and has shared
voting power and investment power with respect to 736,500 shares.
(3) Through his ownership of 60% of the common stock of BSPL, Howard M. Meyers
controls BSPL's voting power. Since BSPL owns 100% of the Company's Class B
Common Stock, Howard M. Meyers has voting control of Class B Common Stock
which accounts for a maximum of 60% of the voting control of the Company.
Howard M. Meyers may be deemed to "control" the Company. Allen & Company
Incorporated and Messrs. Klein, Lospinoso, and Shuman are minority
stockholders of BSPL and Messrs. Lospinoso and Meyers are directors. The
number of shares of Class B Common Stock held by BSPL has been apportioned
to each of Allen & Company Incorporated, Messrs. Klein, Lospinoso and
Shuman based on their percentage ownership in BSPL.
(4) Includes 195,000 shares of Class A Common Stock owned by a partnership of
which Mr. Canning is a general partner, and as to which he has shared
voting and investment power.
(5) Howard M. Meyers has voting control of the Class B Common Stock.
(6) Holders of Class C Common Stock have a vote on all matters, except for the
election of directors. See Note 13 to the Financial Statements.
CERTAIN RELATED PARTY TRANSACTIONS
SERVICE AGREEMENT
The Company, RSR and Quexco are parties to a Service Agreement dated
September 5, 1986 (the "Service Agreement"), pursuant to which RSR and Quexco
provide the Company advice with respect to legal and environmental matters, as
well as other services enumerated in the agreement and such other services as
to which the parties mutually may agree. The Company pays to RSR and/or Quexco
a fee equal to the costs of performing such services (including direct salary,
fringe benefits, general and administrative overhead and other charges incurred
directly in connection with the provision thereof). The Service Agreement will
remain in effect until terminated by any party on 90 days' prior written notice
to the other parties. Messrs. Klein, Lospinoso and Meyers are directors of
Quexco and each of Messrs. Meyers and Lospinoso is President of Quexco and RSR,
respectively. The fees paid by the Company to RSR and/or Quexco for the first
quarter of fiscal 1994 and for fiscal 1993 for services rendered amounted to
approximately $13,000 and $87,000, respectively. The Company believes that the
terms of the Service Agreement are fair and reasonable.
TAX BENEFIT TRANSFER LEASE AGREEMENT AND RELEASE AGREEMENT
Pursuant to the Tax Lease Agreement, the Company has transferred the Federal
income tax benefits that would normally be associated with the ownership of
certain of its property, including the melt shop facility (consisting of rail
and dock facilities, a furnace charging system, two electric melting furnaces,
two continuous casters and billet handling facilities), located at the LaPlace
facility to an unaffiliated third party. These assets comprise a significant
portion of the Company's assets. Under the Tax Lease Agreement, the Company
recognizes rental expense and interest income on its Federal income tax books
each year until its expiration in 1996. As of September 30, 1993, the Company's
unrecognized rental expense exceeded unrecognized interest income by $30.2
million. Such excess constitutes a net deduction that will be available to
offset future taxable earnings. At the time of the Tax Lease Agreement, Voest-
Alpine and V.A.I.C. agreed to indemnify such unaffiliated third party for
certain potential losses under the Tax Lease Agreement. Pursuant to the
acquisition agreement for the purchase of the Company from Voest-Alpine and
V.A.I.C., the Company agreed to comply with the terms of the Tax Lease
Agreement. In addition, the Company and Mr. Meyers agreed to indemnify Voest-
Alpine and V.A.I.C. for any payments required to be made by Voest-Alpine and
V.A.I.C. to the unaffiliated third party caused by a failure to comply with the
Tax Lease Agreement. The Company also agreed (a) that any mortgage covering the
property would be subject to such Tax Lease Agreement and (b) to require any
purchaser of the property to take the property subject to such Tax Lease
Agreement and to execute certain consents and statements to ensure that any
disposition of the
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property upon a foreclosure of the mortgage would not constitute a
"disqualifying event" within the meaning of the regulations promulgated under
the Old Code.
The Company entered into the Release of Federal Income Tax Ownership and
Agreement dated September 5, 1986 (the "Release Agreement") with the trustee
under the indenture for the 14.75% Notes, Voest-Alpine and Mr. Meyers. Pursuant
to the Release Agreement, the trustee (i) released the United States Federal
income tax ownership of the property subject to the Tax Lease Agreement from
the security interest and lien created by the indenture and security documents
related to the 14.75% Notes, (ii) agreed to take or refrain from taking certain
actions in an attempt to ensure that any disposition of the property upon a
foreclosure of the property would not constitute a "disqualifying event" within
the meaning of the regulations promulgated under the applicable section of the
Old Code and (iii) agreed that subsequent transferees would be required to
consent to similar limitations. As a consequence, the Tax Lease Agreement and
any release agreement may have the effect of reducing the value of the
property, restricting the number of persons eligible to purchase the property
and delaying the sale of the property if it were to be sold in a foreclosure
proceeding. The result of such Release Agreement may be to limit the
marketability of the subject property upon a foreclosure. In connection with
the sale of the First Mortgage Notes offered hereby, the Trustee will enter
into a release agreement substantially similar to the Release Agreement.
V.A.I.C. owns all of the outstanding shares of Class C Common Stock of the
Company, which shares contain certain limited voting rights. Through V.A.I.C.'s
ownership of the Class C Common Stock and Howard M. Meyers' control of the
Class B Common Stock, each has the right to prevent certain transactions, i.e.,
liquidation, certain mergers and certain sales of the property subject to the
Tax Lease Agreement which, in each case, could result in the loss of tax
benefits by the unaffiliated third party under the Tax Lease Agreement. In the
event of such a loss Voest-Alpine and V.A.I.C. may be required to indemnify the
unaffiliated third party, and the Company and Howard M. Meyers in turn may be
obligated to indemnify Voest-Alpine and V.A.I.C.
AGREEMENTS WITH ALLEN & COMPANY INCORPORATED
The Company entered into an agreement with Allen & Company Incorporated on
May 28, 1987 pursuant to which the Company granted Allen & Company Incorporated
a right of first refusal, on competitive terms, to perform investment banking
services for the Company in connection with all Company initiated investment
banking transactions until September 4, 1996. "Competitive terms" is defined to
include considerations of costs and expenses, services rendered and ability to
perform. No compensation was paid to Allen & Company Incorporated during fiscal
1992 and 1993. Stanley S. Shuman, a director of the Company, is Executive Vice
President and Managing Director of Allen & Company Incorporated and Lawrence E.
Golub, also a director of the Company, was a Vice President of Allen & Company
Incorporated until February 1990. See "Management."
AGREEMENTS WITH MMG PATRICOF & CO.
On June 20, 1991, MMG Patricof & Co. Inc. and MMG Placement Corp. entered
into an agreement with the Company with respect to merger and acquisition
advisory and private placement services in connection with a proposed corporate
acquisition by the Company which existed at that time. Alan J. Patricof, a
director of the Company, is a minority shareholder in the investment banking
firm of Patricof & Co. Capital Corp. ("Patricof") and its affiliate MMG
Placement Corp. ("Placement"), successors to MMG Patricof & Co. No compensation
was paid during fiscal 1991 and 1992; $25,000 was paid during fiscal 1992 for
out-of-pocket expenses. On December 16, 1992, Patricof entered into a second
arrangement with the Company to provide merger and acquisition advisory
services in connection with a proposed corporate acquisition by the Company.
The agreement provided for a retainer not to exceed $25,000. By its terms, the
agreement terminated on December 16, 1993. Patricof was paid $25,000 for
services provided under the terms of such agreement during fiscal 1993. Each of
the foregoing agreements includes certain indemnification provisions which
survive termination.
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DESCRIPTION OF THE FIRST MORTGAGE NOTES
The First Mortgage Notes will be issued under an indenture (the "Indenture"),
between the Company and First National Bank of Commerce, New Orleans,
Louisiana, as trustee (the "Trustee"), a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary of certain provisions of the Indenture does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Trust Indenture Act of 1939, as amended ("TIA"), as in effect on the date
of the Indenture. The definitions of certain capitalized terms used in the
following summary are set forth below under "Certain Definitions."
PRINCIPAL, MATURITY AND INTEREST
The First Mortgage Notes will be senior secured obligations of the Company
limited to $75,000,000 aggregate principal amount and will mature on ,
2001. Interest on the First Mortgage Notes will accrue at the rate of % per
annum and will be payable semi-annually on each 15 and 15,
commencing 15, 1994, to the Holders of record of First Mortgage Notes at
the close of business on the 1 and 1 immediately preceding such
interest payment date. Interest on the First Mortgage Notes will accrue from
the most recent date to which interest has been paid or, if no interest has
been paid, from the original date of issuance (the "Issue Date"). Interest will
be computed on the basis of a 360-day year comprised of twelve 30-day months.
Interest on overdue principal and (to the extent permitted by law) on overdue
installments of interest will accrue at a rate equal to the stated rate of
interest.
As discussed below, payment of principal of, and interest on, First Mortgage
Notes represented by one or more permanent global First Mortgage Notes
registered in the name of or held by The Depository Trust Company (the
"Depositary") or its nominee will be made in immediately available funds to the
Depositary or its nominee, as the case may be, as the registered owner and
holder of such permanent global First Mortgage Note or Notes. See "--Same-Day
Settlement and Payment."
OPTIONAL REDEMPTION
The First Mortgage Notes may not be redeemed prior to , 1998. On and
after , 1998, the Company may, at its option, redeem the First Mortgage
Notes, in whole or in part, from time to time, at the redemption prices set
forth below (expressed as a percentage of the principal amount thereof), in
each case together with accrued interest, if any, to the date of redemption, if
redeemed during the twelve-month period beginning of the years indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
1998.............................. %
1999.............................. %
2000.............................. %
</TABLE>
; provided, that if the date fixed for redemption is 15 or 15, then
the interest payable on such date shall be paid to the Holder of record on the
next preceding 1 or 1.
In the event that less than all of the First Mortgage Notes are to be
redeemed at any time, selection of First Mortgage Notes for redemption will be
made by the Trustee on a pro rata basis, by lot or by such method as the
Trustee shall deem fair and appropriate; provided, however, that no First
Mortgage Notes of $1,000 or less shall be redeemed in part. Notice of
redemption shall be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each Holder to be redeemed at its registered
address. If any First Mortgage Note is to be redeemed in part only, the notice
of redemption that relates to such First Mortgage Note shall state the portion
of the principal amount thereof to be redeemed. A new First Mortgage Note in a
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original First Mortgage
Note. On and after the redemption date, interest will cease to accrue on First
Mortgage Notes or the portion thereof called for redemption unless the Company
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defaults in the payment of the redemption price or accrued interest. First
Mortgage Notes that are optionally redeemed by the Company or that are
purchased by the Company pursuant to an Asset Sale Offer as described under "--
Certain Covenants--Restrictions on Asset Sales" or pursuant to a Change of
Control Offer as described under "--Change of Control" will be surrendered to
the Trustee for cancellation.
The Credit Facility contains certain financial covenants that may restrict
the ability of the Company to redeem the First Mortgage Notes without the prior
written consent of the Lenders. See "Description of Certain Indebtedness--
Credit Facility."
CHANGE OF CONTROL
The Indenture provides that upon a Change of Control, each Holder shall have
the right to require the Company to repurchase all or any part of such Holder's
First Mortgage Notes at a cash purchase price equal to 101% of the principal
amount plus accrued interest to the date of repurchase pursuant to the
procedures set forth in the Indenture (a "Change of Control Offer"). As more
fully described below, if the Company recapitalizes or enters into a
transaction with management which results in control of the Company being held
by persons other than the controlling persons as of the date of the Indenture,
a Change of Control may be deemed to occur.
Within 30 days following any Change of Control, the Company shall send, by
first class mail, a notice to each Holder, with a copy to the Trustee, which
notice will govern the terms of the Change of Control Offer. This notice will
state, among other things, the repurchase date (which shall not be earlier than
30 days or later than 60 days from the date such notice is mailed) and the
circumstance and relevant facts regarding such Change of Control (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control). Holders electing
to have a First Mortgage Note repurchased will be required to surrender the
First Mortgage Note, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the First Mortgage Note completed, to the paying
agent at the address specified in the notice prior to the close of business on
the date of repurchase. Holders will be entitled to withdraw their election if
the paying agent receives, not later than the close of business on the third
business day (or such shorter period as may be required by applicable law)
preceding the date of repurchase, a telegram, telex, facsimile transmission or
letter setting forth the name of the Holder, the principal amount of the First
Mortgage Notes the Holder delivered for repurchase, and a statement that such
Holder is withdrawing his election to have such First Mortgage Notes
repurchased. Failure to make a Change of Control Offer as required will
constitute a covenant Default under the Indenture.
In the event a Change of Control occurs and the Holders exercise their right
to require the Company to repurchase the First Mortgage Notes, and assuming
that such repurchase constitutes a "tender offer" for purposes of rule 14e-1
under the Exchange Act at the time it is required, the Company will comply with
the requirements of Rule 14e-1 as then in effect with respect to such
repurchase.
A Change of Control under the Indenture could constitute a default under the
Credit Facility. Therefore, upon the occurrence of a Change of Control, the
Lenders may accelerate their loans and the Company may be required to prepay
all of its outstanding obligations under the Credit Facility simultaneously
with the payment of the principal of any of the First Mortgage Notes that the
Company is required to repurchase pursuant to the Indenture. See "Description
of Certain Indebtedness--Credit Facility."
The definition of "Change of Control," and the other components of this
covenant, generally mean that the Company will be obligated to repurchase First
Mortgage Notes from tendering Holders if control of the Company (whether
through stock ownership or control of the Company's assets) is held by Persons
other than the controlling Persons of the Company. With respect to the
disposition of assets, the phrase "all or substantially all" as used in the
Indenture (including as set forth under "Certain Covenants--Limitations on
Investments, Loans and Advances") varies according to the facts and
circumstances of the subject transaction, has no clearly established meaning
under New York law (which governs the Indenture) and is
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<PAGE>
subject to judicial interpretation. Accordingly, in certain circumstances there
may be a degree of uncertainty in ascertaining whether a particular transaction
would involve a disposition of "all or substantially all" of the assets of the
Company, and therefore it may be unclear as to whether a Change of Control has
occurred and whether the Holders have the right to require the Company to
repurchase First Mortgage Notes. None of the provisions relating to a
repurchase upon a Change of Control are waivable by the Board of Directors of
the Company.
If a Change of Control were to occur, the Company may be unable to repay all
of its obligations under the Credit Facility, to purchase all of the First
Mortgage Notes tendered and to repay other indebtedness that may become payable
upon the occurrence of such Change of Control. Accordingly, it is possible that
a prospective acquiror would, in order to avoid the occurrence of an Event of
Default under the Credit Facility, either fund the Company's purchase of the
First Mortgage Notes tendered in the Change of Control Offer following such
acquisition or seek to refinance the First Mortgage Notes, which funding or
refinancing may have the effect of delaying, discouraging or preventing such an
acquisition. Consequently, the obligation of the Company to make a Change of
Control Offer and repurchase tendered First Mortgage Notes upon a Change of
Control could have the effect of preventing or delaying the ability of other
persons or entities to acquire control of the Company.
RANKING
The First Mortgage Notes will rank pari passu with respect to the payment in
full of the principal and interest on all existing and future senior
Indebtedness of the Company, including obligations of the Company arising in
connection with the Credit Facility, and will rank senior to all subordinated
Indebtedness of the Company.
SECURITY
For the benefit of the Trustee and the Holders, the Company and its
Subsidiaries (with the exception of Non-Recourse Subsidiaries) will assign and
pledge and grant a security interest in the following property and assets: (a)
the real property interests in the minimill and the stocking location in
LaPlace, Louisiana, the stocking location in Chicago, Illinois, and all future
real property interests and all extensions, additions or improvements thereto;
(b) all existing or future fixtures, machinery, tools, equipment (including
certain operating equipment classified as inventory) and similar property
(except such personal property located at the stocking location in Tulsa,
Oklahoma); and (c) all proceeds and products of any and all of the foregoing,
except as described under "Possession, Use and Release of Property" (the
property and assets described under clauses (a), (b), and (c) are collectively
referred to as "Collateral"). The security interest will not extend to the
inventory and accounts receivable of the Company as these assets secure the
obligations of the Company under the Credit Facility and a purchase money
facility relating to the Tulsa stocking location (the "Lender Secured
Property"). The security interest in the Collateral will be a first priority
interest (to the extent attainable by filing or possession) subject to certain
permitted encumbrances or Liens that, in the judgment of the Company, will not
adversely affect the value of the Collateral. The Subsidiaries of the Company
(with the exception of Non-Recourse Subsidiaries) shall execute a guarantee of
the Company's obligations with respect to the First Mortgage Notes (the
"Subsidiary Guarantee"). The guarantee of each Subsidiary shall be limited to
the amount which can be guaranteed by such Subsidiary under applicable Federal
and state laws relating to insolvency of debtors. The obligations of a
Subsidiary under the Subsidiary Guarantee will be secured by the Collateral
assigned by such Subsidiary.
The real property Collateral will be pledged pursuant to first mortgages or
deeds of trust (the "Mortgages"), subject to the Liens permitted by the
Indenture. See "--Certain Covenants--Limitation on Liens." Each Mortgage
executed by the Company will secure the full amount payable arising in
connection with the First Mortgage Notes. Each Mortgage executed by a
Subsidiary will secure all obligations arising under its Subsidiary Guarantee.
Upon issuance of the First Mortgage Notes, the Collateral Agent will receive
mortgagee's title insurance policies in satisfactory form. The personal
property to be included within the Collateral will be pledged pursuant to
security agreements (the "Security Agreements") and will constitute a
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<PAGE>
first priority Lien, subject to the Liens permitted by the Indenture (the
"Security Documents"). See""--Certain Covenants--Limitation on Liens." Upon the
occurrence of an Event of Default under the Indenture, the First Mortgage Notes
or the Security Documents, the Collateral Agent will have the customary rights
and remedies of a secured party with respect to the Collateral assigned by the
Company, and to the Collateral assigned by a Subsidiary upon a default under
the Subsidiary Guarantee.
No appraisals of any of the Collateral have been prepared by or on behalf of
the Company in connection with the issuance and sale of the First Mortgage
Notes. In addition, the fair market value of the Collateral is subject to
fluctuations based on factors that include, among others, the condition of the
steel industry, the ability to sell the Collateral in an orderly sale, the
condition of the national and local economy, the availability of buyers and
similar factors. The net book value of the Collateral as of December 31, 1993
was approximately $80.4 million. There can be no assurance that the proceeds of
any sale of the Collateral, in whole or in part, pursuant to the Indenture and
the Security Documents following an Event of Default would be sufficient to
satisfy payments due on the First Mortgage Notes. To the extent that Liens have
been granted to third parties pursuant to clauses (iv) and (v) of "Certain
Covenants--Limitation on Liens," such third parties have or may exercise rights
and remedies with respect to the property subject to such Lien that could
adversely affect the value of such Collateral and the ability of the Collateral
Agent, Trustee or the Holders to realize or foreclose on such Collateral. In
addition, the ability of the Trustee to realize upon the Collateral may be
subject to certain bankruptcy law limitations in the event of a bankruptcy. See
"Certain Bankruptcy Limitations" below.
The following sets forth certain information with respect to the real and
personal property included in the Collateral:
LaPlace Minimill. The principal asset comprising the Collateral is the
Company's steel minimill located in LaPlace, Louisiana which was completed
in 1981 at a cost of $243 million. The minimill is approximately 472,000
square feet and includes a 75,000 square foot warehouse facility. The
minimill and the warehouse are located on approximately 287 acres of land
adjacent to the Mississippi River with a 280-foot deep river loading dock.
At December 31, 1993, the net book value of the land, land improvements and
building improvements with respect to this facility was approximately $8.9
million, the net book value of certain operating equipment classified as
inventory was approximately $15.0 million and the net book value of the
other property and equipment located at this facility was approximately
$52.5 million.
Chicago Stocking Location. The Chicago stocking location is located
outside Chicago, Illinois on approximately 7 acres of land. This stocking
location is approximately 100,000 square feet and was renovated in 1992. At
December 31, 1993, the net book value of the land, land improvements and
building improvements with respect to this facility was approximately $3.6
million and the net book value of the other property and equipment located
at this facility was approximately $0.4 million.
The collateral release provisions of the Indenture permit the release of
Collateral in connection with Asset Sales of Collateral. See "--Possession, Use
and Release of Collateral." As described under "--Certain Covenants--
Restrictions on Asset Sales," the Net Cash Proceeds of such Asset Sales, above
prescribed amounts and subject to certain exceptions, are required to be
deposited in the Collateral Account prior to the making of an offer to purchase
First Mortgage Notes in an Asset Sale Offer or a Permitted Related Acquisition
(each as defined below). To the extent an Asset Sale Offer is not subscribed to
by Holders, the unutilized Net Cash Proceeds may be retained by the Company
free of the Lien of the Indenture and the Security Documents. In addition, the
Collateral release provisions of the Indenture permit the sale, lease, transfer
or other disposition of tangible personal property that, in the reasonable
judgement of the Company, has become worn out, obsolete or no longer necessary
to the operation of the Company's or its Subsidiaries' business and which is
disposed in the ordinary course of business, subject to certain limitations.
If an Event of Default has occurred and is continuing and the Trustee has
been directed by the Holders of at least 25% in aggregate principal amount of
First Mortgage Notes to foreclose upon all or any part of
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<PAGE>
the Collateral (including the Collateral pledged by the Subsidiaries upon a
default under the Subsidiary Guarantee), the Collateral Agent will take such
action to foreclose upon the Collateral as is consistent with such directions.
The Collateral Agent will thereupon foreclose upon the Collateral in accordance
with instructions from such representatives, unless Holders of a majority in
aggregate principal amount of the First Mortgage Notes shall have given
contrary instructions, in each case as provided in the Security Documents. The
proceeds received by the Collateral Agent will be applied by the Collateral
Agent first to pay the expenses of such foreclosure and fees and other amounts
then payable to the Trustee under the Indenture, and thereafter to pay, pro
rata, the principal of, premium, if any, and interest on the First Mortgage
Notes.
Dispositions of real property Collateral may be subject to delay pursuant to
an intercreditor agreement to be entered into with the Lenders (the "Collateral
Agency and Intercreditor Agreement"). The Collateral Agency and Intercreditor
Agreement will provide that the Collateral Agent will provide access to and use
of the real property and, under certain circumstances, may delay liquidation of
the real property for a period of time to permit the agent for the Lenders to
conduct an orderly liquidation of the Lender Secured Property located on the
real property (including, without limitation, the processing of work in
progress inventory).
Pursuant to the Tax Lease Agreement, the Company has transferred the Federal
income tax benefits that would normally be associated with the ownership of
certain of its property, including the melt shop facility (consisting of rail
and dock facilities, a furnace charging system, two electric melting furnaces,
two continuous casters and billet handling facilities), located at the LaPlace
facility to an unaffiliated third party. The Trustee will enter into a release
agreement pursuant to which it will release the United States Federal income
tax ownership of such property from the Lien created by the Indenture or the
Security Documents for the term of the Tax Lease Agreement (the "New Release
Agreement"). In addition, under the New Release Agreement, the Trustee will
agree to take or refrain from taking certain actions in an attempt to ensure
that certain dispositions of the property subject to the Tax Lease Agreement do
not constitute a "disqualifying event" within the meaning of the regulations
promulgated under Section 168(f)(8) of the Old Code. Furthermore, the Company
and Howard M. Meyers, the Chairman of the Board, Chief Executive Officer and
President of the Company and the beneficial owner of 60% of the voting power of
the Company, have each agreed to indemnify Voest-Alpine and its affiliate,
V.A.I.C., for liabilities to the purchaser of the Federal income tax benefits
from the loss of such benefits upon a disqualifying event such as destruction
of the underlying assets or the improper sale of legal title thereto. The
practical effect of the New Release Agreement and the indemnification
agreements, individually or in the aggregate, may be to limit the marketability
of the property upon a foreclosure.
Real property pledged as security may be subject to known and unforeseen
environmental risks. Under the Comprehensive Environmental Compensation and
Liability Act, as amended ("CERCLA"), a secured party may be held liable, in
certain limited circumstances, for the costs of remediating or preventing
releases or threatened releases of hazardous substances at a mortgaged
property. There may be similar risks under various other Federal laws, state
laws and common law theories. Such liability has seldom been imposed, and
finding a secured party liable generally has been based on the secured party
having become sufficiently involved in the operations of the borrower so that
its "participation in the management" of the borrower meets the test set out in
CERCLA and elaborated in a number of court decisions and a recent Environmental
Protection Agency regulation.
If a secured party takes title to property by foreclosure, it may, under
certain circumstances, lose the security interest exclusion contained in CERCLA
and may therefore be held liable for cleanup costs. Additionally, foreclosure
may result in a lender becoming subject to substantial requirements, including
permitting obligations, under environmental laws. A recent Environmental
Protection Agency regulation allows a secured party to exercise some control
over a borrower's enterprise following foreclosure without incurring CERCLA
liability, so long as the secured party's actions are consistent with the
limitations set forth in the regulation. The regulation's protection of
foreclosing secured parties from CERCLA liability is
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subject to challenge, and the protection that the regulation provides in
private actions directed at secured parties to recover cleanup costs is unclear
at this time.
Under the Indenture, the Trustee may, prior to taking certain actions,
request Holders to provide an indemnification against its costs, expenses, and
liabilities. It is possible that CERCLA (or analogous) cleanup costs could
become a liability of the Trustee and cause a loss to any Holders that provided
an indemnification. In addition, such Holders may act directly rather than
through the Trustee, in specified circumstances, in order to pursue a remedy
under the Indenture. If Holders exercise that right, they could be deemed to be
secured parties that are subject to the risks discussed above.
CERTAIN BANKRUPTCY LIMITATIONS
The right of the Collateral Agent to repossess and dispose of the Collateral
upon the occurrence of an Event of Default would be significantly impaired by
applicable Bankruptcy Law in the event that a bankruptcy proceeding were to be
commenced by or against the Company and its Subsidiaries prior to the
Collateral Agent having repossessed and disposed of the Collateral. Upon the
commencement of a case for relief under Title 11 of the United States Code, as
amended (the "Bankruptcy Code"), a secured creditor such as the Collateral
Agent is prohibited from repossessing its security from a debtor in a
bankruptcy case, or from disposing of security repossessed from such debtor,
without bankruptcy court approval. Moreover, the Bankruptcy Code permits the
debtor to continue to retain and use collateral even though the debtor is in
default under the applicable debt instruments provided that the secured
creditor is given "adequate protection." The meaning of the term "adequate
protection" may vary according to circumstances, but it is intended in general
to protect the value of the secured creditor's interest in the collateral and
may include cash payments or the granting of additional security, if and at
such times as the court in its discretion determines, for any diminution in the
value of the collateral as a result of the stay of repossession or disposition
or any use of the collateral by the debtor during the pendency of the
bankruptcy case. A bankruptcy court may determine that a secured creditor may
not require compensation for a diminution in the value of the collateral if the
value of the collateral exceeds the debt it secures.
In view of the broad equitable powers of a bankruptcy court, it is impossible
to predict how long payments under the First Mortgage Notes could be delayed
following commencement of a bankruptcy case, whether or when the Collateral
Agent could repossess or dispose of the Collateral, the value of the Collateral
at the time of a bankruptcy petition or whether or to what extent Holders would
be compensated for any delay in payment or loss of value of the Collateral
through the requirement of "adequate protection." Any disposition of the
Collateral would also require approval of the bankruptcy court. Furthermore, in
the event a bankruptcy court determines the value of the Collateral is not
sufficient to repay all amounts due on the First Mortgage Notes, the Holders
would hold secured claims to the extent of the value of the Collateral to which
the Holders are entitled, and unsecured claims with respect to such shortfall.
The Bankruptcy Code only permits the payment and/or accrual of post-petition
interest, costs and attorney's fees to a secured creditor during a debtor's
bankruptcy case to the extent the value of the Collateral is determined by the
bankruptcy court to exceed the aggregate outstanding principal amount of the
First Mortgage Notes.
POSSESSION, USE AND RELEASE OF COLLATERAL
Unless an Event of Default shall have occurred and be continuing, the Company
and its Subsidiaries will have the right to remain in possession and retain
exclusive control of the Collateral securing the First Mortgage Notes (other
than Trust Moneys and other personal property held by, or required to be
deposited or pledged with, the Collateral Agent under the Indenture or any
Security Document), to freely operate the Collateral and to collect, invest and
dispose of any income thereon. In case a Default or an Event of Default shall
have occurred and be continuing, the Company and its Subsidiaries, while in
possession of the Collateral (other than cash and other personal property held
by, or required to be deposited or pledged with, the Collateral Agent under the
Indenture or any Security Document or with any trustee, mortgagee or other
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holder of a prior Lien permitted under the Security Documents), may do any of
the things enumerated in the "Release of Collateral" provisions only if the
Trustee, in its discretion, or the Holders of a majority in aggregate principal
amount of the outstanding First Mortgage Notes, shall consent to such action.
Release of Collateral. The Company and its Subsidiaries will have the right
to sell, exchange or otherwise dispose of any of the Collateral (excluding
Trust Moneys) (the "Released Collateral") upon delivery to the Trustee of
certain documents that may include, among others, a Company Order, an Officers'
Certificate, all documentation required by the TIA prior to the release of the
Released Collateral by the Collateral Agent, and an Opinion of Counsel. Subject
to certain exceptions for obsolete assets and certain amounts the Company and
its Subsidiaries are permitted to retain pursuant to "--Certain Covenants--
Restrictions on Asset Sales," all cash or Cash Equivalents received by the
Collateral Agent upon an Asset Sale with respect to Collateral will be held by
the Collateral Agent as Trust Moneys under the Indenture prior to application
as provided in "Use of Trust Moneys" below and "--Certain Covenants--
Restrictions on Asset Sales." All purchase money and other obligations received
as part of the Net Proceeds by the Collateral Agent pursuant to these "Release
of Collateral" provisions shall be held by the Collateral Agent.
As long as no Event of Default shall have occurred and be continuing, the
Company and its Subsidiaries, collectively, may, without any release or consent
by the Collateral Agent, sell or otherwise dispose of any machinery, equipment,
furniture, apparatus, tools or implements or other similar property subject to
the Lien of the Security Documents, which may have become worn out, obsolete or
no longer necessary to the operation of the Company's or its Subsidiaries'
business ("Obsolete Assets"), not exceeding individually, in fair market value,
$25,000.
Use of Trust Moneys. All Trust Moneys shall be held by the Collateral Agent
as a part of the Collateral securing the First Mortgage Notes or the
obligations of the Subsidiaries of the Company under the Subsidiary Guarantee,
and, so long as no Event of Default shall have occurred and be continuing, may
either, at the direction of the Company, upon delivery to the Trustee of
certain documents that may include, among others, a Company Order, an Officer's
Certificate, all documentation required by the TIA and an Opinion of Counsel,
be applied by the Collateral Agent from time to time to a Permitted Related
Acquisition or to the payment of the principal, premium, if any, and interest
on any First Mortgage Notes at maturity or to the repurchase of First Mortgage
Notes in an Asset Sale Offer, each of the foregoing being performed by the
Company in accordance with the Indenture.
CERTAIN COVENANTS
The following is a summary of certain covenants that will be contained in the
Indenture. Such covenants will be applicable (unless waived or amended) so long
as any of the First Mortgage Notes are outstanding.
Limitations on Indebtedness. The Indenture provides that the Company will
not, and will not permit any of its Subsidiaries, directly or indirectly, to
incur, create, assume, suffer to exist, guarantee, become liable, contingently
or otherwise, with respect to, or otherwise become responsible for the payment
of (each event, an "incurrence") any Indebtedness unless (a) the pro forma
EBITDA Ratio of the Company and its Subsidiaries for the Reference Period prior
to the incurrence of such Indebtedness (taken as a whole and calculated on the
assumptions that such Indebtedness had been incurred and the proceeds thereof
had been applied on the first day of the Reference Period) would have been
greater than (i) 2.00 to 1.00 and (b) no Default or Event of Default shall have
occurred and be continuing at the time of, or after giving effect to, the
incurrence of such Indebtedness.
The foregoing limitation will not apply to: (i) Indebtedness evidenced by the
First Mortgage Notes and the obligations of the Company and its Subsidiaries
under the Indenture and the Security Documents; (ii) Indebtedness of the
Company issued to any Wholly-Owned Recourse Subsidiary; provided, that (a) any
such Indebtedness is unsecured and is subordinated to the First Mortgage Notes
and (b) that any subsequent
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issuance or transfer of any Capital Stock which results in any such Wholly-
Owned Recourse Subsidiary ceasing to be a Wholly-Owned Recourse Subsidiary or
any transfer of such Indebtedness by any Wholly-Owned Recourse Subsidiary to
someone not a Wholly-Owned Recourse Subsidiary will, in each case, be deemed an
incurrence of Indebtedness under the Indenture; (iii) Indebtedness of the
Company which is existing immediately following the issuance of the First
Mortgage Notes and the application of the proceeds of the First Mortgage Notes
in the manner set forth under "Use of Proceeds"; (iv) Indebtedness arising in
connection with the Credit Facility at any time outstanding not to exceed the
lesser of (1) $30,000,000 and (2) amounts available to be borrowed under the
Credit Facility without causing a mandatory prepayment thereunder in the
absence of a waiver or consent; (v) Indebtedness incurred with respect to
Interest Rate Agreements covering floating rate Indebtedness of the Company
that is permitted under this covenant to the extent the notional principal
amount of such Interest Rate Agreements does not exceed the principal amount of
the Indebtedness to which such Interest Rate Agreements relate; (vi)
Indebtedness incurred in connection with Industrial Development Bonds
(including Pollution Control Bonds) as such terms are defined under the Tax
Code, in an aggregate principal amount not to exceed $5,000,000; (vii)
Indebtedness incurred with respect to the deferred purchase price of machinery
and equipment related to the business of the Company or its Subsidiaries at the
time of purchase and other purchase money obligations (including Capitalized
Lease Obligations) not to exceed, in the aggregate, $5,000,000; provided, that
the maturity of any such obligation does not exceed the anticipated useful life
of the asset being financed; and (viii) any renewal, extension or refinancing
(and subsequent renewals, extensions or refinancings) of any Indebtedness of
the Company permitted under the Indenture, in an amount not in excess of the
amount permitted under the Indenture at the time of such renewal, extension or
refinancing; provided, that Indebtedness which constitutes a renewal, extension
or refinancing of Indebtedness of the Company shall be pari passu or
subordinated in right of payment to the First Mortgage Notes; provided,
further, that in no event may Indebtedness of the Company be renewed, extended
or refinanced by means of Indebtedness of any Subsidiary of the Company
pursuant to this clause (viii). See "Prospectus Summary--Summary Financial
Information" and "Selected Financial Data" for the Ratio of EBITDA to Net
Interest Expense.
The foregoing limitation will not apply to: (i) Indebtedness of a Wholly-
Owned Recourse Subsidiary issued to and held by the Company or any Wholly-Owned
Recourse Subsidiary of the Company; provided, that any subsequent issuance or
transfer of any Capital Stock which results in any such Wholly-Owned Recourse
Subsidiary ceasing to be a Wholly-Owned Recourse Subsidiary or any transfer of
such Indebtedness by the Company or any Wholly-Owned Recourse Subsidiary to
someone not a Wholly-Owned Recourse Subsidiary will, in each case, be deemed an
incurrence of Indebtedness under the Indenture; (ii) Indebtedness of the
Company's Subsidiaries which is existing immediately following the issuance of
the First Mortgage Notes and the application of the proceeds of the First
Mortgage Notes in the manner set forth under "Use of Proceeds"; (iii) Non-
Recourse Indebtedness incurred by Non-Recourse Subsidiaries; and (iv) any
renewal, extension or refinancing (and subsequent renewals, extensions or
refinancings) of any Indebtedness of the Company's Subsidiaries permitted under
the Indenture, in an amount not in excess of the amount permitted under the
Indenture at the time of such renewal, extension or refinancing; provided, that
Indebtedness which constitutes a renewal, extension or refinancing of
Indebtedness of a Subsidiary of the Company shall be pari passu or subordinated
in right of payment to the obligations under the Subsidiary Guarantee.
The foregoing limitation on Indebtedness and the provisions relating to
Changes of Control provide certain protection to Holders against the occurrence
of a highly leveraged transaction, although no assurance may be given that a
highly leveraged transaction may not occur that could adversely affect the
interests of Holders.
Limitation on Liens. The Indenture provides that the Company shall not, and
shall not permit, cause or suffer any of its Subsidiaries to, create, incur,
assume or suffer to exist any Liens of any kind upon any property or assets of
the Company or any Subsidiary, whether now owned or hereafter acquired, except
for (i) Liens in favor of the Collateral Agent or the Holders, including Liens
created by the First Mortgage Notes, the Indenture and the Security Documents;
(ii) Liens on the Lender Secured Property to secure the Credit
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Facility and the purchase money facility relating to the Tulsa stocking
location; (iii) Permitted Liens; (iv) Liens on the property of the Company or
any of its Subsidiaries created solely for the purpose of securing purchase
money obligations for property acquired in the ordinary course of business;
provided, that (a) such property so acquired for use in the ordinary course of
business is for use in lines of business related to the Company's or its
Subsidiaries' business as it exists immediately prior to the issuance of the
related debt and (b) no such Lien shall extend to or cover other property or
assets of the Company and its Subsidiaries other than the respective property
or assets so acquired and the principal amount of Indebtedness secured by any
such Lien shall at no time exceed the original purchase price of such property
or assets; (v) Liens on the assets of any entity existing at the time such
entity or assets are acquired by the Company or any of its Subsidiaries,
whether by merger, consolidation, purchase of assets or otherwise; provided,
that such Liens (a) are not created, incurred or assumed in connection with, or
in contemplation of, such assets being acquired by the Company or any of its
Subsidiaries and (b) do not extend to any other property of the Company or any
of its Subsidiaries; (vi) Liens in existence on the date of the Indenture
(excluding Liens relating to all or any portion of the 14.75% Notes); (vii)
Liens securing Industrial Development Bonds (including Pollution Control Bonds)
as such terms are defined in the Tax Code; provided, that any Lien permitted by
this clause (vii) shall not extend to any other property of the Company or any
of its Subsidiaries; and (viii) any extension, renewal or replacement (or
successive extensions, renewals or replacements), in whole or in part, of any
Lien referred to in the foregoing clauses; provided, that the principal amount
of Indebtedness secured thereby shall not exceed the principal amount of
Indebtedness so secured immediately prior to the time of such extension,
renewal or replacement, and that such extension, renewal, or replacement Lien
shall be limited to all or a part of the property which secured the Lien so
extended, renewed or replaced (plus improvements on such property).
Limitation on Preferred Stock of Subsidiaries. The Indenture provides that
the Company will not permit any of its Subsidiaries to issue, directly or
indirectly, any Preferred Stock, except: (i) Preferred Stock issued to and held
by the Company or a Wholly-Owned Recourse Subsidiary, except that any
subsequent issuance or transfer of any Capital Stock which results in any
Wholly-Owned Recourse Subsidiary ceasing to be a Wholly-Owned Recourse
Subsidiary or any transfer of such Preferred Stock by any Wholly-Owned Recourse
Subsidiary will, in each case, be deemed an issuance of Preferred Stock under
the Indenture; (ii) Preferred Stock issued by a Person prior to the time (a)
such Person became a Subsidiary, (b) such Person merges with or into a
Subsidiary or (c) another Subsidiary merges with or into such Person (in a
transaction in which such Person becomes a Subsidiary), in each case if such
Preferred Stock was not incurred in anticipation of such transaction; and (iii)
Preferred Stock (other than Disqualified Stock) which is exchanged for
Preferred Stock permitted to be outstanding pursuant to clauses (i) and (ii) or
which are used to refinance Indebtedness (or any extension, renewal or
refinancing thereof), having a liquidation preference not to exceed the
liquidation preference of the Preferred Stock or the principal amount of the
Indebtedness so exchanged or refinanced.
Transfer of Assets to Subsidiaries. The Indenture provides that
notwithstanding the covenant restricting Asset Sales, the Company shall not,
and shall not permit any of its Subsidiaries to, make any sale, transfer or
other disposition (including by way of Sale and Leaseback Transaction) to any
of its Subsidiaries (other than in the ordinary course of business) of (i) any
assets of the Company or its Subsidiaries or (ii) any shares of Capital Stock
of any of the Company's Subsidiaries directly owned by the Company, in either
case with an aggregate fair market value in excess of $250,000 (as determined
in good faith by an Independent Appraiser or Independent Financial Adviser, as
the circumstances dictate) unless the Company or its Subsidiaries shall receive
consideration from the Subsidiary acquiring such assets or Capital Stock by way
of any such sale, transfer or otherwise from the Company in cash or Cash
Equivalents equal to the amount in excess of $250,000.
Limitations on Restricted Payments. The Indenture provides that neither the
Company nor any of its Subsidiaries shall, directly or indirectly, declare, pay
or set apart for payment, any Restricted Payment, if after giving effect
thereto: (i) a Default or an Event of Default shall have occurred and be
continuing; (ii) the
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Company or its Subsidiaries would not be permitted to incur or become liable
with respect to at least $1.00 of additional Indebtedness as determined in
accordance with the covenant "--Limitations on Indebtedness"; or (iii) the
aggregate amount of all Restricted Payments made by the Company or any of its
Subsidiaries (the amount expended or distributed for such purposes, if other
than in cash, to be valued at its fair market value as determined in good faith
by the Board of Directors of the Company, whose determination shall be
conclusive and evidenced by a Board Resolution delivered to the Trustee) from
and after the date of the Indenture, through and including the date on which
such Restricted Payment is made, would exceed the sum of:
(a) the aggregate of 50% of the Company's Consolidated Net Income accrued
for the period (taken as one accounting period) (or if such aggregate
Consolidated Net Income shall be less than zero, minus 100% of the amount
of such loss) commencing with the first full fiscal quarter after the Issue
Date to and including the fiscal quarter ended immediately prior to the
date of such calculation; and
(b) the aggregate net cash proceeds received by the Company after the
Issue Date from the issuance or sale (other than to a Subsidiary) by the
Company of its Capital Stock (excluding Disqualified Stock, but including
Capital Stock other than Disqualified Stock issued upon conversion of, or
exchange for, Disqualified Stock or securities other than its Capital
Stock), and upon the exercise of warrants and rights to purchase such
Capital Stock. For purposes of clause (b), the aggregate net cash proceeds
received by the Company (x) from the issuance of its Capital Stock upon the
conversion of, or exchange for, securities evidencing Indebtedness of the
Company, shall be calculated on the assumption that the gross proceeds from
such issuance are equal to the aggregate principal amount (or, if
discounted Indebtedness, the accreted principal amount) of Indebtedness
evidenced by such securities converted or exchanged and (y) upon the
conversion or exchange of other securities of the Company shall be equal to
the aggregate net proceeds of the original sale of the securities so
converted or exchanged if such proceeds of such original sale were not
previously included in any calculation for the purposes of clause (b) of
the preceding sentence, plus any additional sums payable upon conversion or
exchange.
Notwithstanding the foregoing, this provision shall not prevent (i) the
payment of any dividend within 60 days after the date of its declaration (if
the declaration of such dividend was permitted by the foregoing provision at
the time of such declaration); or (ii) the repurchase, retirement or other
acquisition of any shares of the Company's Capital Stock, or any option,
warrant or other right to purchase shares of the Company's Capital Stock, or
the repayment of any Indebtedness of the Company solely in exchange for shares
of, or out of the proceeds of a substantially contemporaneous issuance of,
Capital Stock (other than Disqualified Stock).
Limitations on Transactions with Stockholders and Affiliates. The Indenture
provides that the Company shall not, and shall not permit any of its
Subsidiaries to, enter into or permit to exist any transaction (or series of
related transactions), including, without limitation, any loan, advance,
guarantee or capital contribution to, or for the benefit of, or any sale,
purchase, lease, exchange or other disposition of any property or the rendering
of any service, or any other direct or indirect payment, transfer or other
disposition (a "Transaction"), involving payments, with any holder of 5% or
more of any class of Capital Stock of the Company or with any Affiliate of such
holder or with any Affiliate of the Company (other than a Wholly-Owned Recourse
Subsidiary of the Company), on terms and conditions less favorable to the
Company or such Subsidiary, as the case may be, than would be available at such
time in a comparable Transaction in arm's length dealings with an unrelated
Person as determined by the Board of Directors of the Company or a Subsidiary,
such approval to be evidenced by a Board Resolution.
The provisions of the foregoing paragraph will not apply to (i) Restricted
Payments otherwise permitted pursuant to the Indenture; (ii) transactions
between the Company and one or more of its Recourse Subsidiaries; provided,
that such transactions are not otherwise prohibited by the Indenture; (iii)
reasonable and customary fees and compensation (including amounts paid pursuant
to employee benefit plans) paid to, and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Subsidiary,
as determined by the Board of Directors of the Company or any Subsidiary; (iv)
annual payments in an aggregate amount not to exceed $150,000 under the Service
Agreement, dated as of September 5, 1986,
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between the Company, RSR and Quexco; and (v) payments for goods and services
purchased in the ordinary course of business on an arms-length basis.
Restrictions on Asset Sales. The Indenture provides that the Company will
not, and will not permit any of its Recourse Subsidiaries to, make any Asset
Sale, unless (a) the Company (or its Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the Capital Stock or assets to be sold (as determined in good faith
by its Board of Directors); (b) at least 85% of the consideration therefor is
received by the Company or such Subsidiary in the form of cash or Cash
Equivalents; and (c) 100% of the consideration therefor is received by the
Company or such Subsidiary in the form of cash, Cash Equivalents or
instruments with respect to which a security interest therein may be perfected
by possession.
Within six months of the date that the sum of the Net Cash Proceeds of Asset
Sales (less the sum of the Net Cash Proceeds (i) previously applied to the
acquisition of property and assets used in lines of business related to the
Company's or the Subsidiaries' business at such time (each a "Permitted
Related Acquisition") and (ii) from the sale of Obsolete Assets not exceeding
an aggregate fair market value of $1,000,000 in any year), together with
Condemnation Proceeds and Net Insurance Awards (the "Available Amount"),
equals or exceeds $5,000,000, the Company will elect to either (a) apply or
cause to be applied the Available Amount to a Permitted Related Acquisition or
the commencement thereof (provided that such project is completed within a
reasonable time of the commencement thereof), (b) make an offer to purchase
First Mortgage Notes (an "Asset Sale Offer") from all Holders up to an amount
equal to the Available Amount (rounded to the next lowest multiple of $1,000)
at a purchase price equal to 100% of the principal amount thereof plus accrued
interest thereon, if any, to the date of purchase or (c) any combination of
clauses (a) and (b) above; provided, that (i) property acquired at any time as
a Permitted Related Acquisition that has been acquired with Collateral
Proceeds shall be subject to a first priority Lien in favor of the Collateral
Agent for the benefit of the Trustee and the Holders; (ii) pending application
to a Permitted Related Acquisition or an Asset Sale Offer, the Collateral
Proceeds, together with all Condemnation Proceeds and Net Insurance Awards
received by the Collateral Agent, will be retained by the Collateral Agent in
the Collateral Account; and (iii) notwithstanding the foregoing, the Company
and its Subsidiaries, in the aggregate, shall be permitted to retain
$1,000,000 of Net Cash Proceeds from Asset Sales. To the extent that Holders
do not subscribe to an Asset Sale Offer, the Company may retain the unutilized
Available Amount free of the Lien of the Security Documents. The Company and
its Subsidiaries collectively may retain the Net Cash Proceeds from the sale
of Obsolete Assets in an aggregate amount not to exceed $1,000,000 in any
year.
Each Asset Sale Offer will be mailed to the Holders not more than 195 days
after the Available Amount equals or exceeds $5,000,000, with a copy to the
Trustee, will specify the purchase date (which will be no earlier than 30 days
nor more than 60 days from the date such notice is mailed) and will otherwise
comply with the procedures set forth in the Indenture and the Security
Documents. The Company will comply, to the extent applicable, with the
requirements of Section 14(e) under the Exchange Act and any other securities
laws or regulations in connection with the purchase of the First Mortgage
Notes pursuant to an Asset Sale Offer. To the extent that the provisions of
any securities laws or regulations conflict with provisions of this covenant,
the Company shall comply with the applicable securities laws and regulations
and shall not be deemed to have breached its obligations under this covenant
by virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Indenture provides that the Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, create, assume or
otherwise cause or suffer to exist or enter into any agreement with any Person
that would cause any consensual encumbrance or restriction of any kind on the
ability of any such Subsidiary to (a) pay dividends, in cash or otherwise, or
make any other distributions on its Capital Stock; (b) make payments in
respect of any Indebtedness owed to the Company or any of the Company's
Subsidiaries; (c) make loans or advances to the Company or any of the
Company's Subsidiaries; or (d) transfer any of its assets to the Company or
any of the Company's Subsidiaries, other than by reason of (i) the First
Mortgage Notes, the Indenture and the Security Documents; (ii) restrictions
existing under agreements in effect on the Issue Date, including, without
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limitation, restrictions under the Credit Facility as in effect on the Issue
Date; (iii) consensual encumbrances or restrictions binding upon any Person at
the time such Person becomes a Subsidiary of the Company so long as such
encumbrances or restrictions are not created, incurred or assumed in
contemplation of such Person becoming a Subsidiary of the Company; (iv)
restrictions existing under any agreement which refinances or replaces any of
the agreements containing the restrictions in (ii) or (iii); provided, that the
terms and conditions of any such restrictions are not materially less favorable
to the Company or such Subsidiary than those under the agreement evidencing the
refinanced Indebtedness; (v) customary non-assignment or sublease provisions of
any lease governing a leasehold interest of the Company or any of its
Subsidiaries; (vi) customary restrictions relating to assets acquired with the
proceeds of a purchase money obligation; (vii) customary non-assignment
provisions restricting subletting or assignment of any lease or assignment
entered into by a Subsidiary; and (viii) any restrictions with respect to a
Subsidiary of the Company imposed pursuant to an agreement which has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock or assets of such Subsidiary.
Merger and Consolidation. The Indenture provides that the Company may not
consolidate with or merge into any other Person or convey, sell, assign,
transfer or lease all or substantially all of its properties and assets
(determined on a consolidated basis for the Company and its Subsidiaries taken
as a whole) in one transaction or a series of transactions to any other Person
or Persons, or permit any Person to consolidate with or merge into the Company,
or convey, sell, assign, transfer or lease all or substantially all of such
Person's properties and assets in one transaction or a series of transactions
to the Company, unless: (i) such Person is a solvent corporation, partnership
or trust organized under the laws of the United States, one of the States
thereof or the District of Columbia; (ii) the resulting, surviving or
transferee corporation, partnership or trust (if other than the Company)
assumes by a supplemental indenture executed and delivered to the Trustee, in
form satisfactory to the Trustee, all of the Company's obligations under the
First Mortgage Notes, the Indenture and the Security Documents; (iii)
immediately before and after giving effect to such transaction or series of
transactions, no Default or Event of Default shall have occurred and be
continuing; (iv) immediately after giving effect to such transaction or series
of transactions (including, without limitation, any Indebtedness incurred or
anticipated to be incurred in connection with or in respect of the transaction
or series of transactions), the Company, or the successor or transferee
corporation, would be permitted to incur an additional $1.00 of Indebtedness
pursuant to the Indenture; (v) the Person formed by or surviving any such
consolidation or merger (if other than the Company), or the Person to whom such
sale or conveyance shall have been made, shall have a Consolidated Net Worth
immediately after the transaction or series of transactions (including, without
limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of the transaction or series of transactions)
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction; and (vi) the Company or the surviving entity shall
have delivered to the Trustee an Officer's Certificate and an Opinion of
Counsel, each stating that such consolidation, merger, conveyance, sale,
transfer or lease and, if a supplemental indenture has been executed in
connection with such transaction or series of transactions, such supplemental
indenture complies with this covenant and that all conditions precedent in the
Indenture relating to the transaction or series of transactions have been
satisfied. Notwithstanding the foregoing, clause (iv) of the preceding sentence
shall not prohibit a transaction, the principal purpose of which is (as
determined in good faith by the Board of Directors of the Company and evidenced
by the resolution or resolutions thereof) to change the state of incorporation
of the Company, and such transaction does not have as one of its purposes the
evasion of the limitation on merger, consolidations and sales of assets.
Nothing contained in this section should be deemed to prevent the Company or
any Subsidiary from granting a security interest in, or a mortgage or Lien
upon, or otherwise encumbering, any of its assets, subject to the limitations
on Liens set forth in the Indenture. Notwithstanding the foregoing, the Company
and its Recourse Subsidiaries may not consolidate with or merge into a Non-
Recourse Subsidiary or convey, sell, assign, transfer or lease all or
substantially all of their properties and assets (determined, with respect to
the Company, on a consolidated basis for the Company and its Subsidiaries taken
as a whole) in one transaction or a series of transactions to any Non-Recourse
Subsidiary, or permit any Non-Recourse Subsidiary to consolidate with or merge
into the Company or any of its Recourse Subsidiaries or convey, sell, assign,
transfer or lease all or substantially all of
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such Non-Recourse Subsidiary's properties and assets in one transaction or a
series of transactions to the Company or any of its Recourse Subsidiaries.
Limitation on Sale and Leaseback Transactions. The Indenture provides that
the Company will not, and will not permit any of its Subsidiaries to, enter
into, directly or indirectly, any Sale and Leaseback Transaction, with respect
to any real or tangible personal property, other than (i) a Sale and Leaseback
Transaction entered into between the Company and any of its Wholly-Owned
Recourse Subsidiaries or between Wholly-Owned Recourse Subsidiaries of the
Company, as the case may be; and (ii) Capitalized Lease Obligations permitted
to be incurred by the Company or any of its Subsidiaries pursuant to the
limitations on Indebtedness set forth in the Indenture.
Limitations on Investments, Loans and Advances. The Indenture provides that
the Company will not, and will not permit any of its Subsidiaries to, make any
advances or loans to, or Investments (by way of transfers of property,
contributions to capital, acquisitions of stock, securities or evidences of
indebtedness, or otherwise) in any other Person, except (i) the Company may make
advances and loans to, and Investments in, any Wholly-Owned Recourse Subsidiary
and any Subsidiary may make advances or loans to, and Investments in, the
Company or any Wholly-Owned Recourse Subsidiary of the Company; (ii) the Company
and its Subsidiaries may acquire and hold cash and Cash Equivalents; (iii) the
Company and its Subsidiaries may make advances and loans to officers and
employees in the ordinary course of business not to exceed $50,000 to any one
officer or employee or $100,000 in the aggregate at any one time outstanding;
(iv) the Company and its Subsidiaries may make payroll advances in the ordinary
course of business; (v) the Company may make advances or loans in connection
with Currency Agreements provided such agreements are made in the ordinary
course of business; (vi) the Company may make advances or loans in connection
with Interest Rate Agreements provided such agreements are made in the ordinary
course of business; (vii) the Company and its Subsidiaries may make loans to, or
Investments in, any Person, including Non-Recourse Subsidiaries, not to exceed
at any time outstanding an aggregate amount equal to $250,000 with respect to
loans to, and Investments in, all such Persons (the value of any such loans and
Investments shall be the original cost less the amount returned in cash); (viii)
the Company and its Subsidiaries may make Investments in exchange for assets
sold or otherwise disposed of in accordance with the provisions described under
"--Restrictions on Asset Sales"; (ix) the Company and its Subsidiaries may make
Investments in the form of advances, extensions of credit, progress payments and
prepayments for asset purchases by it in the ordinary course of business; and
(x) accounts receivable arising and trade credit granted in the ordinary course
of business and any securities received in satisfaction or partial satisfaction
thereof from financially troubled account debtors to the extent reasonably
necessary in order to prevent or limit loss.
Limitations as to Non-Recourse Subsidiaries. The Indenture provides that the
Company will not permit any Non-Recourse Subsidiary to create, assume, incur,
guarantee or otherwise become liable in respect of any Indebtedness unless the
lender in respect thereof has effectively waived all claims and/or recourse on
or in respect of such Indebtedness against the Company or any other Subsidiary
of the Company, including, without limitation, a waiver by such lender of the
benefits of the provisions of Section 1111(b) of the Bankruptcy Code, and the
Company has delivered to the Trustee an Opinion of Counsel (by a law firm of
national repute) and a Board Resolution confirming the foregoing, in each case
in form and substance satisfactory to the Trustee. Neither the Company nor any
of its Subsidiaries (other than Non-Recourse Subsidiaries) will sell, lease,
convey or otherwise transfer to any Non-Recourse Subsidiary any asset which is
essential to the steelmaking operations of the Company or its Subsidiaries
(other than Non-Recourse Subsidiaries). The Company will not permit any Non-
Recourse Subsidiary to acquire any such essential asset, and the Company and
its Subsidiaries will not purchase any Non-Recourse Subsidiary, unless in the
judgment of the Board of Directors of the Company the creation and operation of
the Non-Recourse Subsidiary and its acquisition of such assets are neither
intended nor reasonably expected to adversely affect the financial condition,
business, prospects or operations of the Company and its Subsidiaries (other
than Non-Recourse Subsidiaries).
Impairment of Security Interest. The Indenture provides that the Company will
not, and will not permit any of its Subsidiaries to, take or omit to take any
action, which action or omission might or would have the
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result of affecting or impairing the security interest in favor of the
Collateral Agent, on behalf of the Trustee and the Holders with respect to the
Collateral, and the Company shall not grant to any Person (other than the
Collateral Agent on behalf of the Trustee and the Holders) any interest
whatsoever in the Collateral, except, in either case, as expressly permitted by
the Indenture and the Security Documents.
Conflicting Agreements. The Indenture provides that the Company will not, and
will not permit any of its Subsidiaries to, enter into any agreement or
instrument that by its terms expressly (i) prohibits the Company from redeeming
or otherwise making any payments on or in respect of the First Mortgage Notes
in accordance with the terms thereof and of the Indenture, as in effect from
time to time, or (ii) requires that the proceeds received from the sale of any
Collateral be applied to repay, redeem or otherwise retire any Indebtedness of
any Person other than the Indebtedness represented by the First Mortgage Notes,
except as expressly permitted by the Indenture or the Security Documents.
Amendment to Security Documents. The Indenture provides that the Company will
not, and will not permit any of its other Subsidiaries to, amend, modify or
supplement, or permit or consent to any amendment, modification or supplement
of, any of the Security Documents in any way which would be adverse to the
Holders or which would constitute a Default under the Indenture or a default
under any Security Document.
EVENTS OF DEFAULT
The following events will be defined in the Indenture as "Events of Default":
(i) the Company defaults in the payment of interest on any First Mortgage
Note when due and payable and such default in the payment of interest
continues for a period of 30 days;
(ii) the Company defaults in the payment of the principal, or premium, if
any, of any First Mortgage Note when due and payable at maturity, upon
acceleration, redemption, pursuant to an offer to purchase required under
the Indenture or otherwise (including failure to make payment pursuant to a
Change of Control Offer or Asset Sale Offer);
(iii) the Company fails to comply with any of its covenants or agreements
described under "--Certain Covenants--Restrictions on Asset Sales" or "--
Change of Control," and such failure continues for a period of five days;
(iv) the Company fails to observe or perform any covenant, condition or
agreement in the First Mortgage Notes, the Indenture or the Security
Documents (other than as described in clause (i), (ii) or (iii)) and such
failure to observe or perform continues for a period of 30 days after there
has been given to the Company by the Trustee or has been received by the
Company and the Trustee from the Holders of at least 25% of the principal
amount of the First Mortgage Notes then outstanding a written notice
specifying such default, demanding that it be remedied and stating that the
notice is a "Notice of Default", unless, with respect to defaults under the
Security Documents, the remedy or cure of such default requires work to be
performed, acts to be done or conditions to be removed which cannot, by
their nature, reasonably be performed, done or removed within such 30-day
period, or if such remedy or cure is prevented by causes outside of the
control or responsibility of the Company, in which case no "Event of
Default" shall be deemed to exist for a period of 90 days after such
written notice so long as the Company shall have commenced cure within such
90-day period and shall diligently prosecute the same to completion;
(v) a default in the payment of principal at final maturity under any
mortgage, indenture or instrument under which there may be issued or by
which there may be secured or evidenced any Indebtedness of the Company or
any of its Recourse Subsidiaries (or the payment of which is guaranteed now
or hereafter by the Company or any of its Subsidiaries), whether such
Indebtedness or Guarantee now exists or shall be created hereafter, in a
principal amount of at least $1,000,000;
(vi) a default occurs under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
Indebtedness (including any interest thereon) of the
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Company or its Recourse Subsidiaries (or the payment of which is guaranteed
now or hereafter by the Company or any of its Subsidiaries), whether such
Indebtedness or Guarantee now exists or shall be created hereafter, if (i)
as a result of such event of default the maturity of such Indebtedness has
been accelerated prior to its stated maturity and (ii) the principal amount
of such Indebtedness, together with the principal amount of any other
Indebtedness of the Company and its Subsidiaries the maturity of which has
been so accelerated, aggregates $1,000,000 or more;
(vii) the Company or any Subsidiary (other than a Non-Recourse
Subsidiary, unless such action or proceeding adversely affects the
interests of the Company or any Recourse Subsidiary) pursuant to or within
the meaning of any Bankruptcy Law: (a) commences a voluntary case or
proceeding; (b) consents to the entry of an order for relief against it in
an involuntary case or proceeding; (c) consents to the appointment of a
Custodian of it or for all or substantially all of its property; (d) makes
a general assignment for the benefit of its creditors; or (e) admits in
writing its inability to pay its debts as the same become due;
(viii) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that: (a) is for relief against the Company or any
Subsidiary in an involuntary case; (b) appoints a Custodian of the Company
or any Subsidiary for all or substantially all of its property; or (c)
orders the liquidation of the Company or any Subsidiary; provided, that
clauses (a), (b) and (c) shall not apply to a Non-Recourse Subsidiary,
unless such action or proceeding adversely affects the interests of the
Company or any Recourse Subsidiary and in any such case the order or decree
remains unstayed and in effect for 60 days;
(ix) the Company or any Subsidiary shall fail to discharge any one or
more judgments not covered by insurance (from which no further appeal may
be taken) in excess of $1,500,000, and such judgments shall remain in
force, undischarged, unsatisfied, unstayed and unbonded for more than 30
days; or
(x) the Security Documents shall cease, for any reason, to be in full
force and effect or shall cease to be effective to grant a perfected Lien
on the Collateral with the priority purported to be created thereby.
If an Event of Default (other than an Event of Default specified in
subparagraph (vii) or (viii) set forth above) occurs and is continuing, the
Trustee or the Holders of at least 25% of the principal amount of the First
Mortgage Notes then outstanding by notice to the Company (and to the Trustee
if such notice is given by the Holders) may declare the principal amount and
accrued interest on the First Mortgage Notes to be immediately due and
payable. If an Event of Default specified in section (vii) or (viii) above
occurs, the principal amount and accrued interest shall ipso facto become and
be immediately due and payable on all outstanding First Mortgage Notes without
any declaration or other act on the part of the Trustee or any Holder. The
Holders of a majority in principal amount of the then outstanding First
Mortgage Notes by notice to the Company and the Trustee may rescind an
acceleration and its consequences if all existing Events of Default, other
than the nonpayment of the principal of the First Mortgage Notes which have
become due solely by such declaration of acceleration, have been cured or
waived. The Holders of a majority in principal amount of the outstanding First
Mortgage Notes also have the right to waive certain past defaults under the
Indenture except a default in the payment of the principal of, premium, if
any, or interest on any First Mortgage Note, or in respect of a covenant or a
provision which cannot be modified or amended without the consent of all
Holders.
No Holder has the right to institute any proceeding with respect to the
Indenture, the Security Documents or any remedy thereunder, unless the Holders
of at least 25% in principal amount of the outstanding First Mortgage Notes
have made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding as Trustee, the Trustee has failed to institute such
proceeding within 15 days after receipt of such notice, and the Trustee has
not within such 15-day period received directions inconsistent with such
written request by Holders of a majority in principal amount of the
outstanding First Mortgage Notes^. Such limitations do not apply, however, to
suits instituted by a Holder for the enforcement of the payment of the
principal of, premium, if any, or interest on such First Mortgage Note on or
after the respective due dates expressed in such First Mortgage Note.
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The Holders of a majority in principal amount of the outstanding First
Mortgage Notes will have the right, subject to certain limitations, to direct
the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee. The Indenture will provide that in case an Event of Default shall
occur and be continuing, the Trustee will exercise such of its rights and
powers under the Indenture, and use the same degree of care and skill in their
exercise, as a prudent Person would exercise or use under the circumstances in
the conduct of his or her own affairs. Subject to certain provisions of the
Indenture, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the Holders
unless they have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which might be incurred by it in
compliance with such request. The Trustee may withhold from Holders notice of
any continuing default (except a default in payment) if it determines in good
faith that the withholding of such notice is in the interest of such Holders.
Under the Indenture, the Company will be required to furnish to the Trustee
annually (i) a statement by certain officers of the Company to the effect that
to the best of their knowledge the Company is not in default in the fulfillment
of any of its obligations under such Indenture or, if there has been such
default, specifying each such default and (ii) an Opinion of Counsel either
stating that action has been taken with respect to the filing, refiling,
recording or re-recording of the Indenture as is necessary to maintain the Lien
of the Indenture or that no such action is necessary to maintain such Lien.
MODIFICATION OF THE INDENTURE
From time to time, the Company, when authorized by resolutions of its Board
of Directors, and the Trustee and the Collateral Agent (if a party thereto) may
amend, waive or supplement the Indenture, the Security Documents or the First
Mortgage Notes for certain specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies, maintaining the qualification
of the Indenture under the TIA, making any change that does not adversely
affect the rights of any Holder or mortgaging, pledging or granting a security
interest in favor of the Collateral Agent as additional security for the
payment and performance of the obligations under the Indenture, in any property
or assets, including any which are required to be mortgaged, pledged or
hypothecated, or in which a security interest is required to be granted, to the
Collateral Agent pursuant to any Security Document or otherwise; provided, that
the Company delivers to the Trustee an Opinion of Counsel stating that such
change does not adversely affect the rights of any Holder. Other amendments and
modifications of the Indenture, the First Mortgage Notes or the Security
Documents may be made by the Company, the Collateral Agent (if a party thereto)
and the Trustee with the consent of the Holders of not less than a majority of
the aggregate principal amount of the outstanding First Mortgage Notes;
provided, that no such modification or amendment may, without the consent of
the Holder of each outstanding First Mortgage Note affected thereby, (i) reduce
the principal amount of, extend the final maturity of or alter the redemption
provisions of, the First Mortgage Notes, (ii) change the currency in which any
First Mortgage Notes or any premium thereon is payable, (iii) reduce the
percentage in principal amount of outstanding First Mortgage Notes that must
consent to an amendment, supplement or waiver or consent to take any action
under the Indenture, the First Mortgage Notes or the Security Documents, (iv)
impair the right to institute suit for the enforcement of any payment on or
with respect to the First Mortgage Notes, (v) waive a default in payment with
respect to the First Mortgage Notes, (vi) reduce or change the rate or time for
payment of interest on the First Mortgage Notes, or (vii) affect the ranking or
security of the First Mortgage Notes.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company at any time may terminate (i) all its obligations under the First
Mortgage Notes, the Indenture and the Security Documents ("legal defeasance
option") or (ii) its obligations to comply with certain restrictive covenants,
including certain of the covenants described under "--Certain Covenants" above
("covenant defeasance option"). The Company may exercise its legal defeasance
option notwithstanding its prior exercise of its covenant defeasance option.
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If the Company exercises its legal defeasance option, payment of the First
Mortgage Notes may not be accelerated because of an Event of Default. If the
Company exercises its covenant defeasance option, payment of the Notes may not
be accelerated because of certain Events of Default described under "Events of
Default" above (not including Events of Default relating to non-payment,
bankruptcy and insolvency events, among others) or because of the failure of
the Company to comply with certain covenants specified in the Indenture.
The Company may exercise its legal defeasance option or its covenant
defeasance option only if:
(1) the Company irrevocably deposits in trust with the Trustee money or
U.S. Government Obligations for the payment of principal and interest on
the First Mortgage Notes to maturity or redemption, as the case may be;
(2) the Company delivers to the Trustee a certain certificate from a
nationally recognized firm of independent certified public accountants
expressing their opinion that the payments of principal and interest when
due and without reinvestment on the deposited U.S. Government Obligations
plus any deposited money without investment will provide cash at such times
and in such amounts as will be sufficient to pay principal and interest
when due on all the First Mortgage Notes to maturity or redemption, as the
case may be;
(3) 123 days pass after the deposit is made and during the 123-day period
no Default relating to bankruptcy and insolvency events with respect to the
Company occurs which is continuing at the end of the period;
(4) no Default has occurred and is continuing on the date of such deposit
and after giving effect thereto;
(5) the Company delivers to the Trustee an Opinion of Counsel to the
effect that (i) the trust resulting from the deposit does not constitute,
or is qualified as, a regulated investment company under the Investment
Company Act of 1940, (ii) the Holders have a valid first priority perfected
security interest in the trust funds, and (iii) after passage of 123 days
following the deposit (except, with respect to any trust funds for the
account of any Holder who may be deemed to be an "insider" for purposes of
the Bankruptcy Code, after one year following the deposit), the trust funds
will not be subject to the effect of Section 547 of the Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law in a case commenced by
or against the Company under either such statute, and either (A) the trust
funds will no longer remain the property of the Company (and therefore,
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally) or
(B) if a court were to rule under any such law in any case or proceeding
that the trust funds remained property of the Company, (x) assuming such
trust funds remained in the possession of the Trustee prior to such court
ruling to the extent not paid to Holders, the Trustee will hold, for the
benefit of the Holders, a valid first priority perfected security interest
in such trust funds that is not avoidable in bankruptcy or otherwise except
for the effect of Section 552(b) of the Bankruptcy Code on interest on the
trust funds accruing after the commencement of a case under such statute
and (y) the Holders will be entitled to receive adequate protection of
their interests in such trust funds if such trust funds are used in such
case or proceeding;
(6) in the case of the legal defeasance option, the Company shall have
delivered to the Trustee an Opinion of Counsel stating that (i) the Company
has received from, or there has been published by, the Internal Revenue
Service a ruling, or (ii) since the date of the Indenture there has been a
change in the applicable U.S. Federal income tax law or a regulation
clarifying existing law, in either case to the effect that, and based
thereon such Opinion of Counsel shall confirm that, the Holders will not
recognize income, gain or loss for U.S. Federal income tax purposes as a
result of such defeasance and will be subject to U.S. Federal income tax on
the same amounts, in the same manner and at the same times as would have
been the case if such defeasance had not occurred;
(7) in the case of the covenant defeasance option, the Company shall have
delivered to the Trustee an Opinion of Counsel to the effect that the
Holders will not recognize income, gain or loss for U.S. Federal income tax
purposes as a result of such covenant defeasance and will be subject to
U.S. Federal
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income tax on the same amounts, in the same manner and at the same times as
would have been the case if such covenant defeasance had not occurred; and
(8) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent to the defeasance and discharge of the First Mortgage Notes have
been complied with.
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will cease to be of further effect (except as to the surviving
rights of registration of transfer or exchange of First Mortgage Notes, as
expressly provided for in the Indenture, and as otherwise expressly provided
for in the Indenture) when either (i) all such First Mortgage Notes theretofore
authenticated and issued have been delivered (except lost, stolen or destroyed
First Mortgage Notes which have been replaced or paid, or First Mortgage Notes
for whose payment money has been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Trustee or discharged from
such trust) to the Trustee for cancellation or (ii) all such First Mortgage
Notes not theretofore delivered to the Trustee for cancellation have become due
and payable or will become due and payable within one year and the Company has
irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay at maturity or redemption the entire indebtedness on
such First Mortgage Notes not theretofore delivered to the Trustee for
cancellation, including interest thereon, and the Company has paid all sums
payable by it under the Indenture. The Trustee is required to acknowledge
satisfaction and discharge of the Indenture on demand of the Company
accompanied by an Officers' Certificate and an Opinion of Counsel and at the
cost and expense of the Company.
BOOK-ENTRY, DELIVERY AND FORM
Upon issuance, the First Mortgage Notes will be represented by a permanent
global First Mortgage Note or First Mortgage Notes. Each permanent global First
Mortgage Note will be deposited with, or on behalf of, the Depositary and
registered in the name of a nominee of the Depositary. Except under the limited
circumstances described below, permanent global First Mortgage Notes will not
be exchangeable for definitive certificated First Mortgage Notes.
Ownership of beneficial interests in a permanent global First Mortgage Note
will be limited to institutions that have accounts with the Depositary or its
nominee ("participants") or persons that may hold interests through
participants. In addition, ownership of beneficial interests by participants in
such permanent global First Mortgage Note will be evidenced only by, and the
transfer of that ownership interest will be effected only through, records
maintained by the Depositary or its nominee for such permanent global First
Mortgage Note. Ownership of beneficial interests in such permanent global First
Mortgage Note by persons that hold through participants will be evidenced only
by, and the transfer of that ownership interest within such participant will be
effected only through, records maintained by such participant. The Depositary
has no knowledge of the actual beneficial owners of the First Mortgage Notes.
Beneficial owners will not receive written confirmation from the Depositary of
their purchase, but beneficial owners are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the participants through which the
beneficial owners entered the transaction. The laws of some jurisdictions
require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such laws may impair the ability to transfer
beneficial interests in such permanent global First Mortgage Note.
The Company has been advised by the Depositary that upon the issuance of a
permanent global First Mortgage Note and the deposit of such permanent global
First Mortgage Note with the Depositary, the Depositary will immediately
credit, on its book-entry registration and transfer system, the respective
principal amounts represented by such permanent global First Mortgage Note to
the accounts of such participants.
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Payment of principal of, and interest on, First Mortgage Notes represented by
a permanent global First Mortgage Note registered in the name of or held by the
Depositary or its nominee will be made to the Depositary or its nominee, as the
case may be, as the registered owner and holder of the permanent global First
Mortgage Note representing such First Mortgage Notes. The Company has been
advised by the Depositary that upon receipt of any payment of principal of, or
interest on, a permanent global First Mortgage Note, the Depositary will
immediately credit, on its book-entry registration and transfer system,
accounts of participants with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such permanent
global First Mortgage Note as shown in the records of the Depositary. Payments
by participants to owners of beneficial interests in a permanent global First
Mortgage Note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name,"
and will be the sole responsibility of such participants, subject to any
statutory or regulatory requirements as may be in effect from time to time.
None of the Company, the Trustee or any other agent of the Company or the
Trustee will have any responsibility or liability for any aspect of the records
of the Depositary, any nominee or any participant relating to, or payments made
on account of, beneficial interests in a permanent global First Mortgage Note
or for maintaining, supervising or reviewing any of the records of the
Depositary, any nominee or any participant relating to such beneficial
interests.
A permanent global First Mortgage Note is exchangeable for definitive First
Mortgage Notes registered in the name of, and a transfer of a permanent global
First Mortgage Note may be registered to, any person other than the Depositary
or its nominee, only if:
(a) the Depositary notifies the Company that it is unwilling or unable to
continue as Depositary for such permanent global First Mortgage Note or if
at any time the Depositary ceases to be a clearing agency registered under
the Exchange Act;
(b) the Company in its sole discretion determines that such permanent
global First Mortgage Note shall be exchangeable for definitive First
Mortgage Notes in registered form; or
(c) there shall have occurred and be continuing an Event of Default under
the First Mortgage Notes.
Any permanent global First Mortgage Note that is exchangeable pursuant to the
preceding sentence will be exchangeable in whole for definitive First Mortgage
Notes in registered form, of like tenor and of an equal aggregate principal
amount as the permanent global First Mortgage Note, in denominations of $1,000
and integral multiples thereof. Such definitive First Mortgage Notes will be
registered in the name or names of such persons as the Depositary shall
instruct the Trustee. It is expected that such instructions may be based upon
directions received by the Depositary from its participants with respect to
ownership of beneficial interests in such permanent global First Mortgage Note.
With respect to definitive First Mortgage Notes, any principal and interest
will be payable, the transfer of the definitive First Mortgage Notes will be
registerable and the definitive First Mortgage Notes will be exchangeable at
the office of the Trustee in New Orleans, Louisiana, provided that payment of
interest may be made at the option of the Company by check mailed to the
address of the person entitled thereto and as shown on the register for the
First Mortgage Notes.
Except as provided above, owners of beneficial interests in such permanent
global First Mortgage Note will not be entitled to receive physical delivery of
First Mortgage Notes in definitive form and will not be considered the holders
thereof for any purpose under the Indenture, and no permanent global First
Mortgage Note shall be exchangeable except for another permanent global First
Mortgage Note of like denomination and tenor to be registered in the name of
the Depositary or its nominee. Accordingly, each person owning a beneficial
interest in such permanent global First Mortgage Note must rely on the
procedures of the Depositary and, if such person is not a participant, on the
procedures of the participant through which such person owns its interest, to
exercise any rights of a Holder under the permanent global First Mortgage Note.
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The Company understands that, under existing industry practices, in the event
that the Company requests any action of Holders, or an owner of a beneficial
interest in such permanent global First Mortgage Note desires to give or take
any action that a Holder is entitled to give or take under the First Mortgage
Notes, the Depositary would authorize the participants holding the relevant
beneficial interests to give or take such action, and such participants would
authorize beneficial owners owning through such participants to give or take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.
The Depositary has advised the Company that the Depositary is a limited
purpose trust company organized under the laws of the State of New York, a
"banking organization" within the meaning of the New York Banking Law, a member
of the Federal Reserve System, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code and a "clearing agency" registered under
the Exchange Act. The Depositary was created to hold securities of its
participants and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic book-
entry changes in accounts of the participants, thereby eliminating the need for
physical movement of securities certificates. The Depositary's participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. The Depositary is owned by a
number of its participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the Depositary's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly. The rules applicable to the Depositary and its participants are on
file with the Commission.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the First Mortgage Notes will be made in immediately available
funds. So long as the First Mortgage Notes are represented by a permanent
global First Mortgage Note or Notes, all payments of principal, premium, if
any, and interest will be made by the Company in immediately available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing-house or next-day funds. So long as the First
Mortgage Notes are represented by a permanent global First Mortgage Note or
Notes registered in the name of the Depositary or its nominee, the First
Mortgage Notes will trade in the Depositary's Same-Day Funds Settlement System,
and secondary market trading activity in the First Mortgage Notes will
therefore be required by the Depositary to settle in immediately available
funds. No assurance can be given as to the effect, if any, of settlement in
immediately available funds on the trading activity in the First Mortgage
Notes.
REGARDING THE TRUSTEE AND THE COLLATERAL AGENT
First National Bank of Commerce will serve as Trustee under the Indenture and
will act as Collateral Agent under the Security Documents.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
Directors, officers, employees or stockholders of the Company will not have
any liability for any obligations of the Company under the First Mortgage
Notes, the Indenture or the Security Documents or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder,
by accepting a First Mortgage Note, waives and releases all such liability. The
waiver and release are part of the consideration for the issue of the First
Mortgage Notes.
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REPORTS
The Company will furnish the Trustee with copies of all quarterly and annual
reports, and any other documents it is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act, within five days after it
files the same with the Commission.
GOVERNING LAW
The Indenture, the Security Documents and the First Mortgage Notes shall be
governed by, and construed in accordance with, the laws of the State of New
York.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms as well as any other capitalized terms used herein for which no
definition is provided.
"Affiliate" means, with respect to any specific Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specific Person. For the purposes of this definition,
"control," as used with respect to any Person, means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
or policies of such Person whether through the ownership of voting securities,
or by agreement or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Appraiser" means a Person who in the course of its business appraises
property and, where real property is involved, who is a member in good standing
of the American Institute of Real Estate Appraisers, recognized and licensed to
do business in the jurisdiction where the applicable real property is situated,
and who may be employed by the Company.
"Asset Acquisition" means (i) any capital contribution (by means of transfer
of cash or other property to others or payments for property or services for
the account or use of others, or otherwise), or purchase or acquisition of
Capital Stock by the Company or any of its Subsidiaries in any other Person, in
either case pursuant to which such Person shall become a Subsidiary of the
Company or any of its Subsidiaries or shall be merged with or into the Company
or any of its Subsidiaries or (ii) any acquisition by the Company or any of its
Subsidiaries of the assets of any Person which constitute substantially all of
an operating unit or business of such Person.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
or other disposition to any Person (including any Non-Recourse Subsidiary)
other than the Company or a Wholly-Owned Subsidiary of the Company, in one
transaction or a series of related transactions, of (i) any Capital Stock of
any Subsidiary of the Company or (ii) any other property or asset of the
Company or any Subsidiary of the Company, in each case, other than in the
ordinary course of business.
"Bankruptcy Law" means Title 11, United States Code or any similar Federal or
state law for the relief of debtors, as amended.
"Board Resolution" means a copy of a resolution certified by the Secretary or
an Assistant Secretary of the Company or its Subsidiaries, as the case may be,
to have been duly adopted by the Board of Directors of the Company or its
Subsidiaries, as the case may be, and to be in full force and effect on the
date of such certification, and delivered to the Trustee.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, warrants, options or other equivalents (however
designated and whether voting or non-voting) of capital stock of a corporation
and any and all equivalent ownership interests in a Person (other than a
corporation), in each
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case whether outstanding on the Issue Date or thereafter issued, including,
without limitation, all common stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) the discounted present value of the
rental obligations of such Person as lessee under which, in conformity with
GAAP, is required to be capitalized on the balance sheet of that Person.
"Capitalized Lease Obligation" means the discounted present value of the
rental obligations of any Person under any Capitalized Lease.
"Cash Equivalents" means, at any time, (i) any evidence of Indebtedness with
a maturity of 365 days or less issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality
thereof (provided that the full faith and credit of the United States of
America is pledged in support thereof); (ii) certificates of deposit or
acceptances with a maturity of 180 days or less of any financial institution
that is a member of the Federal Reserve System having combined capital and
surplus and undivided profits of not less than $250,000,000; (iii) commercial
paper with a maturity of 180 days or less issued by a corporation (except an
Affiliate of the Company) organized under the laws of any state of the United
States or the District of Columbia and rated at least A-1 by Standard & Poor's
Corporation or at least P-1 by Moody's Investors Service, Inc.
"Change of Control" means the occurrence of one or more of the following
events:
(a) the direct or indirect sale, lease, exchange or other transfer of all
or substantially all of the assets of the Company to any Person or entity
or group of Persons or entities acting in concert as a partnership or other
group (a "Group of Persons") other than an Affiliate of the Company;
(b) the consummation of any consolidation or merger of the Company with
or into another corporation with the effect that the stockholders of the
Company as of the date of the Indenture hold less than 51% of the combined
voting power of the outstanding voting securities of the surviving entity
of such merger or the corporation resulting from such consolidation
ordinarily having the right to vote in the election of directors (apart
from rights accruing under special circumstances) immediately after such
merger or consolidation;
(c) the stockholders of the Company shall approve any plan or proposal
for the liquidation or dissolution of the Company; and
(d) a Person or Group of Persons acting in concert as a partnership,
limited partnership, syndicate or other group (other than management of the
Company and their respective Affiliates) shall, as a result of a tender or
exchange offer, open market purchases, privately negotiated purchases or
otherwise, have become the direct or indirect beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of securities of the Company
representing a majority or more of the combined voting power of the then
outstanding securities of the Company ordinarily (and apart from rights
accruing under special circumstances) having the right to vote in the
election of directors.
For purposes of this definition, the following shall not be considered a
Change of Control:
(i) Transfers among (A) Meyers; (B) any son, daughter, stepson,
stepdaughter or spouse of Meyers; (C) any lineal descendant of an
individual referred to in clause (A) or (B); and (D) any trust in which one
or more of the Persons referred to in clause (A), (B) or (C) are principal
beneficiaries; or
(ii) A merger resulting in the proportionate interest of the Class B
Common Stock held by BSPL being held by BSPL's shareholders, provided such
transaction shall have no adverse effect on the Company.
"Collateral" means, collectively, all of the property and assets (including,
without limitation, Trust Moneys) that are from time to time subject to the
Lien of the Security Documents.
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"Collateral Account" means the collateral account to be established pursuant
to the Indenture.
"Collateral Proceeds" means the Net Cash Proceeds received by the Collateral
Agent from the sale of Collateral.
"Company Order" means a written request or order signed in the name of the
Company by its Chairman of the Board, its Vice Chairman of the Board, its
President or a Vice President, and by its Treasurer, an Assistant Treasurer,
its Secretary or an Assistant Secretary, and delivered to the Trustee.
"Condemnation Award" means any proceeds, award or payment paid to the
mortgagee or beneficiary under the Mortgages relating to any taking of the
Collateral subject to such Mortgage by condemnation or eminent domain or
similar action, together with interest accrued thereon, less certain expenses.
"Consolidated Domestic Income Tax Expense" of any Person for any period
means, without duplication, the aggregate amount of net U.S. taxes based on
income or profits for such period of the operations of such Person and its
Consolidated Subsidiaries, determined in accordance with GAAP (to the extent
such income or profits were included in computing Consolidated Net Income).
"Consolidated Interest Expense" of any Person for any period means the sum of
(a) the aggregate interest expense (including amortization of original issue
discount and non-cash interest payments or accruals) of such Person and its
Consolidated Subsidiaries for such period and (b) to the extent not included in
clause (a), all commissions, discounts and other fees and charges owed with
respect to letters of credit and banker's acceptance financing, the net cost
associated with Interest Rate Agreements and Currency Agreements, amortization
of other financing fees and expenses and the interest portion of any deferred
payment obligation.
"Consolidated Interest Income" of any Person means all amounts that would be
included under interest income on a consolidated income statement of such
Person and its Consolidated Subsidiaries determined in accordance with GAAP,
less accreted amounts attributable to original issue discount securities prior
to the receipt thereof and other non-cash interest payments or accruals.
"Consolidated Net Income" of any Person for any period means the Net Income
of such Person and its Consolidated Subsidiaries for such period, determined on
a consolidated basis in accordance with GAAP; provided, that there shall be
excluded (i) the Net Income of any Person (other than a Consolidated
Subsidiary) in which such Person or any of its Consolidated Subsidiaries has a
joint interest with a third party except to the extent of the amount of
dividends or distributions actually paid to such Person or a Subsidiary during
such period; (ii) except to the extent includable pursuant to the foregoing
clause (i), the Net Income of any Person accrued prior to the date it becomes a
Subsidiary of such Person or is merged into or consolidated with such Person or
any of its Subsidiaries or that Person's assets are acquired by such Person or
any of its Subsidiaries; (iii) the Net Income (if positive), or any portion
thereof, of any Subsidiary of such Person to the extent that the declaration or
payment of dividends or similar distributions by that Subsidiary to such Person
or to any other Subsidiary of such Net Income is not at the time permitted by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Subsidiary; (iv) without duplication, any gains or losses attributable to Asset
Sales; (v) Net Income (if positive), arising from the adoption of changes in
accounting policy to comply with GAAP or voluntarily by the Company with the
consent of its independent auditors that so qualify under Regulation S-X of the
Securities Act; (vi) Net Income arising in connection with a merger,
combination or consolidation that is accounted for as a pooling of interests;
and (vii) foreign currency translation gains and losses.
"Consolidated Net Worth" of any Person means as of any date all amounts that
would be included under stockholders' equity on a consolidated balance sheet of
such Person and its Consolidated Subsidiaries determined in accordance with
GAAP.
"Consolidated Subsidiary" of any Person means a Subsidiary which for
financial reporting purposes is or, in accordance with GAAP, should be,
accounted for by such Person as a consolidated Subsidiary.
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"Credit Facility" means the Credit Agreement, dated June 28, 1989, as amended
and restated through November 23, 1993, among the Company, the Lenders named
therein and Chemical Bank, as agent and Lender, or any renewal, refinancing or
continuation thereof as each of the foregoing may be amended, supplemented or
otherwise modified from time to time.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its Subsidiaries against fluctuations in currency values.
"Custodian" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
"Default" means any event which is, or after the giving of notice or passage
of time or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the holder thereof, in whole or in part on, or prior to, the
final maturity date of the First Mortgage Notes.
"EBITDA" of any Person for any period means the sum of (a) Consolidated Net
Income of such Person; (b) Consolidated Domestic Income Tax Expense; (c)
Consolidated Interest Expense; and (d) depreciation and amortization expense
determined on a consolidated basis for such Person and its consolidated
Subsidiaries in accordance with GAAP for such period; provided, that the
amounts set forth in clauses (b) through (d) will be included only to the
extent such amounts reduced Consolidated Net Income.
"EBITDA Ratio" means the ratio, on a pro forma basis, of (a) EBITDA of any
Person for the Reference Period immediately prior to the date of the
transaction giving rise to the need to calculate the EBITDA Ratio (the
"Transaction Date") to (b) the Net Interest Expense of such Person during such
Reference Period; provided, that in making such computation, (i) the incurrence
of the Indebtedness giving rise to the need to calculate the EBITDA Ratio and
the application of the proceeds therefrom shall be assumed to have occurred on
the first day of the Reference Period; (ii) Asset Sales and Asset Acquisitions
which occur during the Reference Period or subsequent to the Reference Period
but prior to the incurrence of the Indebtedness in question (but including any
Asset Acquisition to be made with such Indebtedness) shall be assumed to occur
on the first day of the Reference Period; (iii) the issuance of any
Indebtedness during the Reference Period or subsequent to the Reference Period
but prior to the Transaction Date and the application of the proceeds therefrom
shall be assumed to have occurred on the first day of the Reference Period;
(iv) the Consolidated Interest Expense attributable to interest on any
Indebtedness (whether existing or being incurred) computed on a pro forma basis
and bearing a floating interest rate shall be computed as if the rate in effect
on the date of computation had been the applicable rate for the entire period,
unless such Person or any of its Subsidiaries is a party to an Interest Rate
Agreement which has the effect of reducing the interest rate below the rate on
the date of computation, in which case such lower rate shall be used; and (v)
there shall be excluded from Consolidated Interest Expense any Consolidated
Interest Expense related to any Indebtedness which was outstanding during and
subsequent to the Reference Period but is not outstanding on the Transaction
Date, except for Consolidated Interest Expense actually incurred with respect
to Indebtedness borrowed under a revolving credit or similar arrangement to the
extent the commitment thereunder remains in effect on the Transaction Date. For
the purposes of making the computation referred to in the preceding sentence,
Asset Sales and Asset Acquisitions which have been made by any Person which has
become a Subsidiary of the Company or been merged with or into the Company or
any Subsidiary of the Company during the Reference Period or subsequent to the
Reference Period and prior to the Transaction Date shall be calculated on a pro
forma basis (including all of the calculations referred to in numbers (i)
through (v) of the preceding sentence) assuming such Asset Sales or Asset
Acquisitions occurred on the first day of the Reference Period.
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"Financial Advisor" means an investment banking firm of national reputation
which (except as otherwise expressly provided in this Indenture) may be
employed by the Company.
"GAAP" means generally accepted accounting principles in the United States as
in effect from time to time, including, without limitation, those set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession of the United States, which are applicable as of the
date of determination.
"Guarantee" means, as applied to any Indebtedness, (a) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such Indebtedness, and (b) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure the payment or
performance (or payment of damages in the event of nonperformance) of any part
or all of such Indebtedness, including, without limiting the foregoing, the
payment of amounts drawn under letters of credit. The amount of any Guarantee
shall be deemed to be an amount equal to the stated or determinable amount of
the primary obligation in respect of which such Guarantee is made (unless such
Guarantee shall be expressly limited to a lesser amount, in which case such
lesser amount shall apply) or, if not stated or determinable, the maximum
reasonably anticipated liability in respect thereof as determined by such
Person in good faith.
"Indebtedness" of any Person means at any date, without duplication, (a) all
obligations of such Person for borrowed money or evidenced by bonds,
debentures, notes or other similar instruments; (b) all obligations of such
Person in respect of letters of credit or other similar instruments (or
reimbursement obligations with respect thereto); (c) all obligations of such
Person to pay the deferred purchase price of property or services, except Trade
Payables; (d) all Capitalized Lease Obligations of such Person; (e) all
Indebtedness of others secured by a Lien on any asset of such Person, whether
or not such Indebtedness is assumed by such Person, provided that, for purposes
of determining the amount of any Indebtedness of the type described in this
clause, if recourse with respect to such Indebtedness is limited to such asset,
the amount of such Indebtedness shall be limited to the fair market value of
the asset; (f) to the extent not otherwise included, all obligations under
Interest Rate Agreements and Currency Agreements; (g) all Guarantees of such
Person in respect of Indebtedness of others; and (h) all Disqualified Stock
issued by such Person (the amount of Indebtedness represented by any
Disqualified Stock will be the greater of the voluntary or involuntary
liquidation preference plus accrued and unpaid dividends).
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future, interest rate option, interest rate swap, interest rate
cap or other interest rate hedge agreement, to or under which the Company or
any of its Subsidiaries is a party or a beneficiary on the date of the
Indenture or becomes a party or a beneficiary thereafter.
"Independent" when used with respect to any specified Person means such a
Person who (a) is in fact independent, (b) does not have any direct financial
interest or any material indirect financial interest in the Company or in any
other obligor in respect of the First Mortgage Notes or in any Affiliate of the
Company or such other obligor and (c) is not an officer, employee, promoter,
underwriter, trustee, partner, director or person performing similar functions
to any of the foregoing for the Company or such other obligor or any Affiliate
thereof. Whenever it is provided in the Indenture that any Independent Person's
opinion or certificate shall be furnished to the Trustee, such Person shall be
appointed by the Company and approved by the Trustee in the exercise of
reasonable care, and such opinion or certificate shall state that the signer
has read this definition and that the signer is Independent within the meaning
thereof.
"Investment" of any Person means all investments in other Persons in the form
of loans, advances or capital contributions (excluding commission, travel and
similar advances to officers and employees made in
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the ordinary course of business), purchases (or other acquisitions for
consideration) of Indebtedness, Capital Stock or other securities issued by any
other Person.
"Joint Venture" means a joint venture, partnership or other similar
arrangement, whether in corporate, partnership or other legal form; provided,
that as to any such arrangement in corporate form, such corporation shall not,
as to any Person of which such corporation is a Subsidiary, be considered to be
a Joint Venture to which such Person is a party.
"Lenders" means the lenders who are from time to time parties to the Credit
Facility.
"Lien" means, with respect to any property, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such
property. For the purposes of the Indenture and the Security Documents, the
Company and its Subsidiaries shall be deemed to own subject to a Lien any
property which they have acquired or hold subject to the interest of a vendor
or lessor under any conditional sales agreement, capital lease or other title
retention agreement relating to such property.
"Meyers" means Howard M. Meyers, an individual with a business address on the
Issue Date at 1111 Mockingbird Lane, Dallas, Texas.
"Net Cash Proceeds" from a sale, transfer or other disposition of properties
or assets means cash payments received (including any cash payments received by
way of deferred payment of principal pursuant to a note or installment
receivable or otherwise, but only as and when received (including any cash
received upon sale or disposition of such note or receivable), excluding any
other consideration received in the form of assumption by the acquiring Person
of Indebtedness or other obligations relating to such properties or assets or
received in any other non-cash form) therefrom, in each case, net of all legal,
title and recording tax expenses, commissions and other fees and expenses
incurred, and all Federal, state, provincial, foreign and local taxes required
to be accrued as a liability under GAAP as a consequence of such sale, transfer
or other disposition, and in each case net of appropriate amounts to be
provided by the Company or its Subsidiaries as a reserve, in accordance with
GAAP, against any liabilities associated with such assets and retained by the
Company or any Subsidiary after such sale, transfer or other disposition,
including, without limitation, pension and other post-employment benefit
liabilities and liabilities related to environmental matters and the after-tax
cost of any indemnification payments (fixed and contingent) attributable to
seller's indemnities to the purchaser undertaken by the Company or any of its
Subsidiaries in connection with such sale, transfer or other disposition (but
excluding any payments, which by the terms of the indemnities will not, under
any circumstances, be made during the term of the First Mortgage Notes) and net
of all payments made on any Indebtedness which is secured by such assets, in
accordance with the terms of any Lien upon or with respect to such assets or
which must by its terms, or in order to obtain a necessary consent to such
asset disposition, or by applicable law be repaid out of the proceeds from such
sale, transfer or other disposition, and net of all distributions and other
payments made to minority interest holders in Subsidiaries or Joint Ventures as
a result of such sale, transfer or other disposition.
"Net Income" of any Person for any period means the net income (loss) of such
Person for such period, determined in accordance with GAAP, except that
extraordinary, unusual and non-recurring gains and losses as determined in
accordance with GAAP shall be excluded.
"Net Insurance Proceeds" means all proceeds paid to the Collateral Agent or
any mortgagee or beneficiary under the Security Documents relating to damage
to, or loss or destruction of, improvements on equipment constituting
Collateral, together with interest earned thereon, less certain expenses.
"Net Interest Expense" means the difference between Consolidated Interest
Expense and Consolidated Interest Income, provided that such amount shall not
be less than zero.
"Non-Recourse Indebtedness" means Indebtedness of a Non-Recourse Subsidiary
where (a) neither the Company nor any Subsidiary (other than such Non-Recourse
Subsidiary): (i) provides any Guarantee or
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credit support for such Indebtedness (including any undertaking, guaranty,
indemnity, agreement or instrument which would constitute Indebtedness); or
(ii) is directly or indirectly liable for such Indebtedness; (b) the holders of
such Indebtedness expressly waive any recourse which they may have, in law,
equity or otherwise, whether based on misrepresentation, control, ownership or
otherwise, to the Company and any Subsidiary (other than such Non-Recourse
Subsidiary), including, without limitation, a waiver of the benefits of the
provisions of Section 1111(b) of the Bankruptcy Code; and (c) no default with
respect to such Indebtedness (including any rights which the holder thereof may
have to take enforcement action against such Non-Recourse Subsidiary) would
permit (upon notice, lapse of time or both) any holder of any other
Indebtedness of the Company or any Subsidiary (other than such Non-Recourse
Subsidiary) to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity.
"Non-Recourse Subsidiary" means a special purpose Subsidiary of the Company
or any of its Subsidiaries formed to acquire securities or assets of a third
party and which (i) has no Indebtedness other than Non-Recourse Indebtedness
and (ii) does not, directly or indirectly, own any Indebtedness, stock or
securities of, and has no Investment in, the Company or any Recourse
Subsidiary.
"Officers' Certificate" means, when used with respect to the Company, a
certificate signed by the Chairman of the Board, the President, a Vice Chairman
of the Board or the Chief Financial Officer of the Company (or any other
officer identified by any of the foregoing officers in an Officers' Certificate
to be an executive officer of the Company) and the Secretary, an Assistant
Secretary or the Controller of the Company.
"Opinion of Counsel" means an opinion in writing signed by legal counsel, who
may be an employee of or of counsel to the Company, or who may be other counsel
satisfactory to the Trustee.
"Permitted Liens" means (a) Liens for taxes, assessments, governmental
charges or claims which are not yet delinquent or which are being contested in
good faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made therefor; (b) other Liens incidental to the conduct of the Company's and
its Subsidiaries' business or the ownership of its property and assets not
securing any Indebtedness, and which do not in the aggregate materially detract
from the value of the Company's and its Subsidiaries' property or assets when
taken as a whole, or materially impair the use thereof in the operation of its
business (including, without limitation, Liens securing any obligation to
landlords, vendors, carriers, warehousemen, mechanics, laborers and materialmen
and other similar obligations arising by operation of law not yet delinquent or
which are being contested in good faith by appropriate proceedings, if a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made therefor); (c) Liens with respect to
assets of a Subsidiary granted by such Subsidiary to the Company to secure
Indebtedness owing to the Company; (d) Liens on assets owned by Non-Recourse
Subsidiaries to secure Non-Recourse Indebtedness; (e) Liens on assets not
constituting Collateral with an aggregate book value not in excess of 5% of the
book value of the Company's total assets as shown on the Company's most recent
consolidated balance sheet; (f) pledges and deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (g) deposits made to secure the
performance of tenders, bids, leases, statutory obligations, surety and appeal
bonds, government contracts, performance and return-of-money bonds and other
obligations of a like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (h) zoning
restrictions, servitudes, easements, rights-of-way, restrictions and other
similar charges or encumbrances incurred in the ordinary course of business
which, in the aggregate, are not substantial in amount and which do not in any
case materially detract from the value of the property subject thereto or
interfere with the ordinary conduct of the business of the Company or its
Subsidiaries; (i) Liens arising out of judgments or awards against the Company
or any Subsidiary with respect to which the Company or such Subsidiary is
prosecuting an appeal or proceeding for review and the Company or such
Subsidiary is maintaining adequate reserves in accordance with GAAP; and (j)
any interest or title of a lessor in the property subject to any Capitalized
Lease Obligation or operating lease.
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"Permitted Payments" means, with respect to the Company or any of its
Subsidiaries, (a) any dividend on shares of Capital Stock payable solely in
shares of Capital Stock (other than Disqualified Stock) or in options, warrants
or other rights to purchase Capital Stock (other than Disqualified Stock); (b)
any dividend, other distribution, loan or advance to the Company by any of its
Subsidiaries or by a Subsidiary to another Subsidiary (except a Non-Recourse
Subsidiary); (c) any defeasance, redemption, repurchase or other acquisition
for value of any Indebtedness of the Company with the proceeds from the
issuance of (i) Indebtedness which is subordinate to First Mortgage Notes at
least to the extent and in the manner as the Indebtedness to be defeased,
redeemed, repurchased or otherwise acquired is subordinate to the First
Mortgage Notes in right of payment to the First Mortgage Notes; provided, that
(1) such newly-issued subordinated Indebtedness provides for no payments of
principal by way of sinking fund, mandatory redemption, defeasance or otherwise
by the Company or its Subsidiaries (including, without limitation, at the
option of the holder thereof other than an option given to a holder pursuant to
a "Change of Control" covenant which (x) is no more favorable to the holders of
such Indebtedness than the provisions in favor of the Holders and (y) such
Indebtedness provides that the Company or its Subsidiaries will not repurchase
such Indebtedness pursuant to such provisions prior to the Company's repurchase
of the First Mortgage Notes required to be repurchased by the Company upon a
Change of Control) prior to the maturity of the Indebtedness being replaced and
(2) the proceeds of such new Indebtedness are utilized for such purpose within
45 days of issuance or (ii) Capital Stock (other than Disqualified Stock); and
(d) the redemption or repurchase by a Wholly-Owned Subsidiary of its Capital
Stock owned by the Company or another Wholly-Owned Subsidiary.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock whether now outstanding or issued after
the Issue Date, and includes, without limitation, all classes and series of
preferred or preference stock.
"Recourse Subsidiary" means any Subsidiary other than a Non-Recourse
Subsidiary.
"Reference Period" means the four fiscal quarters for which financial
information is available preceding the date of a transaction giving rise to the
need to make a financial calculation.
"Restricted Investment" means any Investment in any Person other than a
Wholly-Owned Recourse Subsidiary of the Company.
"Restricted Payment" means, with respect to any Person, (a) any dividend or
other distribution on any shares of such Person's Capital Stock (other than
dividends or distributions payable in Capital Stock that is not Disqualified
Stock); (b) any payment on account of the purchase, redemption, retirement or
other acquisition of (i) any shares of such Person's Capital Stock or (ii) any
option, warrant or other right to acquire shares of such Person's Capital
Stock; (c) any defeasance, redemption, repurchase or other acquisition or
retirement for value prior to scheduled maturity of any Indebtedness ranked
pari passu or subordinate in right of payment to the First Mortgage Notes and
having a maturity date subsequent to the maturity of the First Mortgage Notes;
(d) any investment in, loan, advance to, Guarantee on behalf of, directly or
indirectly, or other transfer of assets to (i) any Restricted Subsidiary or
(ii) any holder of 5% or more of any class of Capital Stock of the Company
(including Affiliates thereof other than Subsidiaries of the Company); and (e)
any Restricted Investment (except to the extent permitted by "Limitations on
Investments, Loans and Advances"); provided, that "Restricted Payments" shall
not include any payment described in (a), (b) or (c) above made by a Subsidiary
to the Company or to a Wholly-Owned Recourse Subsidiary of the Company.
Notwithstanding the foregoing, Restricted Payment shall not include any
Permitted Payment.
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"Restricted Subsidiary" means (a) any Joint Venture in which the Company or
any of its Subsidiaries holds a 50% or less interest or (b) any Subsidiary
which is not a Wholly-Owned Recourse Subsidiary or (c) any Subsidiary subject
to consensual restrictions, other than pursuant to the Credit Facility, direct
or indirect, on the declaration or payment of dividends or similar
distributions by that Subsidiary to the Company or any other Consolidated
Subsidiary of the Company.
"Sale and Leaseback Transaction" means, with respect to any Person, an
arrangement with any bank, insurance company or other lender or investor or to
which such lender or investor is a party, providing for the leasing by such
Person or any of its Subsidiaries of any property or asset of such Person or
any of its Subsidiaries which has been or is being sold or transferred by such
Person or such Subsidiary to such lender or investor or to any person to whom
funds have been or are to be advanced by such lender or investor on the
security of such property or asset.
"Security Documents" means, collectively, (i) the Mortgages, (ii) the
Security Agreements, (iii) the Subsidiary Guarantees and (iv) the Collateral
Agency and Intercreditor Agreement.
"Subsidiary" means, with respect to any Person, any corporation or other
entity of which 50% or more of the Capital Stock or other ownership interests
having ordinary voting power to elect a majority of the board of directors or
other persons performing similar functions are at the time directly or
indirectly owned by such Person.
"Trade Payables" means accounts payable or any other indebtedness or monetary
obligations to trade creditors created or assumed by the Company or its
Subsidiaries in the ordinary course of business in connection with the
obtaining of materials or services.
"Trust Moneys" means all cash or Cash Equivalents received by the Collateral
Agent (a) as Net Cash Proceeds received by the Company and its Subsidiaries
from Asset Sales to be subject to the Lien of the Security Documents in
accordance with "--Restrictions on Asset Sales"; or (b) Condemnation Proceeds
with respect to all or any part of the Collateral; or (c) Net Insurance
Proceeds with respect to all or any part of the Collateral; or (d) as proceeds
of any other sale or other disposition of all or any part of the Collateral by
or on behalf of the Collateral Agent or any collection, recovery, receipt,
appropriation or other realization of or from all or any part of the Collateral
pursuant to the Security Documents or otherwise.
"U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America, the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America, which, in either case,
are not callable or redeemable at the option of the issuer thereof, and shall
also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act) as custodian with respect to any such U.S.
Government Obligation or a specific payment of principal of or interest on any
such U.S. Government Obligation held by such custodian for the account of the
holder of such depository receipt; provided, that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal of or interest on the U.S. Government Obligation evidenced by such
depository receipt.
"Wholly-Owned Recourse Subsidiary" means a Wholly-Owned Subsidiary that is a
Recourse Subsidiary.
"Wholly-Owned Subsidiary" means, with respect to any Person, a Subsidiary of
which at least 95% of the Capital Stock (other than any director's qualifying
stock), or in the case of a non-corporate Subsidiary, other equity interests
having ordinary voting power for the election of directors or other governing
body of such Subsidiary, is owned by such Person or another Wholly-Owned
Subsidiary of such Person.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT FACILITY
The following summary of certain provisions of the Credit Facility is
generalized, does not purport to be complete, and is subject to and is
qualified in its entirety by reference to the provisions of the Credit
Facility, a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. Capitalized terms that are used
but not otherwise defined herein have the meanings assigned to them in the
Credit Facility and those definitions are incorporated herein by reference.
General. The Company amended and restated the Credit Facility on November 23,
1993. The Credit Facility provides that at any one time, the Company may borrow
up to the lesser of $30 million and the then current Borrowing Base under the
Credit Facility. The Borrowing Base is based on a percentage of the Company's
inventory and accounts receivable which must qualify for inclusion therein
under certain tests contained in the Credit Facility. Up to $10 million of the
Credit Facility is available for the issuance of standby letters of credit,
provided that the aggregate Loans and letters of credit outstanding under the
Credit Facility do not exceed $30 million or the Borrowing Base, whichever is
less. On December 31, 1993, the Borrowing Base under the Credit Facility would
have been $30.0 million. The Credit Facility will terminate on November 30,
1996. On such termination date, all amounts outstanding under the Credit
Facility will be due and payable together with any and all accrued interest
thereon to such date. Borrowings under the Credit Facility will be used by the
Company to repay certain outstanding indebtedness, to provide working capital,
to finance investments in stock (subject to certain limitations) or
acquisitions of assets of third parties (subject to certain limitations) and
for other general corporate purposes.
Interest. The Company will pay interest on outstanding amounts under Loans
comprising any ABR Borrowing at a rate per annum equal to the Alternate Base
Rate plus 1.0%. The Company will pay interest on amounts outstanding under
Loans comprising any Eurodollar Borrowing at a rate per annum equal to the
Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus
2.0%.
To the extent permitted by law, the Company will pay default interest on such
defaulted amount for any default in the payment of the principal of or interest
on any Loan or any other amount becoming due under the Credit Facility, by
acceleration or otherwise, at a rate per annum equal to the rate at the time
applicable to ABR Borrowings plus 2%.
Security. The Loans will be secured by a first priority perfected security
interest in the inventory and accounts receivable of the Company.
Certain Covenants. The Credit Facility contains numerous operating and
financial covenants, including, without limitation, the following:
The Company and its Recourse Subsidiaries shall maintain a ratio of
Current Assets to Current Liabilities, on a Consolidated basis, equal to or
greater than 1.8 to 1. For the fiscal quarter ended December 31, 1993 and
the fiscal year ended September 30, 1993, the Company's Current Ratio on a
pro forma basis (assuming completion of the Offering) would have been 3.26
to 1.00 and 3.65 to 1.00, respectively.
The Company and its Recourse Subsidiaries shall maintain a Tangible Net
Worth, computed on a Consolidated basis, at any time, equal to or in excess
of the sum of (i) $44 million plus (ii) 50% of Net Income for the fiscal
year ended September 30, 1993, and each fiscal year which shall have ended
after such date (but excluding any fiscal year for which Net Income is
negative). For the fiscal quarter ended December 31, 1993 and the fiscal
year ended September 30, 1993, the Company's Tangible Net Worth on a pro
forma basis (assuming completion of the Offering) would have been $51.0
million and $52.7 million, respectively.
The Company and its Recourse Subsidiaries shall maintain a total
Indebtedness to Capitalization Ratio, computed on a Consolidated basis, of
.65 to 1.00 or less. For the fiscal quarter ended December 31, 1993 and the
fiscal year ended September 30, 1993, the Company's total Indebtedness to
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<PAGE>
Capitalization Ratio on a pro forma basis (assuming completion of the
Offering) would have been .60 to 1.00 and .58 to 1.00, respectively.
The Company and its Recourse Subsidiaries shall maintain a ratio of
Consolidated Cash Flow Available for Fixed Charges to Consolidated Fixed
Charges (the "Interest Expense Coverage Ratio") from and including October
1, 1993, through and including December 31, 1993 (based only on such
period), of .50 to 1.00; from and including January 1, 1994, through and
including March 31, 1994 (based only on such period), of .75 to 1.00; from
and including April 1, 1994, through and including June 30, 1994 (based
only on such period), of 1.00 to 1.00; from and including July 1, 1994,
through and including September 30, 1994 (based only on such period), of
1.25 to 1.00; from and including October 1, 1994, through and including
December 31, 1994 (based only on such period), of 1.50 to 1.00; from and
including January 1, 1995, through and including March 31, 1995 (computed
on a rolling 2 quarter basis), of 1.60 to 1.00; from and including April 1,
1995, through and including June 30, 1995 (computed on a rolling 3 quarter
basis), of 1.60 to 1.00; from and including July 1, 1995, through and
including September 30, 1995 (computed on a rolling 4 quarter basis), of
1.60 to 1.00 and thereafter (computed on a rolling 4 quarter basis), of
1.80 to 1.00. For the fiscal quarter ended December 31, 1993 and the fiscal
year and quarter ended September 30, 1993, the Company's Interest Expense
Coverage Ratio on a pro forma basis (assuming completion of the Offering)
would have been 1.15 to 1.00, .81 to 1.00 and .79 to 1.00, respectively.
See "Prospectus Summary--Summary Financial Information" and "Selected
Financial Data" for the Ratio of EBITDA to Net Interest Expense.
The Company shall not amend or modify the Indenture or the First Mortgage
Notes issued pursuant thereto without the prior written consent of the
Required Lenders if such amendment or modification would adversely affect
the interests of the Lenders.
In addition, the Credit Facility includes the following covenants: (i)
requirements that the Company deliver to the Agent (a) financial information,
(b) certified quarterly and audited annual financial statements, (c) periodic
Borrowing Base certificates, (d) compliance certificates and (e) other
materials as specified by the Agent or any Lender, (ii) requirements that the
Company and its subsidiaries maintain their corporate existence, (iii)
requirements for the payment and discharge by the Company of its and its
subsidiaries' obligations and indebtedness, (iv) requirements for the
maintenance by the Company of its books and records, (v) requirements for the
Company and its subsidiaries to deliver to the Agent notice of certain
occurrences, (vi) requirements for the perfection of liens for the benefit of
the Lenders, (vii) requirements for the compliance with laws and regulations by
the Company and it subsidiaries including the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), (viii) requirements for the Company
to maintain certain insurance coverage, (ix) prohibitions against the
incurrence of indebtedness by the Company and its subsidiaries, subject to
certain exceptions, (x) prohibitions against the Company and its subsidiaries
granting liens to secure obligations to parties other than the Agent, subject
to certain exceptions, (xi) limitations on the Company's and its subsidiaries'
sales of assets and payment of dividends and distributions, (xii) prohibitions
on changes in the business of the Company or its subsidiaries, (xiii)
restrictions on mergers and acquisitions, loans and investments, capital
expenditures and transactions with affiliates by the Company and its
subsidiaries, (xiv) prohibitions on sale and lease-back transactions, (xv)
prohibitions on acts or omissions by the Company or any subsidiary thereof
constituting a default or an event of default under any loan document or any
other contract, lease, mortgage or instrument, unless such contract, lease,
mortgage or instrument is non-recourse, (xvi) limitations on the incurrence of
termination or withdrawal liability under ERISA by the Company or any
subsidiary thereof and (xvii) requirements that the proceeds of the Loans and
Letters of Credit be used for working capital, financing investments in stock
or acquisitions of assets of third parties (to the extent permitted), the
repayment of obligations under the Indenture and for other general corporate
purposes.
Defaults. The Credit Facility contains certain events of default after
expiration of applicable grace periods including, among others, (i) failure by
the Company to pay its obligations to the Lenders as they become due, (ii)
breach of any representation or warranty set forth in any Loan Document or in
any Borrowing Base Certificate, (iii) failure to observe the covenants,
conditions or agreements set forth in the
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<PAGE>
Credit Facility or any other Loan Document, (iv) a Change in Control, (v) entry
of final judgments against the Company in an aggregate amount in excess of
$1,500,000 after giving effect to reimbursement by insurance carriers, (vi)
certain events of insolvency or bankruptcy with respect to the Company and
(vii) certain ERISA violations.
Upon the occurrence of an Event of Default thereunder, the Agent may, and at
the request of the Required Lenders shall, terminate the Credit Facility,
declare all obligations thereunder to be due and payable, exercise all rights
and remedies available under applicable law and revoke the Company's right to
use any cash collateral in which any Lender has an interest.
Consents/Waivers and Amendments. The provisions of the Credit Facility may
not be waived, amended or modified without the prior written consent of Lenders
holding Loans representing at least two-thirds of the aggregate principal
amount of Loans outstanding or, if no Loans are outstanding, Lenders having
Commitments representing at least two-thirds of the aggregate Commitments,
except that certain events, such as changing the principal amount of, or
extending the maturity date of, any payment of principal or interest with
respect to a Loan, require the consent of each Lender.
Certain Definitions.
"Capitalization" for any person means the sum of (i) such person's
Indebtedness plus (ii) such person's Tangible Net Worth.
"Consolidated Cash Flow Available For Fixed Charges" means, with respect
to the Company and its Recourse Subsidiaries, computed on a Consolidated
basis for any period, the sum of (i) Net Income for such period, (ii)
Interest Expense for such period, (iii) Federal, state and local income and
franchise taxes deducted from revenue in determining such Net Income, and
(iv) depreciation and amortization deducted from revenue in determining
such Net Income.
"Consolidated Fixed Charges" means, with respect to the Company and its
Recourse Subsidiaries, computed on a Consolidated basis for any period, the
Interest Expense incurred in such period.
"Net Income" means, with respect to the Company and its Recourse
Subsidiaries for any period, (a) net revenues and other proper income for
such period minus (b) the aggregate for such period of, without
duplication, (i) costs of goods sold, (ii) Interest Expense, (iii)
operating expenses, (iv) selling, general and administrative expenses, (v)
taxes, (vi) depreciation and amortization, (vii) any other items that are
treated as expenses under GAAP, but excluding from the definition of Net
Income any non-cash extraordinary gains or losses (including the effect of
the adoption of Financial Accounting Standards No. 106 and 109) and (viii)
excluding payments made with respect to premium on the prepayment under the
Indenture for the 14.75% Notes, all computed on a Consolidated basis in
accordance with GAAP consistently applied.
"Tangible Net Worth" means, with respect to any person at any time, (i)
the sum of such person's capital stock, capital in excess of par or stated
value of shares of its capital stock, retained earnings and any other
account principles which, in accordance with GAAP, constitute stockholders'
equity, less (ii) treasury stock and any minority interest in Subsidiaries,
less (iii) the amount of all assets reflected as goodwill, patents,
research and development and all other assets required to be classified as
intangibles in accordance with GAAP and less (iv) the amount of the write-
up in the value of any asset above the cost or depreciated cost thereof to
such person.
TULSA AGREEMENT
The Company is party to a purchase money facility relating to its Tulsa
stocking location (the "Tulsa Agreement"). The principal amount outstanding
under the Tulsa Agreement as of December 31, 1993 is $0.9 million. The Tulsa
Agreement contains substantially the same covenants as the Credit Facility and
provides that an occurrence of an event of default under the Credit Facility or
the First Mortgage Notes will trigger a default under the Tulsa Agreement. In
addition, the Tulsa Agreement is secured by a second priority security interest
in the Company's inventory and accounts receivable.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING SUMMARY OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF
OWNERSHIP AND DISPOSITION OF THE FIRST MORTGAGE NOTES PURSUANT TO THIS OFFERING
IS BASED ON THE TAX CODE, AS AMENDED TO THE DATE HEREOF, EXISTING AND PROPOSED
TREASURY REGULATIONS AND APPLICABLE JUDICIAL AND ADMINISTRATIVE DETERMINATIONS,
ALL OF WHICH ARE SUBJECT TO CHANGE AT ANY TIME BY LEGISLATIVE, JUDICIAL OR
ADMINISTRATIVE ACTION, POSSIBLY WITH RETROACTIVE EFFECT. THIS SUMMARY DEALS
ONLY WITH FIRST MORTGAGE NOTES HELD AS CAPITAL ASSETS WITHIN THE MEANING OF
SECTION 1221 OF THE TAX CODE BY HOLDERS WHO ARE THE ORIGINAL PURCHASERS OF THE
FIRST MORTGAGE NOTES AND, EXCEPT AS NOTED, DOES NOT APPLY TO ANY SUBSEQUENT
PURCHASERS. THE TAX TREATMENT OF THE HOLDERS OF THE FIRST MORTGAGE NOTES MAY
VARY DEPENDING UPON THEIR PARTICULAR SITUATIONS. CERTAIN HOLDERS (INCLUDING
INSURANCE COMPANIES, TAX-EXEMPT ORGANIZATIONS, FINANCIAL INSTITUTIONS, BROKER-
DEALERS, FOREIGN ENTITIES AND INDIVIDUALS WHO ARE NOT CITIZENS OR RESIDENTS OF
THE UNITED STATES) MAY BE SUBJECT TO SPECIAL RULES NOT DISCUSSED BELOW. EACH
PURCHASER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF FIRST MORTGAGE NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS,
AND ANY RECENT CHANGES IN APPLICABLE LAWS.
STATED INTEREST
A holder of a First Mortgage Note using the accrual method of accounting for
income tax purposes generally will be required to include interest in ordinary
income as such interest accrues, while a cash basis holder will be required to
include interest in income when cash payments are received (or made available
for receipt) by such holder.
DISPOSITION OF A FIRST MORTGAGE NOTE
In general, the holder of a First Mortgage Note will recognize gain or loss
upon the sale, exchange, retirement or other disposition of the First Mortgage
Note measured by the difference between the amount of cash and the fair market
value of property received (except to the extent the holder recognizes ordinary
income attributable to the payment of accrued interest), and the holder's tax
basis for the First Mortgage Note. Subject to the market discount rules
discussed below, applicable to subsequent purchasers of the First Mortgage
Notes, the gain or loss on the sale or redemption of a First Mortgage Note will
be long-term capital gain or loss, provided that the First Mortgage Note was
held as a capital asset and had been held for more than one year.
MARKET DISCOUNT ON RESALE
Purchasers of the First Mortgage Notes should be aware that their ability to
resell such Notes may be affected by the market discount provisions of the Tax
Code. These rules generally provide that if a subsequent holder of a First
Mortgage Note purchases it at a market discount in excess of a statutorily
defined de minimis amount, and thereafter recognizes gain upon a disposition
(including a partial redemption) of the First Mortgage Note, the lesser of such
gain or the portion of the market discount that accrued while the First
Mortgage Note was held by such holder will be treated as ordinary interest
income, rather than capital gain, at the time of the disposition. The rules
also provide that a holder who acquires a First Mortgage Note at a market
discount may be required to defer a portion of any interest expense that may
otherwise be deductible on any indebtedness incurred or maintained to purchase
or carry such First Mortgage Note until the holder disposes of such First
Mortgage Note in a taxable transaction. If a holder of a First Mortgage Note
elects to include market discount in income currently, both of the foregoing
rules would not apply. Such an election, once made, applies to all market
discount obligations acquired on or after the first day of the first taxable
year to which the election applies, and may not be revoked without the consent
of the Internal Revenue Service.
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BACKUP WITHHOLDING
Interest paid to a holder of a First Mortgage Note will ordinarily not be
subject to withholding of federal income taxes. Withholding of such tax at a
rate of 31 percent may be required, however, by reason of events specified in
section 3406 of the Tax Code, which events include a failure of a holder to
supply the Company or its agent with such holder's "Taxpayer Identification
Number." Such "backup" withholding may also apply to a holder who is otherwise
exempt from backup withholding if such holder fails properly to document his
exempt status. Each holder of a First Mortgage Note will be asked to provide
and certify his correct Taxpayer Identification Number or otherwise to document
his exempt status.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") between the Company and the Underwriter, the
Company has agreed to sell to the Underwriter, and the Underwriter has agreed
to purchase, the entire principal amount of the First Mortgage Notes.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all the First Mortgage
Notes offered hereby if any of the First Mortgage Notes are purchased. The
Company has been advised by the Underwriter that it proposes initially to offer
the First Mortgage Notes to the public at the public offering price set forth
on the cover page of this Prospectus, and to certain dealers at such price less
a discount not in excess of % of the principal amount of the First Mortgage
Notes. The Underwriter may allow, and such dealers may reallow, a concession to
certain other dealers not in excess of % of the principal amount of the First
Mortgage Notes. After the initial public offering, the public offering price,
discount and concession may be changed.
The First Mortgage Notes are a new issue of securities with no established
trading market. The Company does not intend to apply for listing of the First
Mortgage Notes on a national securities exchange, but has been advised by the
Underwriter that the Underwriter intends to make a market in the First Mortgage
Notes, as permitted by applicable laws and regulations. No assurance can be
given, however, that the Underwriter will make a market in the First Mortgage
Notes or as to the liquidity of, or the trading market for, the First Mortgage
Notes.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments which the Underwriter may be required to make in respect thereof.
The Underwriter and its affiliates, Chemical Bank and Texas Commerce Bank,
have in the past engaged and continue to engage in transactions with, and
perform services for, the Company, Quexco, RSR, BSPL and Howard M. Meyers in
the ordinary course of business. Chemical Bank, in its capacities as agent and
lender, is party to the Credit Facility. See "Description of Certain
Indebtedness--Credit Facility."
LEGAL MATTERS
Certain legal matters related to the First Mortgage Notes offered hereby have
been passed upon for the Company by Kaye, Scholer, Fierman, Hays & Handler, New
York, New York and for the Underwriter by Simpson Thacher and Bartlett (a
partnership which includes professional corporations), New York, New York.
Certain other legal matters have been passed upon for the Company by Jones,
Walker, Waechter, Poitevent, Carrere & Denegre, New Orleans, Louisiana.
EXPERTS
The audited financial statements and schedules of the Company included in
this Prospectus have been audited by Arthur Andersen & Co., independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of such firm as experts in
auditing and accounting in giving such reports.
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NOTICE TO CALIFORNIA PURCHASERS
The First Mortgage Notes offered hereby will be sold in California pursuant
to a limited qualification obtained from the California Department of
Corporations under the California Corporate Securities Law of 1968. Pursuant to
the terms of such limited qualification, the First Mortgage Notes may only be
sold to the following classes of purchasers (and each such purchaser in making
purchase of a First Mortgage Note will be deemed to have represented to, and to
have agreed with, the Underwriter that it is such a purchaser):
A. any bank, any savings and loan association, any trust company, any
insurance company, any investment company registered under the Investment
Company Act of 1940, any pension or profit-sharing trust (other than a
pension or profit-sharing trust of the Company, a self-employed individual
retirement plan, or an individual retirement account);
B. any organization described in Section 501(c)(3) of the Tax Code, as
amended December 29, 1981, which has total assets (including endowment,
annuity and life income funds) of not less than $5,000,000 according to its
most recent audited financial statement, any corporation which has a net
worth on a consolidated basis according to its most recent audited
financial statement of not less than $14,000,000, any wholly owned
subsidiary of a person described in (i) and (ii);
C. the Federal Government, any agency or instrumentality of the Federal
Government, any corporation wholly owned by the Federal Government, any
state, any city, city and county, or county, or any agency or
instrumentality of a state, city, city and county, or county, or any state
university or state college, and any retirement system for the benefit of
employees of any person described in (iii);
D. any "accredited investor", as defined in Rule 501(a) under the
Securities Act;
E. any person who purchases at least $1,000,000 aggregate principal
amount of the First Mortgage Notes; and,
F. any person who (a) has an annual income of at least $65,000 and a net
worth of at least $250,000, or (b) has a net worth of at least $500,000. If
such person is a natural person, such person's net worth shall be
determined by excluding such person's home, home furnishings and personal
automobiles, if any. If such person is not a natural person, (1) annual
income shall be determined on a consolidated basis for such person's last
fiscal year by taking such person's net income and adding back Federal and
state income taxes, depreciation and amortization, and extraordinary items
and (2) net worth shall be determined on a consolidated basis for such
person's last fiscal year by taking such person's total assets and
subtracting therefrom such person's total liabilities.
If any of the foregoing classes of purchasers is purchasing the First
Mortgage Notes on behalf of a beneficial owner in California through the
exercise of investment control or discretion, where such beneficial owner is
not one of the purchasers described in (A) through (F) above, such purchaser
exercising such investment control or discretion must reasonably believe that
such beneficial owner has either (a) an annual income of at least $50,000 and a
net worth of at least $50,000, or (b) a net worth of at least $125,000. If such
beneficial owner is a natural person, such person's net worth shall be
determined by excluding such person's home, home furnishings and personal
automobiles, if any. If such beneficial owner is not a natural person, (1)
annual income shall be determined on a consolidated basis for such person's
last fiscal year by taking such person's net income and adding back state and
Federal income taxes, depreciation and amortization, and extraordinary items
and (2) net worth shall be determined on a consolidated basis for such person's
last fiscal year by taking such person's total assets and subtracting therefrom
such person's total liabilities.
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INDEX TO FINANCIAL STATEMENTS
BAYOU STEEL CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Balance Sheets as of September 30, 1993 and 1992.......................... F-3
Statements of Operations for the years ended September 30, 1993, 1992 and
1991..................................................................... F-4
Statements of Cash Flows for the years ended September 30, 1993, 1992 and
1991..................................................................... F-5
Statements of Changes in Equity for the years ended September 30, 1993,
1992 and 1991............................................................ F-6
Notes to Financial Statements............................................. F-7
Balance Sheets as of December 31, 1993 (unaudited) and as of September 30,
1993..................................................................... F-15
Statements of Income (Loss) for the three months ended December 31, 1993
and 1992 (unaudited)..................................................... F-16
Statements of Cash Flows for the three months ended December 31, 1993 and
1992 (unaudited)......................................................... F-17
Notes to Financial Statements............................................. F-18
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Bayou Steel Corporation:
We have audited the accompanying balance sheets of Bayou Steel Corporation (a
Delaware corporation) as of September 30, 1993 and 1992, and the related
statements of income (loss), cash flows, and changes in equity for the years
ended September 30, 1993, 1992, and 1991. 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 Bayou Steel Corporation as of
September 30, 1993 and 1992 and the results of its operations and its cash
flows for the years ended September 30, 1993, 1992, and 1991 in conformity with
generally accepted accounting principles.
Arthur Andersen & Co.
New Orleans, Louisiana
November 24, 1993
F-2
<PAGE>
BAYOU STEEL CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1993 1992
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments................ $ 517,900 $ 11,149,702
Receivables, net of allowance for doubtful accounts
of $543,000 in 1993 and $943,000 in 1992.......... 18,676,907 12,339,576
Inventories........................................ 48,486,409 53,751,954
Prepaid expenses................................... 222,277 257,058
------------ ------------
Total current assets............................. 67,903,493 77,498,290
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land............................................... 2,750,398 2,411,182
Machinery and equipment............................ 76,257,285 73,623,878
Plant and office building.......................... 14,036,845 13,825,104
------------ ------------
.................................................. 93,044,528 89,860,164
Less--Accumulated depreciation..................... 23,785,624 19,624,375
------------ ------------
Net property, plant and equipment................ 69,258,904 70,235,789
OTHER ASSETS......................................... 1,117,788 1,646,784
------------ ------------
Total assets..................................... $138,280,185 $149,380,863
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt............... $ 9,282,156 $ 391,797
Borrowings under line of credit.................... 4,000,000 --
Accounts payable................................... 17,671,926 14,837,557
Accrued liabilities................................ 4,560,249 5,101,568
------------ ------------
Total current liabilities........................ 35,514,331 20,330,922
------------ ------------
LONG-TERM DEBT....................................... 41,534,625 61,664,977
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value--
Class A: 24,271,127 authorized and
10,613,380 outstanding shares............. 106,134 106,134
Class B: 4,302,347 authorized and
2,271,127 outstanding shares.............. 22,711 22,711
Class C: 100 authorized and outstanding shares..... 1 1
------------ ------------
Total common stock............................... 128,846 128,846
Paid-in capital.................................... 44,890,554 44,890,554
Retained earnings.................................. 16,211,829 22,365,564
------------ ------------
Total stockholders' equity....................... 61,231,229 67,384,964
------------ ------------
Total liabilities and stockholders' equity....... $138,280,185 $149,380,863
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
BAYOU STEEL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES............................ $136,008,039 $119,771,725 $131,270,887
------------ ------------ ------------
COST OF SALES........................ 128,032,556 109,115,193 124,435,433
------------ ------------ ------------
GROSS PROFIT......................... 7,975,483 10,656,532 6,835,454
------------ ------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE.. 3,985,564 4,071,154 4,125,008
NON-PRODUCTION STRIKE EXPENSES....... 3,162,325 -- --
------------ ------------ ------------
827,594 6,585,378 2,710,446
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense................... (8,260,775) (8,976,619) (8,821,364)
Interest income.................... 192,821 485,557 638,189
------------ ------------ ------------
Miscellaneous...................... 501,084 554,015 901,699
------------ ------------ ------------
(7,566,870) (7,937,047) (7,281,476)
------------ ------------ ------------
INCOME (LOSS) BEFORE TAXES &
EXTRAORDINARY GAIN.................. (6,739,276) (1,351,669) (4,571,030 )
PROVISION FOR INCOME TAXES........... -- -- --
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY
GAIN................................ (6,739,276) (1,351,669) (4,571,030)
EXTRAORDINARY GAIN................... 585,541 -- --
------------ ------------ ------------
NET INCOME (LOSS).................... $ (6,153,735) $ (1,351,669) $ (4,571,030)
============ ============ ============
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary
gain.............................. $ (.52) $ (.10) $ (.35)
Extraordinary gain................. .04 -- --
------------ ------------ ------------
Income (loss) per common share..... $ (.48) $ (.10) $ (.35)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
BAYOU STEEL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------
1993 1992 1991
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss)........................ $ (6,153,735) $(1,351,669) $(4,571,030)
Extraordinary gain................... (585,541) -- --
Depreciation and amortization........ 4,616,286 4,308,936 3,803,291
Provision for losses on accounts
receivable.......................... (174,994) (233,025) 373,323
Changes in working capital:
(Increase) decrease in receivables.. (6,162,337) 2,219,855 2,338,345
Decrease (increase) in inventories.. 5,265,545 (3,740,480) 7,765,127
Decrease (increase) in prepaid
expenses........................... 34,781 92,839 (7,567)
Increase (decrease) in accounts
payable............................ 2,834,369 1,517,447 (5,326,494)
(Decrease) increase in accrued
liabilities........................ (541,319) 845,253 1,238,887
------------ ----------- -----------
Net cash (used in) provided by
operations........................ (866,945) 3,659,156 5,613,882
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Addition of property, plant and
equipment........................... (3,184,364) (3,234,659) (7,374,083)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit...... 4,000,000 -- --
Payments of long-term debt........... (10,836,789) (625,887) (5,691,567)
Proceeds from issuance of long-term
debt................................ 256,296 327,214 2,098,232
(Payment of) accrued interest on
unpaid dividends.................... -- -- (1,490,918)
(Increase) in other assets........... -- -- (41,677)
------------ ----------- -----------
Net cash used in financing
activities........................ (6,580,493) (298,673) (5,125,930)
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS...................... (10,631,802) 125,824 (6,886,131)
CASH AND CASH EQUIVALENTS, beginning
balance............................... 11,149,702 11,023,878 17,910,009
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, ending
balance............................... $ 517,900 $11,149,702 $11,023,878
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
BAYOU STEEL CORPORATION
STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------ PAID-IN RETAINED STOCKHOLDERS'
CLASS A CLASS B CLASS C CAPITAL EARNINGS EQUITY
-------- ------- ------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BEGINNING BALANCE,
October 1, 1990........ $106,134 $22,711 $ 1 $44,890,554 $28,288,263 $73,307,663
Net loss.............. -- -- -- -- (4,571,030) (4,571,030)
-------- ------- ---- ----------- ----------- -----------
ENDING BALANCE,
September 30, 1991..... 106,134 22,711 1 44,890,554 23,717,233 68,736,633
Net loss.............. -- -- -- -- (1,351,669) (1,351,669)
-------- ------- ---- ----------- ----------- -----------
ENDING BALANCE,
September 30, 1992..... 106,134 22,711 1 44,890,554 22,365,564 67,384,964
Net loss.............. -- -- -- -- (6,153,735) (6,153,735)
-------- ------- ---- ----------- ----------- -----------
ENDING BALANCE,
September 30, 1993..... $106,134 $22,711 $ 1 $44,890,554 $16,211,829 $61,231,229
======== ======= ==== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
BAYOU STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1993 AND 1992
1. OWNERSHIP:
Bayou Steel Corporation (of LaPlace) was incorporated in Louisiana in 1979.
On September 5, 1986, Bayou Steel Acquisition Corporation (BSAC) acquired
substantially all of the capital stock of Bayou Steel Corporation (of LaPlace)
from the former stockholders (the Acquisition) for $75,343,000. Simultaneously
with the Acquisition, BSAC merged into Bayou Steel Corporation (of LaPlace)
(the Company) with the Company being the surviving corporation. The Company
reincorporated as a Delaware corporation on July 19, 1988 and changed its name
from Bayou Steel Corporation (of LaPlace) to Bayou Steel Corporation on August
3, 1988.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INVENTORIES
Inventories are carried at the lower of cost (last-in, first-out) or market
except mill rolls, operating supplies, and other which are stated at average
cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment acquired as part of the Acquisition was
recorded based on the purchase price (see Note 1). Betterments and improvements
on property, plant and equipment are capitalized at cost. Interest during
construction of significant additions is capitalized. Interest of $115,000,
$107,000 and $264,000 was capitalized during the years ended September 30,
1993, 1992 and 1991, respectively. Repairs and maintenance are expensed as
incurred. Depreciation is provided on the units-of-production method for
machinery and equipment and on the straight-line method for buildings over an
estimated useful life of 30 years.
STATEMENT OF CASH FLOWS
The Company considers investments purchased with an original maturity of
generally three months or less to be cash equivalents.
Cash payments for interest and Federal income taxes during the three years
ended September 30, were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- -----------
<S> <C> <C> <C>
Interest...................................... $8,444,066 $9,083,712 $10,792,024
Income taxes.................................. -- -- --
</TABLE>
TAXES
The Company has not incurred income tax expense for fiscal 1993, 1992 and
1991 due to a net loss in each of these years.
CREDIT RISK
The Company extends credit to its customers primarily on 30 day terms and
encourages discounting. The Company believes that the credit risk is minimal
due to the ongoing review of its customers' financial
F-7
<PAGE>
BAYOU STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
conditions and its requirement of letters of credit on some orders. Also, the
Company invests its excess cash in high-quality short-term financial
instruments.
OPERATING LEASE COMMITMENTS
The Company has no significant operating lease commitments that would be
considered material to the financial statement presentation.
3. INVENTORIES:
Inventories, as of September 30, 1993 and 1992 consisted of the following:
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Scrap steel........................................ $ 3,187,963 $ 3,449,093
Billets............................................ 3,918,223 3,830,571
Finished product................................... 25,242,294 25,920,243
LIFO adjustments................................... (324,303) 3,764,072
----------- -----------
32,024,177 36,963,979
Mill rolls, operating supplies, and other.......... 16,462,232 16,787,975
----------- -----------
$48,486,409 $53,751,954
=========== ===========
</TABLE>
Decrements in the last-in, first-out ("LIFO") inventories had the effect of
decreasing net loss by $124,000 or $0.01 per share in fiscal 1993. There was an
increment in the last-in, first-out inventories in fiscal 1992. At September
30, 1993 and 1992, the first-in, first-out ("FIFO") inventories were $32.3
million and $33.2 million, respectively. A lower of cost or market evaluation
of the carrying value of inventory was done at the end of each fiscal year. For
all years presented, market value was in excess of the carrying value of the
LIFO and FIFO inventories.
4. PROPERTY, PLANT AND EQUIPMENT:
Depreciation expense during the years ended September 30, 1993, 1992 and 1991
was allocated as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Inventory.................................. $ -- $ 87,193 $ --
Cost of sales.............................. 4,156,851 3,884,913 3,467,871
Selling, general and administrative........ 4,398 4,347 4,326
---------- ---------- ----------
$4,161,249 $3,976,453 $3,472,197
========== ========== ==========
</TABLE>
5. OTHER ASSETS:
Other assets consist of costs associated with the issuance of the Senior
Secured Notes and the line of credit (see Notes 6 and 7) which are being
amortized over the lives of the related debt. Amortization expense was
approximately $458,000, $332,000 and $331,000 for the years ended September 30,
1993, 1992 and 1991, respectively.
F-8
<PAGE>
BAYOU STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT:
Long-term debt of the Company as of September 30, 1993 and 1992 included the
following:
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Senior Secured Notes (see below).................... $48,900,000 $60,000,000
Other notes payable, due monthly, bearing interest
from 8.5% to 10.50% secured by Company assets...... 1,916,781 2,056,774
----------- -----------
50,816,781 62,056,774
Less--current maturities............................ 9,282,156 391,797
----------- -----------
$41,534,625 $61,664,977
=========== ===========
</TABLE>
The Senior Secured Notes (the Notes) are secured by a mortgage (the Mortgage)
covering real property, plant and equipment. The Notes bear interest at the
nominal rate of 14.75% per annum (subject to increase as stated below) payable
on March 15 and September 15 of each year. If operating income, as defined,
plus depreciation and amortization, exceeds $20,000,000 for any fiscal year
ending September 30, the interest rate for the following calendar year only is
to be increased by 0.02% for each $50,000 of such excess. The nominal interest
rate and such excess rate cannot exceed a maximum rate of 20.75% per annum if
the Notes remain secured by the Mortgage on February 15 of the year for which
the excess interest rate is being determined or 23.50% per annum if on such
date the Notes are no longer secured by the Mortgage. For fiscal 1993 and 1992,
the Company accrued interest at a rate of 14.75%.
The Notes may be redeemed, at the Company's option, in whole or in part at
specified redemption prices plus accrued interest to the date of redemption.
This redemption price was 115% of principal amount at September 30, 1993 and is
to decline at a rate of 5% per year. Beginning October 1, 1995, the outstanding
principal can be redeemed at par. The Company is required to redeem $9,000,000
of the Notes on March 15 in each of the years 1994, 1995, 1996 and 1997, with a
$24,000,000 balloon payment due March 15, 1998. During fiscal 1993, the Company
purchased $11.1 million in principal of the Notes at a net discount. While the
Company has the right to apply the purchased Notes to any redemption date, it
has not decided which redemption the purchased Notes will be applied against.
The $9.0 million principal payment due in March 1994 has been classified as a
current liability on the Company's balance sheet.
The result of the Note purchases at a net discount, reduced by the write-off
of the related unamortized deferred cost (see Note 5), has been reflected in
the accompanying statement of income as an extraordinary gain. There was no tax
effect related to this transaction.
7. SHORT-TERM BORROWING ARRANGEMENT:
On June 28, 1989, the Company arranged a five-year $40,000,000 line of credit
with a group of banks which will be used for general corporate purposes. The
Company can borrow against the line of credit at market rates. The amount that
may be advanced to the Company is limited to $40,000,000 less the balance of
outstanding letters of credit and unpaid loans under the line. Based on these
criteria, the amount available as of September 30, 1993 and 1992 was
$34,475,016 and $38,475,016, respectively. Amounts borrowed under the line of
credit are secured by a lien on the Company's receivables, inventory and
certain contract rights. There were no borrowings under the line of credit for
fiscal 1992 and the only borrowing for fiscal 1993 of $4,000,000 occurred on
September 15, 1993 and remained outstanding at a rate of 3.75% through
September 30, 1993.
F-9
<PAGE>
BAYOU STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On November 23, 1993, the Company entered into an amendment and restatement
of its line of credit agreement. The terms of the new agreement call for
available borrowings up to $30 million, secured by inventory and accounts
receivable, at interest rates of prime plus 1% or LIBOR plus 2%.
8. INCOME TAXES:
The Company is subject to United States Federal income taxes. The primary
difference between book and tax reporting of income relates to the allocation
of the carrying cost of property, plant and equipment to operations due to (a)
different depreciation methods used for tax and financial reporting purposes,
(b) a writedown of the carrying value of property, plant and equipment to
estimated net realizable value recorded for financial reporting purposes in
prior years, and (c) the sale of tax benefits discussed below.
In 1981, the Company (pre-Acquisition) entered into lease agreements with an
unrelated corporation whereby certain tax benefits were transferred to the
unrelated corporation as allowed under the provisions of the Economic Recovery
Tax Act of 1981. These agreements, the last of which will expire in late 1996,
include various covenants not to dispose of the property covered by the
agreement and indemnification of the unrelated corporation by the former
majority stockholder against any losses which might result from a breach of the
Company's warranties and covenants, including those related to the Federal
income tax implications of the transaction. Pursuant to the Acquisition and as
a result of the merger (see Note 1) and the Mortgage, the Company agreed to
require any purchaser of the property subject to such Mortgage to take the
property subject to such agreements and to ensure that any disposition of the
property upon a foreclosure of the Mortgage would not constitute a
"disqualifying event" within the meaning of the regulations promulgated under
Section 168(f)(8) of the Internal Revenue Code as in effect prior to the
enactment of the Tax Equity and Fiscal Responsibility Act of 1982. The result
of this and other related agreements may be to limit the marketability of the
property upon a foreclosure of the Mortgage. The Company will recognize
interest income of $8.2 million and rent expense of $38.4 million for tax
reporting purposes in fiscal years 1994 through 1997 based upon the foregoing
agreements.
As of September 30, 1993, for tax purposes, the Company had net operating
loss carryforwards ("NOLs") of approximately $310.5 million and $284.5 million
available to offset against regular tax and alternative minimum tax,
respectively. Due to the fact that book and tax losses were generated in 1993,
1992 and 1991, there was no provision for income taxes in any of these years.
The NOLs will expire in varying amounts through fiscal 2008. A substantial
portion of the available NOLs, approximately $200 million, expires by fiscal
2000. In addition, the Company has $30.2 million of future tax benefits
attributable to its tax benefit lease which expires in 1996 and which may, to
the extent of taxable income in the year such tax benefit is produced, be
utilized prior to the NOLs. Even though management believes the Company will be
profitable in the future and will be able to utilize a portion of the NOLs,
management does not believe that it is likely that all of the NOLs will be
utilized. In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS 109"), which will require the Company to change its method of
accounting for income taxes for financial reporting purposes for the fiscal
year beginning October 1, 1993. FAS 109 requires, among other things,
recognition of future tax benefits, subject to a valuation allowance based on
the likelihood of realizing such benefits. Preliminary calculations indicate
that deferred tax assets of approximately $118 million (NOLs and other
temporary timing differences multiplied by the federal income tax rate) and
deferred tax liabilities of approximately $8 million will be recorded upon
adoption of FAS 109 in fiscal 1994. However, in recording these deferred
assets, FAS 109 requires the Company to determine whether it is "more-likely-
than-not" that the Company will realize such benefits and that all negative and
positive evidence be considered (with more weight given to evidence that is
"objective and verifiable") in
F-10
<PAGE>
BAYOU STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
making the determination. FAS 109 indicates that "forming a conclusion that a
valuation allowance is not needed is difficult when there is negative evidence
such as cumulative losses in recent years"; therefore, the Company has
determined that it will be required by the provisions of FAS 109 to establish a
valuation allowance for all of the recorded net deferred tax assets at the time
the standard is adopted. In view of the fact that this determination was based
primarily on historical losses with no regard for the impact of proposed
capital expenditures and business plans, future favorable adjustments to the
valuation allowance may be required if and when circumstances change and the
Company returns to profitability. Adoption of FAS 109 will have no material
adverse impact on income for financial reporting or tax purposes.
The Company and an individual controlling the current majority stockholder
agreed to indemnify the former majority stockholder for any payments required
to be made to the unrelated corporation caused by the Company's failure to
comply with the foregoing agreements. The former stockholder retains ownership
of the Company's Class C Common Stock which carries certain limited voting
rights including the holders' right to prevent certain transactions
(liquidation and certain mergers) which could result in liability to the former
majority stockholder under its indemnification to the unrelated corporation.
The Company's Class B Common Stock carries these same voting rights.
9. COMMITMENTS AND CONTINGENCIES:
CONTRACT WITH KEY EMPLOYEE
The Company entered into an employment arrangement in 1986 with the Chief
Executive Officer (CEO). The agreement provides that the CEO's annual
compensation will be limited to the higher of a specified amount or a
percentage of the Company's pretax net income earned in the previous year. The
CEO has agreed not to pursue any steel-related acquisition activities other
than through the Company, and all other acquisition activities, to the extent
required by his fiduciary duty as a direct or indirect controlling stockholder
and director of the Company, must be through the Company, giving effect to the
legal doctrine of "corporate opportunity."
EMPLOYEE STOCK OPTION PLAN
The Board of Directors and the Stockholders approved the 1991 Employees Stock
Option Plan (the "1991 Plan") for the purpose of attracting and retaining key
employees. The 1991 Plan provides for granting up to 600,000 shares of Class A
Common Stock, over a ten year period, from the Company's authorized and
unissued shares or from Treasury Stock. No options have been granted.
STRIKE
On March 21, 1993, the United Steelworkers of America Local 9121 (the
"Union") initiated a strike against the Company. Negotiations on a new contract
have continued, but differences have thus far precluded an agreement. The
Company cannot predict the impact that a new collective bargaining contract
will have on the Company's results. However, the Company believes a new
contract will not have a material effect on the Company's results. Also, the
Union has filed charges with the National Labor Relations Board alleging that
the Company has violated the National Labor Relations Act relating to its
bargaining conduct. The Company believes it has meritorious defenses to these
charges and has responded timely to all of these allegations and believes that
it has negotiated in good faith with the Union. An unfavorable decision by the
National Labor Relations Board, however, should not materially affect the
Company.
F-11
<PAGE>
BAYOU STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ENVIRONMENTAL
The Company is subject to various Federal, state and local laws and
regulations concerning the discharge of contaminants which may be emitted into
the air, discharged into waterways, and the disposal of solids and/or hazardous
wastes such as electric arc furnace dust. In addition, in the event of a
release of a hazardous substance generated by the Company, the Company could be
potentially responsible for the remediation of contamination associated with
such a release. In the past, the Company's operations in some respects have not
met all of the applicable standards promulgated pursuant to such laws and
regulations. At this time, the Company believes that it is in compliance in all
material respects with applicable environmental requirements and that the cost
of such continuing compliance will not have a material adverse effect on the
Company's competitive position, operations or financial condition, or cause a
material increase in currently anticipated capital expenditures. The Company
currently has no mandated expenditures to address previously contaminated sites
and does not anticipate any infrequent or non-recurring clean-up expenditures.
Also, the Company is not designated as a Potential Responsible Party ("PRP")
under the Superfund legislation.
OTHER
The Company does not provide any post-employment or post-retirement benefits
to its employees other than those described in Note 10.
There are various claims and legal proceedings arising in the ordinary course
of business pending against or involving the Company wherein monetary damages
are sought. It is management's opinion that the Company's liability, if any,
under such claims or proceedings would not materially affect its financial
position.
10. EMPLOYEE RETIREMENT PLANS:
Effective October 1, 1991, the Company implemented two defined benefit
retirement plans (the "Plan(s)"), one for employees covered by the contracts
with the United Steelworkers of America ("hourly employees") and one for
substantially all other employees ("salaried employees"). The Plan for the
hourly employees provides benefits of stated amounts for a specified period of
service. The Plan for the salaried employees provides benefits based on
employees' years of service and average compensation for a specified period of
time before retirement. The Company follows the funding requirements under the
Employee Retirement Income Security Act of 1974 ("ERISA").
The net pension cost for both non-contributory Company sponsored pension
plans consists of the following components for fiscal year 1993 and 1992:
The actuarial present value of future benefit obligations:
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Vested benefit obligation.............................. $ 490,977 $ 246,271
Non-vested benefit obligation.......................... 17,960 16,593
--------- ---------
Accumulated benefit obligation......................... $ 508,937 $ 262,864
========= =========
Projected benefit obligation........................... $ 776,582 $ 369,070
Plan assets at fair value.............................. (473,305) --
--------- ---------
Funded Status.......................................... 303,277 $ 369,070
Unrecognized net loss.................................. (118,300) (82,708)
Adjustment for additional liability.................... 23,319 16,297
--------- ---------
Accrued pension liability.............................. $ 208,296 $ 302,659
========= =========
</TABLE>
F-12
<PAGE>
BAYOU STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Determination of net periodic pension cost:
<TABLE>
<S> <C> <C>
Service cost........................................... $ 336,676 $ 298,332
Interest cost.......................................... 27,216 --
Experience loss........................................ (14,203) (11,970)
Net amortization....................................... 2,838 --
Deficiency in accumulated benefit obligation........... 23,319 16,297
--------- ---------
Total net periodic pension cost........................ $ 375,846 $ 302,659
========= =========
</TABLE>
The primary actuarial assumptions used in determining the above benefit
obligation amounts were established on the September 30, 1993 and 1992
measurement dates and include a discount rate of 7.5% per annum on valuing
liabilities; long-term expected rate of return on assets of 9% per annum;
salary increases of 5% per annum for salaried employees; and an inflation rate
of 5% per annum.
11. MAJOR CUSTOMERS:
No single customer accounts for 10% or more of the total sales for the years
ended September 30, 1993, 1992 and 1991.
12. RELATED PARTY TRANSACTIONS:
SERVICE AGREEMENT WITH RELATED PARTIES
The Company and related parties controlled by a stockholder entered into a
Service Agreement dated September 5, 1986 (the Service Agreement), pursuant to
which the related parties provide certain assistance and services (research and
development, industrial and labor relations, engineering, legal, etc.) to the
Company for a fee. Costs charged for these services were approximately $87,000
for the year ended September 30, 1993, $107,000 for the year ended September
30, 1992, and $84,000 for the year ended September 30, 1991. The Service
Agreement may be terminated by either the Company or the related parties on 90
days' prior written notice to the other party.
OTHER AGREEMENTS WITH STOCKHOLDERS
The Company entered into an agreement on May 28, 1987 with a stockholder to
provide certain investment banking services to the Company over the next 7
years on a competitive, first refusal basis. Although services were provided,
no obligations were incurred in fiscal years 1993 and 1992. On June 20, 1991
and December 16, 1992, another minority shareholder entered into an arms length
success fee agreement with the Company with respect to merger and acquisition
advisory and private placement services in connection with a possible corporate
acquisition by the Company. During fiscal 1992, the Company paid $25,000 for
out-of-pocket expenses; during fiscal 1993 the Company paid $25,000 for
services under such agreement.
13. COMMON STOCK:
Income per common share is based on the average number of common shares
outstanding of 12,884,607 for the years ended September 30, 1993, 1992 and
1991, respectively.
Other than for voting rights, all classes of Common Stock have similar
rights. With respect to voting rights, Class B Common Stock has 60% and Class A
and Class C Common Stock have 40% of the votes except for special voting rights
for Class B and Class C Common Stock on liquidation and certain mergers
F-13
<PAGE>
BAYOU STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(see Note 8). The Company's ability to pay dividends is subject to restrictive
covenants under both the Indenture pursuant to which the Company's Notes were
issued and the Company's line of credit (see Notes 6 and 7).
14. MISCELLANEOUS:
Miscellaneous income/(expense) as of September 30, 1993, 1992 and 1991
included the following:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Discount earned.................................. $149,648 $211,200 $ 68,122
Allowance for doubtful accounts.................. 174,994 233,025 (373,323)
Tax abatement refund FY'90....................... -- -- 813,186
Power company refund FY'81....................... -- -- 152,950
Other income..................................... 176,442 109,790 240,764
-------- -------- --------
$501,084 $554,015 $901,699
</TABLE>
15. QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
FISCAL YEAR 1993 QUARTERS
------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net Sales.......................... $ 31,833 $ 33,408 $ 34,485 $ 36,282
Gross Profit....................... 3,634 2,040* 745 1,556
Net Income (Loss) Before
Extraordinary Gain (Loss)......... 347 (1,697) (4,078) (1,311)
Extraordinary Gain (Loss).......... 756 -- -- (170)
Net Income (Loss).................. 1,102 (1,697) (4,078) (1,481)
Income (Loss) Per Common Share
Before Extraordinary Gain (Loss).. .03 (.13) (.32) (.10)
Extraordinary Gain (Loss) Per
Common Share...................... .06 -- -- (.01)
Income (Loss) Per Common Share..... .09 (.13) (.32) (.11)
<CAPTION>
FISCAL YEAR 1992 QUARTERS
------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net Sales.......................... $ 29,211 $ 29,037 $ 31,050 $ 30,474
Gross Profit....................... 2,386 2,759 2,618 2,893
Net Income (Loss).................. (699) (352) (504) 203
Income (Loss) Per Common Share..... (.05) (.03) (.04) .02
</TABLE>
- --------
* Amount has been restated to conform with the 3rd and 4th quarter's 10-Q
presentation of strike-related expenses.
F-14
<PAGE>
BAYOU STEEL CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
DECEMBER 31, SEPTEMBER 30,
1993 1993
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments.............. $ 3,073,937 $ 517,900
Trade receivables................................ 14,096,150 18,350,338
Other receivables................................ 451,635 326,569
Inventories...................................... 53,930,823 48,486,408
Prepaid expenses................................. 802,908 222,277
------------ ------------
Total current assets........................... 72,355,453 67,903,492
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements............................ 4,124,002 4,124,002
Machinery and equipment.......................... 73,139,509 72,954,682
Plant and office building........................ 12,663,242 12,663,242
Construction in progress......................... 3,531,274 3,302,603
Less-Accumulated depreciation.................... (24,949,331) (23,785,622)
------------ ------------
Net property, plant and equipment.............. 68,508,696 69,258,907
------------ ------------
OTHER ASSETS....................................... 1,546,357 1,117,788
------------ ------------
Total assets................................... $142,410,506 $138,280,187
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................. $ 19,167,924 $ 17,671,923
Accrued liabilities.............................. 6,840,346 4,560,249
Current maturities of long-term debt............. 9,249,068 9,282,156
Borrowings under line of credit.................. 5,900,000 4,000,000
------------ ------------
Total current liabilities...................... 41,157,338 35,514,328
------------ ------------
LONG-TERM DEBT:
Senior secured notes............................. 39,900,000 39,900,000
Notes payable.................................... 1,094,865 1,634,625
------------ ------------
Total long-term debt........................... 40,994,865 41,534,625
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value--
Class A.......................................... 106,134 106,134
Class B.......................................... 22,711 22,711
Class C.......................................... 1 1
------------ ------------
Total common stock............................. 128,846 128,846
Paid-in capital.................................... 44,890,554 44,890,554
Retained earnings.................................. 15,238,903 16,211,834
------------ ------------
Total stockholders' equity..................... 60,258,303 61,231,234
------------ ------------
Total liabilities & stockholders' equity....... $142,410,506 $138,280,187
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
BAYOU STEEL CORPORATION
STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
DECEMBER 31,
------------------------
1993 1992
----------- -----------
<S> <C> <C>
NET SALES............................................. $36,778,489 $31,832,929
COST OF SALES......................................... 34,558,324 28,198,559
----------- -----------
GROSS PROFIT.......................................... 2,220,165 3,634,370
SELLING, GENERAL & ADMINISTRATIVE EXPENSES............ 889,849 1,080,693
NON-PRODUCTION STRIKE EXPENSES........................ 399,181 --
----------- -----------
OPERATING INCOME...................................... 931,135 2,553,677
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense.................................... (1,884,614) (2,224,618)
Interest income..................................... 20,447 52,321
Miscellaneous....................................... (39,899) (34,679)
----------- -----------
(1,904,066) (2,206,976)
----------- -----------
INCOME (LOSS) BEFORE TAXES AND EXTRAORDINARY GAIN..... (972,931) 346,701
PROVISION FOR INCOME TAXES............................ -- --
----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN............... (972,931) 346,701
EXTRAORDINARY GAIN, NET OF APPLICABLE INCOME TAX...... -- 755,788
----------- -----------
NET INCOME (LOSS)..................................... $ (972,931) $ 1,102,489
=========== ===========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING........... 12,884,607 12,884,607
=========== ===========
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary gain............. $ (.08) $ .03
Extraordinary gain.................................. -- .06
----------- -----------
Income (loss) per common share...................... $ (.08) $ .09
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
BAYOU STEEL CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
DECEMBER 31,
------------------------
1993 1992
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ (972,931) $ 1,102,489
Extraordinary gain................................. -- (755,788)
Depreciation and amortization...................... 1,250,086 1,277,926
Provision for losses on accounts receivable........ 112,369 90,080
Changes in working capital:
Decrease (increase) in receivables................ 4,016,754 (2,297,836)
(Increase) decrease in inventories................ (5,444,415) 1,151,286
(Increase) in prepaid expenses.................... (580,631) (533,424)
Increase (decrease) in accounts payable........... 1,496,001 (4,603,392)
Increase in accrued liabilities................... 2,280,097 1,093,228
----------- -----------
Net cash provided by (used in) operations........ 2,157,330 (3,475,431)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Addition of property, plant and equipment.......... (413,498) (1,186,777)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under line of credit..................... 1,900,000 --
Payments of long-term debt......................... (572,847) (3,786,725)
(Increase) in other assets......................... (514,948) --
----------- -----------
Net cash provided by (used in) financing activi-
ties............................................ 812,205 (3,786,725)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. 2,556,037 (8,448,933)
CASH AND CASH EQUIVALENTS, beginning balance......... 517,900 11,149,702
----------- -----------
CASH AND CASH EQUIVALENTS, ending balance............ $ 3,073,937 $ 2,700,769
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
BAYOU STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations. Although Bayou Steel Corporation (the Company) believes that
disclosures made are adequate to ensure that information presented is not
misleading, it is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's latest annual report, Form 10-K, filed with the SEC on December 13,
1993 under File Number 33-22603.
In the opinion of the Company, the accompanying unaudited financial
statements present fairly the Company's financial position as of December 31,
1993 and September 30, 1993 and the results of its operations for the three-
month periods ended December 31, 1993 and 1992 and the cash flow statements for
the three-month periods ended December 31, 1993 and 1992.
The results of operations for the three-month periods ended December 31, 1993
and 1992 are not necessarily indicative of the results for the full year.
2. INVENTORIES:
Inventories as of December 31, 1993 and September 30, 1993 consisted of the
following:
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
DECEMBER 31, SEPTEMBER 30,
1993 1993
------------ -------------
<S> <C> <C>
Scrap steel..................................... $ 4,702,655 $ 3,187,963
Billets......................................... 3,229,014 3,918,223
Finished product................................ 29,445,896 25,242,294
LIFO adjustments................................ (545,106) (324,303)
----------- -----------
$36,832,459 $32,024,177
Mill rolls, operating supplies and other........ 17,098,364 16,462,231
----------- -----------
$53,930,823 $48,486,408
=========== ===========
</TABLE>
The inventory valuations are based on LIFO estimates of year-end levels and
prices. The actual LIFO inventories will not be known until year-end quantities
and indices are determined.
Shapes, billets, scrap steel, and certain production supplies are pledged as
collateral against the Company's line of credit.
3. PROPERTY, PLANT AND EQUIPMENT:
Betterments, improvements, and additions on property, plant and equipment are
capitalized at cost. Interest during construction of significant additions is
capitalized. Interest of $15,000 and $14,000 was capitalized during the three-
month periods ended December 31, 1993 and 1992, respectively. Interest of
$115,000 was capitalized during the fiscal year ended September 30, 1993.
F-18
<PAGE>
BAYOU STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. OTHER ASSETS:
Other assets consist of costs associated with the issuance of the Senior
Secured Notes (the 14.75% Notes) and the Company's lines of credit.
Amortization expense was $86,000 and $179,000 for the three-month periods ended
December 31, 1993 and 1992. Amortization expense was $458,000 for the fiscal
year ended September 30, 1993.
5. LONG-TERM DEBT:
The Company has accrued interest on the 14.75% Notes at the rate of 14.75%
and 15.29% for the three-month periods ended December 31, 1993 and 1992,
respectively. The Company is required to redeem $9.0 million in principal of
its 14.75% Notes on March 15, 1994. The net proceeds of this Offering will be
used for the repayment of outstanding indebtedness, implementation of capital
projects and general working capital purposes.
6. SHORT-TERM DEBT:
On November 23, 1993, the Company entered into an amendment and restatement
of the line of credit agreement. The terms of the agreement call for available
borrowings up to $30 million including outstanding letters of credit. The
agreement is secured by inventory and accounts receivable at interest rates of
prime plus 1% or LIBOR plus 2%. The amount available under the line as of
December 31, 1993 was $22.6 million. There was $5.9 million borrowed under the
line as of December 31, 1993.
Maximum and average borrowings and weighted average interest rates on short-
term borrowings during the first quarter of fiscal 1994, follows:
<TABLE>
<S> <C>
Maximum borrowings outstanding................................... $5,900,000
Average borrowings outstanding................................... $4,485,000
Weighted average interest rate................................... 5.1%
</TABLE>
7. TAXES:
As of September 30, 1993, for tax purposes, the Company had net operating
loss carryforwards ("NOLs") of approximately $310.5 million and $284.5 million
available to offset against regular tax and alternative minimum tax
respectively. Due to the fact that book and tax losses were generated in 1993,
1992 and 1991, there was no provision for income taxes in any of these years.
The NOLs will expire in varying amounts through fiscal 2008. A substantial
portion of the available NOLs, approximately $200 million, expires by fiscal
2000. In addition, the Company has $30.2 million of future tax benefits
attributable to its tax benefit lease which expires in 1996 and which may, to
the extent of taxable income in the year such tax benefit is produced, be
utilized prior to the NOLs. Even though management believes the Company will be
profitable in the future and will be able to utilize a portion of the NOLs,
management does not believe that it is likely that all of the NOLs will be
utilized. In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS 109"), which was adopted beginning October 1, 1993. FAS 109
requires, among other things, recognition of future tax benefits, subject to a
valuation allowance based on the likelihood of realizing such benefits.
Deferred tax assets of approximately $118 million (NOLs and other temporary
timing differences multiplied by the federal income tax rate) and deferred tax
liabilities of approximately $8 million were recorded upon adoption of FAS 109
in the first quarter of fiscal 1994. However, in recording these deferred
assets, FAS 109 requires the Company to determine whether it is "more
F-19
<PAGE>
BAYOU STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
likely than not" that the Company will realize such benefits and that all
negative and positive evidence be considered (with more weight given to
evidence that is "objective and verifiable") in making the determination. FAS
109 indicates that "forming a conclusion that a valuation allowance is not
needed is difficult when there is negative evidence such as cumulative losses
in recent years"; therefore, the Company has determined that it is required by
the provisions of FAS 109 to establish a valuation allowance for all of the
recorded net deferred tax assets. In view of the fact that this determination
is based primarily on historical losses with no regard for the impact of
proposed capital expenditures and business plans, future favorable adjustments
to the valuation allowance may be required if and when circumstances change and
the Company returns to profitability. Adoption of FAS 109 will have no material
adverse impact on income for financial reporting or tax purposes.
8. MISCELLANEOUS:
Miscellaneous for the three-month period ended December 31, 1993 and 1992
included the following:
<TABLE>
<CAPTION>
DECEMBER 1993 DECEMBER 1992
------------- -------------
<S> <C> <C>
Discount earned.................................. $ 59,221 $ 24,561
Provision for bad debts.......................... (112,368) (90,080)
Other............................................ 13,248 30,840
--------- --------
$ (39,899) $(34,679)
========= ========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES:
STRIKE
On March 21, 1993, the United Steelworkers of America Local 9121 (the
"Union") initiated a strike against the Company. Negotiations on a new contract
have continued, but differences have thus far precluded an agreement. The
Company cannot predict the impact that a new collective bargaining contract
will have on the Company's results. However, the Company believes a new
contract will not have a material effect on the Company's results. Also, the
Union has filed charges with the National Labor Relations Board alleging that
the Company has violated the National Labor Relations Act relating to its
bargaining conduct. The Company believes it has meritorious defenses to these
charges and has responded timely to all of these allegations and believes that
it has negotiated in good faith with the Union. An unfavorable decision by the
National Labor Relations Board, however, should not materially affect the
Company.
ENVIRONMENTAL
The Company is subject to various Federal, state and local laws and
regulations concerning the discharge of contaminants which may be emitted into
the air, discharged into waterways, and the disposal of solids and/or hazardous
wastes such as electric arc furnace dust. In addition, in the event of a
release of a hazardous substance generated by the Company, the Company could be
potentially responsible for the remediation of contamination associated with
such a release. In the past, the Company's operations in some respects have not
met all of the applicable standards promulgated pursuant to such laws and
regulations. At this time, the Company believes that it is in compliance in all
material respects with applicable environmental requirements and that the cost
of such continuing compliance will not have a material adverse effect on the
Company's competitive position, operations or financial condition, or cause a
material increase in currently anticipated capital expenditures. The Company
currently has no mandated expenditures to address previously contaminated sites
and does not anticipate any infrequent or non-recurring clean-up expenditures.
Also, the Company is not designated as a Potential Responsible Party ("PRP")
under the Superfund legislation.
F-20
<PAGE>
BAYOU STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OTHER
There are various claims and legal proceedings arising in the ordinary course
of business pending against or involving the Company wherein monetary damages
are sought. It is management's opinion that the Company's liability, if any,
under such claims or proceedings would not materially affect its financial
position.
F-21
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REP-
RESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HERE-
UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMA-
TION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 3
Prospectus Summary........................................................ 4
Investment Considerations................................................. 11
Use of Proceeds........................................................... 16
Capitalization............................................................ 17
Selected Financial Data................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 29
Management................................................................ 42
Principal Stockholders.................................................... 48
Certain Related Party Transactions........................................ 51
Description of the First Mortgage Notes................................... 53
Description of Certain Indebtedness....................................... 82
Certain Federal Income Tax Consequences................................... 85
Underwriting.............................................................. 86
Legal Matters............................................................. 86
Experts................................................................... 86
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
BAYOU STEEL CORPORATION
$75,000,000
% FIRST MORTGAGE NOTES DUE 2001
-------------
PROSPECTUS
-------------
CHEMICAL SECURITIES INC.
FEBRUARY , 1994
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated (except for the Securities and
Exchange Commission registration fee and the National Association of Securities
Dealers, Inc. filing fee) fees and expenses in connection with the offering
described in this Registration Statement:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $25,862.07
National Association of Securities Dealers, Inc. filing fee...... 8,000.00
Trustee and fees................................................. 15,000.00
Blue sky filing and counsel fees and expenses....................
Printing and engraving...........................................
Accountants' fees and expense....................................
Legal fees and expenses..........................................
Rating agency fees...............................................
Miscellaneous....................................................
----------
Total.......................................................... $
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Second Restated Certificate of Incorporation (the "Charter")
provides that the Company shall, to the full extent permitted by Section 145 of
the General Corporation Law of the State of Delaware, as amended from time to
time ("DGCL"), indemnify all persons whom it may indemnify pursuant thereto. In
addition, the Charter eliminates personal liability to the Company of its
directors to the full extent permitted by Section 102(b)(7) of the DGCL. The
Company maintains policies of insurance to protect directors and officers
against certain liabilities asserted against or incurred by them in their
individual or collective capacities as directors or officers of the Company.
Section 145 of the DGCL permits a corporation to indemnify its directors and
officers against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlements actually and reasonably incurred by them in
connection with any action, suit or proceeding brought by third parties, if
such directors or officers acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful. In a derivative action, i.e., one by or in
the right of the corporation, indemnification may be made only for expenses
(including attorney fees) actually and reasonably incurred by directors and
officers in connection with the defense or settlement of an action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation unless and only
to the extent that a court shall determine that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses as a court shall
deem proper, although the court in which the action or suit was brought may
determine upon application that the defendant officers or directors are
reasonably entitled to indemnity for expenses despite such adjudication of
liability.
Section 102(b)(7) of the DGCL provides that a corporation may eliminate or
limit the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the DGCL, or (iv) for any transaction from which the
director or officer derived an improper personal benefit. No such provision
shall eliminate or limit the liability of a director or officer for any act or
omission occurring prior to the date when such provision becomes effective.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A. Exhibits
<TABLE>
<CAPTION>
NUMBER EXHIBIT
------ -------
<C> <S>
1.1 Form of Underwriting Agreement between the Company and Chemical
Securities Inc. (previously filed with this Registration Statement).
3.1 Second Restated Certificate of Incorporation of the Company
(incorporated by reference herein to Post-Effective Amendment No. 1 to
Registration Statement on Form S-1 (No. 33-10745)).
3.2 By-laws of the Company (incorporated herein by reference to
Registration Statement on Form S-1 (No. 33-10745)).
4.1 Form of Indenture (including form of First Mortgage Note) between the
Company and First National Bank of Commerce as trustee (the "Trustee")
(previously filed with Amendment No. 1 to this Registration Statement).
4.2 Form of Mortgage granted by the Company and Subsidiary Guarantors to
the Trustee (Louisiana) (previously filed with Amendment No. 1 to this
Registration Statement).
4.3 Form of Mortgage, Assignment of Rents and Leases and Security Agreement
from the Company to the Trustee (Non-Louisiana) (previously filed with
Amendment No. 1 to this Registration Statement).
4.4 Form of Mortgage, Assignment of Rents and Leases and Security Agreement
from Subsidiary Guarantors to the Trustee (Non-Louisiana) (previously
filed with Amendment No. 1 to this Registration Statement).
4.5 Form of Security Agreement between the Company and the Trustee
(previously filed with Amendment No. 1 to this Registration Statement).
4.6 Form of Subsidiaries Security Agreement between Subsidiary Guarantors
and the Trustee (previously filed with Amendment No. 1 to this
Registration Statement).
4.7 Form of Intercreditor Agreement between the Trustee and Chemical Bank,
as agent under the Credit Agreement (previously filed with Amendment
No. 1 to this Registration Statement).
4.8 Form of Subsidiary Guarantee between each recourse subsidiary of the
Company and the Trustee (previously filed with Amendment No. 1 to this
Registration Statement).
4.9 Form of Release of Federal Income Tax Ownership and Agreement between
the Trustee and the Company, Voest-Alpine A. G. and Howard M. Meyers
(previously filed with Amendment No. 1 to this Registration Statement).
5 Opinion of Kaye, Scholer, Fierman, Hays & Handler.*
10.1 Employment Letter dated July 26, 1988, between Howard M. Meyers and the
Company (incorporated herein by reference to Post-Effective Amendment
No. 1 to Registration Statement on Form S-1 (No. 33-10745)).
10.2 (i) Agreement dated November 11, 1981, between Amoco Tax Leasing I
Corporation ("Amoco") and the Company, (ii) letter dated December 7,
1981 from Voest-Alpine A.G. ("VA") and Voest-Alpine International
Corporation ("VAIC") to Amoco, and (iii) letter dated November 11, 1981
from VAIC, Honen Investissements SARL, Barzel Investissements SARL,
Anku Foundation, Raphaely Steel Investments, N.V., Landotal Properties,
Inc., Canota Investments, Ltd., S.A. and Beruga Establishment and VA to
Amoco (incorporated herein by reference to Registration Statement on
Form S-1 (No.33-10745)).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER EXHIBIT
------ -------
<C> <S>
10.3 Release of Federal Income Tax Ownership and Agreement dated September
5, 1986, among the Company, First National Bank of Commerce, Bayou
Steel Acquisition Corporation, VA and Howard M. Meyers (incorporated
herein by reference to Registration Statement on Form S-1 (No.
33-10745)).
10.4 Service Agreement dated September 5, 1986, between the Company and RSR
Corporation and the assignment by RSR Corporation of a portion of its
interest in the Service Agreement to RSR Holding Corp., now known as
Quexco Incorporated (incorporated herein by reference to Registration
Statement on Form S-1 (No.33-10745)).
10.5 Letter Agreement dated May 28, 1987 between the Company and Allen &
Company Incorporated relating to investment banking services
(incorporated herein by reference to Registration Statement on Form S-1
(No.33-10745)).
10.6 Agreement dated June 20, 1991 among the Company, MMG Patricof & Co.,
Inc., and MMG Placement Corp. relating to investment banking services
(incorporated herein by reference to Post-Effective Amendment No. 4 to
Registration Statement on Form S-1 (No. 33-10745)).
10.7 Agreement dated December 16, 1992 between the Company and Patricof &
Co. Capital Corp. relating to investment banking services (previously
filed with Amendment No. 1 to this Registration Statement).
10.8 Warehouse (Stocking Location) Leases.
(i) Leetsdale, Pennsylvania (incorporated herein by reference to
Registration Statement on Form S-1 (No. 33-10745)).
(ii) Catoosa, Oklahoma (incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1989).
10.9 Tax Abatement Agreement dated July 10, 1985 between the Company and the
Louisiana Board of Commerce and Industry (incorporated herein by
reference to Registration Statement on Form S-1 (No. 33-22603)).
10.10 Tax Abatement Renewal Agreement dated August 22, 1990 between the
Company and the State of Louisiana Board of Commerce and Industry
(incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1989).
10.11 Credit Agreement dated as of June 28, 1989, as amended and restated
through November 23, 1993, among the Company, the Lenders named
therein, and Chemical Bank, as agent (the "Credit Agreement")
(previously filed with this Registration Statement).
10.12 Security Agreement dated as of June 28, 1989, as amended and restated
through November 23, 1993, among the Company, the Lenders named in the
Credit Agreement, and Chemical Bank, as agent (previously filed with
this Registration Statement).
10.13 Intercreditor Agreement dated as of November 23, 1993 between First
National Bank of Commerce and Chemical Bank as agent under the Credit
Agreement (previously filed with this Registration Statement).
10.14 Loan Agreement dated as of January 9, 1991 between the Company and
Hibernia National Bank (previously filed with Amendment No. 1 to this
Registration Statement).
10.15 First Amendment dated as of November 22, 1993 to the Loan Agreement
dated as of January 9, 1991 between the Company and Hibernia National
Bank (previously filed with this Registration Statement).
10.16 Mortgage, Security Agreement and Financing Statement dated as of
January 9, 1991 by the Company in favor of Hibernia National Bank
(previously filed with Amendment No. 1 to this Registration Statement).
10.17 First Amendment dated as of November 22, 1993 to Mortgage, Security
Agreement and Financing Statement dated as of January 9, 1991 by the
Company in favor of Hibernia National Bank (previously filed with this
Registration Statement).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER EXHIBIT
------ -------
<C> <S>
10.18 Intercreditor Agreement dated as of November 23, 1993 between Chemical
Bank and Hibernia National Bank (previously filed with this
Registration Statement).
10.19 Security Agreement dated as of November 22, 1993 between the Company
and Hibernia National Bank (previously filed with this Registration
Statement).
10.20 Bayou Steel Corporation Savings Plan dated March 7, 1991 (previously
filed with Amendment No. 1 to this Registration Statement).
10.21 Incentive Compensation Plan for Key Employees dated March 3, 1988
(incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended September 30, 1991).
10.22 1991 Employees' Stock Option Plan dated April 18, 1991 with technical
amendments (incorporated herein by reference to Post-Effective
Amendment No. 4 to Registration Statement on Form S-1 (No. 33-10745)).
10.23 Pension Plan for Bargained Employees and the Employees Retirement Plan
(incorporated by herein by reference to Post-Effective Amendment No. 5
to the Company's Registration Statement on Form S-1 (No. 33-10745)).
12 Computation of Earnings to Fixed Charges.*
18.1 Letter from Arthur Andersen & Co. regarding change in accounting method
from first-in, first-out (FIFO) to last-in, first-out (LIFO) method of
accounting for inventories (incorporated herein by reference to the
Annual Report on Form 10-K for the year ended September 30, 1989).
18.2 Letter from Arthur Andersen & Co. regarding change in method of
accounting for interest from the effective interest method to another
acceptable method (incorporated herein by reference to the Annual
Report on Form 10-K for the year ended September 30, 1990).
23.1 Consent of Arthur Andersen & Co.
23.2 Consent of Kaye, Scholer, Fierman, Hays & Handler is included in the
opinion of Kaye, Scholer, Fierman, Hays & Handler, filed as Exhibit 5.*
23.3 Consent of Jones, Walker, Waechter, Poitevent, Carrere & Denegre.*
24 Powers of Attorney (reference is made to the signature page of this
Registration Statement).
25 Statement of Eligibility of Trustee under the Trust Indenture Act of
1939 on Form T-1 (previously filed with Amendment No. 1 to this
Registration Statement).
</TABLE>
- --------
* To be filed by amendment.
B. Financial Statement Schedules
Report of Independent Public Accountants
Schedule V Property, Plant and Equipment
Schedule VI Accumulated Depreciation of Property, Plant and
Equipment
Schedule VIII Valuation and Qualifying Accounts
Schedule X Supplementary Income Statement Information
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
II-4
<PAGE>
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF
LAPLACE AND STATE OF LOUISIANA ON JANUARY 31, 1994.
Bayou Steel Corporation
/s/ Richard J. Gonzalez
By __________________________________
RICHARD J. GONZALEZ
VICE PRESIDENT, TREASURER AND
CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED. EACH PERSON WHOSE SIGNATURE APPEARS
BELOW HEREBY AUTHORIZES HOWARD M. MEYERS AND RICHARD J. GONZALEZ AS ATTORNEYS-
IN-FACT, TO SIGN AND FILE ON HIS BEHALF, IN THE CAPACITY STATED BELOW, ALL
AMENDMENTS AND POST-EFFECTIVE AMENDMENTS TO THIS REGISTRATION STATEMENT.
TITLE DATE
----- ----
* Chairman of the
- ------------------------------------- Board, January 31,
HOWARD M. MEYERS Chief Executive 1994
Officer,
* Vice President,
- ------------------------------------- President and January 31,
Director 1994
Treasurer and Chief
RICHARD J. GONZALEZ Financial Officer
* Director
- ------------------------------------- January 31,
JOHN A. CANNING, JR. 1994
- ------------------------------------- Director
LAWRENCE E. GOLUB January 31,
1994
* Director
- ------------------------------------- January 31,
MELVYN N. KLEIN 1994
* Director
- ------------------------------------- January 31,
ALBERT P. LOSPINOSO 1994
II-6
<PAGE>
TITLE DATE
----- ----
* Director
- ------------------------------------- January 31,
ALAN J. PATRICOF 1994
* Director
- ------------------------------------- January 31,
STANLEY S. SHUMAN 1994
/s/ Richard J. Gonzalez
*By__________________________________
Richard J. Gonzalez
Individually and as Attorney-In-Fact
II-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Bayou Steel Corporation:
We have audited, in accordance with generally accepted auditing standards,
the financial statements included in this registration statement. Our audit was
made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedules listed in the index above are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. The schedules have been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly state in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen & Co.
New Orleans, Louisiana,
November 24, 1993
S-1
<PAGE>
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING ADDITIONS RECLASSIFICATIONS END OF
CLASSIFICATION OF PERIOD AT COST RETIREMENTS PERIOD
-------------- ----------- ----------- ----------------- -----------
<S> <C> <C> <C> <C>
Year Ended September 30,
1993
Land................... $ 2,411,182 $ 339,216 $ $ 2,750,398
Machinery and
Equipment............. 71,119,778 1,834,903 72,954,681
Plant and Office
Building.............. 12,394,461 1,642,384 14,036,845
Construction-in-
Progress.............. 3,934,743 2,761,076 (3,393,215) 3,302,604
----------- ----------- ------------ -----------
TOTAL................ $89,860,164 $ 6,577,579 $ (3,393,215) $93,044,528
=========== =========== ============ ===========
Year Ended September 30,
1992
Land................... $ 2,411,182 $ $ $ 2,411,182
Machinery and
Equipment............. 69,031,413 2,119,651 (31,286) 71,119,778
Plant and Office
Building.............. 8,614,736 3,779,725 12,394,461
Construction-in-
Progress.............. 6,590,768 3,243,351 (5,899,376) 3,934,743
----------- ----------- ------------ -----------
TOTAL................ $86,648,099 $ 9,142,727 $ (5,930,662) $89,860,164
=========== =========== ============ ===========
Year Ended September 30,
1991
Land................... $ 2,111,182 $ 300,000 $ $ 2,411,182
Machinery and
Equipment............. 62,002,031 7,464,798 (435,416) 69,031,413
Plant and Office
Building.............. 3,698,639 4,916,097 8,614,736
Construction-in-
Progress.............. 11,731,454 7,240,209 (12,380,895) 6,590,768
----------- ----------- ------------ -----------
TOTAL................ $79,543,306 $19,921,104 $(12,816,311) $86,648,099
=========== =========== ============ ===========
SCHEDULE VI--ACCUMULATED DEPRECIATION
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1992 AND 1991
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING ADDITIONS END OF
DESCRIPTION OF PERIOD AT COST RETIREMENTS PERIOD
----------- ----------- ----------- ----------------- -----------
<S> <C> <C> <C> <C>
Year Ended September 30,
1993
Machinery and
Equipment............. $18,759,410 $ 3,917,892 $ $22,677,302
Plant and Office
Building.............. 864,965 243,357 1,108,322
----------- ----------- ------------ -----------
TOTAL................ $19,624,375 $ 4,161,249 $ $23,785,624
=========== =========== ============ ===========
Year Ended September 30,
1992
Machinery and
Equipment............. $15,037,292 $ 3,744,712 $ (22,594) $18,759,410
Plant and Office
Building.............. 633,224 231,741 864,965
----------- ----------- ------------ -----------
TOTAL................ $15,670,516 $ 3,976,453 $ (22,594) $19,624,375
=========== =========== ============ ===========
Year Ended September 30,
1991
Machinery and
Equipment............. $11,984,762 $ 3,321,822 $ (269,292) $15,037,292
Plant and Office
Building.............. 482,849 150,375 633,224
----------- ----------- ------------ -----------
TOTAL................ $12,467,611 $ 3,472,197 $ (269,292) $15,670,516
=========== =========== ============ ===========
</TABLE>
S-2
<PAGE>
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS (1) PERIOD
----------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
September 30, 1993
Allowance for doubtful
accounts.................... $ 943,267 $(174,994) $ 225,548 $ 542,725
---------- --------- --------- ----------
September 30, 1992
Allowance for doubtful
accounts.................... $1,213,720 $ (36,096) $ 234,357 $ 943,267
---------- --------- --------- ----------
September 30, 1991
Allowance for doubtful
accounts.................... $1,420,690 $ 373,323 $ 580,293 $1,213,720
---------- --------- --------- ----------
</TABLE>
- --------
(1) Write-off of uncollectible accounts.
SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
ITEM 1993 1992 1991
---- ----------- ----------- -----------
<S> <C> <C> <C>
Maintenance and Repairs..................... $ 9,001,320 $ 8,827,799 $ 8,944,936
Depreciation
Inventory................................. $ -- $ 87,193 $ --
Cost of Sales............................. 4,156,849 3,884,913 3,467,871
Selling, General and Administrative....... 4,398 4,347 4,326
Amortization
Loan Acquisition Costs (1)................ $ 457,770 $ 332,483 $ 331,094
</TABLE>
- --------
(1) Represents amortization of costs associated with the issuance of the Senior
Secured Notes entered into on September 5, 1986 and the line of credit
entered into on June 28, 1989.
S-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER EXHIBIT PAGE
- ------ ------- ----
<S> <C> <C>
1.1 Form of Underwriting Agreement between the Company and Chemical
Securities Inc. (previously filed with this Registration Statement).
3.1 Second Restated Certificate of Incorporation of the Company
(incorporated by reference herein to Post-Effective Amendment No. 1 to
Registration Statement on Form S-1 (No. 33-10745)).
3.2 By-laws of the Company (incorporated herein by reference to Registration
Statement on Form S-1 (No. 33-10745)).
4.1 Form of Indenture (including form of First Mortgage Note) between the
Company and First National Bank of Commerce as trustee (the "Trustee").
4.2 Form of Mortgage granted by the Company and Subsidiary Guarantors to the
Trustee. (Louisiana)
4.3 Form of Mortgage, Assignment of Rents and Leases and Security Agreement
from the Company to the Trustee (Non-Louisiana).
4.4 Form of Mortgage, Assignment of Rents and Leases and Security Agreement
from Subsidiary Guarantors to the Trustee (Non-Louisiana).
4.5 Form of Security Agreement between the Company and the Trustee.
4.6 Form of Subsidiaries Security Agreement between the Subsidiary
Guarantors and the Trustee.
4.7 Form of Intercreditor Agreement between the Trustee and Chemical Bank,
as agent under the Credit Agreement.
4.8 Form of Subsidiary Guarantee between recourse subsidiaries of the
Company and the Trustee.
4.9 Form of Release of Federal Income Tax Ownership and Agreement between
the Trustee and the Company.
5 Opinion of Kaye, Scholer, Fierman, Hays & Handler.*
10.1 Employment Letter dated July 26, 1988, between Howard M. Meyers and the
Company (incorporated herein by reference to Post-Effective Amendment
No. 1 to Registration Statement on Form S-1 (No. 33-10745)).
10.2 (i) Agreement dated November 11, 1981, between Amoco Tax Leasing I
Corporation ("Amoco") and the Company, (ii) letter dated December 7,
1981 from Voest-Alpine A.G. ("VA") and Voest-Alpine International
Corporation ("VAIC") to Amoco, and (iii) letter dated November 11, 1981
from VAIC, Honen Investissements SARL, Barzel Investissements SARL, Anku
Foundation, Raphaely Steel Investments, N.V., Landotal Properties, Inc.,
Canota Investments, Ltd., S.A. and Beruga Establishment and VA to Amoco
(incorporated herein by reference to Registration Statement on Form S-1
(No.33-10745)).
10.3 Release of Federal Income Tax Ownership and Agreement dated September 5,
1986, among the Company, First National Bank of Commerce, Bayou Steel
Acquisition Corporation, VA and Howard M. Meyers (incorporated herein by
reference to Registration Statement on Form S-1 (No. 33-10745)).
10.4 Service Agreement dated September 5, 1986, between the Company and RSR
Corporation and the assignment by RSR Corporation of a portion of its
interest in the Service Agreement to RSR Holding Corp., now known as
Quexco Incorporated (incorporated herein by reference to Registration
Statement on Form S-1 (No.33-10745)).
10.5 Letter Agreement dated May 28, 1987 between the Company and Allen &
Company Incorporated relating to investment banking services
(incorporated herein by reference to Registration Statement on Form S-1
(No.33-10745)).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER EXHIBIT PAGE
------ ------- ----
<S> <C> <C>
10.6 Agreement dated June 20, 1991 among the Company, MMG Patricof & Co.,
Inc., and MMG Placement Corp. relating to investment banking services
(incorporated herein by reference to Post-Effective Amendment No. 4 to
Registration Statement on Form S-1 (No. 33-10745)).
10.7 Agreement dated December 16, 1992 between the Company and Patricof & Co.
Capital Corp. relating to investment banking services.
10.8 Warehouse (Stocking Location) Leases.
(i) Leetsdale, Pennsylvania (incorporated herein by reference to
Registration Statement on Form S-1 (No. 33-10745)).
(ii) Catoosa, Oklahoma (incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1989).
10.9 Tax Abatement Agreement dated July 10, 1985 between the Company and the
Louisiana Board of Commerce and Industry (incorporated herein by
reference to Registration Statement on Form S-1 (No. 33-22603)).
10.10 Tax Abatement Renewal Agreement dated August 22, 1990 between the
Company and the State of Louisiana Board of Commerce and Industry
(incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1989).
10.11 Credit Agreement dated as of June 28, 1989, as amended and restated
through November 23, 1993, among the Company, the Lenders named therein,
and Chemical Bank, as agent (the "Credit Agreement") (previously filed
with this Registration Statement).
10.12 Security Agreement dated as of June 28, 1989, as amended and restated
through November 23, 1993, among the Company, the Lenders named in the
Credit Agreement, and Chemical Bank, as agent (previously filed with
this Registration Statement).
10.13 Intercreditor Agreement dated as of November 23, 1993 between First
National Bank of Commerce and Chemical Bank as agent under the Credit
Agreement (previously filed with this Registration Statement).
10.14 Loan Agreement dated as of January 9, 1991 between the Company and
Hibernia National Bank.
10.15 First Amendment dated as of November 22, 1993 to the Loan Agreement
dated as of January 9, 1991 between the Company and Hibernia National
Bank (previously filed with this Registration Statement).
10.16 Mortgage, Security Agreement and Financing Statement dated as of January
9, 1991 by the Company in favor of Hibernia National Bank.
10.17 First Amendment dated as of November 22, 1993 to Mortgage, Security
Agreement and Financing Statement dated as of January 9, 1991 by the
Company in favor of Hibernia National Bank (previously filed with this
Registration Statement).
10.18 Intercreditor Agreement dated as of November 23, 1993 between Chemical
Bank and Hibernia National Bank (previously filed with this Registration
Statement).
10.19 Security Agreement dated as of November 22, 1993 between the Company and
Hibernia National Bank (previously filed with this Registration
Statement).
10.20 Bayou Steel Corporation Savings Plan dated March 7, 1991.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER EXHIBIT PAGE
------ ------- ----
<S> <C> <C>
10.21 Incentive Compensation Plan for Key Employees dated March 3, 1988
(incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended September 30, 1991).
10.22 1991 Employees' Stock Option Plan dated April 18, 1991 with technical
amendments (incorporated herein by reference to Post-Effective Amendment
No. 4 to Registration Statement on Form S-1 (No. 33-10745)).
10.23 Pension Plan for Bargained Employees and the Employees Retirement Plan
(incorporated herein by reference to Post-Effective Amendment No. 5 to
the Company's Registration Statement on Form S-1 (No. 33-10745)).
12 Computation of Earnings to Fixed Charges.
18.1 Letter from Arthur Andersen & Co. regarding change in accounting method
from first-in, first-out (FIFO) to last-in, first-out (LIFO) method of
accounting for inventories (incorporated herein by reference to the
Annual Report on Form 10-K for the year ended September 30, 1989).
18.2 Letter from Arthur Andersen & Co. regarding change in method of
accounting for interest from the effective interest method to another
acceptable method (incorporated herein by reference to the Annual Report
on Form 10-K for the year ended September 30, 1990).
23.1 Consent of Arthur Andersen & Co.
23.2 Consent of Kaye, Scholer, Fierman, Hays & Handler is included in the
opinion of Kaye, Scholer, Fierman, Hays & Handler, filed as Exhibit 5.*
23.3 Consent of Jones, Walker, Waechter, Poitevent, Carrere & Denegre.*
24 Powers of Attorney (reference is made to the signature page of this
Registration Statement).
25 Statement of Eligibility of Trustee under the Trust Indenture Act of
1939 on Form T-1.
</TABLE>
- --------
* To be filed by amendment.
B. Financial Statement Schedules
Report of Independent Public Accountants
Schedule V Property, Plant and Equipment
Schedule VI Accumulated Depreciation of Property, Plant and Equipment
Schedule VIII Valuation and Qualifying Accounts
Schedule X Supplementary Income Statement Information
<PAGE>
BAYOU STEEL CORPORATION
(Graphics Appendix List)
EDGAR Version Typeset Version
- ------------- ---------------
Inside Front Cover; Graphic #1 is a color picture of the inside
contains graphics #1, #2, & #3 of Bayou Steel's warehouse with various
stacks of its products visible. The caption
reads: "Bayou Steel is a leading producer of
a variety of light structural steel
products."
Graphic #2 is a color picture of molten steel
pouring from the Company's furnance into a
ladle. The caption reads: "The Company
melts scrap in a 75-ton capacity Krupp
electric arc furnace."
Graphic #3 is a color picture of the
Company's rolling mill. The caption reads:
"The Company's rolling mill molds billets
into a variety of shape dimensions and
sizes."
Inside Back Cover: Graphic #4 is a color map of the United
contains graphics #4 & #5 States with Bayou Steel locations marked.
Graphic #5 is the color logo of the Company.
<PAGE>
EXHIBIT 23.1
[LETTER HEAD OF ARTHUR ANDERSEN & CO.]
As independent public accountant, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of Amendment No.2
of the Bayou Steel Corporation Form S-1 registration statement.
New Orleans, Louisiana /s/ Arthur Andersen & Co.
January 31, 1994
