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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMMISSION FILE NUMBER: 33-22603
BAYOU STEEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 72-1125783
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
P.O. BOX 5000
RIVER ROAD
LAPLACE, LOUISIANA 70069
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (504) 652-4900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
Class A Common Stock, $.01 par value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
10 1/4% First Mortgage Notes due 2001
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
The aggregate market value and the number of voting shares of the
registrant's common stock outstanding on October 31, 1995 was:
<TABLE>
<CAPTION>
SHARES OUTSTANDING HELD BY MARKET VALUE
TITLE OF EACH CLASS ------------------------------------------ HELD BY
OF COMMON STOCK AFFILIATES NON-AFFILIATES NON-AFFILIATES
----------------------- ----------------- ------------------- --------------
<S> <C> <C> <C>
Class A, $.01 par value.............. 1,357,997 9,255,383 $41,649,224
Class B, $.01 par value.............. 2,271,127 0 N/A
Class C, $.01 par value.............. 100 0 N/A
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 1996 Annual
Meeting of Stockholders are incorporated herein by reference in Part III and
portions of the registrant's 1995 Annual Report filed as an exhibit, are
incorporated herein by reference in Part II hereof.
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BAYOU STEEL CORPORATION
TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1. BUSINESS.................................................................................. 1
General............................................................................... 1
Manufacturing Process and Facilities.................................................. 1
Products.............................................................................. 2
Customers............................................................................. 2
Distribution.......................................................................... 3
Markets and Sales..................................................................... 3
Strategy.............................................................................. 4
Competition........................................................................... 5
Raw Materials......................................................................... 6
Energy................................................................................ 7
Environmental Matters................................................................. 7
Safety and Health Matters............................................................. 9
Strike and Impact Upon the Company.................................................... 9
Employees............................................................................. 11
ITEM 2. PROPERTIES................................................................................ 12
ITEM 3. LEGAL PROCEEDINGS......................................................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................... 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S CLASS A COMMON STOCK AND
RELATED STOCKHOLDER MATTERS............................................................. 13
ITEM 6. SELECTED FINANCIAL DATA................................................................... 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................................... 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................... 14
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...................................... 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.......................................................... 15
ITEM 11. EXECUTIVE COMPENSATION.................................................................... 15
ITEM 12. OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.............................................................................. 15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................ 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K................................................................................ 15
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i
PART I
ITEM 1. BUSINESS
GENERAL
Bayou Steel Corporation (the "Company") owns and operates a steel minimill
located on the Mississippi River in LaPlace, Louisiana ("BSCL") and a rolling
mill in Harriman, Tennessee ("BSCT").
BSCL is a leading producer of light structural steel products. The
Louisiana 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. BSCL produces a variety of shapes,
including angles, flats, channels, standard beams and wide flange beams at the
Louisiana facility.
On April 28, 1995, the Company purchased substantially all of the assets of
Tennessee Valley Steel Corporation ("TVSC") located in Harriman, Tennessee, 37
miles west of Knoxville. The assets are owned by a new wholly owned subsidiary
named "Bayou Steel Corporation (Tennessee)". BSCT's rolling mill produces both
rebar and merchant bar shapes, including angles, channels, flats, rounds and
squares. The merchant bar product mix of BSCT extends and complements BSCL's
product line. BSCT began operation in July 1995.
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. BSCL's minimill, which was owned and
operated by Voest-Alpine A.G. 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. The rolling mill at BSCT includes a computer supervised
reheat furnace, a 16-stand rolling mill, and an automated straightening,
continuous cut-to-length, stacking, and bundling equipment.
The Company sells its products to over 590 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 1995, the Company sold 503,297 tons of shapes and 11,072
tons of billets.
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.
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 which continues to date.
The address of the Company's principal place of business is 138 Highway
3217, P.O. Box 5000, LaPlace, Louisiana 70069 and its telephone number is (504)
652-4900.
MANUFACTURING PROCESS AND FACILITIES
In its production process, BSCL uses steel scrap which is received by
barge, rail, and truck, and then stored in a scrap receiving yard. The scrap is
transported to BSCL'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 3100oF. 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 Louisiana rolling mill for
further processing. Excess billets are either shipped to BSCT via rail or sold
to other processors, depending on market conditions.
1
In the Louisiana rolling mill, the billets are reheated in a walking beam
furnace with recuperative burners. Once the billets are heated to approximately
2000oF, they are rolled through up to fifteen mill stands which form the billets
into the dimensions and sizes of the finished products. The heated finished
shapes are stacked on a cooling bed and then straightened and cut into the
appropriate customer lengths. The shapes are stacked into 21/2 to 5-ton bundles
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 Tennessee rolling mill uses steel billets which will be received by
rail, truck, or barge and then stored in a billet yard. The billets are reheated
in a pusher reheat furnace with recuperative burners before being rolled. Once
the billets are heated to approximately 2000oF, they are rolled through up to 16
mill stands which form the billets into the dimensions and sizes of the finished
products. The heated finished shapes are placed on a cooling bed, and
straightened and cut into the appropriate customer lengths. The shapes are then
stacked into approximately 21/2 ton bundles and placed in a warehouse where they
are subsequently shipped to customers directly via truck or rail.
PRODUCTS
The Louisiana facility produces a variety of light structural steel
products and the Tennessee facility produces a wide range of merchant bar shapes
and rebar.
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SIZE RANGE (IN INCHES)
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PROFILE TENNESSEE LOUISIANA
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Equal Angles 3/4-2 3-6
Flats 1-3 4-8
Channels 1-3 3-8
Squares 1/2-1 1/2 N/A
Rounds 1/2-2 N/A
Unequal Angles N/A 4-7
Rebar (#3-#11) 3/8-1 3/8 N/A
Standard Beams N/A 3-6
Wide Flange Beams N/A 4-6
</TABLE>
The merchant bar shapes, rebar, and light structural shapes produced by the
Company have a wide range of commercial and industrial applications, including
the construction and maintenance 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. Rebar is used in highway and bridge
construction, concrete structures such as parking garages, and home construction
for driveways, sidewalks and swimming pools.
The Company plans to emphasize the merchant bar shapes and light structural
shapes. Shape margins are historically considerably higher than those of rebar.
BSCT will continue to opportunistically produce rebar. BSCT has the necessary
flexibility to produce varying amounts of each product based on economic and
market trends.
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 is certified for nuclear applications. The
Company's products are also certified for state highway and bridge structures.
CUSTOMERS
The Company has over 590 customers in 44 states, Canada, Mexico and
overseas. The majority of the Company's shape products (approximately 72% in
fiscal 1995) are sold to steel service centers, while the remainder are sold to
original equipment manufacturers (approximately 17% in fiscal 1995) and export
customers (approximately 11% in fiscal 1995). 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
2
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. Much of the merchant bar product from the recently acquired
Tennessee rolling mill will be sold to the Company's existing customer base.
Rebar, when produced, will be selectively sold to a few customers who are not
necessarily part of the existing customer base.
In fiscal 1995, the Company's top ten customers accounted for approximately
40% of total shipments. No single customer accounted for 10% 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.
DISTRIBUTION
BSCL's steelmaking facility in Louisiana, 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. The
Company does expect barge rates to increase significantly in 1996 due to the
continued demand for barges. Furthermore, BSCL operates three inventory stocking
warehouses in Chicago, Tulsa and Pittsburgh, which supplement its operations in
Louisiana and Tennessee. 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.
BSCL's deep-water dock at its Louisiana manufacturing facility on the
Mississippi River enables the Company to load vessels or ocean-going barges for
overseas shipments, giving the Company low cost access to overseas markets.
(Additionally, the dock enables the Company to access scrap from the Caribbean
and South and Central America.) 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. Relative to its domestic competitors,
the Company believes it has a 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. In addition, the Company makes rail
shipments to some customers, primarily those on the West Coast and in Mexico.
With the recent completion of a rail spur into the warehouse, the Company
expects to expand rail shipment.
BSCT's mill in east Tennessee fills a geographic void for the Company. BSCT
provides new access for the Company to the Appalachian states and the lower
midwest, plus additional access to the upper midwest, the southeast and the
mid-Atlantic. During economic downturns, BSCT's product line can be distributed
through the Company's LaPlace facility or through its distribution centers in
Chicago, Pittsburgh, and Tulsa. BSCT's location is accessible by all forms of
transportation; the plant is in close proximity to two major interstate
highways; four miles from a barge dock; and is situated on the main line of
Norfolk Southern Railroad.
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 1995, 1994, and
1993, 10.3%, 7.6%, and 2.9%, 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 American Iron and Steel Institute, the domestic market
demand for all structural steel shape products in 1994 was 5.5 million tons. The
Company estimates that its share of the total domestic shapes market was
approximately 8.1% in 1994. 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 is
marketing BSCT's merchant bar shapes mainly through its existing customer base.
This has prevented heavy discounting as would be the case if the Company would
have to buy a market share of BSCT's product line.
3
The Company's 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 of BSCL's production
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 $40.9 million as of September 30, 1995 as
compared to $41.3 million as of September 30, 1994. As of October 31, 1995, the
Company's backlog totaled $39.5 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 2% to 13% of the Company's total tonnage
sales. Excess billets will either be shipped to the BSCT facility or will be
sold to other processors.
STRATEGY
The Company's strategy is to improve operating efficiencies and to reduce
costs through capital at BSCL and to bring BSCT to full capacity within 12 to 18
months. The Company may also consider strategic acquisitions, such as the recent
acquisition of the assets of TVSC, which complement or expand the Company's
current operations.
A. BSCL
The Company's principal operating strategy for BSCL is to improve
operating results by continuing to reduce costs, including labor costs per
ton, and increasing sales of higher margin shape products. In addition,
BSCL has implemented a $10 million capital expenditure program to reduce
its production costs and increase its melt shop and rolling mill capacity
in fiscal 1996.
OPERATING EFFICIENCIES. BSCL has lowered its labor cost per ton by $15
since fiscal 1992 and has lowered its labor costs per ton by $8 since
fiscal 1993. The Company believes that it can continue to lower its labor
costs per ton from fiscal 1995 levels by increasing productivity and
shipments, reducing overtime, and implementing a productivity incentive
plan. In addition, the Company's proposed labor agreement with the Union
would further reduce labor cost per ton.
The Company continues to be committed to developing a high performance
work culture. Through extensive training and individual development
efforts, the Company will further reinforce its basic 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 program does not
involve the terms and conditions of the workplace and is therefore not
subject to the collective bargaining process.
CAPITAL IMPROVEMENTS. From fiscal 1987 through fiscal 1994, the Company
spent an aggregate of approximately $51 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 addition to normal maintenance programs, the Company initiated a $10
million capital expenditure program in late fiscal 1994 to reduce its
production and operating costs and increase its melt shop and 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 modification of the furnace shell and tapping hole to
increase furnace capacity and reduce consumption of materials, (iii) a
steel straightener to improve production capacity
4
in the rolling mill, (iv) an off-line sawing system and conveyor to further
improve production capacity in the rolling mill, and (v) a shipping bay
rail spur to reduce the handling of finished products. These projects were
completed during the fourth quarter of fiscal 1995 and first quarter of
fiscal 1996. However, cost during the initial stages of operations were
high due to a learning curve and start-up expenses associated with
operating new equipment; consequently, BSCL has not yet realized the full
benefit from these projects. The Company believes that these capital
projects, when fully implemented, would result in annual operating savings
of approximately $3.3 million, depending on market conditions.
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. 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 or sufficient demand
for structural steel products will exist for the additional capacity.
B. BSCT
OPERATING CAPACITY. The Company's operating strategy for the recently
acquired rolling mill at BSCT is to expand its merchant bar shape
production. The Company did not restart the outdated Tennessee melting
operations for purposes of supplying billets to the Tennessee rolling mill.
BSCT's billet requirements are currently filled from either BSCL's excess
billet capacity or outside purchases, depending on market conditions.
Billets are shipped to the rolling mill in Tennessee, which is easily
reachable by truck, rail and barge. The billets are then converted into
rebar and merchant bar shapes. Overall annual production of BSCT is
expected to reach 250,000 tons in 1997.
TVSC rolled 79% rebar and 21% bar shapes during its last 12 months of
operating the mill. The Company plans to emphasize the bar shape products.
Management intends to roll predominately merchant bar shapes in fiscal
1996. Bar shape products have historically higher profit margins than rebar
and the shapes produced at BSCT complement and enhance the Company's
existing range of light structural shapes. Additionally, the Company
intends to rationalize the product mix, producing only some of the 70
section sizes which the mill can produce so as to concentrate on higher
margin, higher volume sizes.
CAPITAL IMPROVEMENTS. The Company expects to spend approximately $6
million on various capital projects at the Tennessee facility in the first
18 months of operations to reduce costs and increase productivity. As of
September 30, 1995 there were 120 employees and contractors at the
Tennessee operation. The Company plans to reduce the workforce at BSCT to
approximately 100 by the end of fiscal 1996.
C. ACQUISITION PROGRAM AND TAX BENEFITS
The Company may, from time to time, seek strategic acquisitions, such as
the acquisition of the rolling mill from TVSC, 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, 1995, the Company had
approximately $316 million of regular net operating loss carryforwards
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 the
Notes to the Consolidated Financial Statements.
COMPETITION
The Company does not currently compete with minimill flat rolled or most
domestic integrated steel producers.
5
STEEL STRUCTURAL SHAPES. BSCL'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 light
structural 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.
BAR SHAPES. In fiscal 1997, the Company expects BSCT will sell 250,000 tons
per year of bar shape products in a market that has ranged between 6.2 and 8.6
million tons during the last 10 years. Competitors in the region are Florida
Steel, Structural Metals, Inc., Nucor Corporation, Birmingham Steel, Roanoke
Electric, North Star Steel Co., and SMI/Owen Steel. While excess capacity of
small bars exists in the market, the Company believes that BSCT's conversion
costs will compare favorably with the competition.
REBAR. BSCT will produce rebar in varying quantities depending on economic
and market trends. BSCT's main competitor will be Florida Steel in Knoxville,
TN. Florida Steel, however, fabricates a large portion of its rebar in
competition with independent fabricators who are also customers of BSCT.
Independent fabricators opting not to buy from a competitor may create a
significant niche for BSCT's rebar. Other competitors include SMI/Owen Steel,
Birmingham Steel, Nucor Corporation, and New Jersey Steel.
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.
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
dealers and small peddlers for cash. Through this program, the Company has
procured approximately 20% of its scrap at prices lower than those of large
scrap dealers. The Company has also procured an automobile shredder which is
located at a site adjacent to the plant. Mississippi River Recycling ("MRR"), a
new division of the Company, began operating the automobile shredder in the
fourth quarter of fiscal 1995. It is the Company's intention to expand MRR's
business activities to processing other types of unprepared scrap which could be
used by the Company or sold to other consumers of prepared scrap metal,
generating additional revenues.
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
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
6
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, BSCL consumes smaller quantities of additives,
alloys and flux ("AAF"). AAF cost increased in the fourth quarter and fiscal
1995 by 20.0% and 7.4%, respectively, compared to the same periods of fiscal
1994 mainly due to price. AAF prices have recently increased significantly due
to reduced product availability which was caused by an anti-dumping suit against
foreign producers utilized by BSCL and its competitors. This caused high duties
on imported AAF making it more costly to import AAF. Also contributing to the
higher prices is the increase in domestic demand due to the high steel-making
capacity utilization. This is a general market condition. 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 in Louisiana 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 1995 for a six 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 prior years have had negligible impact on operations; however, BSCL
experienced an unusual number and duration of power curtailments in the fourth
quarter of fiscal 1995 due to record heat levels in New Orleans. Due to the
effect of a fuel adjustment provision in the contract with LPL, BSCL's energy
expense could increase. However energy expense decreased by $1.1 million in
fiscal 1995 compared to fiscal 1994. The Company believes that its utility rates
at BSCL are very competitive in the domestic minimill steel industry. As one of
LPL's largest customers, the Company has been able to obtain competitive rates
from LPL. To a lesser extent, BSCL's manufacturing facility consumes quantities
of natural gas via two separate pipelines serving the facility. BSCL purchases
its natural gas on a month-to-month basis from a variety of suppliers.
Historically, BSCL has been adequately supplied with electricity and natural gas
and does not anticipate any curtailment in its operations resulting from energy
shortages.
BSCT's manufacturing process consumes large amounts of electrical energy.
BSCT purchases its electricity from Tennessee Valley Authority ("TVA").
Historically, TVA has had one of the lowest power rates in the country. The
Company has negotiated a favorable rate with TVA and has no reason to believe
that a similar contract will not be renewed upon similar terms. The Harriman,
TN, area is served by only two gas pipelines, (Tennessee Pipeline and East
Tennessee Pipeline), both belonging to Tenneco. Currently, BSCT does not have a
direct interconnect with either pipeline so all gas for the plant must be
purchased from a Local Distribution Company ("LDC"). Thus, BSCT must pay the
wellhead price plus transportation charges and the LDC mark up. Because BSCT has
no direct interconnect with a pipeline, it must pay the LCD an additional $0.30
per MMBTU for the gas delivered to Harriman. The Company believes this premium
adds approximately $1 per ton to BSCT's cost structure. However, Southern
Natural Gas Pipeline plans to install transmission facilities in the Harriman
area by the spring of 1996 which would improve the competitive situation
significantly and enable the Company to purchase gas at more competitive rates.
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 the event of a release or discharge of a hazardous substance to certain
environmental media, the Company could be responsible for the costs of
remediating the contamination caused by such a release or discharge. In the last
six years, the only environmental penalty assessed to the Company was a fine in
the amount of $43,000 levied in
7
1989 in conjunction with a Hazardous Waste Compliance Order issued by the
Louisiana Department of Environmental Quality for alleged violations of the
hazardous waste management regulations. At this time, the Company believes it is
in compliance in all material respects with applicable environmental
requirements. The Company has a full-time compliance manager 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 plans to close two storm-water retention ponds at the BSCL's
minimill. The Company has conducted limited analysis of the effluents running
into and out of the ponds. This analysis confirms there is little potential for
contamination. Based on this preliminary analysis, the Company does not believe
that future clean up costs, if any, will be material. The Company has proposed a
sampling plan to the Louisiana Department of Environmental Quality (the "LDEQ")
to analyze the contents of the pond sediments. The results of such sampling
could indicate a greater level of contaminants than suggested by the Company's
limited testing. In such case, the costs of clean up could be higher than the
Company now believes. Until such sampling is completed, however, it is
impossible to estimate such costs.
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 manages it through an approved
waste recycling firm. The dust management costs were approximately $1.5 million
in fiscal 1994 and $2.0 million in 1995, and are estimated to be approximately
$2.1 million for fiscal 1996. The increase in cost is due primarily to increases
in recycling costs and to increased steel production. In fiscal 1990, a small
quantity of dust containing very low concentrations 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 a decision as to its appropriate disposal. The Company has
estimated that the ultimate cost of disposal of such dust will be approximately
$500,000. There are at least five other steel mills in the United States storing
such radioactive dust.
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. Specific air regulations and requirements
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 1995, the Company spent approximately $280,000 on various
environmental capital projects, including those related to the 1990 Amendments.
In fiscal 1996, the Company intends to spend approximately $1.3 million on
various environmental capital projects, including those related to the 1990
amendments.
On August 7, 1995 the Company received a Compliance Order issued by the
Louisiana Department of Environmental Quality (LDEQ), Hazardous Waste Division.
The compliance order results from an inspection of the BSCL's plant in February
1995, initiated by the striking workers of the United Steelworkers of America
and conducted by the U.S. Environmental Protection Agency. The Company is
required to take seven steps; identify the contents of an above ground tank;
submit a one time written report concerning the incineration of hazardous waste;
take further action to minimize the possibility of unplanned release of
hazardous waste from drums with wire tops; transfer hazardous waste from a
railcar and hopper loading building into containers in good condition; list
names of all transporters of hazardous waste; document existing hazardous waste
training for employees; provide an annual review for all existing hazardous
waste training courses. The Company intends to comply with the enforcement
action. No penalties were assessed. The Company believes that the corrective
actions will have no material impact on its operations.
TVSC, the prior owners of the BSCT facility, had entered into a Consent
Agreement and Order (the "Voluntary Consent Order") under the Tennessee
Department of Environmental and Conservation's voluntary clean-up program. The
Company, in acquiring the assets of TVSC, has entered into a similar Voluntary
Consent Order. The ultimate remedy and clean-up goals will be dictated by the
results of human health risk assessment and the ecological risk
8
assessment which are part of a required Remedial Investigation/Feasibility
Study. Estimates indicate that the cost for remediating the affected areas
ranges from $350,000 for the lowest cost remedy to $1,800,000 for higher cost
remedies. If during the remedial investigation significantly more extensive or
more toxic contamination is found, then costs could be greater than those
estimated. The definitive asset purchase agreement between the Company and TVSC
provided for $2.0 million of the purchase price to be held in escrow and applied
to costs incurred by the Company for remediation under the Voluntary Consent
Order (with an additional $1.0 million to be held in escrow for one year for
such costs and other costs resulting from a breach of TVSC's representation and
warranties in the agreement).
SAFETY AND HEALTH MATTERS
The Company is subject to various regulations and standards promulgated
under the Occupational Safety and Health Act, which are administered by the
Occupational Safety and Health Administration ("OSHA"). These regulations and
standards are minimum requirements for employee protection and health. It is the
Company's policy to meet or exceed these minimum requirements in all of the
Company's safety and health policies, programs and procedures.
As a result of an inspection initiated by the United Steelworkers of
America and conducted at the LaPlace, Louisiana facility in October and November
of 1994 by OSHA, the Company received various citations and was fined $160,500.
The Company has contested the citations. OSHA officials stated that none of what
was found "showed blatant disregard for safety" and that none of the violations
were deemed "willful". Due to its wide discretion in assessing proposed civil
penalties, OSHA may reduce the proposed fines through negotiation in informal
proceedings with OSHA or after independent administrative or judicial review.
The Company has accrued a loss contingency for the maximum liability of $160,500
arising from these inspections as of September 30, 1995.
The Company knows of no other safety or health issues that would require
any material adjustment in its liabilities.
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 337 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 cost, and lost sales, all of which adversely affected the
Company's profitability, particularly in the early weeks of the strike.
As a result of a strategic contingency plan, 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 October 1993,
overall production and productivity have exceeded pre-strike levels.
For fiscal year 1993, the Company incurred approximately $3.2 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). For fiscal year 1995 and 1994, the Company incurred $1.0 million in
similar out-of-pocket costs in each year. 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 such future strike-related
costs will not exceed $100,000 per month.
9
INJUNCTION. The Company obtained an injunction from a Louisiana state court
on April 1, 1993 imposing restrictions on the number of picketers and regulating
conduct on the picket line. As a result, access to the minimill has been
generally unimpaired (with the exception of a court imposed 90-second per
vehicle waiting time).
UNFAIR LABOR PRACTICE CHARGES. In connection with the strike, the Union
filed unfair labor practice charges against the Company with the New Orleans
regional office of the National Labor Relations Board (the "NLRB"), which
included 22 specific allegations. In late January 1994, the Regional Director of
the NLRB informed the Company that it had sufficient grounds to issue a
complaint against the Company and order a trial with respect to eight of these
allegations. In order to avoid a lengthy and expensive trial on these issues,
the Company agreed to negotiate a tentative settlement agreement with the NLRB.
The settlement agreement does not contain an admission by the Company that it
engaged in any unfair labor practices. The settlement agreement requires the
Company to post a notice stating that it will not engage in any of the actions
specified in the eight allegations. The other 14 allegations were to be
dismissed. The Union appealed the dismissal, and it was denied. Thereafter, the
Union filed a motion for reconsideration and likewise all but one allegation was
denied. The approval of the settlement agreement has not become effective.
However, even if the settlement is not successfully finalized and a trial was
ordered, the Company does not believe that the ultimate outcome would have a
material affect on the Company's operations.
The proposed settlement agreement also covers two separate charges filed in
early 1994. These outstanding charges include allegations that the Company
bargained in bad faith by failing to provide certain employee safety and health
documents and denying the Union access to the minimill and by placing
return-to-work conditions without bargaining. The Union is seeking a finding
that the Company negotiated in bad faith which, under the National Labor
Relations Act (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. 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 believes that it possesses meritorious
defenses to such unfair labor practice charges if it were to get to trial over
these claims. An adverse decision by the NLRB on the charges or a successful
appeal by the Union of the dismissed charges could 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 that an adverse decision by the NLRB on the
outstanding charges or a successful appeal by the Union of the dismissed charges
would have a material long-term effect on the Company. Since the strike began,
the Company has permitted any striking employee who wished to return to his job
upon the terms of the expired contract the opportunity to do so (and the
temporary replacement workers have been operating under the terms of the expired
contract). Since the Company has not replaced any of the striking workers with
permanent replacement employees and has not implemented any of its proposed
contract terms, a return of striking workers would have no material financial
effect on the Company's operations, although it could disrupt operations for a
time.
The Union filed a charge with the NLRB in November 1995 claiming that the
Company offered a striker(s) a certain monetary sum if he would tender his
resignation. The Company believes the charges are without merit.
In conjunction with the acquisition of the assets of TVSC while it was in
Chapter 11, the Union filed a charge with the NLRB alleging that the Company has
violated the NLRA relating to its refusal to hire at BSCT certain individuals,
who were former employees of TVSC. The Company believes it has meritorious
defenses to these charges.
STATUS OF NEGOTIATIONS. After 18 months of no formal negotiating sessions,
the Company and Union met in November of 1995. Proposals were exchanged and
talks remain open.
10
The Union has led the Company to believe that the following issues, among
others, are significant in reaching agreement:
INCENTIVE PLAN. The Company has proposed in its final offer an incentive
plan which is not subject to the grievance procedure or arbitration. The
Union has indicated that it may want to continue to bargain over the
arbitration issue, base rates for new employees, and the computation
period.
CONTRACT SERVICES. 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 letter of understanding granting an affected employee certain
options.
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 is demanding that striking employees, who have engaged in such
misconduct, be returned to their positions at the cessation of the
strike or be given the right to challenge the discipline by "just cause"
standard as opposed to the NLRB standard.
The Company has made a proposal in keeping with the provisions of the proposed
settlement agreement with the NLRB. The Union and Company disagree as to what
may be required. Additionally, the Union is seeking vacation pay in the first
year of the agreement where it is not currently required.
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
plant operations continue, the potential impact of such a campaign, including
the financial impact, is difficult to assess at this time. The Union's corporate
campaign continues but the Company has filed a lawsuit in federal court in
Delaware under the Racketeer Influenced Corrupt Organizations Act (RICO) against
the Union for its conduct in connection with this campaign.
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. Twenty 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. There has been no agreement on a new
contract. The employees covered by this expired contract are on strike. In
addition, 9 hourly employees at the Pittsburgh stocking location are covered by
a collective bargaining contract which expires on July 31, 1999 between the
Company and the Union.
As of September 30, 1995, the Company had 545 non-striking employees, of
whom 250 were salaried office, supervisory, sales personnel and non-exempt
workers, and 295 were hourly employees. As of September 30, 1995, the Company
had utilized 211 temporary replacement workers to perform certain services of
striking workers. Of the 337 bargaining unit employees as of the date of the
strike, 101 have returned to work of which 85 are still working, an additional
28 have resigned, and 208 remain on strike.
11
ITEM 2. 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.
LOCATION PROPERTY
-------- --------
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 River.
Harriman, Tennessee Approximately 198
acres of land, 175,000
square feet of steel mill
buildings, including a melt
shop (which the Company
does not intend to use),
warehouse, a rolling mill,
and related equipment.
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
Company 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.
ITEM 3. LEGAL PROCEEDINGS
See "Business--Strike and Impact Upon the Company" for a description of the
NLRB proceedings, "Business Environmental Matters" for a description of
environmental issues and "Business - Safety and Health Matters" for a
description of safety and health issues. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year ended September 30, 1995.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S CLASS A COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION AND STOCK PRICE
The Class A Common Stock of the Company is traded on the American Stock
Exchange (AMEX) under the symbol BYX. The approximate number of stockholders of
record on October 31, 1995 was 410. The stock has been trading since July 27,
1988. The closing price per share on October 31, 1995 was $4.50. The following
tables set forth the high and low prices for the periods indicated.
<TABLE>
<CAPTION>
SALES PRICE PER SHARE
--------------------------------------------
FISCAL YEAR 1995 FISCAL YEAR 1994
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
October-December................................. $ 4.375 $ 3.250 $ 4.688 $ 3.125
January-March.................................... 4.500 4.000 4.938 3.813
April-June....................................... 6.250 3.875 4.438 3.625
July-September................................... 7.500 4.750 5.000 3.375
</TABLE>
There is no public trading market for the Class B Common Stock and the
Class C Common Stock.
DIVIDENDS
The Company's ability to pay dividends to Class A Common Stock stockholders
is subject to restrictive covenants under the Indenture pursuant to which the
Company's 101/4% First Mortgage Notes due 2001 (the "101/4% Notes") were issued,
the Preferred Stock and Warrant Purchase Agreement, and the Company's line of
credit. At such time as the Company is permitted to pay dividends, the Board of
Directors will determine whether such action would be appropriate based on the
Company's results of operations, financial condition, capital requirements, and
other circumstances.
13
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is summary consolidated financial information for the
Company since 1989.
SUMMARY FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AND FOR YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales........................ $185,772 $160,823 $136,008 $119,772 $131,271 $183,563 $208,962
Cost of Sales.................... 162,158 144,314 128,033 109,116 124,436 170,998 187,132
-------- -------- -------- -------- -------- -------- --------
Gross Profit..................... 23,614 16,509 7,975 10,656 6,835 12,565 21,830
Selling, General and
Administrative................. 5,312 3,925 3,986 4,071 4,125 4,582 4,323
Non-Production Strike Expenses... 1,000 996 3,162 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating Income................. 17,302 11,588 827 6,585 2,710 7,983 17,507
Interest Expense................. (7,821) (7,670) (8,261) (8,977) (8,821) (9,514) (11,131)
Interest Income.................. 543 280 193 486 638 1,850 1,540
Miscellaneous.................... 431 162 502 554 902 1,380 421
-------- -------- -------- -------- -------- -------- --------
Income (Loss) Before Taxes....... 10,455 4,361 (6,739) (1,352) (4,571) 1,699 8,337
Provision (Benefit) for Taxes.... 118 -- -- -- -- (116) 281
-------- -------- -------- -------- -------- -------- --------
Income (Loss) Before Cumulative
Effect of Accounting Change
and Extraordinary Items........ 10,337 4,361 (6,739) (1,352) (4,571) 1,815 8,056
Cumulative Effect on Prior Years
of Accounting Change........... -- -- -- -- -- (1,572) --
Extraordinary Items.............. -- (5,468) 585 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net Income (Loss)................ $10,337(1) $ (1,107) $(6,154) $ (1,352) $ (4,571) $ 243 $ 8,056
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working Capital.................. $ 73,301 $ 65,186 $32,389 $ 57,167 $ 57,532 $ 64,386 $77,266
Total Assets..................... 197,076 156,068 138,280 149,381 148,669 162,411 165,518
Total Debt....................... 85,751 76,076 54,817 62,057 62,355 67,440 66,364
Preferred Stock.................. 12,239 -- -- -- -- -- --
Common Stockholders' Equity...... $ 72,605 $ 60,124 $61,231 $ 67,385 $ 68,737 $ 73,308 $73,064
</TABLE>
- ------------
(1) In fiscal 1995, income applicable to common shares after dividends accrued
and accretion on Preferred Stock was $9.6 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS AND ANALYSIS OF FINANCIAL CONDITION
The requirements to satisfy these items are incorporated by reference to
the "Management's Discussion and Analysis" section of the 1995 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statement and supplementary data information required by this
item is incorporated by reference to the "Consolidated Financial Statements" and
"Footnotes to Consolidated Financial Statements" sections of the 1995 Annual
Report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information regarding Directors and Executive Officers is incorporated by
reference to the "Information with respect to Board of Directors" section of the
Company's Proxy Statement for the 1996 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference
to the "Executive Compensation" section of the Company's Proxy Statement for the
1996 Annual Meeting of Stockholders.
ITEM 12. OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The beneficial ownership of the Company's common stock as of October 31,
1995, by persons, other than Directors and Officers, known to the Company to be
beneficial owners of more than 5% of the outstanding common stock is
incorporated by reference to the "Security Ownership of Certain Beneficial
Owners" section of the Company's Proxy Statement for the 1996 Annual Meeting of
Stockholders.
SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS
The beneficial ownership of the Company's common stock of all Directors and
Executive Officers is incorporated by reference to the "Information with respect
to Board of Directors" section of the Company's Proxy Statement for the 1996
Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Additional information regarding certain relationships and related
transactions is incorporated by reference to the "Certain Transaction" section
of the Company's Proxy Statement for the 1996 Annual Meeting of Stockholders and
to the "Notes to Consolidated Financial Statements" section of the 1995 Annual
Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (i) FINANCIAL STATEMENTS
The Consolidated Financial Statements are incorporated herein by reference
to the Company's 1995 Annual Report to Stockholders and the Accountant's Report
relating to the Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
(ii) FINANCIAL STATEMENT SCHEDULES 10-K PAGE
---------
<S> <C>
Auditor's Opinion Relating to Schedules............................................................ 19
Schedule II Valuation and Qualifying Accounts for the three years
ended September 30, 1995.......................................................................... 21
</TABLE>
Schedules not listed above are omitted because of the absence of conditions
under which they are required or because the required information is included in
the Consolidated Financial Statements submitted.
15
(B) REPORTS ON FORM 8-K
Reports on Form 8-K filed by the Registrant during the fourth quarter of
fiscal year 1995.
- Request for injunctive relief and a request for a jury trial against the
United Steelworkers of America, International, ALF-CIO-CLC; United
Steelworkes of America, Local 9121 (collectively the "Union"); and the
International Union Department of the American Federation of Labor -
Congress of Industrial Organizations ("IUD") filed by the Company in
Delaware court. (Dated August 10, 1995.)
LIST OF EXHIBITS
NUMBER EXHIBIT
- ------ -------
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 Specimen Certificate for Class A Common Stock (incorporated herein by
reference to Registration Statement on Form S-1 (No. 33-10745)).
4.1A Form of Indenture (including form of First Mortgage Note) between the
Company and First National Bank of Commerce as trustee (the
"Trustee") (incorporated herein by reference to Amendment No. 4 to
Registration Statement on Form S-1 (No 33-72-486)).
4.2 Form of Mortgage granted by the Company and Subsidiary Guarantors to
the Trustee (Louisiana) (incorporated herein by reference to
Amendment No. 1 to Registration Statement on Form S-1 (No. 33-
72486)).
4.3 Form of Mortgage, Assignment of Rents and Leases and Security
Agreement from the Company to the Trustee (Non-Louisiana)
(incorporated herein by reference to Amendment No. 1 to Registration
Statement on Form S-1 (No. 33-72486)).
4.4 Form of Mortgage, Assignment of Rents and Leases and Security
Agreement from Subsidiary Guarantors to the Trustee (Non-Louisiana)
(incorporated herein by reference to Amendment No. 1 to this
Registration Statement on Form S-1 (No. 33-72486)).
4.5 Form of Security Agreement between the Company and the Trustee
(incorporated herein by reference to Amendment No. 1 to Registration
Statement on Form S-1 (No 33-72486)).
4.6 Form of Subsidiary Security Agreement between Subsidiary Guarantors
and the Trustee (incorporated herein by reference to Amendment No. 1
to Registration Statement on Form S-1 (No. 33-72486)).
4.7 Form of Intercreditor Agreement between the Trustee and Chemical
Bank, as agent under the Credit Agreement (incorporated herein by
reference to Amendment No. 1 to Registration Statement on Form S-1
(No. 33-72486)).
4.8 Form of Subsidiary Guarantee between each recourse subsidiary of the
Company and the Trustee (incorporated herein by reference to
Amendment No. 1 to Registration Statement on Form S-1 (No 33-
72486)).
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
(incorporated by reference to Amendment No. 1 to Registration
Statement on Form S-1 (No. 33-72486)).
4.21 Stock Purchase Agreement dated August 28, 1986, between BSAC and the
purchasers of the Company's Class A Common Stock and Preferred Stock
(incorporated herein by reference to Post-Effective Amendment No. 1
to Registration Statement on Form S-1 (No. 33-10745)).
4.22 Stock Purchase Agreement dated August 28, 1986, between BSAC and RSR,
the sole purchaser of the Company's Class B Common Stock (incorporate
herein by reference to Registration Statement on Form S-1 (No.
33-22603)).
4.23 Stock Purchase Agreement dated August 28, 1986, between BSAC and
Allen & Company, Incorporated (incorporated herein by reference to
Registration Statement on Form S-1 (No. 33-22603)).
4.24 Agreement between the Company and the holders of Preferred Stock
dated as of July 26, 1988 (incorporated herein by reference to
Post-Effective Amendment No. 1 to Registration Statement on Form S-1
(No. 33-10745)).
16
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)).
10.5 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)).
10.8 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)).
10.12 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 (incorporated
herein by reference to Registration Statement on Form S-1 (No.
33-72486)).
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 (incorporated herein by reference to Registration Statement
on Form S-1 (No. 33-72486)).
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 (incorporated herein by reference to Registration Statement on
Form S-1 (No. 72486)).
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 (incorporated herein by
reference to Registration Statement on Form S-1 (No. 33-72486)).
10.18 Intercreditor Agreement dated as of November 23, 1993 between
Chemical Bank and Hibernia National Bank (incorporated herein by
reference to Registration Statement on Form S-1 (No. 33-72486)).
10.19 Security Agreement dated as of November 22, 1993 between the Company
and Hibernia National Bank (incorporated herein by reference to
Registration Statement on Form S-1 (No. 33-72486)).
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)).
10.24 Amendment among the Company, Bayou Scrap Corporation River Road
Realty Corporation, the Lenders named in the Credit Agreement and
Chemical Bank, as agent (incorporated herein by reference to
Amendment No. 4 to Registration Statement on Form S-1 (No.
33-72486)).
10.25 Asset purchase Agreement, dated as of January 30, 1995, among
Tennessee Valley Steel Corporation, TV Acquisition Corp., Bayou steel
Corporation, BT Commercial Corporation and NationsBank N.A.
(Carolinas) (incorporated herein by reference to Form 8-K dated March
8, 1995 (No. 33-22603)).
10.26 Preferred Stock and Warrant Purchase Agreement, dated as of June 13,
1995, by and between the Company and Rice Partners II, L.P.
(incorporated herein by reference to Form 8-K dated June 20, 1995
(No. 33-22603)).
17
10.27 Shareholder Agreement, dated as of June 13, 1995, by and among the
Company, Bayou Steel Properties Limited, Howard M. Meyers and Rice
Partners II, L.P. (incorporated herein by reference to Form 8-K dated
June 20, 1995 (No. 33-22603)).
10.28 Credit Agreement dated as of June 28, 1989, as amended and restated
through June 1, 1995, among the Company, the Lenders named therein,
and Chemical Bank, as agent ("the Credit Agreement") (incorporated
herein by reference to Form 8-K dated June 20, 1995 (No. 33-22603)).
10.29 Term Loan Agreement, dated as of June 1, 1995, among Bayou Steel
Corporation (Tennessee), the several term loan lenders from time to
time parties thereto, and Chemical Bank, as agent (incorporated
herein by reference to Form 8-K dated June 20, 1995 (No. 33-22603)).
13.1 Annual Report filed with this report.
18.1 Letter from Arthur Andersen LLP 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 LLP 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).
18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Bayou Steel Corporation
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Bayou Steel Corporation's
annual report to stockholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated November 17, 1995. Our audit was made for
the purpose of forming an opinion on the consolidated 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 consolidated financial statements. The schedules have been subjected
to the auditing procedures applied in the audit of the consolidated 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 consolidated
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
November 17, 1995
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BAYOU STEEL CORPORATION
By /S/ HOWARD M. MEYERS
Howard M. Meyers
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ HOWARD M. MEYERS Chairman of the Board, Chief
Howard M. Meyers Executive Officer and Director December 14, 1995
/S/ JERRY M. PITTS President, Chief Operating December 14, 1995
Jerry M. Pitts Officer and Director
/S/ RICHARD J. GONZALEZ Vice President, Chief Financial December 14, 1995
Richard J. Gonzalez Officer, Treasurer and Secretary
/S/ JOHN A. CANNING, JR. Director December 14, 1995
John A. Canning, Jr.
/S/ LAWRENCE E. GOLUB Director December 14, 1995
Lawrence E. Golub
/S/ MELVYN N. KLEIN Director December 14, 1995
Melvyn N. Klein
/S/ ALBERT P. LOSPINOSO Director December 14, 1995
Albert P. Lospinoso
/S/ STANLEY S. SHUMAN Director December 14, 1995
Stanley S. Shuman
/S/ JEFFREY P. SANGALIS Director December 14, 1995
Jeffrey P. Sangalis
</TABLE>
20
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING OF CHARGED TO AT END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS(1) PERIOD
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
September 30, 1995
Allowance for doubtful accounts........................ $ 617,497 $ (49,527) $ -- $ 567,970
----------- ----------- ----------- -----------
September 30, 1994
Allowance for doubtful accounts........................ $ 542,725 $ 186,560 $ 111,788 $ 617,497
----------- ----------- ----------- -----------
September 30, 1993
Allowance for doubtful accounts........................ $ 943,267 $ (174,994) $ 225,548 $ 542,725
----------- ----------- ----------- -----------
</TABLE>
- ------------
(1) Write-off of uncollectible accounts.
21
EXHIBIT 13.1
BAYOU STEEL
CORPORATION
ANNUAL REPORT
1995
<PAGE>
Bayou Steel Corporation owns and operates a steel minimill located on the
Mississippi River in LaPlace, Louisiana, 35 miles northwest of New Orleans,
Louisiana and a rolling mill in Harriman, Tennessee, 37 miles west of Knoxville.
The Company's principal raw material, scrap steel, is melted in electric
arc furnaces and continuously cast into billets, then rolled on its two rolling
mills into a variety of bar and light structural steel shapes. Currently, the
Company rolls angles, channels, flats, standard beams, wide-flange beams, rebar,
rounds, and squares. These products are sold principally to steel service
centers that supply various end-users in manufacturing and construction. The
Company has over 590 customers in 44 states, Canada, and Mexico. The Company
also, occasionally, ships both billets and shapes overseas.
The Company has four modern warehouses located at strategic points along
the inland waterway system and an additional warehouse in Tennessee, creating a
wide geographic market for product distribution. The Company ships substantial
quantities of billets and light structural steel shapes and receives scrap steel
using barge transportation. The Company also utilizes state-of-the-art equipment
and technology, resulting in product flexibility and significant operating
efficiencies. The high productivity of its employees, together with the modern
equipment, enable the Company to produce high quality products at a low cost.
<PAGE>
BAYOU STEEL CORPORATION
FINANCIAL HIGHLIGHTS
YEAR ENDED SEPTEMBER 30, PERCENT
1995 1994 CHANGE
FOR THE YEAR:
Net Sales ............................... $ 185,772,280 $ 160,822,995 + 15.5
Income Before Extraordinary Item ........ 10,336,789 4,361,015 +237.0
Net Income (Loss) ....................... 10,336,789 (1,107,201) --
Income (Loss) Per Equivalent Common Share .73 (.08) --
EBITDA(1) ............................... $ 23,774,764 $ 17,025,229 + 39.6
Interest Coverage Ratio ................. 3.14 2.28 + 37.7
AT YEAR END:
Cash Equivalent ......................... $ 10,521,664 $ 8,903,413 + 18.2
Working Capital ......................... 73,301,225 65,186,105 + 12.5
Property, Plant and Equipment ........... 91,650,047 67,272,744 + 36.2
Total Assets ............................ 197,076,165 156,067,669 + 26.3
Long-Term Debt .......................... 85,137,665 75,735,924 + 12.4
Common Stockholders' Equity ............. 72,605,395 60,124,028 + 20.8
Stockholder Equity per Share ............ 5.54 4.67 + 18.6
Stock Price per Share ................... $ 4.94 $ 4.13 + 19.6
OTHER DATA:
Shape Shipments ......................... 503,297 446,572 + 12.7
Billet Shipments ........................ 11,072 35,503 - 68.8
Employees ............................... 545 428 + 27.3
(1) Earnings before Interest, Tax, Depreciation, and Amortization.
<PAGE>
2
BAYOU STEEL CORPORATION
LETTER TO THE STOCKHOLDERS
TO OUR STOCKHOLDERS:
The 1995 fiscal year has been exciting and profitable. Years of planning
are turning into increased shareholder value. We implemented several projects
associated with our $10 million capital improvement program which is expected to
lead to operational cost reductions. Your Company also acquired a rolling mill
in Tennessee which should lead to additional sales and earnings. We kept our
Company on the right track for continued success. Listed below are the
operational milestones accomplished during fiscal 1995:
- Lowest rolling mill conversion cost
- Second highest shape tons produced
- One furnace productivity record
- Lowest secondary production
- Record margins
- Safety records in several categories
FINANCIAL PERFORMANCE
The financial performance in fiscal 1995 was the second best in the history
of the Company despite several significant challenges. Your Company reported
consolidated net earnings of $10.3 million, or $0.79 per share. This represents
a notable improvement of $5.9 million over the previous year. The $5.9 million
improvement was primarily due to a strong economy which led to increased
shipments and improved metal margins. Shape shipments were 12.7% higher than
fiscal 1994 and the highest since 1988. Selling prices were at levels not seen
since 1989. Cost of sales as a percentage of sales decreased 2.4% from fiscal
1994.
ACQUISITION
As we have stated in past years, our Company continues to pursue strategic
acquisitions. On April 28, 1995, we found a great opportunity with the purchase
of a rolling mill in Tennessee for a net cash purchase price of $18.8 million.
The purpose of this acquisition is to increase our basic earning power and
shareholder value, and give us a solid position in the southeast and
mid-Atlantic markets. The Tennessee mill was recently refurbished and is
technologically advanced. The mill produces rebar and merchant bar and has
250,000 tons per year of rolling capacity. Merchant bar products range in size
from 1/2" through 2" and complement our existing product range from 3" through
8" in angles and flats. Many of the buyers of merchant bar products are already
our customers. We will now be able to supply these and other customers with an
expanded range of steel sections. Since we will not be operating the Tennessee
facility's inefficient melt shop, the Tennessee mill will use as its principal
raw material surplus billets from our Louisiana electric arc furnace and
purchase additional billets as required.
Operations started in the fourth quarter of fiscal 1995. As we reported at
the time of the acquisition, losses were expected at the Tennessee facility for
a few quarters after start-up. While start-up losses continue, our productivity
has improved each month. Losses will decline as productivity improves and the
Tennessee operation should be profitable in 1996. In November, nearly 7,000 tons
were rolled. Within 12 to 18 months, we expect to produce 21,000 tons per month.
At current market prices, this planned capacity is projected to add nearly $85
million to annual revenues which should result in improved earnings.
3
CAPITAL PROJECTS
Besides the acquisition of the Tennessee facility, your Company invested
$12.5 million to keep the present facilities modern and efficient. These
investments are directed at improving cost and increasing operating capacity.
Several of these projects were completed during the fourth fiscal quarter and
the first fiscal quarter of 1996. The Company has experienced high costs with
operating the new equipment due to the learning curve and start-up expenses. We
believe that these projects, when fully implemented, will result in substantial
economic benefits. The key projects are:
AUTOMOBILE SHREDDER.
This $4.0 million project involves backward integration into scrap metal
processing. Scrap is our principal raw material and accounts for 40% of the
final product cost. This operation purchases car bodies and sheet metal and then
shreds them into 3" nuggets of steel. Shredded material is the most expensive
scrap type that we consume in steelmaking. After four months of operations, the
shredder facility is nearing planned capacity. The quality of scrap is excellent
and the conversion costs are very competitive. Currently, the cost of car bodies
is high due to local competitive conditions and increased domestic demand for
shredded material. We believe this project will continue to enhance our
competitive position by giving us greater control over scrap availability and
cost.
ECCENTRIC BOTTOM TAPPING (EBT).
This $1.0 million project has great potential. We expect the EBT to expand
billet production by 7% or 40,000 tons per year. In November, the first month in
which the equipment was operated in a one-furnace mode, 13% of the planned
improvement was achieved. Surplus production is used at our new Tennessee
rolling mill.
STRAIGHTENER.
This $2.0 million project at our Louisiana minimill is intended to improve
productivity by eliminating a bottleneck which affected 40% of our products.
Recently implemented, we have used it on 3 section sizes and have realized
noticeable productivity improvements that equaled or exceeded what was
anticipated.
STRIKE AND CORPORATE CAMPAIGN
The strike initiated by the United Steelworkers of America Local 9121
against your Company over 21/2 years ago continues today. During this period,
despite the difficulties imposed by the strike, we charged forward to establish
productivity and production records. Your Company continues to seek a contract
which is in the long-term interests of the stockholders. As you know, the steel
industry is cyclical and the minimill segment of the industry is characterized
by very efficient producers. A contract is needed that works in both the good
economic markets and the lean ones. Above all, we must always be competitive. A
cornerstone of our contract proposal is a productivity incentive
4
compensation plan. We are already aggressively implementing the pay for
performance philosophy for our non-bargaining unit workforce.
The Union's corporate campaign, an attempt by the Union to force your
Company to capitulate, continues in full force. We believe the Union has
overstepped its boundaries and has engaged in illegal activities. Consequently,
a lawsuit was filed charging the Union with numerous violations of the Racketeer
Influenced Corrupt Organizations Act (RICO) and federal securities fraud. The
Company hopes to recover significant monetary damages for past and current
activities.
FINANCIAL POSITION
Bayou Steel's financial position continues to be strong. Stockholder's
equity is $84.8 million. Net working capital increased $8.1 million during
fiscal 1995 to $73.3 million with a current ratio of 3.71 to 1.00, including
$10.5 million in invested cash. Our $45 million line of credit had no borrowings
before or after the temporary financing of the Tennessee facility.
OUTLOOK
We are optimistic about the future prospects of our Company. Many benefits
will be derived from the Tennessee facility. Also, we will realize cost
reductions from the capital projects recently completed. The Company expects an
improvement in shipments in fiscal 1996 mainly due to expanding our market with
products from the Tennessee facility. A less robust market for steel is expected
in fiscal 1996 which would result in lower prices in both merchant bar products
at the Tennessee facility and, to a lesser extent, light structural shape
products at the Louisiana facility. Your Company plans to continue to optimize
its product mix to remain competitive, maintain its share in the light
structural shape market, and establish its place in the merchant bar market.
We would like to extend a special thanks to our employees and their
families for their commitment and personal sacrifices, particularly during the
past year when challenged with major capital construction projects and the
acquisition and start-up of the Tennessee facility. Through the support of our
suppliers and customers and the continued loyalty of you, our stockholders, we
will meet the challenges ahead. Our focus in 1996 will be to build on the
achievements of 1995 and the solid foundations laid in recent years. We will
continue to plan for the future to ensure continued success and build value for
our stockholders.
Sincerely,
Howard M. Meyers
Chairman of the Board and
Chief Executive Officer
Jerry M. Pitts
President and Chief
Operating Officer
December 13, 1995
<PAGE>
BAYOU STEEL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Bayou Steel Corporation (the "Company") reported consolidated net income of
$10.3 million in fiscal 1995 compared to a net income of $4.4 million before an
extraordinary loss in fiscal 1994. The $5.9 million improvement in the Company's
results was mainly due to two factors. First, shape shipments increased by
12.7%. Second, metal margin, the difference between shape selling price and raw
material ("scrap") cost, increased by 8.8%. The loss of $2.2 million at Bayou
Steel Corporation (Tennessee) ("Tennessee") ("BSCT"), a wholly owned subsidiary,
which started operations in the fourth fiscal quarter, impacted earnings. Cost
of goods sold for the Company was adversely impacted by the start-up of several
recently completed capital improvement projects and the idle second furnace at
the Louisiana facility ("Louisiana") ("BSCL"), the increase in additive and
alloy costs ("AAF"), and unusual adjustments in scrap inventories.
The Company reported a net income of $4.4 million before an extraordinary
loss in fiscal 1994 compared to a net loss of $6.7 million before an
extraordinary gain in fiscal 1993. The $11.1 million improvement in the
Company's results was due to several factors. First, shape shipments increased
by 10.7%. Second, metal margin increased by 6.2%. Third, conversion cost, the
cost to convert raw material into shapes, decreased by 9.4%. Lastly,
out-of-pocket expenses of the strike and its related corporate campaign
decreased by $2.2 million.
The 1993 loss was primarily caused by sharp increases in scrap costs and by
the strike. The increases in scrap costs during the year was only partially
offset by increases in selling prices, resulting in reduced metal margins. The
United Steelworkers of America ("Union") initiated a strike after the parties
failed to reach a new labor contract due to economic issues. In July of 1993 the
Union launched a corporate campaign to damage the Company. Both the strike and
corporate campaign are ongoing.
On April 28, 1995, the Company purchased substantially all the assets of
Tennessee Valley Steel Corporation ("TVSC") for a purchase price of $26.8
million. The purchase price included land, buildings, equipment, inventory,
receivables, and $8 million in cash. The assets are operated by BSCT. The
rolling mill began limited production in July and is currently operating
twenty-four hours a day. The Company does not plan to operate the inefficient
melt shop at the Tennessee facility.
The dividends accrued and accretion of $0.7 million on the preferred stock
in fiscal 1995 is the result of the Company issuing $15 million in preferred
stock and warrants in late fiscal 1995 as part of the financing of the
acquisition of the assets of TVSC. The extraordinary loss of $5.5 million in
fiscal 1994 was caused by the prepayment of the 14.75% Senior Secured Notes (the
"14.75% Notes") which had provisions for escalating interest rates as operating
cash flow improved. The loss includes prepayment penalties, interest during the
defeasance period, and the write-off of the unamortized portion of deferred
financing cost. This debt was replaced with $75 million of 10.25% First Mortgage
6
Notes Due 2001 (the "10.25% Notes"). This refinancing transaction not only
improved cash flow by essentially eliminating requirements for near-term
principal payments but also provided the Company with cash to undertake a $10
million capital improvements program directed toward cost reduction. The
extraordinary gain of $0.6 million in fiscal 1993 was the result of purchasing
some of the outstanding 14.75% Notes at a discount.
The following table sets forth the shipment and sales data for the fiscal
years indicated.
YEARS ENDED SEPTEMBER 30,
-----------------------------------
1995 1994 1993
------- ------- ------
Shape Shipment Tons .................. 503,297 446,572 403,274
Average Shape Selling
Price Per Ton ...................... $ 360 $ 337 $ 300
Billet Shipment Tons ................. 11,072 35,503 59,604
Average Billet Selling
Price Per Ton ...................... $ 235 $ 224 $ 209
Net Sales (in thousands) ............. $185,772 $160,823 $136,008
SALES
Net sales increased by $25 million or 15.5% in fiscal 1995 compared to
fiscal 1994 due to an increase in shape shipments and selling prices. The
increase was partially offset by fewer tons of billets shipped in fiscal 1995.
Net sales increased by $25 million or 18.2% in fiscal 1994 compared to fiscal
1993 also due to an increase in shipments and selling prices for shapes. The
increase in fiscal 1994 compared to fiscal 1993 was partially offset by a
reduction in billet shipments.
SHAPES. In fiscal 1995, the 56,725 tons or 12.7% increase in shape
shipments was attributable to a strong economy and improved product mix which
enabled the Company to better respond to customer demand. This was the best
shipment year since fiscal 1988. Exports to Mexico and overseas were minimal,
while exports to Canada of 50,000 tons represent an improvement of 2.7% compared
to fiscal 1994. Shipments from the Tennessee facility in fiscal 1995 were
minimal, since operations only began in mid-July, and their were no finished
product in inventory available for sale. The $23 per ton or 6.8% increase in
shape prices was primarily in response to a strong market demand. This was the
best selling price since fiscal 1989. The selling price of shapes, towards the
end of fiscal 1994 and into fiscal 1995, began to be influenced more by the
strong market and less by scrap cost as was the case during the first half of
fiscal 1994 resulting in improved metal margins.
In 1994, the 43,298 tons or 10.7% increase in shape shipments was
attributable to an improvement in the economy and in the Company's product mix
and availability. In 1993, shipments were adversely affected by the lack of
availability and mix of product resulting from a reduced production schedule
caused by the strike. The $37 per ton or 12.3% increase in shape prices in 1994
compared to 1993 was in response to continued escalation in scrap prices and
strong domestic demand. The shape price increases, toward the end of the fiscal
1994, surpassed the scrap price increases resulting in improved margins compared
to fiscal 1993.
The Company expects an improvement in shipments in fiscal 1996 mainly due
to expanding its market with products from the Tennessee's operation. At the
time of the
7
acquisition of the Tennessee mill, the Company planned to initially produce
approximately 30% rebar and 70% merchant bar and to move even more toward
merchant bar over the years. With the significant decreases in rebar pricing,
the Company plans to produce predominately merchant bar in fiscal 1996,
depending on market conditions. The Company expects that the additional product
line from Tennessee will complement the existing product line and increase the
Company's market share. Merchant bar product prices have declined during the
forth quarter of fiscal 1995. The Company does expect a slightly slowing economy
in fiscal 1996 which may result in lower prices in both merchant bar products
from Tennessee and, to a lesser extent, light structural shape products from
Louisiana. Consequently, metal margin should be lower in fiscal 1996. The
Company plans to continue to optimize its product mix to remain competitive,
maintain its share in the light structural shape market, and establish its place
in the merchant bar market.
BILLETS. In both fiscal 1995 and 1994, billet shipments, the Company's
semi-finished product, decreased compared to the prior fiscal year due to the
lack of billets available for sale. More billets were used in Louisiana's
rolling mill due to higher production levels, resulting in fewer billets
available for sale to customers. Also, the Company supplied Tennessee's rolling
mill with some billets exhausting the remainder of the Company's production. The
selling price for billets increased in fiscal 1994 and again in 1995 due to
increased raw material costs and improving market conditions.
In fiscal 1996, the Company will continue to supply all of Louisiana's
billet requirements for its rolling mill. Excess billets will be shipped to
Tennessee's rolling mill to partially fill its billet requirements. Tennessee's
remaining billet requirements will be purchased from other steel mills.
Depending on market conditions, the Company may sell billets on an occasional
and selective basis to domestic and export customers while purchasing additional
billets for Tennessee.
COST OF GOODS SOLD
Cost of goods sold was 87.3% of sales in fiscal 1995 compared to 89.7% in
fiscal 1994. The percentage decrease in cost of goods sold was due to shape
selling prices increasing more than the scrap price increases. Offsetting some
of the improvements in cost of goods sold as a percentage of sales in fiscal
1995 compared to fiscal 1994 was the high production cost associated with
beginning operations at Tennessee, starting up the previously idle second
furnace at the Louisiana plant, and the learning curve associated with the
installation of the new capital improvements.
Cost of goods sold was 89.7% of sales in fiscal 1994 compared to 94.1% in
fiscal 1993. Contributing to the improvement was increases in productivity and
reductions in conversion costs (the cost of converting raw materials into
shapes). Fiscal 1993 conversion cost was high due to the curtailment of
operations during the initial phases of the strike and higher purchase prices
for electricity, natural gas, and electrodes. Cost of goods sold has been
favorably impacted
8
in fiscal 1994 and 1993 by approximately $1 million due to a contract with
the State of Louisiana to abate state franchise and sales taxes. This agreement
expired during fiscal 1995.
SCRAP. The major component of cost of goods sold is scrap. The volatility
of the scrap markets was evident during fiscal 1994 and 1993. In 1994, the scrap
costs increased an average of 24% compared to 1993. In 1994, selling prices
increased $11 per ton more than the increases in the scrap prices, increasing
margins. The average metal margin was 6.2% higher in 1994 compared to 1993. In
fiscal 1995, the scrap cost increased an average 3.5% compared to fiscal 1994.
The selling prices increased $18 per ton more than the scrap price increases
resulting in significantly better margins. In order to achieve better control
over scrap cost and availability, the Company opened Mississippi River Recycling
("MRR") which operates an automobile shredder. MRR produces shredded scrap metal
which is one of several scrap types used in steelmaking. This project was
completed in the fourth quarter of fiscal 1995 and experienced normal start-up
problems but is now operating near planned capacity. Currently, the market for
car bodies is higher than anticipated due to local competitive conditions and
increased domestic demand for shredded material. This project was part of the
$10 million capital improvements program directed at cost reduction. The Company
is evaluating the expansion of MRR to process other types of unprepared scrap.
AAF. Another component of raw materials is additives, alloys and flux
("AAF"). AAF cost increased 20% and 7.4% in the fourth quarter of fiscal 1995
and fiscal year 1995, respectively, compared to the same periods of fiscal 1994,
mainly due to price. AAF prices have recently increased significantly due to
reduced product availability which was caused by an anti-dumping suit against
foreign markets utilized by the Company and its competitors. This resulted in
high duties on imported AAF. Also contributing to the higher prices is the
increase in domestic demand due to the high steel-making capacity utilization.
This general market condition affects the Company and its competition and is
expected to continue into fiscal 1996.
CONVERSION COST. Another significant portion of cost of goods sold is
conversion cost, which includes labor, energy, maintenance material, and
supplies used to convert raw materials into billets and billets into shapes.
Conversion cost per ton for the Louisiana facility, which include fixed and
variable costs, decreased 9.4% in fiscal 1994 compared to fiscal 1993, and
decreased 1% in fiscal 1995 compared to fiscal 1994.
Conversion cost per ton in 1993 was high 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 and a higher than normal
fixed cost per ton. Overtime wages paid to workers as a result of reduced
staffing and training new employees during this period of the strike was
significant. The Company has been operating at full capacity since July 1993.
9
The decrease in conversion cost per ton in fiscal 1994 was due to
improvements in production and productivity compared to fiscal 1993. As the
temporary replacement workers hired during the strike gained experience,
productivity improved. The melt shop and the rolling mill set several production
records in fiscal 1994, resulting in lower fixed costs per ton. Variable cost
per ton also decreased due to more efficient consumption of supplies. Man-hours
per ton were also reduced by .57 or 21% since 1992. Labor cost per ton has been
reduced by $13 since 1992.
In fiscal 1995 conversion cost per ton at the Louisiana plant decreased by
1% compared to fiscal 1994. Late in the third fiscal quarter, the Louisiana
operations took a planned shutdown for major maintenance and installation of
capital improvements. One of the projects completed in the melt shop was the
eccentric bottom tapping ("EBT") furnace which will increase production and
reduce conversion cost through reduced consumption of power and supplies. The
start-up of the EBT affected productivity due to the learning curve.
Simultaneously, costs were impacted in the melt shop as the Company hired and
trained personnel for starting the idled second furnace to supply billets to
Tennessee. The learning curve on the second furnace was slow, resulting in
higher costs. Together, these two start-up issues increased operating costs by
approximately $1.5 million. The Company also spent $1.4 million in capital
expenditures on the second furnace. Production costs in Louisiana's rolling mill
were better than 1994 as productivity increased by 8.7%. Man-hours per ton in
fiscal 1995 remained at the same levels as fiscal 1994. Labor cost per ton has
been reduced by $15 since 1992. The Company's goal is to further reduce labor
cost per ton through increased shipments and increased productivity.
Due to the impact of the second furnace learning curve and the recent
favorable change in billet availability in the market place, the Company
returned to a one furnace operation during the first fiscal quarter of 1996. The
other furnace is run on maintenance down days and serves as a back-up for
unexpected outages. The one furnace operation should reduce conversion cost per
ton due to improved efficiencies. The Louisiana operation will still supply the
Tennessee rolling mill with a substantial quantity of billets while the
remaining requirements will be purchased on the open market. The Company will
continue to evaluate its long-term billet supply strategy while reacting to
short-term market changes.
In July 1995, Tennessee started operating its rolling mill. As expected,
the learning curve associated with new and refurbished equipment combined with
an inexperienced work force caused the production tons to be low and the
conversion cost per ton to be higher than expected. Consequently, production
costs exceeded sales by $1.3 million. As experience is gained with the workforce
and the equipment, conversion cost per ton and gross margins will improve.
However, the Company still expects several quarters of high conversion costs at
Tennessee in fiscal 1996.
SHIPPING AND OTHER COSTS. There were also several other issues that
adversely affected cost of goods sold in fiscal 1995 as compared to the
10
prior year. First, shipping, dock, and stocking location operating costs
were higher than fiscal 1994 due to higher shipment volume, extra freight
expense caused by a lock closure in Chicago, higher barge freight rates, and
demurrage. The Company expects a significant increase in barge freight rates in
fiscal 1996. Second, an unusual scrap fire and inventory adjustment increased
cost of goods sold by $0.8 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased in fiscal 1995
compared to fiscal 1994 and 1993 due to an increase in amortization expenses
related to the financing of the Tennessee facility, additional administrative
expenses related to the Tennessee facility, and additional franchise and
property taxes. Selling, general and administrative expenses were favorably
impacted by a contract with the State of Louisiana to abate state franchise and
sales taxes in fiscal 1993, 1994, and the first six months of 1995. This
contract expired in fiscal 1995 resulting in an increased franchise tax expense.
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
expenses related to the strike and the Union's announced corporate campaign. In
fiscal 1995 and 1994, the Company's expenses averaged approximately $83,000 per
month for direct out-of-pocket strike-related and corporate campaign issues.
Future strike-related costs should not exceed $100,000 per month. However, if
the corporate campaign activities increase, these expenses could also increase.
INTEREST EXPENSE & MISCELLANEOUS
Interest expense increased in fiscal 1995 compared to fiscal 1994 due to
the temporary financing of the Tennessee facility and the financing of a $10
million term loan. The increase was partially offset by capitalized interest.
The Company expects interest expense to increase in fiscal 1996 due to a full
year of interest on the term loan.
Interest expense decreased in fiscal 1994 compared to 1993 primarily due to
the purchase of $6.5 million of the 14.75% Notes in late 1993. During the first
half of fiscal 1994, the Company accrued interest on $48.9 million of the 14.75%
Notes, and as of March 1994, the Company accrued interest on $75 million of the
10.25% Notes; in addition, the Company borrowed an average of $2.4 million under
its revolving line of credit at a weighted average interest rate of 5.2%. In
fiscal 1993, the Company accrued interest on $55.4 million of its 14.75% Notes
on a weighted outstanding basis.
Interest income increased in fiscal 1994 compared to fiscal 1993 due to
investing excess cash from the sale of the $75 million 10.25% Notes. Also,
interest rates improved in fiscal 1994. Interest income increased in fiscal 1995
compared to fiscal 1994 due to the Company having more cash to invest and better
interest rates.
11
Miscellaneous income in fiscal 1995 and 1993 was higher than 1994 due to a
better collection record on credit sales.
NET INCOME/LOSS BEFORE EXTRAORDINARY ITEMS
The Company's results before extraordinary items improved by $11.1 million
in fiscal 1994 compared to fiscal 1993. The primary reasons for the improvement
are increased shipments, better margins, lower conversion cost per ton, and
lower strike-related costs.
In fiscal 1995, the Company's consolidated results before extraordinary
items improved by $5.9 million compared to fiscal 1994 mainly due to stronger
shape shipments and a better metal margin. The improvement was partially offset
by start-up expenses of the Tennessee facility, start-up expenses related to the
$10 million capital improvement projects and the idle second furnace in
Louisiana, increases in AAF cost, and an unusual adjustment in scrap inventory.
The loss at the Tennessee facility had a negative impact on the Company's
consolidated results of $2.2 million for fiscal 1995. For the fourth quarter of
fiscal 1995, income was impacted by a $1.6 million loss from Tennessee. The
Company expects several quarters of losses from Tennessee. The Company expects
these losses to decrease as the work force gains experience, the learning curve
on new equipment is completed, and the adjustments are made to the rolling
program of new products.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended fiscal 1995 with $10.5 million of cash and current assets
exceeding current liabilities by a ratio of 3.7 to 1.0. Working capital
increased by $8.1 million to $73.3 million in fiscal 1995.
OPERATING CASH FLOW. Net cash provided by operations was $9.0 million.
Income, depreciation, and amortization contributed $16.4 million in operating
cash. Accounts payable increased by $5.6 million due to the start-up of the
Tennessee rolling mill and the second furnace. Accounts receivable increased by
$2.7 million as business expanded. Inventories also increased by $10.5 million
as most of Tennessee's production went into inventory, as Louisiana's operations
built billet inventory for Tennessee, and as Louisiana's finished goods
inventory increased as a result of high productivity levels.
CAPITAL EXPENDITURES. Capital expenditures amounted to $29.5 million in
fiscal 1995 of which $17.1 million was for the acquisition of the TVSC assets.
Also, $8.2 million was spent for the $10 million capital expenditure program to
reduce operating costs and increase melt shop and rolling capacity. These
projects were completed during the fourth quarter of fiscal 1995 and first
quarter of fiscal 1996. Costs were high due to the learning curve and start-up
expenses associated with operating new equipment; consequently, Louisiana's
operation
12
has not yet realized the full benefit from these projects. The Company believes
that these capital projects, when fully implemented, will result in substantial
annual operating savings. In fiscal 1996, depending on market conditions, the
Company expects to spend approximately $12 million on various capital projects
to reduce cost and increase productivity, to enhance safety and environmental
programs, and to maintain the plants.
FINANCING ACTIVITIES. Cash provided by financing activities of $22.2
million was due to the cash generated from the issuance of a $10 million term
loan and $15 million for preferred stock and warrants. This was offset by $2.5
million in transaction costs.
On June 20, 1995, the Company completed the issuance and sale of 15,000
shares of redeemable preferred stock, par value $0.01 per share ("Preferred
Stock"), and warrants to purchase, at a nominal exercise price, six percent of
the Company's Common Stock for $15 million. The Preferred Stock is mandatorily
redeemable by the Company seven years after issuance and requires the payment of
quarterly dividends, at a rate of 14.5% per annum or $2.2 million per year. The
Company intends to declare and pay quarterly dividends on the Preferred Stock
unless prohibited by covenants in the revolving line of credit and the 10.25%
Notes. In addition, upon certain adverse events encountered by the Company, such
holders will have the right to additional warrants.
Simultaneously with the sale of the Preferred Stock and warrants, the
Company entered into a five-year term loan agreement of $10 million for the
Company's wholly owned subsidiary, BSCT. The proceeds received from the term
loan were used to repay the loan outstanding under the Company's revolving
credit facility which had been incurred to acquire substantially all of the
assets of TVSC. The term loan is partially secured by the Company's accounts
receivable and inventory. The term loan agreement calls for quarterly principal
payments beginning on June 30, 1997. The term loan bears interest on a sliding
scale based on the quarterly leverage ratio which is defined as indebtedness
divided by earnings before interest, taxes, depreciation, and amortization
("EBITDA"). Based on the fourth quarter leverage ratio, the Company will accrue
at LIBOR plus 2% or approximately 8% at current rates.
On June 20, 1995, the Company entered into an amended and restatement of
its revolving line of credit agreement which will be used for general corporate
purposes. The terms of the amended and restated agreement call for available
borrowings up to $45 million, including outstanding letters of credit using a
borrowing base of BSCL's receivables and inventory. Based on these criteria, the
amount available as of September 30, 1995, was $29.7 million. The five year
revolving line of credit bears interest on a sliding scale based on the
quarterly leverage ratio which is defined as indebtedness divided by EBITDA. The
terms of the loan agreement impose certain restrictions on the Company, the
13
most significant of which require the Company to maintain a minimum interest
coverage ratio and limit the incurrence of certain indebtedness. There were no
outstanding borrowings under the line of credit as of September 30, 1995. The
Company does not anticipate any difficulties in obtaining another secured line
of credit upon the expiration of the current line of credit in fiscal 2000.
All of the $75 million 10.25% Notes are classified as long-term debt. There
are no principal payments due on the 10.25% Notes until maturity in 2001. The
Company currently intends to refinance the 10.25% Notes on or before the
maturity date in 2001. The Indenture under which the Notes are issued ("the
Indenture") contains a covenant which restricts the Company's ability to incur
additional indebtedness and place liens on the assets acquired with the
indebtedness. Under the Indenture, the Company may not incur additional
indebtedness unless its Interest Expense Coverage Ratio for the trailing 12
months would be greater than 2.00 to 1.00 after giving effect to such
incurrence. As of September 30, 1995, the Interest Expense Coverage Ratio was
3.14 to 1.00.
The Company believes that current cash balances, internally generated
funds, the credit facility, and additional purchase money mortgages are adequate
to meet the foreseeable short-term and long-term liquidity needs. If additional
funds are required to accomplish long-term expansion of its production
facilities or significant acquisitions, the Company believes funding can be
obtained from a secondary equity offering or additional indebtedness.
There are no financial obligations with respect to post-employment or
post-retirement benefits.
OTHER COMMENTS
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state, and local laws and
regulations. See Footnote 10 and the "10K Business Environmental Matters."
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 supply and demand.
14
<PAGE>
BAYOU STEEL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30,
-----------------------------
CURRENT ASSETS: 1995 1994
------------- -------------
Cash and temporary cash investments ........ $ 10,521,664 $ 8,903,413
Receivables, net of allowance for doubtful
accounts of $567,970 in 1995 and
$617,497 in 1994 .......................... 21,921,347 19,156,407
Inventories ................................ 67,694,741 57,145,550
Prepaid expenses ........................... 257,405 188,452
------------- -------------
Total current assets ................... 100,395,157 85,393,822
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land ....................................... 3,790,398 2,750,398
Machinery and equipment .................... 102,582,968 78,317,920
Plant and office building .................. 18,929,288 14,708,733
------------- -------------
125,302,654 95,777,051
Less--Accumulated depreciation ............. (33,652,607) (28,504,307)
------------- -------------
Net property, plant and equipment ...... 91,650,047 67,272,744
------------- -------------
OTHER ASSETS .................................... 5,030,961 3,401,103
------------- -------------
Total assets ........................... $ 197,076,165 $ 156,067,669
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ....... $ 613,483 $ 340,232
Accounts payable ........................... 22,188,484 16,540,005
Accrued liabilities ........................ 3,675,716 3,327,480
Accrued dividends on redeemable
preferred stock .......................... 616,249 --
------------- -------------
Total current liabilities .............. 27,093,932 20,207,717
------------- -------------
LONG-TERM DEBT .................................. 85,137,665 75,735,924
------------- -------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK ...................... 12,239,173 --
------------- -------------
COMMON 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 ............................ 47,769,034 44,890,554
Retained earnings .......................... 24,707,515 15,104,628
------------- -------------
Total common stockholders' equity ...... 72,605,395 60,124,028
------------- -------------
Total liabilities and common
stockholders' equity ................. $ 197,076,165 $ 156,067,669
============= =============
The accompanying notes are an integral part of these consolidated balance
sheets.
15
<PAGE>
BAYOU STEEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
NET SALES ..................................................... $ 185,772,280 $ 160,822,995 $ 136,008,039
COST OF SALES ................................................. 162,158,316 144,313,879 128,032,556
------------- ------------- -------------
GROSS PROFIT .................................................. 23,613,964 16,509,116 7,975,483
------------- ------------- -------------
SELLING, GENERAL AND ADMINISTRATIVE ........................... 5,312,402 3,924,986 3,985,564
NON-PRODUCTION STRIKE EXPENSES ................................ 999,938 996,091 3,162,325
------------- ------------- -------------
17,301,624 11,588,039 827,594
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense ......................................... (7,821,244) (7,669,665) (8,260,775)
Interest income .......................................... 542,909 280,224 192,821
Miscellaneous ............................................ 431,655 162,417 501,084
------------- ------------- -------------
(6,846,680) (7,227,024) (7,566,870)
INCOME (LOSS) BEFORE TAXES &
EXTRAORDINARY ITEMS ........................................ 10,454,944 4,361,015 (6,739,276)
PROVISION FOR INCOME TAXES .................................... 118,155 -- --
------------- ------------- -------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS ........................................ 10,336,789 4,361,015 (6,739,276)
EXTRAORDINARY ITEMS ........................................... -- (5,468,216) 585,541
------------- ------------- -------------
NET INCOME (LOSS) ............................................. 10,336,789 (1,107,201) (6,153,735)
DIVIDENDS ACCRUED AND ACCRETION ON
PREFERRED STOCK ............................................ (733,902) -- --
------------- ------------- -------------
INCOME (LOSS) APPLICABLE TO COMMON
AND COMMON EQUIVALENT SHARES ............................... $ 9,602,887 $ (1,107,201) $ (6,153,735)
============= ============= =============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING .............................. 13,113,058 12,884,607 12,884,607
INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE:
Income (loss) before extraordinary items ................. $ .73 $ .34 $ (.52)
Extraordinary items ...................................... -- (.42) .04
------------- ------------- -------------
Income (loss) per common and
common equivalent share ................................. $ .73 $ (.08) $ (.48)
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
16
<PAGE>
BAYOU STEEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1995 1994 1993
------------- ------------- --------------
<S> <C> <C> <C>
Income (loss)................................................... $10,336,789 $ (1,107,201) $ (6,153,735)
Extraordinary items............................................. -- 5,468,216 (585,541)
Loss on retirement of equipment................................. -- 25,373 --
Depreciation ................................................... 5,148,300 4,721,862 4,158,515
Amortization.................................................... 893,185 552,909 457,771
Provision for losses on accounts receivable..................... (53,204) 186,560 (174,994)
Changes in working capital:
(Increase) in receivables..................................... (2,711,736) (666,060) (6,162,337)
(Increase) decrease in inventories............................ (10,549,191) (8,659,142) 5,265,545
(Increase) decrease in prepaid expenses....................... (68,953) 33,825 34,781
Increase (decrease) in accounts payable....................... 5,648,479 (1,131,922) 2,834,369
Increase (decrease) in accrued liabilities.................... 348,236 (1,232,769) (541,319)
------------- ------------- --------------
Net cash provided by (used in) operations................... 8,991,905 (1,808,349) (866,945)
------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Tennessee facility - net of current assets....... (17,056,000) -- --
Addition of property, plant and equipment....................... (12,469,603) (2,761,075) (3,184,364)
------------- ------------- --------------
Net cash used by investing activities....................... (29,525,603) (2,761,075) (3,184,364)
------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line of credit.................. -- (4,000,000) 4,000,000
Payments of long-term debt and retirement cost.................. (325,008) (54,255,783) (10,836,789)
(Increase) in other assets...................................... (2,523,043) (3,789,280) --
Proceeds from issuance of long-term debt........................ 10,000,000 75,000,000 256,296
Proceeds from issuance of preferred stock and warrants.......... 15,000,000 -- --
------------- ------------- --------------
Net cash provided by (used in)
financing activities....................................... 22,151,949 12,954,937 (6,580,493)
------------- ------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................................... 1,618,251 8,385,513 (10,631,802)
CASH AND CASH EQUIVALENTS,
beginning balance................................................. 8,903,413 517,900 11,149,702
------------- ------------- --------------
CASH AND CASH EQUIVALENTS, ending balance............................ $ 10,521,664 $ 8,903,413 $ 517,900
============= ============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
17
<PAGE>
BAYOU STEEL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK COMMON
------------------------------------- PAID-IN RETAINED STOCKHOLDERS' PREFERRED
CLASS A CLASS B CLASS C CAPITAL EARNINGS EQUITY STOCK
------------ ---------- --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BEGINNING BALANCE,
October 1, 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 --
Net loss ................... -- -- -- -- (1,107,201) (1,107,201) --
------------ ---------- --------- ------------ ------------ ------------ ------------
ENDING BALANCE,
September 30, 1994 ........... 106,134 22,711 1 44,890,554 15,104,628 60,124,028 --
Issuance of preferred
stock net of discount .... -- -- -- -- -- -- 12,121,520
Discount from issuance
of preferred stock ....... -- -- -- 2,878,480 -- 2,878,480 --
Net income ................. -- -- -- -- 10,336,789 10,336,789 --
Dividends on preferred stock -- -- -- -- (616,249) (616,249) --
Accretion on preferred stock -- -- -- -- (117,653) (117,653) 117,653
------------ ---------- --------- ------------ ------------ ------------ ------------
ENDING BALANCE,
September 30, 1995 ........ $ 106,134 $ 22,711 $ 1 $ 47,769,034 $ 24,707,515 $ 72,605,395 $ 12,239,173
============ ========== ========= ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
18
<PAGE>
BAYOU STEEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1994
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) ("BSC") with BSC being the surviving corporation. BSC
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.
During the year ended September 30, 1995, BSC formed Bayou Steel
Corporation (Tennessee) ("BSCT") to acquire the assets of Tennessee Valley Steel
Corporation ("TVSC") for $26.8 million (see Note 3). BSCT is a wholly owned
subsidiary of BSC.
The accompanying financial statements include the consolidated accounts of
BSC and BSCT (collectively referred to herein as the "Company") after
elimination of all significant intercompany accounts and transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INVENTORIES
Inventories are carried at the lower of cost (last-in, first-out) or
market except mill rolls which are stated at cost (specific identification) and
operating supplies and other which are stated at average cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment acquired as part of the acquisition of BSC
in 1986 and of BSCT in 1995 (see Notes 1 and 3) has been recorded based on the
respective purchase prices. Betterments and improvements on property, plant and
equipment are capitalized at cost. Interest during construction of significant
additions is capitalized. 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
three months or less to be cash equivalents.
19
Cash payments for interest and Federal income taxes during the three years
ended September 30, were as follows:
1995 1994 1993
---------- ---------- ----------
Interest ................. $8,162,394 $7,947,182 $8,444,066
Income taxes ............. -- -- --
INCOME TAXES
The Company adopted the provisions of Financial Accounting Standards Board
Statement No. 109 "Accounting for Income Taxes" ("FAS 109") effective October 1,
1993. As permitted under FAS 109, the Company elected not to restate the
financial statements of prior years upon adoption.
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 conditions, the Company's
sizeable customer base and the geographical dispersion of the customer base. On
some occasions, particularly large export shipments, the Company requires
letters of credit. Historically, credit losses have not been significant. 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. ACQUISITION:
On April 28, 1995, BSCT completed the acquisition of the assets of TVSC.
The purchase price has been allocated to the assets based upon their estimated
fair values, as follows (in thousands):
Cash ....................................................... $ 8,000
Receivable ................................................. 103
Inventory .................................................. 2,547
Property, Plant & Equipment ................................ 16,150
-------
$26,800
In addition to the purchase price, additional acquisition costs of
$906,000 for legal, consulting, and other expenditures were capitalized to
property, plant and equipment.
20
The acquisition was initially financed with excess cash and borrowings
from the Company's $30 million revolving line of credit. Within two months, the
Company arranged permanent financing by placing a $10 million term loan (see
Note 7) and issuing of $15 million in redeemable preferred stock and warrants
(see Note 15). In addition, the Company amended and restated the existing
revolving line of credit which increased the available borrowings from $30
million to $45 million (see Note 8).
4. INVENTORIES:
Inventories, as of September 30, 1995 and 1994 consisted of the following:
1995 1994
------------ ------------
Scrap steel .................................. $ 4,964,364 $ 3,811,616
Billets ...................................... 6,357,640 1,854,211
Finished product ............................. 42,541,400 35,651,158
LIFO adjustments ............................. (4,741,268) (931,213)
------------ ------------
49,122,136 40,385,772
Mill rolls, operating supplies, and other .... 18,572,605 16,759,777
------------ ------------
$ 67,694,741 $ 57,145,549
There was an increment in the last-in, first-out ("LIFO") inventories in
fiscal 1995 and fiscal 1994. At September 30, 1995 and 1994, the first-in,
first-out ("FIFO") inventories were $53.9 million and $41.3 million,
respectively. A lower of cost or market evaluation of the carrying value of
inventory was prepared at the end of each fiscal year, and market value was in
excess of the carrying value of the LIFO and FIFO inventories for all years
presented.
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment of TVSC was acquired for $17.1 million (see
Note 3) during fiscal 1995. Excluding the acquisition, capital expenditures
totaled $12.5 million, $2.7 million and $3.2 million in fiscal 1995, 1994, and
1993, respectively. As of September 30, 1995, the estimated costs to complete
authorized projects under construction or contract amounted to $1.2 million.
The Company capitalized interest of $394,000, $69,000, and $115,000 during
the years ended September 30, 1995, 1994, and 1993, respectively, related to
qualifying assets under construction. Depreciation expense during the years
ended September 30, 1995, 1994, and 1993 was allocated as follows:
1995 1994 1993
---------- ---------- ----------
Inventory ............................... $ 178,835 $ 297,409 $ --
Cost of sales ........................... 4,964,204 4,419,930 4,156,851
Selling, general and administrative ..... 5,261 4,523 4,398
---------- ---------- ----------
$5,148,300 $4,721,862 $4,161,249
========== ========== ==========
21
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". The Company has
elected to adopt the provisions of this statement as of October 1, 1994. The
adoption of this statement had no impact on the financial position or results of
operations of the Company as of September 30, 1995.
6. OTHER ASSETS:
Other assets consist of financing costs associated with the issuance of
long-term debt, redeemable preferred stock and warrants, and the Company's
revolving line of credit (see Notes 7, 8, and 15) which are being amortized over
the lives of the related transaction. During fiscal 1995, the Company wrote off
$165,000 of other assets related to the previously existing revolving line of
credit. The Company also capitalized $2,176,000 of deferred financing costs
related to the term loan, redeemable preferred stock and warrants, and the
amended and restated revolving line of credit. During fiscal 1994, the Company
wrote off $953,000 of other assets related to the 14.75% Senior Secured Notes
(the "14.75% Notes") and capitalized $3,783,000 of deferred financing costs
related to the 10.25% First Mortgage Notes (the "10.25% Notes") and the 1994
amended and restated revolving line of credit. Amortization of other assets was
approximately $893,000, $553,000, and $458,000 for the years ended September 30,
1995, 1994, and 1993, respectively.
7. LONG-TERM DEBT:
Long-term debt of the Company as of September 30, 1995 and 1994 included
the following:
1995 1994
----------- -----------
First Mortgage Notes (see below) ................... $75,000,000 $75,000,000
Term Loan (see below) .............................. 10,000,000 --
Other notes payable, due monthly, bearing interest
from 8.5% to 10.25% secured by Company assets ...... 751,148 1,076,156
----------- -----------
85,751,148 76,076,156
Less--current maturities ........................... 613,483 340,232
----------- -----------
$85,137,665 $75,735,924
On June 20, 1995, the Company entered into a five-year term loan agreement
for $10 million. The proceeds received from the term loan were used to repay the
loan outstanding under BSC's revolving credit facility which had been incurred
to acquire substantially all of the assets of TVSC. The term loan is partially
secured by the Company's accounts receivable and inventories. The term loan
agreement calls for quarterly principal payments of $750,000 beginning June 30,
1997 through March 31, 1999 and $1,000,000 million beginning June 30, 1999
through December 31, 1999. The remaining $1,000,000 million principal payment is
due on the final maturity date of June 20, 2000. The term loan bears interest on
a sliding scale based on the quarterly leverage ratio which is defined as
indebtedness divided by earnings before interest, taxes, depreciation and
amortization ("EBITDA"). As of September 30, 1995, the interest rate was LIBOR
plus 2% or approximately 7.9%. Term loan interest is payable quarterly. Fair
value of the term loan approximates carrying value.
22
The 10.25% First Mortgage Notes (the "10.25% Notes") are secured by a
first priority security interest granted by the Company, 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) and the proceeds thereof, whether
existing or hereafter acquired.
The 10.25% Notes bear interest at the nominal rate of 10.25% per annum
payable semi-annually on each March and September 1, commencing September 1,
1994. The 10.25% Notes will be redeemable, in whole or in part, at any time on
and after March 1, 1998, initially at 103.33% of the principal amount, plus
accrued interest to the date of redemption, and declining ratably to par on
March 1, 2000. There are no principal payments due on the 10.25% Notes until
maturity in 2001. As of September 30, 1995 and 1994, the Company accrued
interest at a rate of 10.25%. The fair value of the 10.25% Notes on September
30, 1995 was $69.0 million.
On March 3, 1994, the Company redeemed $39.9 million of the 14.75% Notes
at a price of 110 in connection with the issuance of the 10.25% Notes. Call
premiums of $3.9 million, write-offs of unamortized finance costs of $1.0
million, and interest of $0.6 million related to this redemption are included in
the extraordinary loss recorded in the Statement of Operations as of September
30, 1994. There was no tax effect related to this transaction.
8. SHORT-TERM BORROWING ARRANGEMENT:
On June 20, 1995, the Company entered into an amendment and restatement of
its revolving line of credit agreement which will be used for general corporate
purposes. The terms of the amended and restated agreement call for available
borrowings up to $45 million, including outstanding letters of credit using a
borrowing base of receivables and inventory. Based on these criteria, the amount
available as of September 30, 1995 was $29.7 million, net of $3.3 million
outstanding letters of credit. The agreement is secured by inventory and
accounts receivable at interest rates on a sliding scale based on the quarterly
leverage ratio which is defined as indebtedness divided by EBITDA. As of
September 30, 1995, the interest rate was LIBOR plus 2% or approximately 7.9%.
The terms of the loan agreement impose certain restrictions on the Company, the
most significant of which require the Company to maintain a minimum interest
coverage ratio and limit the incurrence of certain indebtedness. There were no
borrowings under the line of credit as of September 30, 1995 and 1994. The
maximum amount outstanding during fiscal 1995 and 1994 was $23.3 million and
$7.9 million, respectively. The average borrowings were $2.2 million and $2.4 as
of September 30, 1995 and 1994, respectively. The weighted average interest
rates were 8.9% and 5.2% as of September 30, 1995 and 1994, respectively.
9. 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.
23
In 1981, the Company 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. In 1986, 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 $1.3 million and rent
expense of $13.7 million for tax reporting purposes in fiscal years 1996 and
1997 based upon the foregoing agreements.
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.
As of September 30, 1995, for tax purposes, the Company had net operating
loss carryforwards ("NOLs") of approximately $316.1 million and $289.6 million
available to offset against regular tax and alternative minimum tax,
respectively. As of September 30, 1995, the Company provided $118,000 for
Federal alternative minimum tax and state income tax purposes. Due to generating
book and tax losses in fiscal 1994 and 1993, there was no provision for income
taxes in these years.
The NOLs will expire in varying amounts through fiscal 2009. A substantial
portion of the available NOLs, approximately $200 million, expires by fiscal
2000. In addition, the Company has $12.4 million of future tax benefits
attributable to its tax benefit lease which expires in 1997 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. The Company adopted the provisions of Financial Accounting Standards
Board Statement No. 109, "Accounting for Income Taxes" ("FAS 109"), effective
October 1, 1993. FAS 109 required recognition of future tax benefits, subject to
a valuation allowance based on the likelihood of realizing such benefits.
Deferred tax assets of approximately $121 million (NOLs, future tax benefits
attributable to its tax benefit lease, and other temporary timing differences
multiplied by the federal income tax rate) and deferred tax liabilities of
approximately $13 million (basis differences between tax and book plant,
property, and equipment multiplied by the federal income tax rate) were recorded
in fiscal 1995. However, in recording these deferred assets, FAS 109 required
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
24
indicated 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 determined that it was required by the provisions
of FAS 109 to establish a valuation allowance of $108 million for all of the
recorded net deferred tax assets. 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.
Adoption of FAS 109 had no impact on income for financial reporting or tax
purposes for fiscal 1995 or prior years.
10. COMMITMENTS AND CONTINGENCIES:
STRIKE
On March 21, 1993, the United Steelworkers of America Local 9121 (the
"Union") initiated a strike against the Company. The strike is ongoing. After
nearly 18 months of no formal negotiations on a new contract, the Union
requested formal negotiating sessions in November 1995. 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 negative material effect on the
Company's results.
The Union has filed charges with the National Labor Relations Board (the
"NLRB") alleging that the Company has violated the National Labor Relations Act
(the "NLRA") relating to its bargaining conduct. The Company believes it has
meritorious defenses to these charges, has responded timely to all charges, and
believes that it has negotiated in good faith with the Union. An unfavorable
decision by the NLRB, however, should not materially affect the Company.
In conjunction with the acquisition of the assets of TVSC, the Union filed
a charge with the NLRB alleging that the Company has violated the NLRA relating
to its refusal to hire certain individuals, who were former employees of TVSC,
at BSCT. The Company believes it has meritorious defenses to these charges.
The Union's corporate campaign against the Company continues on many
different fronts. The Union recently appealed to the states of Louisiana and
Tennessee to take away tax exemptions/grants from the Company; neither attempt
was successful. The Union also attempted to disrupt the Company's activities to
secure permanent financing for the acquisition of the assets of TVSC and the
10.25% Notes. The Company expects similar activities to continue.
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
25
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 at its Louisiana facility to address previously
contaminated sites. Also, the Company is not designated as a Potential
Responsible Party ("PRP") under the Superfund legislation. At September 30,
1995, the Company has accrued a loss contingency for environmental matters.
TVSC had entered into a Consent Agreement and Order (the "Voluntary
Consent Order") under the Tennessee Department of Environmental and
Conservation's voluntary clean-up program. The Company, in acquiring the assets
of TVSC, has entered into a similar Voluntary Consent Order. Estimates indicate
that the cost for remediating the affected areas ranges from $350,000 for the
lowest cost remedy to $1,800,000 for higher cost remedies. The purchase
agreement between the Company and TVSC provided for $2.0 million of the purchase
price to be held in escrow and applied to costs incurred by the Company for
remediation under the Voluntary Consent Order ( with an additional $1.0 million
to be held in escrow for one year for such costs and other costs resulting from
a breach of TVSC's representation and warranties in the agreement). If during
the remedial investigation significantly more extensive or more toxic
contamination is found, then costs could be greater than those estimated, and to
the extent these costs exceeded funds escrowed by TVSC, the Company would be
liable.
OTHER
The Company does not provide any post-employment or post-retirement
benefits to its employees other than those described in Note 11.
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.
11. 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.
On September 21, 1994, the Board of Directors granted 115,000 incentive
stock options to purchase Class A Common Stock, exercisable at the market price
on that date of $4.375, to key employees. The options are exercisable in five
equal annual installments commencing on September 21, 1995. As of September 30,
1995, no options were exercised, 23,000 shares were exercisable, and 485,000
shares were available for grant under the 1991 Plan. The Company recorded no
compensation expense related to the 1991 Plan during fiscal 1995 and 1994.
26
A summary of activity relating to stock options is as follows:
# OF
STOCK OPTIONS
-------------
Outstanding, September 30, 1994................................... 115,000
Granted........................................................... 0
Exercised......................................................... 0
Canceled.......................................................... 0
-------
Outstanding, September 30, 1995................................... 115,000
=======
12. 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"), except those employees
at BSCT who are covered by a defined contribution plan. 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 1995 and 1994:
The actuarial present value of future benefit obligations:
1995 1994
----------- -----------
Vested benefit obligation......................... $ 949,213 $ 727,904
Non-vested benefit obligation..................... 48,985 30,030
----------- -----------
Accumulated benefit obligation.................... $ 998,198 $ 757,934
=========== ===========
Projected benefit obligation...................... $ 1,498,397 $ 1,137,044
Plan assets at fair value......................... (1,302,778) (839,506)
----------- -----------
Funded status..................................... 195,619 297,538
Unrecognized net loss............................. (142,776) (170,986)
----------- -----------
Accrued pension liability......................... $ 52,843 $ 126,552
=========== ===========
Determination of net periodic pension cost:
Service cost...................................... $ 300,877 $ 307,382
Interest cost..................................... 82,813 57,533
Expected return on plan assets.................... (93,613) (57,045)
Net amortization.................................. 1,735 2,546
----------- -----------
Total net periodic pension cost................... $ 291,812 $ 310,416
=========== ===========
The primary actuarial assumptions used in determining the above benefit
obligation amounts were established on the September 30, 1995 and 1994
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.
27
The Company recognized expenses of $58,000 in fiscal 1995 and $50,000 in
fiscal 1994 and 1993 in connection with a defined contribution plan to which
non-bargaining employees at the Louisiana facility contribute and the Company
makes matching contributions based on employee contributions. In addition, the
Company recognized expenses of $31,000 in fiscal 1995 in connection with a
defined contribution plan at BSCT to which the employees contribute and the
Company makes matching contributions based on employee contributions and profit
sharing contributions based on employees' annual wages.
13. MAJOR CUSTOMERS:
No single customer accounts for 10% or more of the total sales for the
years ended September 30, 1995, 1994, and 1993.
14. RELATED PARTY TRANSACTIONS:
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. The Service Agreement was terminated as of September 30,
1994. There were no charges for the year ended September 30, 1995. Costs charged
for these services, prior to terminating the contract, were approximately
$64,000 for the year ended September 30, 1994, and $87,000 for the year ended
September 30, 1993.
The Company entered into an agreement on May 28, 1987 with a stockholder
to provide certain investment banking services to the Company on a competitive,
first refusal basis until September 4, 1996. During the year ended September 30,
1995, the stockholder acted as co-manager in conjunction with the placement of
preferred stock and warrants (see Note 15) and received $160,000 for its
services. Although services were provided, no obligations were incurred in
fiscal years 1994 and 1993.
15. PREFERRED STOCK AND WARRANTS
On June 20, 1995, the Company completed the issuance and sale of preferred
stock and warrants to purchase common stock for $15 million. The Company issued
15,000 shares of its redeemable preferred stock and warrants to purchase six
percent of the Company's Common Stock (or 822,422 Class A shares) at a nominal
amount. The Company valued the 15,000 shares of preferred stock sold at
$12,121,520, after deducting $2,878,480 for the market value of the warrants
issued.
The holders of the preferred stock are entitled to receive quarterly
dividends at a rate of 14.5% per annum. If a quarterly dividend payment is not
made by the end of a quarter, the rate will increase by 3%. In addition, the
holders have a right to additional warrants in the event that any two
consecutive quarterly
28
payments are missed or other defined events take place. As of September 30,
1995, the Company accrued dividends at a rate of 14.5%. The carrying amount of
the preferred stock will increase by periodic accretion of the difference
between the recorded value of the stock at the date of issuance and the
redemption value from 1995 through the mandatory redemption date of June 20,
2002, based on the interest method. The terms of the stock purchase agreement
impose certain financial covenants which are generally related to covenants in
the revolving line of credit or the 10.25% Notes.
The preferred stock is mandatorily redeemable by the Company on June 20,
2002 ; however, the Company can redeem at any time on and after June 20, 1996,
initially at 113.0% of the outstanding balance, plus accrued dividends to the
date of redemption, and declining ratably to par on June 20, 2000. The fair
value of the preferred stock on September 30, 1995 was $15.2 million. The fair
value of the warrants on September 30, 1995 was $3.7 million.
16. COMMON STOCK:
Income per common and common equivalent share are based on the weighted
average number of common shares and common stock equivalent shares outstanding
of 13,113,058 for the year ended September 30, 1995 and 12,884,607 for the years
ended September 30, 1994 and 1993, respectively. In connection with the issuance
of redeemable preferred stock on June 20, 1995 as discussed in note 15, the
Company reserved 822,422 shares of its Class A Common Stock for issuance upon
exercise of the outstanding warrants at a nominal exercise price. These warrants
are considered common stock equivalents in calculating income per common and
common equivalent share for fiscal 1995. There was no impact on income per share
as a result of the stock options granted in September, 1994 (see Note 11).
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 (see
Note 9). The Company's ability to pay dividends is subject to restrictive
covenants under the Indenture pursuant to which the Company's 10.25% Notes were
issued, the Preferred Stock and Warrant Purchase Agreement, and the Company's
line of credit (see Notes 7 and 8).
17. MISCELLANEOUS:
Miscellaneous income/(expense) as of September 30, 1995, 1994, and 1993
included the following:
1995 1994 1993
--------- --------- ---------
Discount earned.......................... $ 211,566 $ 228,453 $ 149,648
Allowance for doubtful accounts.......... 53,204 (186,560) 174,994
Other income............................. 166,885 120,524 176,442
--------- --------- ---------
$ 431,655 $ 162,417 $ 501,084
========= ========= =========
29
18. QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
FISCAL YEAR 1995 QUARTERS
------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- --------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net Sales.............................................................. $ 43,852 $ 49,522 $ 47,386 $45,012
Gross Profit........................................................... 6,629 6,944 6,472 3,569
Net Income............................................................. 3,422 3,843 2,802 271
Dividends and Accretion on Preferred Stock............................. -- -- (77) (657)
Income (Loss) Applicable to Common and
Common Equivalent Shares............................................ 3,422 3,843 2,725 (386)
Income (Loss) Per Common and
Common Equivalent Shares............................................ .27 .30 .21 (.03)
<CAPTION>
FISCAL YEAR 1994 QUARTERS
------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- --------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Sales.............................................................. $ 36,778 $ 37,433 $ 44,877 $ 41,735
Gross Profit........................................................... 2,220 3,575 5,166 5,548
Net Income (Loss) Before Extraordinary Items........................... (973) 513 2,316 2,505
Extraordinary Items.................................................... -- (5,468) -- --
Net Income (Loss)...................................................... (973) (4,955) 2,316 2,505
Income (Loss) Per Common Share Before Extraordinary Items.............. (.08) .04 .18 .19
Extraordinary Items Per Common Share................................... -- (.42) -- --
Income (Loss) Per Common Share......................................... (.08) (.38) .18 .19
</TABLE>
<PAGE>
BAYOU STEEL CORPORATION
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Bayou Steel Corporation:
We have audited the accompanying consolidated balance sheets of Bayou
Steel Corporation (a Delaware corporation) and subsidiary as of September 30,
1995 and 1994, and the related consolidated statements of operations, cash
flows, and changes in equity for the years ended September 30, 1995, 1994, and
1993. 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 and
subsidiary as of September 30, 1995 and 1994 and the results of their operations
and their cash flows for the years ended September 30, 1995, 1994, and 1993 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
New Orleans, Louisiana
November 17, 1995
31
BAYOU STEEL CORPORATION
SHAREHOLDER INFORMATION
CORPORATE DATA
CORPORATE HEADQUARTERS
Bayou Steel Corporation
138 Highway 3217
LaPlace, Louisiana 70068
(504) 652-4900
MAILING ADDRESS
Bayou Steel Corporation
P.O. Box 5000
LaPlace, Louisiana 70069-1156
TRANSFER AGENT AND REGISTRAR
Class A Common Stock
Society National Bank
KeyCorp Shareholders, Inc.
700 Louisiana Street
Suite 2620
Houston, Texas 77002-2729
(1-800) 539-6549
TRUSTEE
101/4% First Mortgage Notes due 2001
First National Bank of Commerce
210 Baronne Street
P.O. Box 60279
New Orleans, Louisiana 70160
(504) 561-1606
INDEPENDENT AUDITORS
Arthur Andersen LLP
201 St. Charles Avenue, Suite 4500
New Orleans, Louisiana 70170
(504) 581-5454
STOCK LISTING
American Stock Exchange
Trading Symbol-BYX
INVESTOR INFORMATION
SEC Form 10-K and other
investor information is available
upon request by writing or calling:
Bayou Steel Corporation
Vice President, Chief Financial
Officer, Treasurer and Secretary
P.O. Box 5000
LaPlace, Louisiana 70069-1156
(504) 652-4900
BOARD OF DIRECTORS
Howard M. Meyers
Chairman of the Board and
Chief Executive Officer
Bayou Steel Corporation
John A. Canning, Jr.
President
Madison Dearborn Partners, Inc.
Lawrence E. Golub*
President
Golub Associates, Inc.
Melvyn N. Klein, Esq.*
President
JAKK Holding Corporation
General Partner
GKH Partners, L.P.
Albert P. Lospinoso*
President and Chief Operating Officer
RSR Corporation
Stanley S. Shuman
Executive Vice President and
Managing Director
Allen & Company Incorporated
Jeffrey P. Sangalis*
Partner and Director
Rice Capital
Jerry M. Pitts
President and Chief
Operating Officer
Bayou Steel Corporation
CORPORATE OFFICERS
Howard M. Meyers
Chairman of the Board and
Chief Executive Officer
Jerry M. Pitts
President and Chief
Operating Officer
Richard J. Gonzalez
Vice President, Chief Financial
Officer, Treasurer and Secretary
Rodger A. Malehorn
Vice President of Commercial Operations
Timothy R. Postlewait
Vice President of Plant Operations
Henry S. Vasquez
Vice President of Human Resources
*Member of Audit Committee
For information, contact:
[BAYOU STEEL LOGO]
Bayou Steel Corporation
P.O. Box 5000
LaPlace, LA 70069-1156
Phone: (504) 652-4900
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 10,521,664
<SECURITIES> 0
<RECEIVABLES> 21,921,347
<ALLOWANCES> 567,970
<INVENTORY> 67,694,741
<CURRENT-ASSETS> 100,395,157
<PP&E> 125,302,654
<DEPRECIATION> 33,652,607
<TOTAL-ASSETS> 197,076,165
<CURRENT-LIABILITIES> 27,093,932
<BONDS> 85,137,665
<COMMON> 128,847
12,239,173
0
<OTHER-SE> 72,476,549
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<SALES> 185,772,280
<TOTAL-REVENUES> 185,772,280
<CGS> 162,158,316
<TOTAL-COSTS> 162,158,316
<OTHER-EXPENSES> 5,390,980
<LOSS-PROVISION> (53,204)
<INTEREST-EXPENSE> 7,821,244
<INCOME-PRETAX> 9,721,042
<INCOME-TAX> 118,155
<INCOME-CONTINUING> 9,602,887
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,602,887
<EPS-PRIMARY> .73
<EPS-DILUTED> .73
</TABLE>
