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, 1996 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.)
138 HIGHWAY 3217
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
101/4% 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, 1996 was:
MARKET VALUE
TITLE OF EACH CLASS SHARES OUTSTANDING HELD BY HELD BY
OF COMMON STOCK AFFILIATES NON-AFFILIATES NON-AFFILIATES
------------------- ---------- --------- --------------
Class A, $.01 par value........ 1,301,512 9,311,868 $27,935,604
Class B, $.01 par value........ 2,271,127 0 N/A
Class C, $.01 par value........ 100 0 N/A
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders are incorporated herein by reference in Part III and
portions of the registrant's 1996 Annual Report filed as an exhibit, are
incorporated herein by reference in Part II hereof.
<PAGE>
BAYOU STEEL CORPORATION
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS.................................................... 1
General.................................................. 1
Manufacturing Process and Facilities..................... 1
Products................................................. 2
Customers................................................ 3
Distribution............................................. 3
Markets and Sales........................................ 4
Strategy................................................. 4
Competition.............................................. 5
Raw Materials............................................ 6
Energy................................................... 7
Environmental Matters.................................... 7
Safety and Health Matters................................ 8
Strike/Corporate Campaign Impact Upon the Company........ 9
Employees................................................ 10
ITEM 2. PROPERTIES.................................................. 11
ITEM 3. LEGAL PROCEEDINGS........................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S CLASS A COMMON STOCK AND
RELATED STOCKHOLDER MATTERS............................... 12
ITEM 6. SELECTED FINANCIAL DATA..................................... 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 13
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........ 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS............................ 14
ITEM 11. EXECUTIVE COMPENSATION...................................... 14
ITEM 12. OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.................................................. 14
i
<PAGE>
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"), four stocking
locations along the inland waterway system 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, has an electric arc
furnace, a rolling mill, climate-controlled warehouse facilities, and a dock on
the Mississippi River. BSCL produces a variety of shapes, including angles,
flats, channels, standard beams, and wide flange beams at the Louisiana
facility. In addition, the Company operates an automobile shredder to produce
some of the scrap metal required by the electric arc furnace.
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 wholly owned subsidiary named
"Bayou Steel Corporation (Tennessee)". BSCT's rolling mill produces merchant bar
shapes, including angles, flats, rounds, and squares. BSCT also has the
capability to produce rebar. 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 roof, 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, an automated straightening, continuous
cut-to-length, stacking and bundling equipment.
The Company sells its products to over 613 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 at BSCL or
BSCT) on a worldwide basis to other steel producers for their own rolling or
forging applications.
In August 1988, the Company completed an initial public offering of its
Class A Common Stock, which shares are traded on the American Stock Exchange.
The Company was incorporated under the laws of the State of Louisiana in 1979
and was reincorporated in Delaware in 1988 in connection with its public
offering.
The address of the Company's principal place of business is 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. With the use of a
newly installed automobile shredder, the Company is able to process
approximately 10% of its steel scrap requirements. The scrap is transported to
BSCL's melt shop by rail car or truck and loaded into its furnace. The steel
scrap is melted in an 80-ton capacity alternating current 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 at a predetermined temperature, 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 (semi-finished product) and moved to a cooling bed and marked
for identification. After cooling, the billets are transferred to the Louisiana
rolling mill for further processing. Billets, in excess of BSCL's rolling mill
requirements, are either shipped to BSCT via rail or sold to other processors.
1
<PAGE>
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 either
standard 40 foot lengths or specific customer lengths. The shapes are stacked
into 2 1/2 to 5-ton bundles, processed (if needed) through an off-line saw to 20
foot standard lengths, and placed in a climate-controlled warehouse where they
are subsequently shipped to the Company's climate-controlled 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 climate-controlled
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.
SIZE RANGE (IN INCHES)
-------------------------
PROFILE TENNESSEE LOUISIANA
--------------------------------- ---------- -----------
Equal Angles 3/4-2 3-6
Flats 1-3 4-8
Channels (1) 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
(1) Channels will be added in fiscal 1997.
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 opportunistically produce rebar.
The Company's shapes are produced to various national specifications, such
as those set by the American Society for Testing and Materials ("ASTM"), or to
specific customer specifications which have more stringent quality criteria. 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.
2
<PAGE>
CUSTOMERS
The Company has over 613 customers in 44 states, Canada, Mexico, and
overseas. The majority of the Company's shape products (approximately 76% in
fiscal 1996) are sold to domestic steel service centers, while the remainder are
sold to original equipment manufacturers (approximately 14% in fiscal 1996) and
export customers (approximately 10% in fiscal 1996). Steel service centers
purchase nearly 30% of all carbon industrial steel products produced in the
United States. Steel service centers warehouse steel products from various
minimills and integrated mills and sell combinations of products from different
mills to their customers. Some steel service centers also provide additional
labor-intensive value-added services such as fabricating, cutting or selling
steel by the piece rather than by the bundle. Much of the merchant bar product
from the Tennessee rolling mill is 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 1996, the Company's top ten customers accounted for approximately
26% 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 flexibility in transportation because it can ship its product by barge,
normally the least costly method of transportation in the steel industry.
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 Louisiana
minimill and Tennessee rolling mill facilities 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 uneconomical 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 Louisiana warehouse, the
Company has expanded 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. BSCT's product line can be distributed through the Company's
LaPlace facility or through its distribution centers in Chicago, Pittsburgh, and
Tulsa. Currently, BSCT is only using the Chicago stocking location. 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 1996, 1995, and
1994, 9.0%, 10.3% and 7.6% 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.
3
<PAGE>
MARKETS AND SALES
According to the American Iron and Steel Institute, the domestic market
demand for all structural steel shape products in 1995 was 5.7 million tons
while the market for bar mill products was 5.1 million tons. The Company
estimates that its share of the total domestic shapes market was approximately
8.8% in 1995. 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 steel service center customer base and is
expanding to new customers, such as OEM's and fabricators.
The Company's products are sold domestically and in Canada, Mexico, and
overseas on the basis of availability, quality, service, and price. 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. A new
system that allows the customer to manage its inventory needs at the Company was
recently implemented. This system interfaces with the customer's system which
results in less clerical effort and increases sales for the Company. The system
also provides the customer with just-in-time inventory capabilities. The Company
feels that this system gives it a competitive advantage.
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 orders for shapes, which typically are filled in
approximately three months, totaled $62.6 million as of September 30, 1996 and
$40.9 million as of September 30, 1995. As of October 31, 1996, the Company's
backlog totaled $68.4 million.
The level of billet sales to third parties is dependent on the Company's
billet requirements at BSCL and BSCT, 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.
STRATEGY
The Company's strategy is to improve operating efficiencies and to reduce
costs through improved processes, utilization, and capital at BSCL and to bring
BSCT to full capacity operating rate within 18 months. The Company will also
consider strategic acquisitions, such as the acquisition of the assets of TVSC,
which complement or expand the Company's current operations, and/or captures
finished goods or raw material capacity.
A. BSCL
The Company's principal operating strategy for BSCL is to improve
operating results by continuing to increase productivity and reduce costs,
including labor cost per ton, and increasing sales of higher margin shape
products.
OPERATING EFFICIENCIES. BSCL has lowered its labor cost per ton by $18
since fiscal 1992. The Company believes that it can continue to lower its
labor costs per ton from fiscal 1996 levels by increasing productivity and
shipments, reducing overtime, and implementing the new labor contract.
The Company continues its commitment 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.
CAPITAL IMPROVEMENTS. The Company wants to increase billet production so
as to supply most of BSCT's billet requirements. In fiscal 1996, BSCL
produced 594,780 tons of billets. In fiscal 1997, as part of its short-term
strategy, the Company is committing approximately $2 million in capital to
improve melt shop operations. The Company is currently evaluating options
for its long-term strategy. In order to increase annual capacity to 800,000
tons, the Company would have to commit approximately $20 million over 24
months. Both fixed cost per ton and variable cost per ton could be reduced
by employing this increased capacity strategy.
4
<PAGE>
B. BSCT
OPERATING CAPACITY. The Company's operating strategy for the rolling
mill at BSCT is to expand its merchant bar shape production. In fiscal 1996,
BSCT produced 95,815 tons. BSCT's production is expected to reach above
150,000 tons in 1997. However, this projection can vary and will depend on
market demand and new sections to be introduced during the fiscal year. The
total annual capacity of the plant is estimated at 250,000 tons depending on
the actual product mix.
BSCT produced only merchant bar shapes and customer specific sections
in fiscal 1996. BSCT also has the ability to produce rebar. However, 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.
CAPITAL IMPROVEMENTS. The Company expects to commit approximately $3
million on various capital projects at the Tennessee facility in fiscal 1997
on operations to reduce costs and increase productivity. As of September 30,
1996, there were 126 employees and contractors at the Tennessee operation.
The Company plans to reduce the required workforce at BSCT by 10% by the end
of fiscal 1997 through capital improvements and facilitated primarily
through attrition.
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, 1996, the Company had
approximately $329 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.
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 since increases in the cost of
raw materials and other conversion costs may offset any operating cost savings
to cause actual results to vary significantly. 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.
COMPETITION
The Company does not currently compete with minimill flat rolled or most
domestic integrated steel producers.
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
primarily Nucor Corporation, Structural Metals, Inc., North Star Steel Co.,
Northwestern Steel and Wire Company, and Lake Ontario Steel Corporation, among
others.
BAR SHAPES. In fiscal 1997, the Company expects to sell BSCT's yearly
production of bar shape products in a market that has ranged between 5.1 and 8.6
million tons during the last 10 years. Competitors in the region are Ameri
Steel, Structural Metals, Inc., Nucor Corporation, Birmingham Steel, Roanoke
Electric, North Star Steel Co., and SMI/Owen Steel.
REBAR. BSCT will produce rebar in varying quantities depending on economic
and market trends. BSCT's main competitor will be Ameri Steel in Knoxville, TN.
Ameri Steel, however, fabricates a large portion of its rebar in competition
with independent fabricators would be the target customers of BSCT. Independent
fabricators opting not
5
<PAGE>
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. No single vendor
supplies more than 10% of the Company's scrap needs. The Company, on average,
maintains a 25-day inventory of steel scrap.
The Company has 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 installed an automobile shredder, which is located
at a site adjacent to the plant, to produce shredded steel scrap, one of several
types used by the Company. Mississippi River Recycling ("MRR"), a division of
the Company, began operating the automobile shredder in late 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 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 fiscal 1996 by 12.0% compared to
fiscal 1995, 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.
BSCT currently purchases billets on the open market to supply part of its
billet requirements. The Company currently has competitive billet supply
contracts with several vendors which expire on December 31, 1996. The Company
currently is negotiating with several suppliers for calendar year 1997. The
Company does not anticipate a problem with securing competitively priced billet
contracts.
6
<PAGE>
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 at BSCL consumes large amounts of
electrical energy. The Company purchases its electrical service needs from
Entergy 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 Entergy'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 1996 due to
generating and transmission failures at Entergy. BSCL's contract with Entergy
contains a fuel adjustment clause which allows them to pass on to their
customers any increases in price they must pay for the various fuels used in
generating electrical power. This fuel adjustment applies to all of Entergy
consumers. Due to the effect of a fuel adjustment provision in the contract with
Entergy, BSCL's energy expense could increase. Energy expense increased by $1.9
million in fiscal 1996 compared to fiscal 1995 primarily due to increases in the
fuel adjustment rate. The Company believes that its utility rates at BSCL are
very competitive in the domestic minimill steel industry. As one of Entergy's
largest customers, the Company has been able to obtain competitive rates from
Entergy. 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. Natural
gas expense increased by $1.1 million in fiscal 1996 compared to fiscal 1995
primarily due to price increases. Historically, BSCL has been adequately
supplied with electricity and natural gas and does not anticipate any
significant curtailments in its operations resulting from energy shortages.
BSCT's manufacturing process consumes 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, Tennessee 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. The Company believes this premium
adds approximately $1 per ton to BSCT's cost structure. (This is not an uncommon
arrangement throughout the industry.) In fiscal 1996, BSCT had to curtail
operations on several occasions because no firm transportation was available
from East Tennessee Pipeline. BSCT has now secured the firm transportation
needed to avoid any significant curtailments.
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
five (5) years, the only environmental penalty assessed to the Company was a
$2,500 fine levied in 1996 in conjunction with an Air Quality Notice of
Violation issued by the Louisiana Department of Environmental Quality (the
"LDEQ"). 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.
7
<PAGE>
The U.S. Public Interest Research Group ("USPIRG") filed a lawsuit in
Louisiana against the Company for alleged violations of air quality regulations.
The Company believes it has meritorious defenses to these charges and has asked
the court to dismiss USPIRG's lawsuit on various grounds.
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 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, $2.0 million in fiscal 1995 and $2.1 million in fiscal 1996. The
increase in cost is due primarily to increases in recycling costs and increases
in steel production. It is anticipated that recycling costs will decline in
fiscal 1997 due to increases in recycling competition and implementation of a
new dust recycling contract. 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.
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. 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 1996, the Company spent
approximately $200,000 on various environmental capital projects. In fiscal
1997, the Company intends to spend approximately $1 million on various
environmental capital projects, including those related to the 1990 Clean Air
Act Amendments.
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 Environment 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 and ecological risk assessment which are components of a
required, structured investigative, remedial, and assessment process. 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 activities pursuant to the Voluntary Consent Order
(with an additional $1.0 million to be held for one year for such costs and
other costs resulting from a breach of TVSC's representations and warranties in
the agreement). As of September 30, 1996, investigative, remedial, and risk
assessment activities have resulted in expenses of approximately $1.0 million.
At this time, the Company does not expect the costs of resolution of the
Voluntary Consent Order to exceed monies provided by escrow 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.
8
<PAGE>
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 $34,000. OSHA
officials stated that none of what was found "showed blatant disregard for
safety" and that none of the violations were deemed "willful".
The Company knows of no other material safety or health issues.
STRIKE/CORPORATE CAMPAIGN IMPACT UPON THE COMPANY
GENERAL. On March 21, 1993, the Union initiated a strike after the parties
failed to reach agreement on a new labor contract due to differences on economic
issues. 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,
strikers who returned to work, and salaried employees. As a result of such
measures, the Company operated at full capacity during most of the strike; and,
since October 1993, overall production and productivity have exceeded pre-strike
levels. On September 23, 1996, the Company and Union entered into a settlement
agreement which, among other issues, resulted in a new labor contract.
CONTRACT TERMS. The Company and Union entered into a six year contract on
September 27, 1996. The Company considers the contract terms to be favorable to
the Company. The key terms are:
- There will be no increases in base pay during the life of the
contract.
- The Company implemented a productivity incentive plan which pays for
increased performance.
- The Company implemented a discretionary profit sharing plan.
- The Company will implement a managed care health care plan and
require employee contributions toward the cost of the plan. The
Company estimates that this will save over $0.5 million annually.
All future cost increases will be shared with the employees paying
33%.
- The Company has improved flexibility in contracting out work,
combining jobs, and utilizing all available resources to accomplish
a job.
SETTLEMENT AGREEMENT. Besides specifying the contract terms, the settlement
agreement covered five significant items.
VACATION. As vacation is not carried forward from year to year, and even
though the striking employees were not entitled to any vacation in 1996 and
1997 under the terms of the contract, the Company offered one week in 1997
to be taken during a planned shutdown.
PERFORMANCE BONUS. The Company agreed to pay each eligible striking
employee $425.00; this is related to a performance bonus paid in 1995 to
employees. This one-time settlement issue cost approximately $100,000.
STRIKE DISCIPLINE. The Company has maintained that it has a right to
impose disciplinary action, including termination, on picketers who have
engaged in strike-related misconduct. The Company and Union agreed to use a
special standard focusing only on the action committed. A special
arbitration process was negotiated to resolve any disagreements relating to
this discipline.
RETURN TO WORK PROTOCOL. The Company agreed to a protocol for striking
workers to return to work. The protocol addresses physical examinations,
drug tests, and training before the employees enter the plant. The Company
believes this will help to minimize the anticipated difficulties in making a
transition to a workforce composed of workers who crossed the picket line,
replacement workers who will be retained, and returning strikers. The
Company estimates that approximately 100 of the 210 employees who were on
strike will return.
9
<PAGE>
UNFAIR LABOR PRACTICE CHARGES. In connection with the strike, the Union
filed numerous unfair labor practice charges against the Company with the
National Labor Relations Board (the "NLRB"). All, except one, were withdrawn
by the Union or discharged by the NLRB. The one remaining charge revolves
around a lawsuit the Company has against the Union. See the following
discussion on "Corporate Campaign".
IMPACT. The settlement will have a short-term adverse impact upon the
Company. The Company will incur some one-time expenditures, such as the
performance bonus, employment physical and drug tests, training for returning
workers and existing workers, extra security, and legal expenses for arbitration
cases related to disciplinary action. Back-pay may be required for any
arbitration cases for which the arbitrators decide that the discipline was
inappropriate for the misconduct. These one-time expenditures are estimated to
be $0.5 to $1.0 million. In addition, the transition of placing returning
workers in jobs will disrupt operations for a time and impact productivity until
all workers become familiar with new equipment and new jobs responsibilities.
The Company is unable to estimate the impact; although, the introduction of the
productivity incentive plan should shorten this process.
Besides the benefits of the new contract, the Company expects out-of-pocket
costs for security, legal matters, and other services to decrease; although,
legal expenses for two ongoing lawsuits related to the corporate campaign will
continue. The Company incurred non-production strike and corporate campaign
expenses of $3.2 million in fiscal year 1993, $1.0 million in each of fiscal
years 1994 and 1995, and $1.8 million in fiscal year 1996.
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. The impact of the corporate
campaign has been significant. The Company has filed a lawsuit in federal court
in Delaware under the Racketeer Influenced Corrupt Organizations Act (RICO)
against the Union for their conduct in connection with this campaign. The
Company seeks both an end to the illegal activities used in the Corporate
Campaign and recovery of damages.
TENNESSEE LABOR RELATIONS. 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 violated the National Labor Relations Act. The Union
asserts that the Company refused to hire, at BSCT, certain individuals who were
former employees of TVSC. On August 16, 1996, the Company reached a settlement
with the Union which was approved by the NLRB. The Company agreed to recognize
the Union as the bargaining agent for the employees, pay the former employees
who applied for work but were not employed a settlement amount, and to put these
individuals on a preferential hiring list. In return, the Company maintained the
current trained work force. The settlement amount involves approximately 135
applicants for employment, each of whom would receive 25% of lost wages, less
interim earnings. Until interim earnings for 1996 are known for each applicant,
the liability cannot be determined. Based on assumptions of earnings, the
Company estimates that the settlement could cost between $136,000 and $500,000.
A final determination will be forthcoming through the NLRB. A labor contract is
in the process of being negotiated for the Tennessee facility and the Company
does not expect any material changes from current terms of employment.
EMPLOYEES
As of September 30, 1996, the Company had 550 non-striking employees, of
whom 152 were salaried office, supervisory, sales personnel and non-exempt
workers, and 398 were hourly employees. Approximately 380 are or will be covered
by labor contracts. As of September 30, 1996, there were 206 employees who were
on strike at the time of the settlement but have not yet returned to work.
During the later part of October and early November, the Company began the
process of bringing back the eligible employees that were previously on strike.
As of November 30, 1996, there were 85 former strikers who were eligible and
returned to work. There were approximately 68 employees involved in arbitration
over their status. The total employment numbers will fluctuate until the current
and returning workers settle into the workforce.
10
<PAGE>
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.
Louden County, 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, 1996.
11
<PAGE>
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, 1996 was 404. In addition, there are approximately 3,500
shareholders whose stock is held in street name. The stock has been trading
since July 27, 1988. The closing price per share on October 31, 1996 was $3.00.
The following tables set forth the high and low prices for the periods
indicated.
SALES PRICE PER SHARE
-------------------------------------
FISCAL YEAR 1996 FISCAL YEAR 1995
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
October-December........................ $5.375 $3.813 $4.375 $3.250
January-March........................... 4.750 3.875 4.500 4.000
April-June.............................. 4.500 3.625 6.250 3.875
July-September.......................... 4.000 2.750 7.500 4.750
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 10 1/4% First Mortgage Notes due 2001 (the "10 1/4% Notes") were
issued, the Preferred Stock and Warrant Purchase Agreement, and the Company's
line of credit. See "Notes 6, 14, and 15 of the Consolidated Financial
Statements" section of the 1996 Annual Report.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is summary consolidated financial information for the
Company since 1992.
SUMMARY FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AND FOR YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Net Sales .................................. $ 204,426 $ 185,772 $ 160,823 $ 136,008 $ 119,772
Cost of Sales .............................. 188,453 162,158 144,314 128,033 109,116
--------- --------- --------- --------- ---------
Gross Profit ............................... 15,973 23,614 16,509 7,975 10,656
Selling, General and Administrative ........ 6,273 5,312 3,925 3,986 4,071
Non-Production Strike and
Corporate Campaign Expenses ............... 1,768 1,000 996 3,162 --
--------- --------- --------- --------- ---------
Operating Income ........................... 7,932 17,302 11,588 827 6,585
Interest Expense ........................... (8,635) (7,821) (7,670) (8,261) (8,977)
Interest Income ............................ 147 543 280 193 486
Miscellaneous .............................. 871 431 162 502 554
--------- --------- --------- --------- ---------
Income (Loss) Before Taxes ................. 315 10,455 4,361 (6,739) (1,352)
Provision for Taxes ........................ 0 118 -- -- --
--------- --------- --------- --------- ---------
Income (Loss) Before Cumulative
Effect of Accounting Change
and Extraordinary Items .................. 315 10,337 4,361 (6,739) (1,352)
Extraordinary Items ........................ -- -- (5,468) 585 --
--------- --------- --------- --------- ---------
Net Income (Loss) .......................... $ 315(1) $ 10,337(1) $ (1,107) $ (6,154) $ (1,352)
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Working Capital ............................ $ 70,090 $ 73,301 $ 65,186 $ 32,389 $ 57,167
Total Assets ............................... 199,272 197,076 156,068 138,280 149,381
Total Debt ................................. 85,142 85,751 76,076 54,817 62,057
Preferred Stock ............................ 10,489 12,239 -- -- --
Common Stockholders' Equity ................ $ 70,328 $ 72,605 $ 60,124 $ 61,231 $ 67,385
</TABLE>
(1) In fiscal 1995 and 1996, income (loss) applicable to common shares after
dividends accrued and accretion on Preferred Stock was $9.6 and ($2.3)
million, respectively.
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 1996 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 1996 Annual
Report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE.
13
<PAGE>
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 1997 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
1997 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,
1996, 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 1997 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 1997
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 1997 Annual Meeting of Stockholders and
to the "Notes to Consolidated Financial Statements" section of the 1996 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 1996 Annual Report to Stockholders and the Accountant's Report
relating to the Consolidated Financial Statements and Notes thereto.
(II) FINANCIAL STATEMENT SCHEDULES 10-K PAGE
Auditor's Opinion Relating to Schedules........................... 18
Schedule II Valuation and Qualifying Accounts for the three years
ended September 30, 1996......................................... 20
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.
14
<PAGE>
(B) REPORTS ON FORM 8-K
No reports were filed on Form 8-K by the Registrant during the fourth quarter of
fiscal year 1996.
LIST OF EXHIBITS
NUMBER EXHIBIT
- ------ -------
3.1 Third 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 Restated 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. 1g 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)).
15
<PAGE>
NUMBER EXHIBIT
- ------ -------
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 Amendment No. 1 to the 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 the Company's quarterly
report on Form 10-Q for the quarter ending June 30, 1996 (No.
33-22603)).
16
<PAGE>
NUMBER EXHIBIT
- ------ -------
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).
17
<PAGE>
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 22, 1996. 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 22, 1996
18
<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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ HOWARD M. MEYERS Chairman of the Board, Chief
Howard M. Meyers Executive Officer and Director December 18, 1996
/s/ JERRY M. PITTS President, Chief Operating December 18, 1996
Jerry M. Pitts Officer and Director
/s/ RICHARD J. GONZALEZ Vice President, Chief Financial December 18, 1996
Richard J. Gonzalez Officer, Treasurer and Secretary
/s/ LAWRENCE E. GOLUB Director December 18, 1996
Lawrence E. Golub
/s/ MELVYN N. KLEIN Director December 18, 1996
Melvyn N. Klein
/s/ ALBERT P. LOSPINOSO Director December 18, 1996
Albert P. Lospinoso
/s/ STANLEY S. SHUMAN Director December 18, 1996
Stanley S. Shuman
/s/ JEFFREY P. SANGALIS Director December 18, 1996
Jeffrey P. Sangalis
19
<PAGE>
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
<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, 1996
Allowance for doubtful accounts ...... $ 567,970 $(208,928) $ (6,077) $ 352,965
--------- --------- --------- ---------
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
--------- --------- --------- ---------
</TABLE>
(1) Write-off of uncollectible accounts.
20
EXHIBIT 13.1
BAYOU STEEL
CORPORATION
------------------------------------
ANNUAL REPORT
21
<PAGE>
1996
22
<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, 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 613 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.
23
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
YEAR ENDED SEPTEMBER 30, 1996 1995
---- ----
FOR THE YEAR:
Net Sales ................................... $ 204,425,858 $ 185,772,280
Net Income .................................. 314,600 10,336,789
Income (Loss) Per Equivalent Common Share ... (.17) .73
EBITDA(1) ................................... $ 16,373,900 $ 23,774,764
Interest Coverage Ratio ..................... 1.93 3.14
AT YEAR END:
Cash Equivalent ............................. $ 748,608 $ 10,521,664
Working Capital ............................. 70,090,008 73,301,225
Property, Plant and Equipment ............... 90,334,397 91,650,047
Total Assets ................................ 199,271,685 197,076,165
Long-Term Debt .............................. 83,540,331 85,137,665
Common Stockholders' Equity ................. 70,327,577 72,605,395
Stockholder Equity per Share ................ 5.13 5.54
Stock Price per Share ....................... $ 3.63 $ 4.94
OTHER DATA:
Shape Shipments ............................. 580,069 503,297
Billet Shipments ............................ 15,638 11,072
Employees ................................... 550 545
(1) Earnings before Interest, Tax, Depreciation, and Amortization.
24
<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 income in
fiscal 1996 of $0.3 million compared to $10.3 million in fiscal 1995. The $10.0
million reduction in the Company's results was mainly due to four factors.
First, metal margin at the Louisiana facility ("Louisiana") ("BSCL"), the
difference between shape selling price and raw material ("scrap") cost,
decreased by 4.1% or $9 per ton. Second, the prices of certain supply items and
energy increased significantly at the Louisiana facility, resulting in
additional expenses of $4.4 million. Third, the loss at Bayou Steel Corporation
(Tennessee) ("Tennessee") ("BSCT"), a wholly owned subsidiary, which started
operations in the last quarter of the prior fiscal year, increased by $4.6
million. And fourth, non-production strike expenses increased 77% or $0.8
million.
The Company reported consolidated net income of $10.3 million in fiscal 1995
compared to $4.4 million before an extraordinary item 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 increased by
8.8%. The loss of $2.2 million at BSCT impacted earnings. Cost of goods sold for
the Company was adversely impacted by the start-up of several capital
improvement projects and the idle second furnace at the Louisiana facility, the
increase in additive and alloy costs, and unusual adjustments in scrap
inventories.
The dividends accrued and accretion of $2.6 and $0.7 million on the
preferred stock in fiscal 1996 and 1995, respectively, 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 Tennessee Valley
Steel Corporation ("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
Notes Due 2001 (the "10.25% Notes").
The following table sets forth the shipment and sales data for the fiscal
years indicated.
YEARS ENDED SEPTEMBER 30,
1996 1995 1994
-------- ------- --------
Shape Shipment Tons .................. 580,069 503,297 446,572
Average Shape Selling
Price Per Ton ....................... $ 340 $ 360 $ 337
Billet Shipment Tons ................. 15,638 11,072 35,503
Average Billet Selling
Price Per Ton ....................... $ 233 $ 235 $ 224
Net Sales (in thousands) ............. $204,426 $185,772 $160,823
25
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
SALES
Net sales increased by $18.7 million or 10.0% in fiscal 1996 compared to
fiscal 1995 due to increased shipments out of both the Louisiana and Tennessee
facilities. The increases in shipments were partially offset by an overall
decrease in selling prices. 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, reflecting a stronger economy. The increase was partially offset
by fewer tons of billets shipped in fiscal 1995.
SHAPES. In fiscal 1996, the 76,772 tons or 15.3% increase in shape shipments
was attributable to improved product demand and the additional product line from
the Tennessee facility. The Louisiana facility's, which had the best shipment
year in the history of the Company, shipments increased by 5,973 tons compared
to the prior year. Exports to Mexico and overseas were minimal, while shipments
to Canada were slightly less than the prior year. More shipments, as a
percentage of the total, went to steel service centers and less to end users.
The $20 per ton or 5.6% decrease in shape prices was the result of additional
capacity being shifted into the Company's product line from mills previously
producing for the special bar quality ("SBQ") market. This unanticipated shift
was due to the extreme softness of the SBQ market. In addition, excess inventory
at certain minimills and imports in the Southwest from Mexican mills contributed
to the decrease in selling price. The Tennessee facility's, which started
operations late in fiscal 1995, shipments increased by 70,800 tons. The prices
for the merchant bar product line from the Tennessee facility also carried a
lower selling price compared to the structural products from the Louisiana
facility. Consequently, the mix of selling more merchant bar products from the
Tennessee facility in fiscal 1996 resulted in lowering the overall selling price
by $4 per ton. The Company also expanded it's market area for merchant bar
resulting in lower selling prices.
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. Exports to Mexico and overseas
were minimal, while exports to Canada improved by 2.7% compared to fiscal 1994.
Shipments from the Tennessee facility in fiscal 1995 were minimal, since
operations only started-up in mid-July, and there were no finished products 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. The 1995 selling price was
the best since fiscal 1989. The selling price of structural 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.
The Company expects an improvement in shipments in fiscal 1997 mainly due to
the expansion of its market with products from the Tennessee operation. The
Company plans to continue to optimize its product mix to remain competitive,
maintain its share in the light structural shape market, and establish stability
in the merchant bar market. The Company expects prices to remain stable in the
first fiscal quarter of 1997.
BILLETS. In fiscal 1996, billet shipments, the Company's semi-finished
product, increased slightly compared to fiscal 1995 due to a large export
shipment and several smaller domestic shipments. The overall selling price of
billet sales were consistent with last year. The Company supplied approximately
26
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
29,000 tons of billets to the Tennessee rolling mill, exhausting the remainder
of the Company's excess billet production in fiscal 1996. The remainder of
BSCT's billet requirements were purchased on the open market at competitive
prices.
In fiscal 1995, billet shipments decreased compared to fiscal 1994 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 1995 due to increased raw material costs
and improved market conditions.
In fiscal 1997, 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. The Company will continue to evaluate its long-term
billet supply strategy while reacting to short-term market changes.
COST OF GOODS SOLD
Cost of goods sold was 92.2% of sales in fiscal 1996 compared to 87.3% in
fiscal 1995. The percent increase in cost of goods sold was due to shape selling
prices decreasing more than scrap prices, the learning curve associated with the
start-up of operations at Tennessee, the learning curve associated with the
installation of the new capital improvements at Louisiana, and price increases
of certain key supply items.
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.
SCRAP. The major component of cost of goods sold is scrap. In fiscal 1996,
the scrap costs decreased 3.4% compared to fiscal 1995 levels. BSCL's shape
selling prices decreased $9 more than the scrap costs resulting in 4.1%
reduction in BSCL's metal margin. Partially offsetting the margin reduction was
the best scrap yield in the history of the Company. 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 the first quarter of fiscal 1997, the Company
expects scrap prices to temporally decrease.
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 at the minimill. This project was completed in
27
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
the fourth quarter of fiscal 1995 and experienced normal start-up problems
during the early stages of the operation and is now operating at planned
capacity. In fiscal 1996, the market for car bodies, the principal raw material
feed for a shredder, was higher than anticipated due to local competitive
conditions and increased domestic demand for shredded material. However, the
market has been stabilizing in recent months and further reductions in raw
material prices are expected.
AAF. Another component of raw materials is additives, alloys and flux
("AAF"). AAF cost increased in fiscal 1996 and 1995 by 12.0% and 7.4%,
respectively, 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 BSCL and its competitors.
This resulted in higher duties on imported AAF. Also contributing to the higher
prices is the increase in domestic demand due to the high steelmaking capacity
utilization. These general market conditions affect the Company and its
competition.
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, increased 5.6% in fiscal 1996 compared to fiscal 1995, and
decreased 1% in fiscal 1995 compared to fiscal 1994.
In fiscal 1995, conversion cost per ton at the Louisiana plant decreased by
1% compared to fiscal 1994 primarily due to an 8.7% improvement in productivity
which reduced fixed cost per ton. Late in the third fiscal quarter, the
Louisiana operations took a planned shutdown for major maintenance and
installation of capital improvements. The start-up of several new capital
projects initially affected productivity. 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. These start-up issues increased
operating costs by approximately $1.5 million and carried over to the first
quarter of fiscal 1996.
In fiscal 1996, conversion cost per ton at the Louisiana plant increased by
5.6% compared to fiscal 1995. The main increase in conversion cost was caused by
the increase in prices for power and natural gas. This accounted for
approximately $3.2 million of the increase in conversion cost. Also, as a result
of the continued impact of the second furnace learning curve and the 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
serves as a back-up for significant unexpected outages or extensive planned
shutdowns. Several operating records were established in fiscal 1996 which
contributed to offsetting increased costs of certain supply items. First,
productivity, as measured in tons produced per hour, in the Louisiana plant was
the best ever. Second, power consumption was the best ever. Third, electrode
consumption, which was the best ever, improved 11.6% resulting in savings of
$556,000 over last year. And fourth, man-hours per cast tons was the best in
seventeen years of operation.
The first quarter of fiscal 1997 will be impacted by the returning striking
workers. The Company will incur some one-time expenses, estimated to be $0.5 to
$1.0 million, related to the strikers returning to work under a settlement
agreement. In addition, productivity will be affected as returning and
28
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
current workers become re-acquainted with the equipment or learn new jobs. The
Company is unable to estimate the total impact although the introduction of a
productivity incentive plan should shorten the process. The Company also
experienced two unusual equipment outages at its Louisiana operations which
affected production and resulted in increased maintenance costs. The costs, net
of insurance proceeds, are estimated to be $0.5 to $1.0 million. The melt shop
is now operating at normal levels.
In July 1995, BSCT started operating its rolling mill. 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. During fiscal 1996, BSCT rolled 44 new section sizes
which impacted productivity yet will ultimately provide opportunities to
penetrate the original equipment manufacturer markets. Consequently, production
costs exceeded sales by $4.8 million and $1.3 million in fiscal 1996 and 1995,
respectively. The rolling mill performance has improved during the fiscal year
due to capital improvements and the experience gained by the workforce.
Comparing the first quarter of fiscal 1996 to the last quarter of fiscal 1996 in
Tennessee, tons produced improved by 87%, conversion cost per ton improved by
30%, productivity as measured in tons produced per operating hour improved by
92%, yield improved by 6.3%, and natural gas consumption improved by 25%. Since
the book selling price fell $40 per ton since the acquisition, the break-even
production and shipment rate has increased from approximately 32,000 tons per
quarter to nearly 45,000 tons per quarter under current market conditions and
certain operating improvements. In the last fiscal quarter, BSCT produced, after
adjusting for a planned outage, 33,000 tons.
SHIPPING AND OTHER COSTS. There were also several other issues that
adversely affected cost of goods sold in fiscal 1995 as compared to the 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. Second, an
unusual scrap fire and inventory adjustment increased cost of goods sold by $0.8
million. Shipping, dock, and stocking location operating costs have improved in
fiscal 1996 compared to fiscal 1995 while inventory adjustments were minimal.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased in fiscal 1996 and
1995 compared to the respective prior years 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.
NON-PRODUCTION STRIKE & CORPORATE CAMPAIGN EXPENSES
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. In fiscal 1996, these expenses increased to an average of $147,000 per
month mainly due to increased legal expenses related to the Racketeer Influenced
Corrupt Organization Act ("RICO") suit which the Company filed against the
Union. The three and one-half year old strike ended in September, 1996;
consequently, strike expenses for fiscal 1997 will be related to the RICO law
suit and other expenses related to returning the strikers back to work. The
29
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
overall strike expenses should decrease in fiscal 1997.
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 ("Term Loan"). Interest expense increased in fiscal 1996 due to a full
year of interest expense on the Term Loan, additional short-term borrowings
under it's line-of-credit, and higher interest rates. The Company borrowed an
average of $1.7 million under its line of credit at a weighted average interest
rate of 8.4% in fiscal 1996.
Interest income increased in fiscal 1995 compared to fiscal 1994 due to the
Company having more cash to invest and better interest rates. Interest income
decreased in fiscal 1996 due to the Company having less cash to invest.
Miscellaneous income increased in fiscal 1996 and 1995, compared to the
respective prior years, due to a better collection record on credit sales. There
were also sales of scrapped inventory in fiscal 1996 increasing miscellaneous
income.
NET INCOME/LOSS BEFORE EXTRAORDINARY ITEMS
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.
In fiscal 1996, the Company's consolidated results were $10.0 million less
than fiscal 1995 mainly due to the Tennessee facility incurring substantial
losses for fiscal 1996. The metal margin decreased substantially while prices of
certain supply items and energy increased, and the start-up costs of several
recently completed capital projects and the idle furnace at the Louisiana
facility contributed to the reduction in results.
The results for the fourth fiscal quarter of 1996 were affected by several
unusual factors. In July, the power company which supplies electrical power to
the Louisiana plant had operational problems. As a consequence, BSCL curtailed
production by 5% during the month and paid a higher fuel rate. The resolution of
the labor issues at BSCL and BSCT also resulted in some non-recurring expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended fiscal 1996 with $0.7 million of cash, after borrowing
$3.0 million under its line of credit, and current assets exceeding current
liabilities by a ratio of 3.0 to 1.0. Working capital decreased by $3.2 million
to $70.1 million in fiscal 1996.
30
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
OPERATING CASH FLOW. Net cash used in operations was $4.5 million. Income,
depreciation, and amortization contributed $7.6 million in operating cash.
Accounts payable increased by $2.1 million due to a year end build-up of raw
materials. Accounts receivable increased by $2.0 million as sales increased in
Tennessee. Inventories also increase by $12.2 million as much of Tennessee's
production went into building an acceptable mix of products to service the
Company's customers. The Tennessee operation also built up the billet inventory
to support its operations. The BSCL shape inventory increased as the rolling
mill's productivity level increased.
CAPITAL EXPENDITURES. Capital expenditures amounted to $4.9 million in
fiscal 1996. The Louisiana operations spent $3.2 million which was primarily
directed to completing its $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. The Company also spent over $1.7 million at the Tennessee facility on
capital projects to reduce costs and increase productivity. In fiscal 1997,
depending on market conditions, the Company expects to spend approximately $9
million on various capital projects to reduce costs and increase productivity,
to enhance safety and environmental programs, and to maintain the plants.
FINANCING ACTIVITIES. The Company paid $2.8 million in dividends to the
holders of the preferred stock. The Company incurred $3.0 million in short-term
borrowings as of September 30, 1996.
All of the Company's $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 10.25% Notes are issued
("the Indenture") contains covenants which restrict the Company's ability to
incur additional indebtedness, make dividend payments, or place liens on the
assets acquired with the indebtedness. Under the Indenture, the Company may not
incur additional indebtedness or make dividend payments unless its Interest
Expense Coverage Ratio for the trailing 12 months would be greater than 2.00 to
1.00. As of September 30, 1996, the Interest Expense Coverage Ratio was 1.93 to
1.00.
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. The Company declared four regular quarterly dividends in fiscal 1996. If
a quarterly dividend payment is not made by the end of a quarter, the dividend
rate will increase by 3% or $112,500 per quarter. In addition, the holders of
the Preferred Stock have a right to additional warrants, approximately 77,000
shares, for each two consecutive quarterly payments missed. Based on the
September 30, 1996 results, the Company would be unable to make the December 31,
1996 dividend payment. The Company also does not expect to make the ratio test
for the quarter ended December 31, 1996. Prior to September 30, 1996, the
Company declared the regular dividends for fiscal 1997. Subsequent to fiscal
year end, the Company paid these dividends. This eliminates the additional
dividend
31
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
rate and additional warrants that would have otherwise been payable in fiscal
1997. Depending on the Company's future results, the Company may not be able to
declare and pay other dividends.
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 of $750,000 beginning on June 30, 1997 and 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 2.5% or approximately 8.0% 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. 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 most significant of
which require the Company to maintain a minimum interest coverage ratio and
limit the incurrence of certain indebtedness. Borrowings against the line of
credit as of September 30, 1996, was $3.0 million. The amount available to
borrow as of September 30, 1996 was $28 million. As of November 13, 1996, the
Company's outstanding borrowings were $5.2 million. 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.
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
FORWARD-LOOKING INFORMATION
This document contain various "forward-looking" statements which represent
the Company's expectation or belief concerning future events. The Company
cautions that a number of important factors could, individually or in the
aggregate, cause actual results to differ materially from those included in the
forward-looking statements including, without limitation, the following: changes
in the price of supplies, power, natural gas, purchased billets; changes in the
selling price of the Company's finished products or
32
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (Continued)
the purchase price of steel scrap; weather conditions in the market area of the
finished product distribution; unplanned equipment outages; prolonged
productivity impact from returning strikers; and changing laws affecting labor,
employee benefit cost and or environmental regulations.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state, and local laws and
regulations. See Footnote 9 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.
33
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------
CURRENT ASSETS: 1996 1995
------------- -------------
<S> <C> <C>
Cash and temporary cash investments ................................................ $ 748,608 $ 10,521,664
Receivables, net of allowance for doubtful accounts
of $352,965 in 1996 and $567,970 in 1995 .......................................... 24,107,566 21,921,347
Inventories ........................................................................ 79,856,062 67,694,741
Prepaid expenses ................................................................... 292,458 257,405
------------- -------------
Total current assets ........................................................... 105,004,694 100,395,157
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land ............................................................................... 3,790,398 3,790,398
Machinery and equipment ............................................................ 104,683,209 102,582,968
Plant and office building .......................................................... 20,975,997 18,929,288
------------- -------------
129,449,604 125,302,654
Less--Accumulated depreciation ..................................................... (39,115,207) (33,652,607)
------------- -------------
Net property, plant and equipment .............................................. 90,334,397 91,650,047
------------- -------------
OTHER ASSETS ........................................................................... 3,932,594 5,030,961
------------- -------------
Total assets ................................................................... $ 199,271,685 $ 197,076,165
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ............................................... $ 1,601,851 $ 613,483
Borrowings under line of credit .................................................... 3,000,000 --
Accounts payable ................................................................... 24,281,494 22,188,484
Accrued liabilities ................................................................ 3,856,341 3,675,716
Accrued dividends on redeemable preferred stock .................................... 2,175,000 616,249
------------- -------------
Total current liabilities ...................................................... 34,914,686 27,093,932
------------- -------------
LONG-TERM DEBT ......................................................................... 83,540,331 85,137,665
------------- -------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK ............................................................. 10,489,091 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 47,769,034
Retained earnings .................................................................. 22,429,697 24,707,515
------------- -------------
Total common stockholders' equity .............................................. 70,327,577 72,605,395
------------- -------------
Total liabilities and common stockholders' equity .............................. $ 199,271,685 $ 197,076,165
============= =============
</TABLE>
34
The accompanying notes are an integral part of these
consolidated statements.
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
NET SALES ..................................................... $ 204,425,858 $ 185,772,280 $ 160,822,995
COST OF SALES ................................................. 188,453,259 162,158,316 144,313,879
------------- ------------- -------------
GROSS PROFIT .................................................. 15,972,599 23,613,964 16,509,116
------------- ------------- -------------
SELLING, GENERAL AND ADMINISTRATIVE ........................... 6,272,624 5,312,402 3,924,986
NON-PRODUCTION STRIKE AND
CORPORATE CAMPAIGN EXPENSES ................................. 1,768,197 999,938 996,091
------------- ------------- -------------
7,931,778 17,301,624 11,588,039
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense .......................................... (8,634,510) (7,821,244) (7,669,665)
Interest income ........................................... 146,825 542,909 280,224
Miscellaneous ............................................. 870,507 431,655 162,417
------------- ------------- -------------
(7,617,178) (6,846,680) (7,227,024)
------------- ------------- -------------
INCOME BEFORE TAXES AND
EXTRAORDINARY ITEMS ......................................... 314,600 10,454,944 4,361,015
PROVISION FOR INCOME TAXES .................................... -- 118,155 --
------------- ------------- -------------
INCOME BEFORE
EXTRAORDINARY ITEMS ......................................... 314,600 10,336,789 4,361,015
EXTRAORDINARY ITEMS ........................................... -- -- (5,468,216)
------------- ------------- -------------
NET INCOME (LOSS) ............................................. 314,600 10,336,789 (1,107,201)
DIVIDENDS ACCRUED AND ACCRETION ON
PREFERRED STOCK ............................................. (2,592,418) (733,902) --
------------- ------------- -------------
INCOME (LOSS) APPLICABLE TO COMMON
AND COMMON EQUIVALENT SHARES ................................ $ (2,277,818) $ 9,602,887 $ (1,107,201)
============= ============= =============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING ............................... 13,707,030 13,113,058 12,884,607
INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE:
Income (loss) before extraordinary items .................. $ (.17) $ .73 $ .34
Extraordinary items ....................................... -- -- (.42)
------------- ------------- -------------
Income (loss) per common and
common equivalent share .................................. $ (.17) $ .73 $ (.08)
============= ============= =============
</TABLE>
35
The accompanying notes are an integral part of these
consolidated statements.
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Income (loss) ......................................................... $ 314,600 $ 10,336,789 $ (1,107,201)
Extraordinary items ................................................... -- -- 5,468,216
Loss on retirement of equipment ....................................... -- -- 25,373
Depreciation .......................................................... 6,094,870 5,148,300 4,721,862
Amortization .......................................................... 1,163,952 893,185 552,909
Provision for losses on accounts receivable ........................... (186,039) (53,204) 186,560
Changes in working capital:
(Increase) in receivables ........................................... (2,000,180) (2,711,736) (666,060)
(Increase) in inventories ........................................... (12,161,321) (10,549,191) (8,659,142)
(Increase) decrease in prepaid expenses ............................. (35,053) (68,953) 33,825
Increase (decrease) in accounts payable ............................. 2,093,010 5,648,479 (1,131,922)
Increase (decrease) in accrued liabilities .......................... 180,625 348,236 (1,232,769)
------------ ------------ ------------
Net cash (used in) provided by operations ......................... (4,535,536) 8,991,905 (1,808,349)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Tennessee facility - net of current assets ............. -- (17,056,000) --
Purchases of property, plant and equipment ............................ (4,989,761) (12,469,603) (2,761,075)
Proceeds from the sale of property, plant and equipment ............... 210,541 -- --
------------ ------------ ------------
Net cash used by investing activities ............................. (4,779,220) (29,525,603) (2,761,075)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under line of credit ........................ 3,000,000 -- (4,000,000)
Payments of long-term debt and retirement cost ........................ (608,966) (325,008) (54,255,783)
(Increase) in other assets ............................................ (65,585) (2,523,043) (3,789,280)
Proceeds from issuance of long-term debt .............................. -- 10,000,000 75,000,000
Proceeds from issuance of preferred stock and warrants ................ -- 15,000,000 --
Payments of dividends on preferred stock .............................. (2,783,749) -- --
------------ ------------ ------------
Net cash (used in) provided by
financing activities ............................................. (458,300) 22,151,949 12,954,937
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND TEMPORARY
CASH INVESTMENTS ........................................................ (9,773,056) 1,618,251 8,385,513
CASH AND TEMPORARY CASH INVESTMENTS,
beginning balance ....................................................... 10,521,664 8,903,413 517,900
------------ ------------ ------------
CASH AND TEMPORARY CASH INVESTMENTS,
ending balance .......................................................... $ 748,608 $ 10,521,664 $ 8,903,413
============ ============ ============
</TABLE>
36
The accompanying notes are an integral part of these
consolidated statements.
<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, 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
Net income ................. -- -- -- -- 314,600 314,600 --
Dividends on preferred stock -- -- -- -- (2,167,500) (2,167,500) --
Prepaid dividends on
preferred stock .......... -- -- -- -- -- -- (2,175,000)
Accretion on preferred stock -- -- -- -- (424,918) (424,918) 424,918
------------ ------------ ------- ------------ ------------ ------------ -----------
ENDING BALANCE,
September 30, 1996 .......... $ 106,134 $ 22,711 $ 1 $ 47,769,034 $ 22,429,697 $ 70,327,577 $10,489,091
============ ============ ======= ============ ============ ============ ============
</TABLE>
37
The accompanying notes are an integral part of these
consolidated statements.
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS:
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 produces light structural steel
products at this technologically advanced facility. BSCT produces merchant bar
shapes. In addition, the Company operates four stocking locations along the
inland waterway system and an additional warehouse in Tennessee. The Company's
customer base is comprised of steel service centers located throughout the
United States, with export shipments going to Canada and Mexico.
During the year ended September 30, 1995, the Company formed BSCT to
acquire the assets of Tennessee Valley Steel Corporation ("TVSC") for $26.8
million. BSCT is a wholly owned subsidiary of the Company. Fiscal 1996 was the
first full year of operations at BSCT, whose losses totalled $6.8 million
(unaudited).
The accompanying financial statements of the Company include the
consolidated accounts of BSCL and BSCT 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 BSCL
in 1986 and of BSCT in 1995 (see Note 1) 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 temporary cash investments. Cash payments for
interest and Federal income taxes during the three years ended September 30,
were as follows:
38
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1996 1995 1994
------------ ----------- ----------
Interest ................. $8,651,413 $8,162,394 $7,947,182
Income taxes ............. $ 42,611 -- --
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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. INVENTORIES:
Inventories, as of September 30, 1996 and 1995 consisted of the following:
1996 1995
------------ ------------
Scrap steel .................................. $ 6,567,308 $ 4,964,364
Billets ...................................... 7,778,092 6,357,640
Finished product ............................. 47,943,429 42,541,400
LIFO adjustments ............................. (3,255,589) (4,741,268)
------------ ------------
59,033,240 49,122,136
Mill rolls, operating supplies, and other .... 20,822,822 18,572,605
------------ ------------
$ 79,856,062 $ 67,694,741
============ ============
There were increments in the last-in, first-out ("LIFO") inventories in
fiscal 1996 and fiscal 1995. At September 30, 1996 and 1995, the first-in,
first-out ("FIFO") inventories were $62.3 million and $53.9 million,
respectively. A lower of cost or market evaluation of the carrying value of
inventory was prepared
39
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
at the end of each fiscal year. In 1996, lower of cost or market adjustments of
$382,000 were required for the finished goods inventory at BSCT. The market
values, after adjustments, were in excess of the carrying value of the LIFO and
FIFO inventories for all years presented.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment of TVSC was acquired for $17.1 million during
fiscal 1995. Excluding the acquisition, capital expenditures totaled $5.0
million, $12.5 million, and $2.7 million in fiscal 1996, 1995, and 1994,
respectively. As of September 30, 1996, the estimated costs to complete
authorized projects under construction or contract amounted to $2.5 million.
The Company capitalized interest of $18,000, $394,000, and $69,000 during
the years ended September 30, 1996, 1995, and 1994, respectively, related to
qualifying assets under construction. Effective July 1, 1996, estimates of total
plant production capacity were revised, due in part to production enhancements
attained by recent capital expenditures. As a result of these revised estimates,
depreciation expense decreased approximately $.66 per ton produced in the melt
shop and $1.62 per ton produced in BSCL's rolling mill, generating a total
decrease in depreciation expense in the fourth quarter of fiscal 1996 of
approximately $318,000, or $.02 per common and common equivalent share.
Depreciation expense during the years ended September 30, 1996, 1995, and 1994
was allocated as follows:
1996 1995 1994
---------- ---------- ----------
Inventory ............................... $ 140,401 $ 178,835 $ 297,409
Cost of sales ........................... 5,947,719 4,964,204 4,419,930
Selling, general and administrative ..... 6,750 5,261 4,523
---------- ---------- ----------
$6,094,870 $5,148,300 $4,721,862
========== ========== ==========
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. Since
adoption, this statement has had no impact on the financial position or results
of operations of the Company.
5. OTHER ASSETS:
Other assets consist of financing costs associated with the issuance of
long-term debt, redeemable preferred stock and warrants, and the revolving line
of credit (see Notes 6, 7, and 14) which are being amortized over the lives of
the related transactions. 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
40
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
$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 1993 amended and
restated revolving line of credit. Amortization of other assets was
approximately $1,164,000, $893,000, and $553,000 for the years ended September
30, 1996, 1995, and 1994, respectively. Other assets are reflected in the
accompanying balance sheets net of accumulated amortization of $2,009,000 and
$910,000 at September 30, 1996 and 1995, respectively.
6. LONG-TERM DEBT:
Long-term debt of the Company as of September 30, 1996 and 1995 included
the following:
1996 1995
----------- -----------
First Mortgage Notes (see below) ................... $75,000,000 $75,000,000
Term loan (see below) .............................. 10,000,000 10,000,000
Other notes payable, due monthly, bearing interest
from 8.5% to 10.25% secured by Company assets ..... 142,182 751,148
----------- -----------
85,142,182 85,751,148
Less--current maturities ........................... 1,601,851 613,483
----------- -----------
$83,540,331 $85,137,665
=========== ===========
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 the Company's revolving credit facility which had been
obtained 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 $1.0 million beginning June 30, 1999 through
December 31, 1999. The remaining $1.0 million principal payment is due on the
final maturity date of June 20, 2000. As of September 30, 1996, $1,500,000 was
classified as a current liability. The term loan bears interest on a sliding
scale based on the quarterly leverage ratio, as defined in the agreement. As of
September 30, 1996, the interest rate was LIBOR plus 2.5% or approximately 8%.
Term loan interest is payable quarterly. Fair value of the term loan
approximates carrying value.
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 from sales
thereof, whether existing or hereafter acquired. The Indenture under which the
10.25% Notes are issued contains covenants, including an interest expense
coverage ratio, which restrict the Company's ability to incur additional
indebtedness, make dividend payments, or place liens on the assets acquired with
such indebtedness.
The 10.25% Notes bear interest at the nominal rate of 10.25% per annum
payable semi-annually on
41
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
each March and September 1, which commenced 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, 1996 and 1995, the Company accrued interest at a rate of 10.25%.
The fair value of the 10.25% Notes on September 30, 1996 was $73.1 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 for the year
ended September 30, 1994. There was no tax effect related to this transaction.
7. 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, 1996 was $28 million, net of $3.8 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, as defined in the agreement. As of September 30, 1996, the
interest rate was LIBOR plus 2.5% or approximately 8%. 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. As of September 30, 1996, the
Company had an outstanding balance of $3 million under the line of credit. There
were no borrowings under the line of credit as of September 30, 1995. The
maximum amount outstanding during fiscal 1996 and 1995 was $6.4 million and
$23.3 million, respectively. The average borrowings were $1.7 million and $2.2
as of September 30, 1996 and 1995, respectively. The weighted average interest
rates were 8.4% and 8.9% as of September 30, 1996 and 1995, respectively. Fair
value of the line of credit approximates carrying value.
8. INCOME TAXES:
The Company is subject to United States Federal income taxes and accounts
for income taxes under the provisions of Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). 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
42
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
years, and (c) the sale of tax benefits discussed below.
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 expires in May 1997, 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 such 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 such
Mortgage. The Company will recognize interest income of $50,000 and rent expense
of $1.4 million for tax reporting purposes in fiscal year 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, 1996, for tax purposes, the Company had net operating
loss carryforwards ("NOLs") of approximately $328.7 million and $301.5 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
tax losses in fiscal 1996 and 1994, there was no provision for income taxes in
these years.
The NOLs will expire in varying amounts through fiscal 2011. A substantial
portion of the available NOLs, approximately $200 million, expires by fiscal
2000. In addition, the Company has $1.35 million of net future tax deductions
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 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 $121.4 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
43
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
of approximately $7.7 million (basis differences between tax and book plant,
property, and equipment multiplied by the federal income tax rate) were recorded
in fiscal 1996. However, in recording these net 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 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 $113.7 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 1996
or prior years.
9. COMMITMENTS AND CONTINGENCIES:
STRIKE AND CORPORATE CAMPAIGN
On March 21, 1993, the United Steelworkers of America Local 9121 (the
"Union") initiated a strike after the parties failed to reach agreement on a new
labor contract due to differences on economic issues. On September 23, 1996, the
Company and Union entered into a settlement agreement which, among other issues,
resulted in a new labor contract, ending the strike. The settlement will have a
short-term adverse impact upon the Company. The Company will incur one-time
expenditures estimated to be $0.5 to $1.0 million. Additionally, the Company may
experience a temporary negative impact in productivity during the transition.
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. The impact of the corporate campaign has been
significant. The Company has filed a lawsuit in federal court in Delaware under
the Racketeer Influenced Corrupt Organizations Act (RICO) against the Union for
their conduct in connection with this campaign. The Company seeks both an end to
the illegal activities used in the corporate campaign and the recovery of
damages. These legal expenses will continue even though the strike has been
resolved.
In conjunction with the acquisition of the assets of TVSC, the Union filed
a charge with the National Labor Relations Board (the "NLRB") alleging that the
Company has violated the National Labor Relations Act relating to its refusal to
hire at BSCT certain individuals, who were former employees of TVSC. On August
16, 1996, the Company reached a settlement with the Union which was approved by
the NLRB and resolved the issue. The Company agreed to recognize the Union as
the bargaining agent for the employees and pay 135 former employees, who applied
for work but were not employed, a settlement
44
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
amount of 25% of lost wages, less interim earnings. Until interim earnings for
1996 are known for each applicant, the liability cannot be determined. Based on
assumptions of earnings, the Company estimated that the settlement could range
from $136,000 to $500,000. As of September 30, 1996, the Company accrued
$136,000 for the settlement.
ENVIRONMENTAL
The Company is subject to various Federal, state, and local laws and
regulations concerning the discharge of contaminants which may be emitted into
the air, discharged into waterways, and the disposal of solids and/or hazardous
wastes such as electric arc furnace dust. In addition, in the event of a release
of a hazardous substance generated by the Company, the Company could be
potentially responsible for the remediation of contamination associated with
such a release. In the past, the Company's operations in some respects have not
met all of the applicable standards promulgated pursuant to such laws and
regulations. At this time, the Company believes that it is in compliance, in all
material respects, with applicable environmental requirements and that the cost
of such continuing compliance will not have a material adverse effect on the
Company's competitive position, operations or financial condition, or cause a
material increase in currently anticipated capital expenditures. The Company
currently has no mandated expenditures 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, 1996, the Company has accrued a loss contingency for environmental
matters.
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 Environment and Conservation's voluntary clean up program. The
Company, in acquiring the assets of TVSC, has entered into a similar order. The
ultimate remedy and clean-up goals will be dictated by the results of human
health and ecological risk assessments which are components of a required,
structured investigative, remedial process. As of September 30, 1996,
investigative, remedial and risk assessment activities have resulted in expenses
of approximately $1.0 million. Estimates indicate that the future cost for
remediating the affected areas ranges from $500,000 for the lowest cost remedy
to $1,500,000 for higher cost remedies. 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 activities
pursuant to the Voluntary Consent Order (with an additional $1.0 million to be
held for one year for such costs and other costs resulting from a breach of
TVSC's representations and warranties in the agreement). At this time, the
Company does not expect the costs of resolution of the Voluntary Consent Order
to exceed funds provided by the escrow fund. 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 the escrow funds, the Company would be liable.
RAW MATERIAL SUPPLY/CONTRACTS
The Company has commitments to purchase billets for use in the Tennessee
rolling mill through
45
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1996. As of September 30, 1996, the commitments are approximately
$5.2 million.
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.
10. 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,
1996, no options were exercised, 46,000 shares were exercisable, and 485,000
shares were available for grant under the 1991 Plan.
A summary of activity relating to stock options is as follows:
# OF
STOCK OPTIONS
-------------
Outstanding, September 30, 1995................................ 115,000
Granted........................................................ 0
Exercised...................................................... 0
Canceled....................................................... 0
-------
Outstanding, September 30, 1996................................ 115,000
=======
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation",
was issued. SFAS No. 123 establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. The
Company presently accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and, accordingly,
does not recognize compensation expense for stock option grants made at an
exercise price equal to or in excess of the fair market value of the stock at
the date of grant. The Company intends to adopt SFAS No. 123 by disclosing the
pro-forma net income and earnings per share amounts assuming the fair value
method was adopted on October 1, 1996. The adoption of SFAS No. 123 will not
impact the Company's results of operations, financial position or cash flows.
46
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. 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 1996 and 1995:
The actuarial present value of future benefit obligations:
1996 1995
----------- -----------
Vested benefit obligation ................. $ 1,230,062 $ 949,213
Non-vested benefit obligation ............. 64,779 48,985
----------- -----------
Accumulated benefit obligation ............ $ 1,294,841 $ 998,198
=========== ===========
Projected benefit obligation .............. $ 2,001,427 $ 1,498,397
Plan assets at fair value ................. (1,884,984) (1,302,778)
----------- -----------
Funded status ............................. 116,443 195,619
Unrecognized net loss ..................... (170,847) (142,776)
----------- -----------
Accrued pension liability ................. $ (54,404) $ 52,843
=========== ===========
Determination of net periodic pension cost:
Service cost .............................. $ 335,976 $ 300,877
Interest cost ............................. 111,708 82,813
Expected return on plan assets ............ (134,083) (93,613)
Net amortization .......................... 1,061 1,735
----------- -----------
Total net periodic pension cost ........... $ 314,662 $ 291,812
=========== ===========
The primary actuarial assumptions used in determining the above benefit
obligation amounts were established on the September 30, 1996 and 1995
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.
The Company recognized expenses of $63,000 in fiscal 1996, $58,000 in
fiscal 1995, and $50,000 in fiscal 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 $84,000 and
$31,000 for the fiscal years 1996 and 1995, respectively, in connection with a
defined contribution plan at BSCT to which the employees contribute and the
Company makes matching contributions based on employee contributions
47
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
and profit sharing contributions based on employees' annual wages.
12. MAJOR CUSTOMERS:
No single customer accounts for 10% or more of the total sales for the
years ended September 30, 1996, 1995, and 1994.
13. 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, 1996 and 1995.
Costs charged for these services, prior to terminating the contract, were
approximately $64,000 for the year ended September 30, 1994.
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. 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 14) and received $160,000 for this services. Although
services were provided, no obligations were incurred in fiscal years 1996 and
1994. The agreement terminated on September 4, 1996.
14. 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 payments are missed or other defined events take place.
Based on the September 30, 1996 results, the Company would be unable to make the
December 31, 1996 dividend payment or any other dividend payment until an
interest coverage ratio test, as defined in the Indenture pursuant to which the
10.25% Notes were issued, is again met. The Company also does not expect to make
the ratio test for the quarter
48
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
ending December 31, 1996. Prior to September 30, 1996, the Company declared the
regular dividends for fiscal 1997. Subsequent to fiscal year end, the Company
paid these dividends. This eliminates the additional dividend rate and
additional warrants that would have otherwise been payable in fiscal 1997. The
dividend prepayment has been recorded as a reduction in the balance of the
preferred stock in the accompanying balance sheet, as the Company would be able
to apply any remaining amount against the principal balance in the event of an
early redemption of the preferred stock. Depending on the Company's future
results, the Company may not be able to declare and pay future dividends. As of
September 30, 1996, the Company accrued dividends at a rate of 14.5%. The
carrying amount of the preferred stock will increase as the accrued dividends
are charged to retained earnings during fiscal 1997 and 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 as well as by the normal amortization of
the prepaid dividends, discussed above. 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 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, 1996 was $14.6 million, net of
dividend prepayments. The fair value of the warrants on September 30, 1996 was
$3.0 million.
15. COMMON STOCK:
Income (loss) per common and common equivalent share are based on the
weighted average number of common shares and common stock equivalent shares
outstanding of 13,707,030, 13,113,058, and 12,884,607 for the years ended
September 30, 1996, 1995, and 1994, respectively. In connection with the
issuance of redeemable preferred stock on June 20, 1995, as discussed in Note
14, 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 1996 and 1995. There was no impact
on income per share as a result of the stock options granted in September, 1994
(see Note 10).
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 8). 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 6 and 7). Based on financial results for fiscal 1996,
the Company would be unable to declare and pay dividends until an interest
coverage ratio limit, as defined in the Indenture, is again obtained.
49
<PAGE>
BAYOU STEEL CORPORATION
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
16. MISCELLANEOUS:
Miscellaneous income (expense) as of September 30, 1996, 1995, and 1994
included the following:
1996 1995 1994
--------- --------- ---------
Discount earned ..................... $ 220,919 $ 211,566 $ 228,453
Allowance for doubtful accounts ..... 186,039 53,204 (186,560)
Other income ........................ 463,549 166,885 120,524
--------- --------- ---------
$ 870,507 $ 431,655 $ 162,417
========= ========= =========
17. QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
FISCAL YEAR 1996 QUARTERS
---------------------------------------------
FIRST SECOND THIRD FOURTH
--------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net Sales ................................ $ 41,163 $ 52,145 $ 58,875 $ 52,243
Gross Profit ............................. 4,055 3,647 4,214 4,057
Net Income (Loss) ........................ 175 21 222 (103)
Dividends and Accretion on Preferred Stock (646) (650) (650) (646)
Income (Loss) Applicable to Common and
Common Equivalent Shares ............... (471) (629) (428) (750)
Income (Loss) Per Common and
Common Equivalent Shares ............... (.03) (.05) (.03) (.05)
</TABLE>
<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)
</TABLE>
50
<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, 1996 and
1995, and the related consolidated statements of operations, cash flows, and
changes in equity for the years ended September 30, 1996, 1995, and 1994. 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, 1996 and 1995 and the results of their operations
and their cash flows for the years ended September 30, 1996, 1995, and 1994 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
New Orleans, Louisiana
November 22, 1996
51
<PAGE>
[GRAPHIC OMITTED]
FOR INFORMATION, CONTACT:
BAYOU STEEL CORPORATION
P.O. BOX 5000
LAPLACE, LA 70069-1156
PHONE: (504) 652-4900
52
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM BAYOU STEEL CORPORATION CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED
STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 748,608
<SECURITIES> 0
<RECEIVABLES> 24,460,531
<ALLOWANCES> 352,965
<INVENTORY> 79,856,062
<CURRENT-ASSETS> 105,004,694
<PP&E> 129,449,604
<DEPRECIATION> 39,115,207
<TOTAL-ASSETS> 199,271,685
<CURRENT-LIABILITIES> 34,914,686
<BONDS> 83,540,331
10,489,091
0
<COMMON> 128,846
<OTHER-SE> 70,327,577
<TOTAL-LIABILITY-AND-EQUITY> 199,271,685
<SALES> 204,425,858
<TOTAL-REVENUES> 204,425,858
<CGS> 188,453,259
<TOTAL-COSTS> 188,453,259
<OTHER-EXPENSES> 6,837,450
<LOSS-PROVISION> 186,039
<INTEREST-EXPENSE> 8,634,510
<INCOME-PRETAX> (2,277,818)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,277,818)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,277,818)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
