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 August 31, 1996 Commission File Number 0-22496
SCHNITZER STEEL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0341923
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification
No.)
3200 N.W. Yeon Ave., P.O. Box 10047
Portland, OR 97296-0047
- ---------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 224-9900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $1 par value
----------------------------------
(Title of class)
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 reports), 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 the 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 September 30, 1996 was:
Shares Outstanding Held By Market Value
Title of Each Class --------------------------- Held By
of Common Stock Affiliates Non-Affiliates Non-Affiliates
- --------------------- ---------- -------------- --------------
Class A, $1 par value 68,550 5,704,149 $165,417,421
Class B, $1 par value 4,575,255 0 N/A
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 1997 Annual
Meeting of Shareholders are incorporated herein by reference in Part III.
Page 1 of 78
Exhibits index on page 58
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART ITEM PAGE
<S> <C> <C>
I 1. BUSINESS...............................................................3
Overview.......................................................3
Proposed Acquisition of Proler International Corp (NYSE: PS)...3
Acquisition of MMI.............................................4
Business Strategy..............................................5
Scrap Operations...............................................6
Steel Operations..............................................11
Environmental Matters.........................................15
Employees.....................................................17
2. PROPERTIES......................................................17
3. LEGAL PROCEEDINGS...............................................18
4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.....................................18
4.(a) EXECUTIVE OFFICERS OF THE REGISTRANT............................18
II 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS........................................20
6. SELECTED FINANCIAL DATA...............................................21
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................22
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................29
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.............................50
III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.........................................................50
11. EXECUTIVE COMPENSATION................................................50
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..............................................50
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................50
IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K................................................51
</TABLE>
2
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
OVERVIEW
Schnitzer Steel Industries, Inc. (the Company) collects, processes and recycles
steel scrap and manufactures finished steel products by operating one of the
largest steel scrap recycling businesses in the United States and a
technologically advanced steel mini-mill. As a result of its vertically
integrated business, the Company is able to transform auto bodies and other
scrap into finished steel products. The Company believes that its scrap and
steel facilities are cost competitive in its markets.
The Company's Scrap Operations have collection and processing facilities in
Portland, Eugene, White City, Grants Pass and Bend, Oregon, Oakland, Sacramento
and Fresno, California, and Tacoma, Washington. The Company believes that its
Scrap Operations have a strong competitive position in their regions due to
significant economies of scale, low cost scrap processing and loading methods,
and deep water terminal facilities which provide efficient and flexible access
to foreign steel producers.
The Company's Steel Operations are conducted by Cascade Steel Rolling Mills,
Inc., a wholly owned subsidiary acquired in 1984. Steel Operations produces
steel reinforcing bar (rebar), merchant bar, fence posts, specialty sections and
grape stakes. The Company believes that Steel Operations has a strong
competitive position in its market due to its captive source of steel scrap
supply, efficient production processes, state-of-the-art technology,
well-located shipping and transportation facilities, and proximity to California
and other major western markets.
PROPOSED ACQUISITION OF PROLER INTERNATIONAL CORP. (NYSE: PS)
On September 16, 1996, the Company announced the signing of an agreement among
the Company and Proler International Corp. (Proler) by which the Company would
acquire Proler. Proler is an environmental services company involved in the
recovery and recycling of scrap metals and industrial wastes. Through its joint
ventures, Proler exports ferrous scrap to foreign markets from scrap collection,
processing and deep water facilities in Los Angeles, California; Providence,
Rhode Island; Everett Massachusetts; and Jersey City, New Jersey.
Pursuant to the agreement with Proler, the Company commenced a cash tender offer
for all of the outstanding shares of Proler at a cash price of $7.50 per share.
If and when the tender offer is completed, Proler will become a wholly owned
subsidiary of the Company through a cash merger at the same per share price. The
agreement provides that the tender offer is conditioned, among other things, on
at least a majority of Proler's outstanding shares being tendered and not
withdrawn prior to the expiration of the offer. The tender offer and merger are
also subject to the expiration or termination of the applicable waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). The
tender offer was originally scheduled to expire on October 18, 1996, but has
been extended on three occasions and is currently scheduled to expire on
November 29, 1996.
On October 4, 1996, the Company received a second request from the U.S.
Department of Justice (DOJ) for additional information with respect to its
filings under the HSR Act. The request extended the waiting period under the HSR
Act until 10 days after the DOJ receives all requested information, unless the
DOJ grants early termination. The Company is currently working on complying with
the DOJ's request.
3
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
Hugo Neu Corporation (Hugo Neu), which is a partner with Proler in the three
principal joint ventures through which Proler conducts its scrap metal business,
has proposed to acquire all outstanding shares of Proler for $9.00 per share in
cash, subject to certain conditions. On November 15, 1996, in response to Hugo
Neu's proposal, the Company announced that it had increased its offer price to
$9.00 per share in cash and extended its tender offer until November 29, 1996.
Proler's board of directors continues to support the Company's offer for Proler
stock as superior to Hugo Neu's offer. Proler has approximately 4.7 million
shares outstanding, making the value of the transaction at $9.00 per share about
$42 million.
Hugo Neu has also taken various steps, including commencing lawsuits and
arbitration proceedings, to block the acquisition of Proler by the Company. On
November 14, 1996, Hugo Neu added the Company as a defendant in an action
pending in the U.S. District Court for the Southern District of Texas and seeks,
among other things, to prevent the Company from purchasing Proler stock. The
Company believes that Hugo Neu's claims have no legal or factual merit.
Completion of the acquisition of Proler continues to be subject to considerable
uncertainty due to the ongoing review by the DOJ under the HSR Act and the
possibility that Hugo Neu might increase its offer for the Proler stock or
succeed in its efforts to block the transactions through litigation.
ACQUISITION OF MMI
In March 1995, the Company acquired all of the outstanding stock of
Manufacturing Management, Inc. (MMI) for $66 million in cash. MMI's principal
operation is a major scrap collection, processing and overseas shipping facility
in Tacoma, Washington. MMI is the largest scrap processor in the State of
Washington, collecting scrap principally from Seattle and the surrounding area
as well as from throughout Washington, Montana, Idaho, Alaska and Western
Canada. The Tacoma scrap yard is a 25 acre facility with a deep water shipping
terminal for loading scrap shipments to Asian customers, two auto shredders, and
other scrap processing equipment. With the addition of the Tacoma scrap
facility, the Company increased its annual ferrous scrap volume by 50 percent to
approximately 1.5 million long tons. The purchase was funded with borrowings
under a $100 million, five-year, unsecured revolving credit facility.
As part of the MMI acquisition, the Company also acquired MMI's Portland, Oregon
subsidiaries Acme Trading & Supply, Inc. (Acme), a nonferrous scrap operation,
and Columbia Forge & Machine Works, Inc., a small specialty forge operation. In
July 1995, the Company sold Acme, together with certain of the Company's other
Portland-based nonferrous operations, as part of its strategy to focus on its
ferrous scrap business.
The acquisition of MMI was accounted for as a purchase and MMI's results of
operations have been included in the Company's financial statements since March
17, 1995. Goodwill of $42.0 million was recorded and is being amortized over 40
years. In 1994 MMI recorded a reserve of $24.4 million for the estimated costs
to cure its environmental liabilities as well as the related deferred tax
benefit of $7.8 million.
4
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
BUSINESS STRATEGY
The Company has developed a multi-part strategy which includes the following
elements:
EXPAND SCRAP RECYCLING OPERATIONS. The Company will continue to aggressively
seek out expansion opportunities for its Scrap Operations within both its
existing markets and elsewhere in the United States. The Company has focused on
and will continue to emphasize increasing its sources of scrap through its
existing network and through selective acquisitions or joint ventures. The
Company's purchase of MMI in March 1995 added approximately 500,000 tons per
year to the Company's ferrous scrap volume. In December 1993, the Company
acquired four scrap collection and processing facilities in central and southern
Oregon. To facilitate increased purchasing of bundled scrap available in its
California market area, the Company installed a pre-shredder at its Oakland
facility in 1993 to break apart bundles for further processing into a
higher-margin, more marketable shredded product. The Fresno scrap facility was
acquired in 1989 to increase the Company's access to scrap in the central valley
of California. The Company has made a series of scrap-related joint venture
investments to increase its scrap sources and to enter related businesses with
significant growth prospects. The Company expects to look for acquisition
opportunities in other regions in the United States where it can apply its
expertise in the scrap business.
INCREASE FINISHED STEEL PRODUCTION AND PRODUCT FLEXIBILITY. In February 1996, a
second rolling mill (Rolling Mill #2) was completed increasing Steel Operations'
production capacity by 500,000 tons per year. The Company is in the process of
installing a rod block at the new mill which is scheduled to be completed during
the second quarter of fiscal 1997. The rod block will allow the Company to
enhance its product mix through the production of coiled rebar and wire rod. In
addition, the ability of the new bar mill to produce Steel Operations' existing
cut-to-length rebar products will permit the Company to increase its production
of higher-margin merchant bar products at Rolling Mill #1 and will also increase
the Company's flexibility to adjust its product mix among rebar, merchant bar
and wire rod products to respond to relative demand and price conditions among
those products. The new mill is expected to expand the Company's rolling
capacity, based on anticipated product mix, to about 700,000 tons annually to
more closely match the potential output of the melt shop at full capacity. After
completion of the rod block, the Company does not expect to expand Steel
Operations, either through significant capital additions or acquisitions of
other mini-mills, in the foreseeable future.
INVEST IN STATE-OF-THE-ART MANUFACTURING AND PROCESSING. The Company's objective
is to be a low cost producer of both steel scrap and finished steel products
primarily through the efficient purchase and processing of scrap and
state-of-the-art production of steel. The Company has made significant
investments in new equipment to ensure that its operations have cost effective
technology to produce high quality products. During fiscal years 1992 through
1996, the Company made capital expenditures of $80.1 million to improve Steel
Operations' steelmaking facility and to increase its production capacity. In May
1991, the Company installed a new melt shop comprised of a technologically
advanced electric arc furnace and five-strand continuous caster. The
installation of new in-line straightening, stacking and bundling equipment at
Rolling Mill #1 was completed in August 1994. This equipment improves merchant
5
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
bar product quality, lowers processing costs, and has permitted the Company to
expand its higher margin merchant bar product line. The Company also continues
to invest in equipment to improve the efficiency and capabilities of its Scrap
Operations. During fiscal years 1992 through 1996, the Company spent $23.4
million on capital improvements related to Scrap Operations.
CAPTURE BENEFITS OF INTEGRATION. The Company has historically sought to capture
the potential benefits of business integration whenever possible. For example,
the Company believes it enjoys a competitive advantage over non-vertically
integrated mini-mill steel producers as a result of its extensive scrap
operations. Scrap Operations ensures Steel Operations will receive a
predictable, high quality supply of scrap in an optimal mix of scrap grades for
efficient melting. In its Steel Operations, the Company's new wire rod and bar
mill is expected to upgrade the Company's finished steel production and product
mix capturing additional margin. Going forward, the Company will consider
opportunities to further enhance its value-added finished steel product
capabilities through the acquisition of businesses that use the Company's
finished steel products as raw materials.
SCRAP OPERATIONS
The Company is one of the largest scrap processors in the United States, with
nine scrap collection and processing facilities. The Company buys, processes and
sells ferrous scrap to foreign and other domestic steel producers or their
representatives and to Steel Operations. The Company's Scrap Operations also
purchase ferrous scrap from other scrap processors for shipment directly to
Steel Operations without further processing by Scrap Operations.
Due to the large capital investment required for scrap processing equipment and
the scarcity of potential scrap yard sites that are properly zoned and have
access to waterways and railroads, the scrap metal industry is characterized by
a relatively small number of large, regionally dominant scrap processors. These
large processors collect raw scrap from a variety of scrap sources, including
smaller scrap recyclers and dealers, and then sort, clean and cut it into sizes
and grades suitable for use by steel manufacturers.
The Company's Portland, Oakland, and Tacoma Scrap Operations are located at deep
water terminal facilities operated by the Company and have rail and highway
access. As a result, the Company believes it is strategically located, both for
scrap collection from suppliers and for distribution of processed scrap to West
Coast and Asian steel producers. The Sacramento and Fresno facilities are
smaller feeder yards which collect and process scrap for transfer to the Oakland
facility or to Steel Operations. The scrap facilities in Eugene, White City,
Grants Pass and Bend are similar feeder yards, but their production is
transferred to the Portland facility or to Steel Operations.
6
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
CUSTOMERS AND MARKETING. The following table sets forth information about the
amount of ferrous scrap sold by the Company's Scrap Operations to certain groups
of customers during the last five fiscal years:
<TABLE>
<CAPTION>
Year Ended August 31,
-------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ----------------- ------------------ ---------------- ------------------
Sales Vol.(1) Sales Vol.(1) Sales Vol.(1) Sales Vol.(1) Sales Vol.(1)
--------- -------- --------- ------- --------- -------- -------- ------- --------- --------
FERROUS SCRAP
CUSTOMERS: (dollar amounts in millions)
-------------------------------------------------------------------------------------------
Asian Steel
Producers and
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Representatives $131.8 858 $125.9 680 $ 75.9 461 $62.3 436 $48.8 391
--------- -------- --------- ------- --------- -------- -------- ------- --------- --------
Steel Operations:
Supplied by
Company Scrap
Facilities 44.1 358 44.3 338 36.8 304 25.1 223 14.1 136
Purchased from
Others for Direct
Shipment 2 9.9 92 10.4 91 17.5 139 23.4 233 12.3 148
--------- -------- --------- ------- --------- -------- -------- ------- --------- --------
Total
Steel Operations 54.0 450 54.7 429 54.3 443 48.5 456 26.4 284
--------- -------- --------- ------- --------- -------- -------- ------- --------- --------
Other US Steel
Producers 30.1 171 25.2 145 16.1 87 9.7 61 12.3 92
--------- -------- --------- ------- --------- -------- -------- ------- --------- --------
Total $215.9 1,479 $205.8 1,254 $146.3 991 $120.5 953 $87.5 767
========= ======== ========= ======= ========= ======== ======== ======= ========= ========
(1) In thousands of long tons (2,240 pounds).
(2) Consists of prepared scrap that is not processed by Scrap Operations.
</TABLE>
The Company sells scrap to foreign and other domestic steel producers or their
representatives and to Steel Operations. The Company has developed long-standing
relationships with Asian and U.S. steel producers. Asian scrap customers are
located principally in China, India, Japan, Korea, Taiwan, and Thailand. To
serve these customers more effectively, the Company operates a wholly-owned
subsidiary, MMI International Far East Ltd., in Seoul, South Korea.
Additionally, the Company uses affiliated offices in Tokyo, Japan and Busan,
South Korea. The Company believes these offices not only enhance the Company's
service to its Asian customers, but also provide a valuable local presence and
source of information in these markets. In fiscal 1996, one customer accounted
for approximately 17% and Scrap Operations' five largest customers accounted for
46% of scrap sales to unaffiliated customers. However, the Company's scrap
customers vary from year to year due to demand, relative currency values and
other factors. All scrap sales are denominated in U.S. dollars and substantially
all scrap shipments to foreign customers are supported by letters of credit.
7
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SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
While ferrous scrap prices have on average increased historically, such prices
are subject to market cycles. Prices for foreign scrap shipments are generally
established through a competitive bidding process. The Company generally
negotiates domestic prices based on export price levels. Foreign scrap sales
contracts typically provide for shipment 45 to 75 days after the price, which in
most cases includes freight, is determined. The Company attempts to respond to
changing export price levels by adjusting its purchase prices at its scrap yards
to maintain its gross profit per ton. However, the Company's ability to fully
maintain its gross profit per ton through periods of falling prices can be
limited by the impact of lower purchase prices on the volume of scrap flowing to
the Company from marginal scrap sellers. Accordingly, the Company believes it
benefits from rising scrap prices which provide the Company greater flexibility
to maintain both margins and scrap flow into its scrap yards.
SOURCES OF SCRAP. The most common forms of raw scrap purchased by the Company
are wrecked automobiles, railroad cars, railroad tracks, machinery, and
demolition scrap from buildings and other obsolete structures. Scrap is acquired
from drive-in sellers at posted prices at the Company's nine scrap yards, from
drop boxes at over 1,000 industrial sites and through negotiated purchases from
railroads and other large suppliers. The Company purchases scrap from a large
number of suppliers, including railroads, industrial manufacturers, automobile
salvage yards, scrap dealers and individuals. Because of the significance of
freight charges relative to the value of scrap, scrap yards situated nearest to
scrap sellers and major transportation routes have a competitive advantage. The
Company's Portland yard benefits from northwestern rail, highway and water
transportation routes allowing it to attract sellers from Oregon, Washington,
Idaho, Montana, Utah, Nevada and Northern California. The Eugene, Grants Pass,
White City and Bend yards are smaller facilities that serve as collection points
from central and southern Oregon. The Oakland yard gives the Company sourcing
capability in the San Francisco Bay area, the fifth largest metropolitan region
in the country. Oakland's deep water terminal also receives scrap by barge from
Hawaii. The Sacramento and Fresno yards are smaller facilities that serve as
collection points for scrap from the central valley of California and western
Nevada. The Company's Tacoma yard collects scrap from Seattle and the entire
Puget Sound area as well as from throughout Washington, Montana, Idaho, Alaska,
and western Canada. No single supplier accounted for more than 5% of the scrap
purchased by the Company during the last fiscal year.
JOINT VENTURE SUPPLIERS OF SCRAP. The Company is a 50% partner in a joint
venture which operates thirteen self-service used auto parts yards in central
California and the Bay Area, two yards in Texas and one yard in Reno, Nevada.
Customers purchase parts that they remove themselves from wrecked automobiles
purchased by the joint venture and displayed in its yards. The Company then has
a right of first refusal to purchase the picked over car bodies for shredding at
the Oakland scrap operation. The joint venture opened or acquired two yards in
fiscal 1991, one yard in fiscal 1992, four yards in fiscal 1993, three yards in
fiscal 1995, and one yard in fiscal 1996, and intends to continue to open or
acquire new yards as appropriate sites are identified and acquired. During
fiscal 1996, the Company purchased substantially all the car bodies generated in
California by this joint venture.
8
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SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
The Company is also a 50% partner in a joint venture operating out of Richmond,
California which is an industrial plant demolition contractor. The joint venture
dismantles industrial plants, performs environmental remediation, resells any
machinery or pieces of steel that are salvaged from the plants in a usable form,
and sells other recovered metals as scrap, primarily to the Company. During
fiscal 1996, the Company purchased substantially all of the ferrous scrap
generated by this joint venture. A related joint venture between the Company and
its partner in the plant demolition joint venture was created in 1994 to act as
an asbestos removal contractor.
The Company is also a 50% partner in a joint venture operating out of Chicago,
Illinois which provides services to a major railroad in connection with the
marketing and sale of the railroad's scrap. This joint venture gives the Company
an opportunity with other scrap buyers to bid for scrap purchases from the
railroad.
During fiscal 1996, the Company purchased 100,000 long tons of ferrous scrap
from its joint ventures, on terms negotiated at arms-length between the Company
and the other partners to the joint ventures.
SCRAP PROCESSING. The Company processes raw scrap by cleaning, sorting, shearing
and shredding it into metal pieces of a size, density and purity required by
customers for introduction into their melting furnaces. Smaller, denser pieces
of scrap are more valuable because they melt easier and more completely fill a
furnace charge bucket. Over 80% of the ferrous scrap collected by the Company's
scrap facilities requires processing before sale.
Six of the Company's nine scrap facilities operate large capacity
guillotine-style shears for cutting large pieces of ferrous scrap into smaller,
more valuable pieces. At Portland, Eugene, Tacoma and Oakland, the Company also
has large scissor shears mounted on cranes that move about the yards and cut
bulky pieces of scrap into sizes that can be further processed by the guillotine
shears. These mobile shears are capable of reducing a railroad boxcar to useable
scrap in approximately 30 minutes.
The Portland and Oakland facilities each operate a large auto shredder capable
of processing up to 1,500 tons of scrap per day. The Tacoma facility has two
auto shredders with combined capacity to process up to 1,000 tons of scrap per
day. These shredders reduce automobile bodies and other light gauge sheet metal
into fist-size pieces of shredded scrap. The shredded material is then carried
by conveyor under magnetized drums which attract the ferrous scrap and separate
it from the nonferrous metals and other material (fluff) found in the shredded
material, resulting in a relatively pure and clean shredded steel product. The
nonferrous metal and fluff then pass through a rising current separator that
removes the fluff. In Oakland, the nonferrous scrap is further processed using a
sink float method to separate aluminum from other metals based on the
differences in their specific gravities. The remaining nonferrous metals are
either hand sorted and graded or sold unsorted.
A pre-shredder at the Oakland facility is used to break apart compacted bundles
of light gauge ferrous scrap purchased from other scrap processors and dealers.
The unbundled scrap is further processed through the shredder.
9
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
DEEP WATER TERMINAL FACILITIES. The Company delivers by ship processed scrap to
Asian steel producers. The Company achieves cost efficiencies by operating deep
water terminal facilities at the Portland, Tacoma and Oakland scrap operations.
As a result, the Company is generally not subject to berthing delays often
experienced by users of unaffiliated terminal facilities. The Portland dock has
three operating berths for ships and two tie-up berths, and is equipped with
three 60-ton cranes and one 30-ton crane for loading and unloading heavy
materials and a bulk loading conveyor capable of loading up to 700 tons of
shredded scrap per hour directly into a ship's hold. The Oakland dock also has a
berth serviced by a bulk loading conveyor for loading shredded scrap as well as
a concrete wharf with a 40-ton container crane. The Tacoma marine terminal is
serviced by three 28-ton cranes on two floating docks and one 40-ton crane on a
cement dock.
The deep water terminal facilities are used extensively for loading scrap
shipments to the Company's foreign customers. The Portland terminal and, to a
lesser extent, the Oakland and Tacoma terminals also sell docking, loading and
warehousing services to unrelated parties.
Ocean freight costs are a significant element of the cost of scrap delivered to
foreign customers. The Company believes it benefits from the experience and
market knowledge of the Schnitzer Group's shipping businesses in arranging ocean
transportation. To limit its exposure to fluctuations in ocean shipping rates
and to assure the availability of appropriate vessels, in 1993 the Company
entered into a five-year time charter of a vessel from Trans-Pacific Shipping
Co. (TPS), a Schnitzer Group company, and entered into two additional seven-year
time charters with TPS in May 1995.
COMPETITION. The Company competes both with respect to the purchase of scrap
from scrap sources and the sale of processed scrap to metal producers.
Competition for scrap purchased in the Company's markets comes from one large
scrap processor, LMC Metals, a division of Simsmetal USA Corporation,
headquartered in Richmond, California, one large scrap broker, David J. Joseph
Company, which purchases scrap throughout the region for delivery to steel
producers, as well as from smaller scrap yards and dealers, and steel producers
such as Oregon Steel Mills, Inc. and Birmingham Steel Corporation (Salmon Bay
Steel) who buy scrap directly. Competition for scrap purchases depends almost
entirely upon price and the distance from the scrap source.
The Company competes with a number of U.S. and foreign scrap processors for
export sales to the Company's Asian customers. Price, including shipping costs,
and availability are the most important competitive factors, but reliability and
quality are also important. The Company believes that its size and locations
allow it to compete effectively with other U.S. and foreign scrap processors.
SEASONALITY. The Company makes a small number of large ferrous scrap shipments
to foreign steel producers each year. The Company's control over timing of scrap
shipments is limited by customers' requirements, shipping schedules and other
factors. Variations in the number of foreign scrap shipments from quarter to
quarter results in fluctuations in quarterly revenues and earnings.
BACKLOG. At August 31, 1996, the Company's Scrap Operations had a backlog of
firm orders of $16.7 million, as compared to $21.3 million at August 31, 1995.
All of the backlog at August 31, 1996 is related to export shipments and is
expected to be shipped during the first quarter of fiscal 1997.
10
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
STEEL OPERATIONS
The Company's Steel Operations are conducted by its subsidiary, Cascade Steel
Rolling Mills, Inc., located in McMinnville, Oregon (approximately 45 miles
southwest of Portland). Steel Operations' mini-mill was established in 1968 and
acquired by the Company in 1984.
PRODUCTS AND MARKETING. Steel Operations produces rebar, merchant bar and
specialty products such as studded fence posts, grape stakes and special
sections. Sales of these products during the last five fiscal years were as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended August 31,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------- ----------------- ------------------ ------------------ ------------------
Sales Vol.(1) Sales Vol.(1) Sales Vol.(1) Sales Vol.(1) Sales Vol.(1)
---------- -------- -------- -------- --------- -------- --------- -------- --------- --------
(dollar amounts in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rebar $98.7 321 $ 78.3 255 $ 85.9 310 $ 73.0 286 $ 60.9 227
---------- -------- -------- -------- --------- -------- --------- -------- --------- --------
Merchant Bar 35.5 95 34.4 87 41.7 113 36.5 104 35.7 107
---------- -------- -------- -------- --------- -------- --------- -------- --------- --------
Specialty Products 25.8 60 23.5 56 18.0 47 14.2 35 13.2 30
---------- -------- -------- -------- --------- -------- --------- -------- --------- --------
Total $160.0 476 $136.2(2) 398 $145.6(2) 470 $123.7 425 $109.8 364
========== ======== ======== ======== ========= ======== ========= ======== ========= ========
(1) In thousands of short tons (2,000 pounds).
(2) Does not include billet sales of $5.2 million in 1995 and $9.0 million in 1994.
</TABLE>
Rebar is steel rod used to increase the tensile strength of poured concrete.
Merchant bar sold by Steel Operations consists of round, flat, angle and square
steel bars used by fabricators or manufacturers to produce a wide variety of
products, including gratings, steel floor and roof joints, safety walkways,
ornamental furniture, stair railings and farm equipment. The Company's fence
posts are designed to support barbed wire and are sold under the trademark White
Top(TM) primarily to the agricultural industry. The addition of in-line
straightening, stacking and bundling equipment to Rolling Mill #1 in fiscal 1995
allowed the Company to expand its higher-margin merchant bar product lines.
The Company's installation of a rod block and finishing equipment at Rolling
Mill #2 for the rolling of wire rod and coiled rebar is scheduled for completion
in the second quarter of fiscal 1997. Current demand for wire rod and coiled
11
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
rebar on the West Coast is filled by suppliers outside of the region (both
domestic and foreign), creating what the Company believes to be an attractive
opportunity to capture market share at good margins. Wire rod is steel wire used
by fabricators to produce a variety of products such as chain link fencing,
nails, wire and stucco netting. Coiled rebar is rebar delivered on coils rather
than in flat lengths, a method preferred by some fabricators. The addition of
the new bar mill, with its ability to produce Steel Operations' existing
cut-to-length rebar products, has permitted the Company to increase it's
production of higher-margin merchant bar products at Rolling Mill #1 and will
also increase the Company's flexibility to adjust its product mix among rebar,
merchant bar and wire rod products to respond to relative demand and price
conditions among those products.
Steel Operations sells directly from its plant in McMinnville, Oregon and from
its distribution centers located in Union City, California (San Francisco area)
and El Monte, California (Los Angeles area). The two California distribution
centers facilitate sales by holding a ready inventory of products close to major
customers for just-in-time delivery. Steel Operations communicates regularly
with major customers to determine their anticipated needs and plans its rolling
mill production schedule accordingly. Steel Operations also produces and
inventories a mix of products forecasted to meet the needs of other customers.
Shipments to customers are made by common carrier, either truck or rail.
During the year ended August 31, 1996, Steel Operations sold its steel products
to approximately 400 customers primarily located in the 10 western states. In
that period, approximately 51% of Steel Operations' sales were made to customers
in California. Steel Operations' customers are principally steel service
centers, construction industry subcontractors, steel fabricators, and major farm
and wood product suppliers.
One customer accounted for 14% of Steel Operations' revenues in fiscal 1996.
Steel Operations' 10 largest customers accounted for approximately 50% of its
revenues during fiscal 1996.
SCRAP SUPPLY. The Company believes it operates the only mini-mill in the western
United States which has the ability to obtain its entire scrap requirement from
its own scrap operations. The demand for steel scrap has intensified with the
increase in the number and capacity of steel producers both in the U.S. and
overseas. There have at times been regional shortages of steel scrap with some
mills being forced to pay higher prices for scrap shipped from other regions or
to temporarily curtail operations. The Company's Scrap Operations currently
supplies Steel Operations both with steel scrap that it has processed and with
steel scrap that it has purchased from third-party processors. See "Scrap
Operations." Scrap Operations is also able to deliver to Steel Operations an
optimal mix of scrap grades to achieve maximum efficiency in its melting
operations.
ENERGY SUPPLY. Electricity and natural gas represented approximately 6% and 2%,
respectively, of Steel Operations' cost of goods sold in the year ended August
31, 1996.
Steel Operations purchases hydroelectric power from McMinnville Water & Light
Company (McMinnville), a municipal utility that acquires its power from the
Bonneville Power Administration (BPA). Steel Operations is McMinnville's largest
12
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
customer. McMinnville obtains power at the lowest cost available from BPA and
then resells it to Steel Operations at its cost plus a fixed charge per kilowatt
hour and a 3% city surcharge. In fiscal 1996, Steel Operations paid an average
of $.03 per kilowatt hour used. Due to a renegotiation of rates that became
effective October 1, 1996, the Company expects to pay approximately 19% less per
killowatt hour used in fiscal 1997. The favored rate McMinnville obtains from
BPA is for firm power; therefore, Steel Operations is not forced to sacrifice
the reliability of its power supply for a lower interruptible power rate as is
the case with certain other mini-mills. The contract with McMinnville expires
June 30, 2001.
Steel Operations purchases natural gas for use in the reheat furnaces from
Associated Gas Services of Salt Lake City, Utah, pursuant to a contract that
obligates Steel Operations to purchase minimum amounts of gas at a fixed rate or
pay a demand charge. The contract expires on October 31, 1997. All natural gas
used by Steel Operations must be transmitted by a single pipeline owned by
Northwest Natural Gas Company (Northwest) that also serves local residential
customers of Northwest. To protect against interruptions in gas supply, Steel
Operations maintains stand-by propane gas storage tanks which hold enough gas to
operate one of the rolling mills for at least three days without refilling.
MANUFACTURING OPERATIONS AND EQUIPMENT. Steel Operations' melt shop includes a
96-ton capacity electric arc furnace and a five-strand continuous billet caster,
installation of which was completed in May 1991. The melt shop is highly
computerized and automated. The 96-ton capacity of the furnace accommodates
larger, less expensive grades of scrap, resulting in scrap cost savings. Energy
savings result in part from efficiencies of the larger furnace, but also as a
result of new post-combustion equipment added to the furnace in 1995. This new
technology injects oxygen into the furnace during melting operations which
creates energy by combusting carbon monoxide. The melt shop also has enhanced
steel chemistry refining capabilities, permitting the Company to develop new
higher margin products using special alloy quality grades of steel not currently
produced by other mills on the West Coast, including the steel grades required
for wire rod.
During the fiscal years ended August 31, 1994, 1995 and 1996 the melt shop
produced 529,000, 525,000 and 493,000 tons of billets, respectively. The melt
shop operates 24 hours a day, seven days a week, except for one six-to-ten hour
period each week in which it is shut down for maintenance. In 1995 and 1996
Steel Operations constrained melt shop production through additional shutdown
days to limit the increase in billet inventory. The Company continues to
anticipate that the melt shop will produce over 600,000 tons of billets per year
when it is operating at capacity.
Billets produced by the melt shop are reheated in one of two natural gas-fueled
reheating furnaces and then drawn red-hot through one of two rolling mills.
Rolling Mill #1, a technologically advanced 17-stand mill, was completed in July
1986. The mill is computerized, allowing for efficient synchronized operations
of the rolls and related equipment. The computer controls facilitate the
reconfiguration of the rolls to produce different products, thus reducing costly
downtime. The computer controls include a self-diagnostic system that detects
and identifies electronic and mechanical malfunctions in the mill. In 1994,
Steel Operations completed the installation of in-line straightening, stacking
13
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
and bundling equipment on the end of Rolling Mill #1. The addition of this
equipment has permitted Steel Operations to improve the quality of its rebar
products and to produce its merchant bar products more efficiently by automating
the straightening and bundling function, and has permitted the Company to expand
its higher-margin merchant bar product line.
Rolling Mill #2, a technologically advanced 18-stand mill, was completed in
February 1996. The mill is computerized, allowing for efficient synchronized
operations of the rolls and related equipment. The computer controls facilitate
the reconfiguration of the rolls to produce different products, thus reducing
costly downtime. The computer controls include a self-diagnostic system that
detects and identifies electronic and mechanical malfunctions in the mill. Steel
Operations is in the process of installing a rod block at Rolling Mill #2 which
is scheduled to be completed during the second quarter of fiscal 1997. The rod
block will allow the Company to enhance its product mix through the production
of coiled rebar and wire rod. In addition, the ability of the new bar mill to
produce Steel Operations' existing cut-to-length rebar products will permit the
Company to increase its production of higher-margin merchant bar products at
Rolling Mill #1 and will also increase the Company's flexibility to adjust its
product mix among rebar, merchant bar and wire rod products to respond to
relative demand and price conditions among other products. The new mill is
expected to expand the Company's rolling capacity, based on anticipated product
mix, to about 700,000 tons annually to more closely match the potential output
of the melt shop at full capacity.
Steel Operations' melt shop and rolling mills are each shut down for one week
twice each year for comprehensive maintenance (in addition to normal weekly
maintenance performed throughout the year). During these periods, substantially
all of the equipment in the mills is dismantled, inspected and overhauled.
TRANSPORTATION. The Company makes extensive use of rail transportation for
shipment of Steel Operations' products to its distribution centers and customers
in California and for the shipment of scrap to Steel Operations from the
Company's scrap yards and other scrap processors in Southern Oregon and
California. As a result, the Company believes it is one of the largest customers
of Southern Pacific Rail Corporation and the largest customer for northbound
freight. The Company believes this position enables the Company to obtain
favorable rates which permit Steel Operations to compete with mills that are
closer to California markets.
COMPETITION. Steel Operations currently competes primarily with five western
U.S. steel producers for sales of rebar and merchant bar -- Birmingham Steel
Corporation in Seattle, Washington; NUCOR Corporation in Plymouth, Utah; Tamco
in Los Angeles, California; North Star Steel Company in Kingman, Arizona; and
Chaparral Steel Company in Midlothian, Texas. Other domestic mills generally do
not compete in the Company's market area because of transportation costs. The
principal competitive factors in Steel Operations' market are price (including
freight cost), availability, quality and service. Certain of Steel Operations'
competitors have substantially greater financial resources than the Company.
U.S. steel manufacturers have historically faced competition from foreign steel
producers. The Company experienced some competition from Mexican steel mills in
the southern California market during fiscal 1996. While the Company has
experienced little foreign competition in recent years, there can be no
assurance that foreign competition will not increase in the future.
14
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
Additional competition for sales of rebar and wire rod in California is expected
from a new mini-mill, North Star Steel Company in Kingman, Arizona, that became
operational in 1996. Steel Operations' new wire rod products will also compete
with an Oregon Steel Mill, Inc. plant in Colorado, as well as other domestic and
foreign producers.
SEASONALITY. Steel Operations' revenues can fluctuate significantly between
quarters due to factors such as the seasonal slowdown in the construction
industry and other industries it serves. In the past, Steel Operations has
generally experienced its lowest sales during the second quarter of the fiscal
year. The Company expects this pattern to continue in the future.
BACKLOG. Steel Operations generally ships products within days after the receipt
of purchase orders. Accordingly, Steel Operations does not normally have any
backlog of firm orders.
ENVIRONMENTAL MATTERS
Compliance with environmental laws and regulations is a significant factor in
the Company's business. The Company is subject to local, state, federal, and
supranational environmental laws and regulations concerning, among other
matters, solid waste disposal, air emissions, waste water disposal, dredging,
and employee health. Environmental legislation and regulations have changed
rapidly in recent years and it is likely that the Company will be subject to
even more stringent environmental standards in the future.
During 1994, in conjunction with the Company's due diligence investigation of
MMI, a third-party consultant was hired to estimate the cost to cure both
current and future environmental liabilities. Based on the consultant's report,
MMI recorded in 1994 a reserve of $24.4 million for the estimated cost to cure
environmental liabilities, increasing its environmental reserve to $24.9
million. This reserve was carried over to the Company's financial statements and
is reflected on the Company's balance sheet.
MMI's Tacoma scrap facility is located on the Hylebos Waterway, a part of
Commencement Bay, which is the subject of an ongoing investigation and
remediation project by the Environmental Protection Agency (EPA) under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).
The Company, along with over 60 other parties, has been named as a potentially
responsible party (PRP) for the investigation and cleanup of the sediment along
the Hylebos Waterway. The Company, along with five other PRPs, has entered into
an Administrative Order on Consent with the EPA to fund a 3 1/2 year study of
sediment contamination and remediation alternatives scheduled to be completed in
1997. The Company's share of the estimated $6 million study is $1 million. The
Company may also be named in a claim for potential natural resource damages in
Commencement Bay currently under assessment by certain government agencies and
others acting as natural resource trustees.
In 1990, MMI entered into a Consent Decree with the Washington Department of
Ecology which required the Company to pave the entire Tacoma scrap facility and
install a stormwater collection and treatment system. The stormwater system has
been installed and final paving was completed during fiscal 1996.
15
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
MMI is also a named PRP at two third-party sites at which it allegedly disposed
of transformers. At one site, MMI entered into a settlement under which it
agreed to pay $825,000 towards remediation of the site, $525,000 of which has
been paid, and 11% of any costs over the estimated $9.5 million in total
clean-up costs. The other site has not yet been subject to significant remedial
investigation. MMI has been named as a PRP at several other sites for which it
has reached de minimis settlements. In addition to the matters discussed above,
the Company's environmental reserve includes amounts for potential future
cleanup of other sites at which MMI has conducted business or disposed of other
materials.
After the shredding of automobile bodies and the separation of ferrous and
saleable nonferrous metals, the remaining material (fluff) must be disposed. To
avoid classification as a hazardous waste, fluff must pass a toxic
characteristic test. Fluff from the Company's scrap operations currently passes
the applicable federal toxic characteristic test. In addition, fluff from the
Oakland and Tacoma scrap operations undergo a chemical stabilization treatment
before being sent to a landfill. The California Department of Toxic Substances
Control (DTSC) has expressed reservations, which the Company is contesting,
concerning whether the procedures employed by the Company with respect to fluff
are adequate under California law. The Company has implemented certain changes
to its procedures to accommodate concerns raised by the DTSC and does not
believe that the changes that have been made or any additional changes required
by the DTSC will result in any material additional expense to the Company
although there is no assurance that this will be the case.
The Company's steel mini-mill generates electric arc furnace (EAF) dust which is
classified as a hazardous waste by the EPA because of its zinc and lead content.
Currently, a majority of the Company's EAF dust is shipped to a firm in the
United States that applies a treatment which delists the EAF dust as hazardous
so it can be disposed of as a solid waste. The remaining portion of the EAF dust
generated is either shipped to a firm in the United States that uses EAF dust to
produce agricultural fertilizer or is exported, pursuant to an annually
renewable export license, to a secondary smelter in Mexico that produces zinc
and lead from EAF dust.
It is not possible to predict the total size of all capital expenditures or the
amount of any increases in operating costs or other expenses that may be
incurred by the Company to comply with the environmental requirements applicable
to the Company and its operations, or whether all such cost increases can be
passed on to customers through product price increases. Moreover, environmental
legislation has been enacted, and may in the future be enacted, to create
liability for past actions that were lawful at the time taken but which have
been found to affect the environment and to increase public rights of actions
for environmental conditions and activities. As is the case with steel producers
and scrap processors in general, if damage to persons or the environment has
been caused, or is in the future caused, by the Company's hazardous materials
activities or by hazardous substances now or hereafter located at the Company's
facilities, the Company may be fined and/or held liable for such damage and, in
addition, may be required to remedy the condition. Thus, there can be no
assurance that potential liabilities, expenditures, fines and penalties
associated with environmental laws and regulations will not be imposed on the
Company in the future or that such liabilities, expenditures, fines or penalties
will not have a material adverse effect on the Company.
16
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
The Company has, in the past, been found not to be in compliance with certain
environmental laws and regulations and has incurred liabilities, expenditures,
fines and penalties associated with such violations. The Company's objective is
to maintain compliance and efforts are ongoing to be responsive to environmental
regulations.
The Company believes that it is in material compliance with currently applicable
environmental regulations, except as discussed above, and does not anticipate
any substantial capital expenditures for new environmental control facilities
during fiscal 1997 or 1998.
EMPLOYEES
As of August 31, 1996 the Company had 1,077 full-time employees, consisting of
464 employees at the Company's Scrap Operations, 541 employees at Steel
Operations, and 72 corporate administrative employees. Of these employees, 650
are covered by collective bargaining agreements with eleven unions. Steel
Operations' contract with the United Steelworkers of America covers 402 of these
employees and expires on February 1, 2000. The Company believes that its labor
relations generally are good.
ITEM 2. PROPERTIES
The Company's Portland Scrap Operations, Portland deep water terminal
facilities, and the related buildings and improvements are located on an
approximately 120-acre industrial site owned by Schnitzer Investment Corp.
(SIC), a related party, and leased to the Company under a long-term lease. See
Part III, Item 13 "Certain Relationships and Related Transactions."
Approximately 17 acres are occupied by the deep water terminal facilities, and
the balance is used by the scrap operations.
The Sacramento Scrap Operations are located on a 7-acre site, most of which is
leased from SIC under a long-term lease. See Part III, Item 13 "Certain
Relationships and Related Transactions."
The following scrap operations are all located on sites owned by the Company:
LOCATION ACREAGE OWNED AT SITE
-------- ---------------------
Oakland 33
Tacoma 26
Fresno 17
Eugene 11
Grants Pass 5
White City 4
Bend 3
Steel Operations' steel mill and administrative offices are located on an
83-acre site owned by Steel Operations in McMinnville, Oregon. Steel Operations
also owns its 87,000 sq. ft. distribution center in El Monte, California and its
46,000 sq. ft. distribution center in Union City, California.
17
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
The equipment and facilities on each of the foregoing sites are described in
more detail in the descriptions of each of the Company's businesses. Due to
rezoning, Steel Operations is forced to relocate its Union City, California
distribution center within 18 months. The Company does not anticipate a problem
finding a suitable replacement site. Except for the Union City facility
mentioned above, the Company believes its present facilities are adequate for
operating needs for the foreseeable future.
The Company's principal executive offices are located at 3200 NW Yeon Avenue in
Portland, Oregon in 20,000 sq. ft. of space leased from SIC under two long-term
leases. See Part III, Item 13 "Certain Relationships and Related Transactions."
ITEM 3. LEGAL PROCEEDINGS
Except as described above under Part I, Item 1 "Business -- Environmental
Matters", the Company is not a party to any material pending legal proceedings.
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 the fiscal year ended August 31, 1996.
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Age Office
- ---- --- ------
<S> <C> <C>
Leonard Schnitzer 71 Chairman of the Board and Chief Executive Officer
Robert W. Philip 49 President
Kenneth M. Novack 50 Executive Vice President
Gary Schnitzer 54 Executive Vice President-California Scrap
Operations
Barry A. Rosen 51 Vice President - Finance and Treasurer
Kurt C. Zetzsche 57 President of Steel Operations
Edgar C. Shanks 48 Vice President - Taxation
James W. Cruckshank 41 Controller and Assistant Treasurer
Dori Schnitzer 42 Secretary
</TABLE>
18
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
Leonard Schnitzer has been the Chief Executive Officer of the Company since
August 1973, and became Chairman of the Board in March 1991.
Robert W. Philip has been President of the Company since March 1991. He had
been a Vice President of the Company since 1984 with responsibility for the
Company's Metra Steel distribution division from 1984 to the time of its sale in
July 1990. Mr. Philip is Leonard Schnitzer's son-in-law.
Kenneth M. Novack is Executive Vice President of the Company and President
of Schnitzer Investment Corp. and certain other Schnitzer Group companies. From
1975 to 1980, he worked for the Company as Vice President and then Executive
Vice President. Mr. Novack was also President of Schnitzer Investment Corp. from
1978 to 1980. From 1981 until April 1991, he was a partner in the law firm of
Ball, Janik and Novack. Mr. Novack is the son-in-law of Gilbert Schnitzer, a
brother of Leonard Schnitzer.
Gary Schnitzer has been Executive Vice President in charge of the Company's
California scrap operations since 1980. Gary Schnitzer is the son of Gilbert
Schnitzer.
Barry A. Rosen has been Vice President-Finance and Treasurer of the Company
since 1982.
Kurt C. Zetzsche joined the Company in February 1993 as President of Steel
Operations. Mr. Zetzsche has been in the steel production business since 1966.
From 1990 to February 1993, he was President of Tennessee Valley Steel, a
mini-mill steel producer. From 1976 to 1989, he was President of Knoxville Iron
Co., also a mini-mill steel producer.
Edgar C. Shanks joined the Company in September 1991 as Vice
President-Taxation. From 1970 to 1991, he was a CPA with Price Waterhouse and
was a partner there from 1982 to 1991.
James W. Cruckshank has been the Controller of the Company since May 1987.
Except for a brief period in 1986, he has been employed by the Company in
various accounting positions since 1984. From 1978 to 1984, he was a CPA with
Price Waterhouse.
Dori Schnitzer has been the Secretary of the Company since June 1987. She
also served as corporate counsel of the Company from October 1987 to May 1991
when she became Vice President of Lasco Shipping Co. Ms. Schnitzer is a daughter
of Morris Schnitzer, a deceased brother of Leonard Schnitzer.
19
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The principal market in which the Class A Common Stock of the Company is traded
is the NASDAQ National Market System under the symbol SCHN. The approximate
number of shareholders of record on September 30, 1996 was 100. The stock has
been trading since November 16, 1993. The following table sets forth the high
and low sales prices reported on the NASDAQ National Market System and the
dividends paid per share for the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year 1996
---------------------------------------------------------
DIVIDENDS
HIGH SALES PRICE LOW SALES PRICE PER SHARE
--------------- --------------- ----------
<S> <C> <C> <C>
First Quarter $30 3/4 $26 $.05
Second Quarter 31 3/4 28 .05
Third Quarter 30 1/2 24 .05
Fourth Quarter 29 1/4 23 1/2 .05
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1995
---------------------------------------------------------
DIVIDENDS
HIGH SALES PRICE LOW SALES PRICE PER SHARE
--------------- --------------- ----------
<S> <C> <C> <C>
First Quarter $26 3/4 $18 1/2 $.05
Second Quarter 23 1/4 18 3/4 .05
Third Quarter 22 1/4 17 3/8 .05
Fourth Quarter 29 1/4 20 .05
</TABLE>
20
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended August 31,
--------------------------------------------------------------------------
1996 1995(1) 1994 1993 1992
------------ -------------- ------------- ------------- ------------
(In millions, except per share, per ton and shipment data)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Revenues $ 339.3 $ 330.7 $ 261.7 $ 204.9 $ 183.0
Cost of goods sold and other
operating expenses 290.8 284.5 234.3 188.1 174.5
Selling and administrative 18.9 16.2 13.2 13.3 13.6
Income from joint ventures 3.3 2.5 2.4 1.9 1.5
---------- ---------- ----------- ---------- ----------
Income (loss) from operations 32.9 32.5 16.6 5.4 (3.6)
Interest expense (3.8) (2.4) (1.0) (2.3) (3.7)
Other income 1.7 3.9 0.9 0.6 1.3
---------- ---------- ----------- ---------- ----------
Income (loss) before income taxes 30.8 34.0 16.5 3.7 (6.0)
Income tax (provision) benefit (10.0) (11.8) (5.8) (1.6) 2.2
---------- ---------- ----------- ---------- ----------
Net income (loss) from
continuing operations $ 20.8 $ 22.2 $ 10.7 $ 2.1 $ (3.8)
========== ========== =========== ========== ==========
Net income (loss) per share $ 2.24 $ 2.82 $ 1.47 $ 0.42 $ (0.75)
========== ========== =========== ========== ==========
Dividends per common share $ 0.20 $ 0.20 $ 0.15 $ -- $ --
========== ========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
OTHER DATA
Shipments (in thousands of tons)(2):
<S> <C> <C> <C> <C> <C>
Ferrous scrap 1,479 1,254 991 953 767
Finished steel products 476 398 470 425 364
Average selling price per ton:
Ferrous scrap $ 146 $ 154 $ 148 $ 126 $ 114
Finished steel products 336 342 310 291 302
Depreciation and amortization $ 14.0 $ 11.6 $ 9.3 $ 9.9 $ 11.5
Capital expenditures 44.6 31.1 21.1 5.6 6.5
</TABLE>
<TABLE>
<CAPTION>
Year Ended August 31,
--------------------------------------------------------------------------
1996 1995(1) 1994 1993 1992
------------ ------------ ------------- ------------- ------------
(In millions)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Working capital $ 92.4 $ 56.8 $ 48.2 $ 39.7 $ 46.7
Total assets 337.5 280.3 164.1 148.8 150.2
Short-term debt 0.2 0.2 1.9 4.4 4.4
Long term debt 44.5 64.7 2.8 44.5 51.9
Shareholders' equity 223.8 136.0 115.3 58.1 56.0
</TABLE>
(1) Includes the results of operations of MMI from March 17, 1995, the date of
acquisition, through August 31, 1995. See Note 12 to the Consolidated
Financial Statements.
(2) Tons for ferrous scrap are long tons (2,240 pounds) and for finished steel
products are short tons (2,000 pounds).
21
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The results of operations of the Company depend in large part upon demand and
prices for scrap metals in world markets and steel products on the West Coast.
The Company's operating income declined in fiscal 1992 as a slowdown in world
economic activity resulted in declining demand and prices for scrap metals and
steel products. Increasing steel demand and prices have led to improved
profitability since fiscal 1993, although the Company experienced softening in
its markets in fiscal 1996.
In March 1995, the Company acquired all of the outstanding stock of MMI. MMI's
results of operations have been included in the Company's financial statements
since March 17, 1995 and, therefore, had a significant impact on the Company's
scrap related revenue and income for the year ended August 31, 1995. In December
1993, the Company acquired four smaller scrap yards in central and southern
Oregon.
The following tables set forth information regarding the breakdown of revenues
between the Company's Scrap Operations and Steel Operations, and the breakdown
of income from operations between Scrap Operations, Steel Operations and Joint
Ventures. Additional financial information relating to business segments is
contained in Note 10 of Notes to Consolidated Financial Statements.
22
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
<TABLE>
<CAPTION>
Revenues
Year Ended August 31,
--------------------------------------------------
1996 1995 (1) 1994 1993 1992
------ ------ ------ ------ ------
(In millions)
Scrap Operations:
<S> <C> <C> <C> <C> <C>
Ferrous $215.9 $205.8 $146.4 $120.5 $ 87.5
Nonferrous (2) 10.7 32.2 11.4 6.5 10.3
Other 6.8 6.1 4.0 2.7 1.8
------ ------ ------ ------ ------
Scrap Total 233.4 244.1 161.8 129.7 99.6
Sales to Steel Operations (3) (54.1) (54.9) (54.7) (48.5) (26.4)
------ ------ ------ ------ ------
Sales to Unaffiliated
Customers 179.3 189.2 107.1 81.2 73.2
Steel Operations 160.0 141.5 154.6 123.7 109.8
------ ------ ------ ------ ------
Total $339.3 $330.7 $261.7 $204.9 $183.0
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Income (Loss) from Operations
Year Ended August 31,
---------------------------------------------------
1996 1995 (1) 1994 1993 1992
------ ------ ------ ------ ------
(In millions)
<S> <C> <C> <C> <C> <C>
Scrap Operations $29.6 $ 26.3 $ 12.3 $ 6.5 $ 5.1
Steel Operations 6.3 9.3 6.5 1.9 (5.0)
Joint Ventures 3.3 2.5 2.4 1.9 1.5
Corporate Expense and
Eliminations (4) (6.2) (5.5) (4.6) (4.9) (5.2)
----- ------ ------ ------ ------
Income (Loss) from Operations $33.0 $ 32.6 $ 16.6 $ 5.4 $ (3.6)
===== ====== ====== ====== =======
</TABLE>
(1) Includes the results of operations of MMI from March 17, 1995, the date of
acquisition, through August 31, 1995.
(2) In July 1995, the Company sold certain of its Portland nonferrous
operations including a nonferrous business acquired in the MMI transaction,
which resulted in a decline in nonferrous revenues for fiscal 1996.
(3) Ferrous scrap sales from Scrap Operations to Steel Operations are made at a
negotiated market rate per ton.
(4) Corporate expense and eliminations consist primarily of unallocated
corporate expense for services that benefit both Scrap Operations and Steel
Operations. Because of this unallocated expense, the income from operations
of each segment does not reflect the income from operations the segment
would have as a stand-alone business.
23
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUES. Revenues in fiscal 1996 increased $8.6 million (3%) compared to fiscal
1995, as an increase in steel revenues more than offset a decrease in scrap
revenues. Revenues from Scrap Operations before intercompany eliminations
decreased by $10.7 million (4%), reflecting increased shipments of ferrous scrap
offset by lower average selling prices and decreased nonferrous scrap sales.
Ferrous scrap revenues increased $10.1 million (5%) and shipments increased by
225,700 tons (18%). Ferrous scrap sales to unaffiliated customers increased by
$10.9 million (7%), reflecting a 203,500 ton (25%) increase in shipments.
Ferrous scrap sales to unaffiliated customers included a 177,900 ton increase in
export shipments and a 25,600 ton increase in shipments to other domestic steel
mills as a result of the acquisition of MMI in March 1995. Average selling
prices of ferrous scrap decreased $8 per ton (5%) to $146 per ton as a result of
what the Company believes to be short term market conditions. See "Forward
Looking Statements." Nonferrous scrap revenues decreased $21.5 million (67%)
resulting from a 55% decrease in nonferrous shipments, due to the sale of the
Company's Portland, Oregon nonferrous operations in July 1995, combined with a
27% decrease in average selling prices.
Steel Operations' revenues increased $18.5 million (13%) in fiscal 1996 compared
with fiscal 1995 resulting from increased shipments of finished steel products
offset by lower average selling prices and decreased billet sales. Finished
steel revenues increased $23.8 million (17%) as shipments increased 78,000 tons
(20%) primarily due to the new rolling mill, which began production in February.
There were no billet sales in fiscal 1996 compared to 23,500 tons of billet
shipments, or $5.2 million in billet revenues, in fiscal 1995. It is not the
Company's intent to produce billets for resale. Average finished steel selling
prices, excluding billets, decreased $6 per ton (2%) to $336 per ton as finished
steel selling prices remained relatively soft throughout the fourth quarter.
COST OF GOODS SOLD. Overall cost of goods sold increased $6.3 million (2%) in
fiscal 1996, but as a percentage of revenues remained unchanged at 86%. Gross
profit increased $2.3 million (5%) to $48.5 million in fiscal 1996 as a result
of a $4.9 million increase in Scrap Operations' gross profit offset by a $2.8
million decrease in Steel Operations' gross profit.
Cost of goods sold for Scrap Operations decreased by $15.5 million (7%) to
$193.9 million and decreased as a percentage of scrap revenues from 86% to 83%.
Average cost of goods sold per ton of ferrous scrap decreased from $131 to $123.
Scrap Operations' gross profit increased from $34.7 million to $39.6 million
primarily as a result of a $4.5 million increase in ferrous scrap gross profit
compared to fiscal 1995. Ferrous gross profit increased as a result of a 225,700
ton increase in shipments, while the average gross profit per ton was relatively
unchanged despite falling prices. For fiscal 1996, nonferrous gross profit
decreased $1.3 million primarily as a result of a 31,000 ton decrease in
shipments.
24
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
Cost of goods sold for Steel Operations in fiscal 1996 increased $21.3 million
(17%) and increased as a percentage of revenues from 92% to 94%. The increase
resulted predominately from increased finished steel shipments combined with a
$5 per ton increase in average finished steel cost of goods sold. The $5 per ton
increase reflects increased rolling mill costs primarily due to the start up of
the new rolling mill offset by a decrease in depreciation expense as a result of
a change in the estimated remaining life of the melt shop. Steel Operations'
gross profit decreased $2.8 million to $9.1 million as a result of lower average
selling prices combined with an increase in cost of goods sold partially offset
by the increase in finished steel shipments.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased $2.7 million (17%) to $18.9 million for fiscal 1996 compared to fiscal
1995, primarily due to the Company's acquisition of MMI in March 1995.
INCOME FROM JOINT VENTURES. Income from joint ventures for fiscal 1996 increased
$.8 million compared to the prior year largely due to the improved results at
the industrial plant reclamation, asbestos removal and used auto parts joint
ventures.
INTEREST EXPENSE. Interest expense for fiscal year 1996 increased $1.4 million
compared with fiscal 1995 as a result of higher average borrowings during part
of the current fiscal year due in part to the acquisition of MMI and capital
expenditures at Steel Operations for the addition of the new wire rod and bar
mill. Average borrowings were lower during the most recent quarter, however, as
the Company used the proceeds it received from its February 1996 stock offering
and cash generated from operations to pay down debt. Average borrowings for
fiscal 1996 were $72.2 million compared with $37.5 million for fiscal 1995. The
average interest rate for fiscal 1996 was 5.9% and for fiscal 1995 was 6.3%.
OTHER INCOME. Other income decreased $2.2 million to $1.7 million in fiscal
1996. A significant portion of this decrease resulted from a decrease in gain on
sale of assets, down $1.7 million from fiscal 1995, primarily due to the sale of
certain of the Company's nonferrous assets in July 1995. Other income in fiscal
1995 also included $.7 million in property tax refunds.
FISCAL 1995 COMPARED TO FISCAL 1994
REVENUES. Revenues in fiscal 1995 increased $69.0 million (26%) as compared with
fiscal 1994 as an increase in scrap revenues more than offset a decline in steel
revenues. Revenues from Scrap Operations before intercompany eliminations
increased by $82.3 million (51%). Ferrous scrap revenues increased $59.2 (41%)
and shipments increased by 263,000 tons (27%). Ferrous scrap sales to
unaffiliated customers increased by $59.4 million (65%) and shipments to
unaffiliated customers increased by 277,200 tons (51%). Sales of nonferrous
scrap increased by $20.8 million (182%). These increases resulted largely from
the purchase of MMI and higher average selling prices for both ferrous and
nonferrous scrap. Average selling prices of ferrous and nonferrous scrap
increased by $16 per ton (11%) and $.20 per pound (56%), respectively. In July
1995, the Company sold certain of its Portland nonferrous operations, including
the nonferrous business acquired in the MMI transaction, to permit the Company
to focus on its ferrous scrap activities. Accordingly, nonferrous revenues will
decline in future periods.
25
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
Steel Operations' revenues decreased $13.1 million (9%) in fiscal 1995 compared
with fiscal 1994 reflecting lower volumes offset partially by higher prices.
Sales of rebar and merchant bar decreased by approximately 54,000 tons and
25,000 tons, respectively, while sales of fence posts and other special sections
increased by 8,400 tons. The overall reduction in shipments resulted from
roughly corresponding decreases in rebar and merchant bar production offset by
an increase in special section production. The decreases in production were due
to a shift in production mix to slower-rolling products such as fence posts and
flat merchant bar, an extra 11-day shutdown of the rolling mill in fiscal 1995
to rebrick the reheat furnace, and a slower rolling rate for certain merchant
bar products due to start-up issues with the new in-line straightener and
stacker. However, increased average selling prices partially offset the effects
of reduced shipments. The average selling price of finished steel products for
fiscal 1995 was $342, representing an increase of 10% over the prior year.
Shipments of billets declined 42% from approximately 41,000 tons to 23,000 tons.
Billet sales vary from period to period based on customer demand.
COST OF GOODS SOLD. Overall cost of goods sold increased in fiscal 1995 as
compared to fiscal 1994, but decreased as a percentage of revenues from 90% to
86%. Gross profit increased $18.8 million (68%) to $46.2 million in fiscal 1995
as a result of a $16.9 million increase in Scrap Operations' gross profit and a
$2.8 million increase in Steel Operations' gross profit.
Cost of goods sold for Scrap Operations increased by $65.4 million (46%) to
$208.9 million. Cost of goods sold as a percent of scrap revenues decreased from
89% to 86%. Scrap gross profit increased from $18.2 million to $35.2 million.
Ferrous scrap cost of goods sold increased $45.0 million to $176.6 million
primarily as a result of increased shipments. The average cost of sales per ton
of ferrous scrap increased 6%. Gross profit for ferrous scrap increased 97% to
$29.2 million, largely due to the increase in tons shipped, generally improved
margins, and a change in the mix of sales. For fiscal 1995, higher margin export
sales accounted for 54% of total ferrous scrap shipments compared with 47% for
fiscal 1994. Gross profit for nonferrous scrap increased $1.5 million to $2.6
million, but may decline in future periods as a result of the sale of certain
Portland nonferrous operations.
Cost of goods sold for Steel Operations in fiscal 1995 were $129.6 million (92%
of revenues) compared with $145.5 million (94% of revenues) for the prior year.
The decrease in amount was mostly attributable to reduced shipments. The
increases in average manufacturing costs per ton resulted from an increase in
fixed costs per ton due to lower production and the fact that a greater
percentage of tons sold were higher-cost merchant bar and special sections. Even
though shipments declined, average revenues per ton increased more than costs
per ton, resulting in a $2.8 million rise in total gross profits to $11.9
million.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased $2.9 million (22%) to $16.2 million for fiscal 1995 compared to fiscal
1994, primarily due to the purchase of MMI in March 1995.
INCOME FROM JOINT VENTURES. Income from joint ventures for fiscal 1995 increased
$.1 million compared to the prior year largely as a result of higher earnings at
the Company's used auto parts joint venture ($.3 million) offset by lower
earnings from the asbestos removal joint venture ($.2 million).
26
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
INTEREST EXPENSE. Interest expense for fiscal 1995 increased $1.5 million
compared with fiscal 1994 principally as a result of financing the purchase of
MMI in March 1995 and higher average borrowing rates, partially offset by the
effect of paydowns of other debt. The Company also capitalized $.5 million of
interest costs in fiscal 1995 compared with $.2 million in fiscal 1994. Average
borrowings for fiscal 1995 were $37.5 million compared with $17.0 million for
fiscal 1994. The average interest rate for fiscal 1995 was 6.3% and for fiscal
1994 was 4.0%.
OTHER INCOME. Other income increased $3.0 million to $3.9 million in fiscal
1995. A significant portion of this increase resulted from the sale of certain
of the Company's nonferrous assets in July 1995. Total gains on sale of assets
for fiscal 1995 were $1.9 million. Interest income increased $.6 million over
the prior year. Steel Operations also received $.7 million in property tax
refunds.
LIQUIDITY AND CAPITAL RESOURCES
On February 16, 1996, the Company raised $70 million through the sale of
2,500,000 shares of its Class A common stock. Proceeds from the sale were used
to repay outstanding bank borrowings.
Cash used by operations was $5.8 million for fiscal year 1996, compared with
cash provided by operations of $33.7 million and $15.4 million for fiscal years
1995 and 1994, respectively. The fiscal 1996 decrease in cash flow from
operations is primarily a result of increased inventories of $18.9 million,
reflecting a $9.1 million increase in inventories at Scrap Operations and a $9.8
million increase in inventories at Steel Operations. The increase in inventories
at Scrap Operations is primarily due to the timing of export shipments. Steel
Operations' finished goods inventories increased $9.2 million and work in
process inventories decreased $4.9 million, both predominately due to the
startup of the bar mill portion of its new rolling mill in February 1996.
Supplies inventories at Steel Operations increased $5.5 million in anticipation
of the new wire rod and bar mill.
Capital expenditures and expenditures for acquisitions totalled $44.6 million,
$95.9 million and $22.7 million for fiscal years 1996, 1995 and 1994,
respectively. Capital expenditures in fiscal 1996 include $34.1 million in
progress payments related to construction of the new wire rod and bar mill for
Steel Operations. At August 31, 1996, the Company had outstanding purchase
commitments related to the wire rod mill aggregating $6.4 million. Fiscal year
1995 capital expenditures and acquisition expenditures included the purchase of
MMI, progress payments related to construction of the new wire rod and bar mill,
and final payments on the in-line straightner for Steel Operations. The Company
expects to spend $25.1 million on capital improvements, including the wire rod
mill, in fiscal 1997.
In March 1995, the Company purchased all of the outstanding stock of MMI for $66
million in cash. Prior to the acquisition, MMI established a reserve of $24.4
million to reflect the cost to cure environmental liabilities. As of August 31,
1996, the environmental liability aggregated $22.9 million. The Company expects
to require significant future cash outlays as it incurs the actual costs
relating to the remediation of such environmental liabilities.
27
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
At August 31, 1996, the Company had a $100.0 million, five year (expires March
2000), unsecured revolving credit facility and had additional lines of credit
available of $55 million, $35 million of which was uncommitted. In the
aggregate, the Company had borrowings outstanding under its lines of credit at
August 31, 1996 of $41.5 million.
The Company believes that the current cash balance, internally generated funds,
and existing credit facilities will provide adequate financing for capital
expenditures, working capital and debt service requirements for the next twelve
months. The Company does not presently anticipate that additional funding
sources will be required for the completion of Steel Operations' wire rod mill,
currently scheduled for fiscal 1997. In the longer term, the Company may seek to
finance business expansion, including potential acquisitions, with additional
borrowing arrangements or additional equity financing.
FORWARD LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward looking statements that involve a number of risks
and uncertainties. In particular, the Company has stated its belief that
decreases in scrap market prices are a result, at least in part, of short term
market conditions. Future market conditions are subject to supply and demand
conditions and decisions of other market participants over which the Company has
no control and which are inherently difficult to predict. Accordingly, there can
be no assurance that scrap prices will rise in the short term. In addition to
the factors discussed above, among the other factors that could cause actual
results to differ materially are the following: business conditions and growth
in the scrap and steel industries; competitive factors, including pricing
pressures from national steel companies; availability of scrap supply;
fluctuations in scrap prices; seasonality of results; the uncertainty of the
Company being able to complete future acquisitions; and the risk that there will
not be a successful start-up of the wire rod mill at Steel Operations in 1997.
28
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants....................................30
Consolidated Balance Sheet - August 31, 1996 and 1995................31
Consolidated Statement of Operations - Years ended
August 31, 1996, 1995, and 1994.................................32
Consolidated Statement of Cash Flows - Years ended
August 31, 1996, 1995, and 1994.................................33
Consolidated Statement of Shareholders' Equity - Years
ended August 31, 1996, 1995, and 1994...........................34
Notes to Consolidated Financial Statements...........................35
Report of Independent Accountants on Financial Statement Schedules...56
Financial Statement Schedule - Years ended August 31, 1996,
1995, and 1994..................................................57
Schedule II - Valuation and Qualifying Accounts and Reserves
</TABLE>
All other schedules and exhibits are omitted, as the information is not
applicable or is not required.
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Schnitzer Steel Industries, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Schnitzer
Steel Industries, Inc. and its subsidiaries at August 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended August 31, 1996, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Portland, Oregon
September 27, 1996, except as to Note 13, which is as of November 15, 1996
30
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
August 31,
--------------------------------------
1996 1995
----------------- ----------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 1,896 $ 1,598
Accounts receivable, less allowance for
doubtful accounts of $420 and $797 23,542 17,124
Accounts receivable from related parties 1,058 912
Inventories (Note 2) 90,746 71,853
Deferred income taxes (Note 6) 3,128 4,835
Prepaid expenses and other 4,118 2,313
----------------- ----------------
TOTAL CURRENT ASSETS 124,488 98,635
----------------- ----------------
NET PROPERTY, PLANT & EQUIPMENT (Note 3) 150,517 119,664
----------------- ----------------
OTHER ASSETS:
Investment in joint venture partnerships (Note 11) 9,909 9,026
Advances to joint venture partnerships (Note 11) 4,163 3,839
Goodwill (Note 12) 43,445 44,665
Intangibles and other 4,967 4,476
----------------- ----------------
62,484 62,006
----------------- ----------------
$ 337,489 280,305
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 4) $ 254 $ 247
Accounts payable 17,877 20,596
Accrued payroll liabilities 4,135 5,360
Accrued income taxes payable 2,266
Deferred revenue 392 3,916
Current portion of environmental liabilities (Note 5) 2,202 2,513
Other accrued liabilities 6,360 6,900
----------------- ----------------
TOTAL CURRENT LIABILITIES 31,220 41,798
----------------- ----------------
DEFERRED INCOME TAXES (Note 6) 15,994 14,184
----------------- ----------------
LONG-TERM DEBT LESS CURRENT PORTION (Note 4) 44,475 64,698
----------------- ----------------
ENVIRONMENTAL LIABILITIES, NET OF
CURRENT PORTION (Note 5) 20,736 22,342
----------------- ----------------
OTHER LONG-TERM LIABILITIES (Note 8) 1,251 1,310
----------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 3 and Note 7)
SHAREHOLDERS' EQUITY:
Preferred stock--20,000 shares authorized, none issued
Class A common stock--75,000 shares $1 par value
authorized, 5,773 and 3,128 shares issued 5,773 3,128
Class B common stock--25,000 shares $1 par value authorized,
4,575 and 4,761 shares issued 4,575 4,761
Additional paid-in capital 113,747 47,322
Retained earnings 99,718 80,762
----------------- ----------------
223,813 135,973
----------------- ----------------
$ 337,489 $ 280,305
================= ================
The accompanying notes are an integral part of this statement.
</TABLE>
31
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended August 31,
------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
REVENUES $ 339,352 $ 330,711 261,697
--------------- --------------- ---------------
COSTS AND EXPENSES:
Cost of goods sold and other operating expenses 290,841 284,500 234,250
Selling and administrative 18,860 16,155 13,235
--------------- --------------- ---------------
309,701 300,655 247,485
--------------- --------------- ---------------
Income from joint ventures (Note 11) 3,291 2,511 2,370
--------------- --------------- ---------------
INCOME FROM OPERATIONS 32,942 32,567 16,582
--------------- --------------- ---------------
OTHER INCOME (EXPENSE):
Interest expense (3,814) (2,441) (963)
Gain on sale of assets 209 1,929 140
Other income 1,452 1,974 720
--------------- --------------- ---------------
(2,153) 1,462 (103)
--------------- --------------- ---------------
INCOME BEFORE INCOME TAXES 30,789 34,029 16,479
Income tax provision (Note 6) (10,006) (11,782) (5,773)
--------------- --------------- ---------------
NET INCOME $ 20,783 $ 22,247 $ 10,706
=============== =============== ===============
EARNINGS PER SHARE $ 2.24 $ 2.82 $ 1.47
=============== =============== ===============
The accompanying notes are an integral part of this statement.
</TABLE>
32
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------------------------------
1996 1995 1994
-------------- --------------- ------------
OPERATIONS:
<S> <C> <C> <C>
Net income $ 20,783 $ 22,247 $ 10,706
Noncash items included in income:
Depreciation and amortization 13,994 11,598 9,348
Deferred income taxes 3,517 (1,308) 486
Equity in earnings of joint ventures and other
investments (3,291) (2,511) (2,370)
Gain on disposal of assets (209) (1,929) (140)
Cash provided (used) by current assets and liabilities:
Accounts receivable (6,564) 9,270 (6,152)
Inventories (18,893) (13,008) 607
Prepaid expenses and other (2,299) (121) 1,024
Accounts payable (2,719) 3,951 (88)
Deferred revenue (3,524) 3,898
Accrued expenses (4,031) 931 1,550
Other assets and liabilities (2,603) 667 472
------------- -----------------------------
NET CASH (USED) PROVIDED BY OPERATIONS (5,839) 33,685 15,443
------------- -----------------------------
INVESTMENTS:
Payment for purchase of MMI, net of cash acquired (Note 12) (64,799)
Capital expenditures (44,589) (31,158) (21,084)
Proceeds from sale of assets 1,839 4,982 1,376
Goodwill acquired (1,600)
Distributions from joint ventures 2,370 750 1,556
Advances (to) from joint ventures (324) (4,238) 5,367
------------- ------------- ------------
NET CASH USED BY INVESTMENTS (40,704) (94,463) (14,385)
------------- ------------- ------------
FINANCING:
Proceeds from sale of Class A common stock 69,850 48,529
Repurchase of Class A common stock (966) (835)
Dividends declared and paid (1,827) (1,578) (1,188)
Increase in long-term debt 38,216 61,750 500
Reduction in long-term debt (58,432) (2,181) (44,659)
------------- ------------- ------------
NET CASH PROVIDED BY FINANCING 46,841 57,991 2,347
------------- ------------- ------------
NET INCREASE (DECREASE) IN CASH 298 (2,787) 3,405
CASH AT BEGINNING OF YEAR 1,598 4,385 980
------------- ------------- ------------
CASH AT END OF YEAR $ 1,896 $ 1,598 $ 4,385
============= ============= ============
The accompanying notes are an integral part of this statement.
</TABLE>
33
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Additional
-------------------- ---------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
-------- ---------- --------- ------------ ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 31, 1993 $ 5,011 $ 5,011 $ 2,506 $ 50,575 $ 58,092
Class A common stock issued 2,923 2,923 45,606 48,529
Class B common stock converted
to Class A common stock 245 245 (245) (245)
Class A common stock repurchased (45) (45) (790) (835)
Net income 10,706 10,706
Dividends paid (1,188) (1,188)
-------- --------------------- ------------ ------------ ----------- --------------
BALANCE AT AUGUST 31, 1994 3,123 3,123 4,766 4,766 47,322 60,093 115,304
Class B common stock converted
to Class A common stock 5 5 (5) (5)
Net income 22,247 22,247
Dividends paid (1,578) (1,578)
-------- --------------------- ------------------------- ----------- --------------
BALANCE AT AUGUST 31, 1995 3,128 3,128 4,761 4,761 47,322 80,762 135,973
Class A common stock issued 2,500 2,500 67,350 69,850
Class B common stock converted
to Class A common stock 186 186 (186) (186)
Class A common stock repurchased (41) (41) (925) (966)
Net income 20,783 20,783
Dividends paid (1,827) (1,827)
-------- --------------------- ------------ ------------ ----------- --------------
BALANCE AT AUGUST 31, 1996 5,773 $ 5,773 4,575 $ 4,575 $ 113,747 $ 99,718 $ 223,813
======== ========== ========= ============ ============ =========== ==============
The accompanying notes are an integral part of this statement.
</TABLE>
34
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
Schnitzer Steel Industries, Inc. (the Company) operates a scrap metal processing
and recycling business and a mini-mill steel production business in Oregon,
Washington and California.
In February 1996, the Company sold 2,500,000 shares of Class A common stock at
$29.50 per share in a public offering.
In March 1995, the Company purchased all of the outstanding common stock of
Manufacturing Management, Inc. (MMI) (Note 12).
On November 16, 1993, the Company sold 2,922,500 shares of Class A common stock
in an initial public offering.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. The Company, through subsidiaries, holds a 50%
interest in four joint ventures, operating in the Western United States, which
are accounted for using the equity method. All intercompany transactions and
balances have been eliminated.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
LIFO (last-in, first-out) and average cost methods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Major renewals and
improvements are capitalized. Expenditures for maintenance and repairs are
charged to income as incurred.
For financial reporting purposes, depreciation is determined principally using
the straight-line method over estimated useful lives of 20 to 40 years for
buildings and 3 to 10 years for equipment. Leasehold improvements are amortized
over the estimated useful lives of the property or the remaining lease term,
whichever is less. When assets are retired or sold, the related cost and
accumulated depreciation are removed from the accounts and resulting gains or
losses are included in other income.
GOODWILL
Goodwill is being amortized on a straight-line basis over 40 years. At August
31, 1996 and 1995, accumulated amortization aggregated $2,456 and $1,235,
respectively. Goodwill is periodically reviewed by the Company for impairments
where the fair value may be less than the carrying value.
35
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
COMMON STOCK VOTING RIGHTS
Each share of Class A common stock is entitled to one vote and each share of
Class B common stock is entitled to ten votes.
NET INCOME PER SHARE
Net income per share is based on weighted average common and common equivalent
shares outstanding of 9,295,705, 7,906,593, and 7,285,010 for fiscal years 1996,
1995 and 1994, respectively.
INTEREST AND INCOME TAXES PAID
The Company paid $5,016, $2,719 and $1,078 in interest during fiscal years 1996,
1995 and 1994, respectively. For the same periods, the Company paid $10,703,
$12,431 and $4,791 in income taxes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, receivables and current liabilities are reflected in the consolidated
financial statements at fair value because of the short-term maturity of these
instruments. The fair value of long-term debt is deemed to be the same as that
reflected in the consolidated financial statements given the variable interest
rates on the significant credit facilities. There are no quoted prices for the
Company's investments in joint ventures accounted for on the equity method. A
reasonable estimate of fair value could not be made without incurring excessive
costs.
USE OF ESTIMATES IN FINANCIAL STATEMENT PREPARATION
The preparation of financial statements in accordance with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain line items of the prior year's financial statements have been
reclassified for consistency with the current year.
NOTE 2 - INVENTORIES:
Inventories consist of the following:
August 31,
-------------------------
1996 1995
------- -------
Scrap metals $21,006 $11,861
Work in process 24,535 29,468
Finished goods 29,767 20,591
Supplies 15,438 9,933
------- -------
$90,746 $71,853
======= =======
Scrap metal inventories are valued at LIFO; the remainder are at average cost.
The cost of scrap metal inventories exceeded the stated LIFO value by $8,215 and
$10,478 at August 31, 1996 and 1995, respectively. In 1994, net income increased
by $114 or $.02 per share resulting from the liquidation of LIFO inventory
quantities carried at lower costs prevailing in prior years.
36
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
August 31,
--------------------------
1996 1995
-------- --------
Land and improvements $ 31,235 $ 30,911
Buildings and leasehold improvements 15,425 13,433
Machinery and equipment 195,367 139,377
Construction in progress 8,489 28,242
-------- --------
250,516 211,963
Less accumulated depreciation 99,999 92,299
-------- --------
$150,517 $119,664
======== ========
Capitalized interest costs associated with construction were $1,112 and $529 in
fiscal years 1996 and 1995, respectively.
In 1991, the Company installed a new melt shop at its mini-mill steel production
facility. At that time, it was estimated that the useful life of certain melt
shop assets was ten years. In May 1996, the Company hired a consultant to
estimate the remaining useful life of such assets. Based on the consultant's
findings, the Company extended the original life of these assets by five years.
Beginning in fiscal 1996, the Company began depreciating the assets over their
estimated remaining life of ten years. The change in accounting estimate
increased net income by $1,100 and increased earnings per share by $.12 in
fiscal 1996.
At August 31, 1996, the Company had outstanding purchase orders totalling $6,408
for machinery and equipment for the new rod block being constructed at the
Company's Steel Operations.
37
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE 4 - LONG-TERM DEBT:
Long-term debt consists of the following:
August 31,
-------------------------
1996 1995
------- --------
Bank unsecured revolving credit
facility, $100,000 maximum,
due March 2000, interest payable
at floating interest rates on varying
dates depending upon the maturity of
individual advances $41,500 $61,500
State of Oregon loan for energy conservation
equipment, secured by same, 7.89% fixed-rate
interest, principal and interest installments
payable monthly through June 2011 2,273 2,351
Other 956 1,094
------- --------
Total long-term debt 44,729 64,945
Less portion due within one year 254 247
-------- --------
Long-term debt less current portion $44,475 $64,698
======= =======
At August 31, 1996, the Company had a $100 million, unsecured revolving credit
facility with its banks. Individual advances outstanding under the line bear
interest at floating rates. As of August 31, 1996, such rates approximated 5.4%.
Interest is payable upon maturity of each advance under the line unless the term
of the advance exceeds three months, in which case interest is payable at each
three-month interval. The facility matures in March 2000, at which time all
principal amounts outstanding are due.
In addition to the above facility, the Company has a committed line of credit of
$20 million and an uncommitted line of credit of $35 million with other banks.
The committed bank credit facilities contain financial covenants, including
covenants related to net worth, the ratios of current assets to current
liabilities, and debt to equity and cash flow.
Payments on long-term debt during the next five fiscal years are as follows:
1997 $ 254
1998 362
1999 180
2000 41,693
2001 207
Thereafter 2,033
--------
$ 44,729
========
38
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE 5 - ENVIRONMENTAL LIABILITIES:
During fiscal 1995, in conjunction with the due diligence proceedings for the
Company's acquisition of MMI, an independent third-party consultant was hired to
estimate the costs to cure both current and future potential environmental
liabilities. The cumulative provision for the total costs specified in the
consultant's report aggregated $24,366 and was included in MMI's statement of
operations prior to its acquisition by the Company resulting in an increase in
MMI's reserve for environmental liabilities to $24,981. As of August 31, 1996,
the environmental liability aggregated $22,938.
A portion of the liability recorded in fiscal 1995 relates to MMI's status as a
potentially responsible party (PRP) for the investigation and cleanup of
sediment along the Hylebos Waterway, on which the Tacoma scrap yard is located,
as well as for alleged damage to natural resources in the waterway.
Additionally, the Washington State Department of Ecology issued a consent decree
in 1990 which required paving of MMI's ferrous scrap yard, and the installation
of a stormwater treatment system, which were completed in fiscal 1996. In 1994,
MMI reached a settlement with its insurance carriers with respect to costs
incurred under the 1990 Consent Decree and Hylebos Waterway projects. Under this
settlement, the Company can be reimbursed for covered costs up to $600 through
1997 as funds are expended. The remaining recorded liability covers third-party
sites at which MMI has been named as a PRP, as well as potential future cleanup
of other sites at which MMI has conducted business or allegedly disposed of
materials.
39
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE 6 - INCOME TAXES:
The provision for (benefit from) income taxes is as follows:
August 31,
--------------------------------------------
1996 1995 1994
-------- -------- -------
Current:
Federal $ 7,235 $12,360 $ 4,915
State 721 1,600 559
Deferred:
Federal 1,678 (2,011) 325
State 372 (167) (26)
------- ------- -------
$10,006 $11,782 $ 5,773
======= ======= =======
Deferred tax assets and liabilities are as follows:
August 31,
-------------------------
1996 1995
------- -------
Net current deferred tax assets:
Inventory valuation methods $ 1,035 $ 2,173
Employee benefit accruals 1,607 1,757
State income tax and other 486 905
------- -------
$ 3,128 $ 4,835
======= =======
Net noncurrent deferred tax liabilities:
Accelerated depreciation
and bases differences $25,957 $22,157
Environmental liabilities (8,638) (8,392)
Other (325) 419
------- --------
$15,994 $14,184
======= =======
The reasons for the difference between the effective income tax rate and the
statutory federal income tax rate are as follows:
August 31,
--------------------------------------
1996 1995 1994
-------- -------- -------
Federal statutory rate 35% 35% 35%
Foreign sales corporation (5) (4) (3)
State taxes and credits 2 3 3
Other 1 1
--- --- ---
33% 35% 35%
=== === ===
40
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE 7 - RELATED PARTY TRANSACTIONS:
Certain shareholders of the Company own significant interest in, or are related
to owners of, the entities discussed below. As such, these entities are
considered related parties for financial reporting purposes.
TRANSACTIONS AFFECTING COST OF GOODS SOLD AND OTHER OPERATING EXPENSES
The Company charters several vessels from related companies to transport scrap
metal to foreign markets. Charges incurred for these charters were $7,943,
$3,309, and $3,360 for 1996, 1995, and 1994, respectively. In 1993, the Company
signed a five-year time-charter agreement for one vessel. The agreement
guarantees the ship owner a residual market value of $2,500 at the end of the
time-charter. The Company entered into two additional seven-year time charters
in May 1995. In August 1996, these two time charters were re-negotiated due to
the condition of the vessels and lower charter rates experienced in the shipping
industry resulting in a $769 refund of time-charter expenses related to the
first three fiscal quarters of 1996. This refund was recorded in the fourth
quarter of 1996.
The Company purchased scrap metals from its joint venture operations totalling
$8,513, $7,704 and $8,118 in 1996, 1995, and 1994, respectively.
The Company leases certain land and buildings from a related real estate company
under operating leases. The following table summarizes the lease terms, annual
rents and future minimum rents:
Lease Current
Location: Expiration Annual Rent
---------- -----------
Scrap Operations:
Portland facility and marine terminal 2063 $1,056
Sacramento facility 2003 80
Administrative offices 2006 166
Net
Minimum Sublease Minimum
Rents Income Rents
------- --------- -------
1997 $1,319 $ (38) $1,281
1998 1,319 (38) 1,281
1999 1,319 (38) 1,281
2000 1,319 (38) 1,281
2001 1,319 (38) 1,281
Thereafter 66,628
The rent expense was $1,274, $1,315 and $1,185 for 1996, 1995 and 1994,
respectively.
The rents for Scrap Operations increased 15% in 1994 and will be adjusted every
5 years thereafter based upon changes in the Consumer and the Producer Price
Indices. Beginning in 2003 and every 15 years thereafter, the rent will be
adjusted to market.
41
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
TRANSACTIONS AFFECTING SELLING AND ADMINISTRATIVE EXPENSES
The Company performs some administrative services and provides operation and
maintenance of management information systems for certain related parties. These
services are charged to the related parties based upon cost plus a 15% margin
for overhead and profit. These administrative charges totalled $816, $872 and
$1,579 in 1996, 1995, and 1994, respectively.
TRANSACTIONS AFFECTING OTHER INCOME (EXPENSE)
The vessels discussed above are periodically sub-chartered to third parties. In
this case, a related shipping agency company acts as the Company's agent in the
collection of income and payment of expenses related to sub-charter activities.
Charges incurred for these sub-charters totalled $3,135 in 1996, net of a $163
refund recorded in the fourth quarter, resulting from the re-negotiation of
time-charter contracts previously discussed above. These charges were offset by
income of $3,157 in 1996. There was no sub-charter activity in previous years.
On February 27, 1996, the Company sold a parcel of land to a related real estate
company. The Company received $585,000, recognizing no gain or loss on the
transaction.
TRANSACTIONS AFFECTING PROPERTY, PLANT & EQUIPMENT
From time to time, the law firm of Ball Janik LLP, of which director Robert S.
Ball is a partner, provides legal services to the Company. Mr. Ball is a
director, significant shareholder and the secretary of Electrical Construction
Company (ECC), an electrical contractor, which has provided electrical
construction services on the Company's new rolling mill. The Company paid ECC
$7,301 and $1,256 in 1996 and 1995, respectively.
NOTE 8 - EMPLOYEE BENEFITS:
In accordance with union agreements, the Company contributed to union pension
plans $1,782, $1,444, and $1,275 in 1996, 1995, and 1994, respectively. These
are multi-employer plans and, consequently, the Company is unable to determine
its relative portion of or estimate its future liability under the plans.
The Company has several defined contribution plans covering nonunion employees.
The pension cost related to these plans totalled $1,268, $935, and $789 for
1996, 1995, and 1994, respectively.
42
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
For some nonunion employees, the Company also maintains a defined benefit
pension plan. The Company has funded the maximum contribution deductible for
federal income tax purposes. The following table sets forth the plan's funded
status at:
August 31, 1996 July 1, 1995
------------------- ----------------
Actuarial present value of accumulated
plan benefits:
Vested $ 2,669 $ 1,841
Non-vested 333 218
--------- ---------
Accumulated benefit obligation 3,002 2,059
Effect of projected future compensation
levels 544 288
--------- ---------
Projected benefit obligation 3,546 2,347
Plan assets at fair value, primarily
marketable securities 3,408 2,290
--------- ---------
Plan assets less than projected
benefit obligation (138) (57)
Unrecognized prior service costs 75 49
Unrecognized net loss 369 129
--------- ---------
Net pension asset $ 306 $ 121
========= =========
Components of the defined benefit net pension cost are as follows:
August 31,
-----------------------------
1996 1995 1994
-------- -------- ------
Service costs for benefits earned during the year $ 367 $ 280 $ 285
Interest cost on projected benefit obligation 219 186 167
Actual return on plan assets (248) (192) (158)
Net amortization and deferral 4 2
------ ------ ------
Net pension cost $ 342 $ 276 $ 294
====== ====== ======
Assumptions used each year in determining the defined benefit net pension cost
are:
1996 1995 1994
-------- -------- -------
Weighted average discount rate 7.5% 8.0% 7.5%
Rate of increase in future compensation levels 4.5 4.5 4.5
Expected long-term rate of return on assets 9.0 8.0 7.5
43
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
During 1991, the Company adopted a nonqualified supplemental retirement plan for
certain executives. A restricted trust fund has been established and invested in
life insurance policies which can be used for plan benefits, but which are
subject to claims of general creditors. The trust fund and deferred compensation
expense are classified as other assets. The status of this plan is summarized as
follows:
August 31,
---------------------------------
1996 1995 1994
------ ------ ------
Restricted trust fund $ 459 $ 234 $ 97
Deferred compensation expense 545 741 776
Long-term pension liability 1,249 1,308 1,194
Pension cost 136 149 96
NOTE 9 - STOCK INCENTIVE PLAN:
In September 1993, the Company adopted a Stock Incentive Plan for employees,
consultants and directors of the Company. The plan covers 375,000 shares of
Class A common stock. All options have a ten-year term and become exercisable
for 20% of the shares covered by the option on each of the first five
anniversaries of the grant. At its October 7, 1996 meeting, the Company's board
of directors voted to amend the Stock Incentive Plan to, among other things,
increase the number of reserved shares from 375,000 to 1,200,000. The proposed
revisions will be submitted to Company shareholders at the January 6, 1997
Annual Meeting of Shareholders.
The following table summarizes the stock option transactions:
Shares
Under Option Price Range
------------ ---------------
Balance at August 31, 1993 -- --
Options granted 99,167 $18.00 - $18.50
-------
Balance at August 31, 1994 99,167 $18.00 - $18.50
Options granted 81,460 $20.00
-------
Balance at August 31, 1995 180,627 $18.00 - $20.00
Options granted 113,888 $24.25
-------
Balance at August 31, 1996 294,515 $18.00 - $24.25
=======
Exercisable at August 31, 1996 55,955
=======
Available for grant at
August 31, 1996 80,485
=======
NOTE 10 - SEGMENT INFORMATION:
The Company operates in two industry segments: scrap metal processing and
recycling, and mini-mill steel production. The business segments operate in
Oregon, Washington and California.
Intersegment sales, which are primarily from the Scrap Operations to the Steel
Operations, are transferred at a negotiated market rate per ton and are
eliminated in consolidation. Segment income from operations does not include
general corporate expenses or income taxes.
44
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
The Scrap Operations segment sells to foreign customers, primarily in Asia,
resulting in export sales of $137,701, $140,046 and $79,961 in 1996, 1995 and
1994, respectively. In 1996, sales to one customer accounted for 12% of
consolidated revenues.
August 31,
----------------------------------------------
1996 1995 1994
-------- -------- --------
Net revenues:
Scrap operations $ 233,484 $244,129 $161,755
Steel operations 160,019 141,469 154,634
Intersegment sales (54,151) (54,887) (54,692)
--------- -------- --------
$ 339,352 $330,711 $261,697
========= ======== ========
Income from operations:
Scrap operations $ 29,587 $ 26,282 $ 12,297
Steel operations 6,303 9,252 6,513
Income from joint ventures 3,291 2,511 2,370
Corporate and eliminations (6,239) (5,478) (4,598)
-------- -------- --------
$ 32,942 $ 32,567 $ 16,582
======== ======== ========
Total assets:
Scrap operations $133,324 $122,545 $ 47,352
Steel operations 191,823 147,059 106,992
Corporate and eliminations 12,342 10,701 9,798
-------- -------- --------
$337,489 $280,305 $164,142
======== ======== ========
Depreciation and amortization expense:
Scrap operations $ 6,891 $ 5,036 $ 3,498
Steel operations 6,907 6,401 5,486
Corporate 196 161 364
-------- -------- --------
$ 13,994 $ 11,598 $ 9,348
======== ======== ========
Capital expenditures:
Scrap operations $ 7,695 $ 5,375 $ 6,820
Steel operations 36,323 25,638 14,187
Corporate 571 145 77
-------- -------- --------
$ 44,589 $ 31,158 $ 21,084
======== ======== ========
45
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE 11 - SUMMARIZED FINANCIAL INFORMATION OF JOINT VENTURES:
The summary of combined operations of joint venture partnerships is as follows:
August 31,
------------------------------
1996 1995
------- -------
Current assets $ 9,526 $10,465
Noncurrent assets 24,527 22,022
------- -------
$34,053 $32,487
======= =======
Current liabilities $ 5,613 $ 6,256
Noncurrent liabilities 7,874 7,344
Minority interest 1,762 1,870
Partners' equity 18,804 17,017
------- -------
$34,053 $32,487
======= =======
August 31,
---------------------------------------
1996 1995 1994
-------- -------- --------
Revenues $43,883 $57,377 $55,282
======= ======= =======
Income from operations $ 7,691 $ 5,910 $ 5,318
======= ======= =======
Net income before taxes $ 6,636 $ 5,019 $ 4,737
======= ======= =======
The Company's share of these combined operations is 50%. The Company's
investment in one partnership was $742 in excess of its partnership equity due
to asset carryover values at inception. This excess is being amortized over 20
years; accumulated amortization totalled $266 and $229 at August 31, 1996 and
1995, respectively.
The Company performs some administrative services and provides operation and
maintenance of management information systems to these joint ventures. These
administrative charges totalled $184, $185 and $218 in 1996, 1995, and 1994,
respectively.
Advances from and to joint venture partnerships, included in noncurrent assets
and liabilities above, respectively, bear interest at the prime rate less one
percent. Although these advances are collectible on demand, management does not
intend to request payment in the foreseeable future. The Company earned interest
income of $309, $385 and $134 from these advances in 1996, 1995, and 1994,
respectively.
NOTE 12 - ACQUISITION OF MANUFACTURING MANAGEMENT, INC. (MMI)
On March 29, 1995, the Company purchased all of the outstanding shares of stock
of MMI for $66,000 in cash. The Company borrowed all of the funds for the
acquisition from its banks under a $100,000 revolving line of credit (Note 4).
Control of MMI's board of directors was transferred to the Company on March 17,
1995, the designated effective date of the purchase.
46
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
The Company has accounted for this acquisition using the purchase method.
Accordingly, the purchase price was allocated to the assets acquired and the
liabilities assumed based on their fair values as of the effective date of the
acquisition. Goodwill aggregating $42,017 was recorded for the difference
between the acquisition cost and the fair values of the assets acquired and
liabilities assumed. The Company is amortizing goodwill over forty years using
the straight-line method.
The consolidated results of operations included MMI's results of operations
beginning on March 17, 1995.
The following supplemental pro forma information presents the combined results
of operations of the Company and MMI as though the acquisition had occurred at
the beginning of the periods shown. However, the pro forma information is not
necessarily indicative of the results which would have resulted had the
acquisition occurred at the beginning of the periods presented.
A provision for environmental liabilities related to MMI (Note 5) is included in
the results of operations for the year ended August 31, 1994.
For the Year
Ended August 31,
------------------------------
1995 1994
-------- --------
(unaudited)
Revenues $392,031 $365,809
======== ========
Net income $ 22,601 $ 3,176
======== ========
Earnings per share $2.86 $ .44
===== =====
In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $95,958
Cash paid for the stock 66,000
--------
Liabilities assumed $ 29,958
========
NOTE 13 - SUBSEQUENT EVENTS
On September 16, 1996, the Company announced the signing of an agreement among
the Company and Proler International Corp. (Proler) by which the Company would
acquire Proler. Proler is an environmental services company involved in the
recovery and recycling of scrap metals and industrial wastes. Through its joint
ventures, Proler exports ferrous scrap to foreign markets from scrap collection,
processing and deep water facilities in Los Angeles, California; Providence,
Rhode Island; Everett Massachusetts; and Jersey City, New Jersey.
Pursuant to the agreement with Proler, the Company commenced a cash tender offer
for all of the outstanding shares of Proler at a cash price of $7.50 per share.
If and when the tender offer is completed, Proler will become a wholly owned
subsidiary of the Company through a cash merger at the same per share price. The
agreement provides that the tender offer is conditioned, among other things, on
at least a majority of Proler's outstanding shares being tendered and not
withdrawn prior to the expiration of the offer. The tender offer and merger are
also subject to the expiration or termination of the applicable waiting period
47
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). The
tender offer was originally scheduled to expire on October 18, 1996, but has
been extended on three occasions and is currently scheduled to expire on
November 29, 1996.
On October 4, 1996, the Company received a second request from the U.S.
Department of Justice (DOJ) for additional information with respect to its
filings under the HSR Act. The request extended the waiting period under the HSR
Act until 10 days after the DOJ receives all requested information, unless the
DOJ grants early termination. The Company is currently working on complying with
the DOJ's request.
Hugo Neu Corporation (Hugo Neu), which is a partner with Proler in the three
principal joint ventures through which Proler conducts its scrap metal business,
has proposed to acquire all outstanding shares of Proler for $9.00 per share in
cash, subject to certain conditions. On November 15, 1996, in response to Hugo
Neu's proposal, the Company announced that it had increased its offer price to
$9.00 per share in cash and extended its tender offer until November 29, 1996.
Proler's board of directors continues to support the Company's offer for Proler
stock as superior to Hugo Neu's offer. Proler has approximately 4.7 million
shares outstanding, making the value of the transaction at $9.00 per share about
$42 million.
Hugo Neu has also taken various steps, including commencing lawsuits and
arbitration proceedings, to block the acquisition of Proler by the Company. On
November 14, 1996, Hugo Neu added the Company as a defendant in an action
pending in the U.S. District Court for the Southern District of Texas and seeks,
among other things, to prevent the Company from purchasing Proler stock. The
Company believes that Hugo Neu's claims have no legal or factual merit.
Completion of the acquisition of Proler continues to be subject to considerable
uncertainty due to the ongoing review by the DOJ under the HSR Act and the
possibility that Hugo Neu might increase its offer for the Proler stock or
succeed in its efforts to block the transactions through litigation.
48
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED):
Fiscal Year 1996
--------------------------------------------------
First Second Third Fourth
------- ------- -------- --------
Net revenues $71,591 $82,721 $ 86,950 $ 98,090
Income from operations 8,575 8,209 8,031 8,129
Net income 5,078 5,400 4,551 5,755
Income per common share .64 .65 .44 .55
The results for the fourth quarter of 1996 include a refund of time-charter
expenses of $769 and sub-charter expenses of $163 related to the first three
fiscal quarters of 1996. See Note 7.
Fiscal Year 1995
--------------------------------------------------
First Second Third Fourth
------- ------- -------- --------
Net revenues $56,002 $63,339 $106,611 $104,759
Income from operations 3,958 5,399 12,702 10,508
Net income 2,764 3,762 7,854 7,867
Income per common share .35 .47 .98 1.02
49
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is included under "Election of Directors" in the
Company's Proxy Statement for its 1997 Annual Meeting of Shareholders and is
incorporated herein by reference. Information with respect to executive officers
of the Company is included under Item 4(a) of Part I of this Report. Information
required by Item 405 of Regulation S-K is included under "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for
its 1997 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under "Executive Compensation"
and "Compensation Committee Interlocks and Insider Participation" in the
Company's Proxy Statement for its 1997 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners and
management is included under "Voting Securities and Principal Shareholders" in
the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under "Certain Transactions"
in the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders and
is incorporated herein by reference.
50
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following financial statements are filed as part of this
report:
See Index to Financial Statements and Schedules on page 29 of this
Report.
2. The following financial statement schedule is filed as part of
this report:
See Index to Financial Statements and Schedules on page 29 of this
Report.
Schedules other than those listed on the Index to Financial Statements
and Schedules are omitted as the information is either not applicable
or is not required.
3. Exhibits:
2.1 Agreement and Plan of Merger dated September 15, 1996
between the Registrant and Proler International Corp.
Incorporated by reference to Exhibit (c) (1) to
Registrants' Schedule 14D-1 filed September 20, 1996.
3.1 1993 Restated Articles of Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1,
Registration No. 33-69352 (the Form S-1).
3.2 Restated Bylaws of the Registrant. Filed as Exhibit 3.2 to
Registrant's Form 10-K for the fiscal year ended August 31,
1995, and incorporated herein by reference.
9.1 Schnitzer Steel Industries, Inc. Voting Trust and Buy-Sell
Agreement dated March 31, 1991. Incorporated by reference
to Exhibit 9.1 to the Form S-1.
9.2 First Amendment to Voting Trust and By-Sell Agreement dated
July 15, 1991. Incorporated by reference to Exhibit 9.2 to
the Form S-1.
10.1 Lease Agreement dated September 1, 1988 between Schnitzer
Investment Corp. and the Registrant, as amended, relating
to the Corporate Headquarters. Incorporated by reference to
Exhibit 10.1 to the Form S-1.
10.2 Second Amendment of Lease dated as of October 18, 1995
between Schnitzer Investment Corp. and the Registrant,
relating to the Corporate Headquarters. Filed as Exhibit
10.5 to Registrant's Form 10-Q for the quarterly period
ended November 30, 1995, and incorporated herein by
reference.
10.3 Second Extension of Lease dated May 28, 1996 between
Schnitzer Investment Corp. and the Registrant, relating to
the Corporate Headquarters. Filed as Exhibit 10.1 to the
Registrant's Form 10-Q for the quarterly period ended May
31, 1996, and incorporated herein by reference.
51
<PAGE>
10.4 Lease Agreement dated March 24, 1980 between Schnitzer
Investment Corp. and the Registrant, as amended, relating
to the Corporate Headquarters. Incorporated by reference to
Exhibit 10.2 to the Form S-1.
10.5 Third Amendment of Lease dated May 29, 1996 between
Schnitzer Investment Corp. and the Registrant, relating to
the Corporate Headquarters. Filed as Exhibit 10.2 to the
Registrant's Form 10-Q for the quarterly period ended May
31, 1996, and incorporated herein by reference.
10.6 Lease Agreement dated March 1, 1995 between Schnitzer
Investment Corp. and the Registrant, relating to the
Corporate Headquarters. Filed as Exhibit 10.3 to
Registrants Form 10-Q for the quarterly period ended
November 30, 1995, and incorporated herein by reference.
10.7 Lease Agreement dated April 20, 1995 between Schnitzer
Investment Corp. and the Registrant, relating to the
Corporate Headquarters. Filed as Exhibit 10.4 to
Registrant's Form 10-Q for the quarterly period ended
November 30, 1995, and incorporated herein by reference.
10.8 Lease Agreement dated September 1, 1988 between Schnitzer
Investment Corp. and the Registrant, as amended, relating
to the Portland scrap operations. Incorporated by reference
to Exhibit 10.3 to the Form S-1.
10.9 Second Amendment to Lease dated as of October 28, 1994
between Schnitzer Investment Corp. and the Registrant,
relating to Portland scrap operations. Filed as Exhibit
10.1 to Registrant's Form 10-Q for the quarterly period
ended November 30, 1995, and incorporated herein by
reference.
10.10 Lease Agreement dated September 1, 1988 between Schnitzer
Investment Corp. and the Registrant, as amended, relating
to the Sacramento scrap operation. Incorporated by
reference to Exhibit 10.4 to the Form S-1.
10.11 Amendment of lease dated as of February 8, 1995 between
Schnitzer Investment Corp. and the Registrant, relating to
the Sacramento scrap operations. Filed as Exhibit 10.2 to
Registrant's Form 10-Q for the quarterly period ended
November 30, 1995, and incorporated herein by reference.
10.12 Second Amended Shared Services Agreement dated as of
September 13, 1993 between the Registrant and certain
entities controlled by shareholders of the Registrant.
Incorporated by reference to Exhibit 10.5 to the Form S-1.
10.13 Amendment dated as of September 1, 1994 to Second Amended
Shared Services Agreement between the Registrant and
certain entities controlled by shareholders of the
Registrant. Filed as Exhibit 10.6 to Registrant's Form 10-K
for the fiscal year ended August 31, 1995, and incorporated
herein by reference.
10.14 Uniform Time Charter dated May 27, 1993 between the
Registrant and Trans-Pacific Shipping Co. Incorporated by
reference to Exhibit 10.6 to the Form S-1.
10.15 Uniform Time Charter dated May 9, 1995 between the
Registrant and Trans-Pacific Shipping Co. Filed as Exhibit
10.10 to Registrant's Form 10-K for the fiscal year ended
August 31, 1995, and incorporated herein by reference.
10.16 Addendum No. 3 to M/V Jade Pacific Uniform time Charter
Agreement dated August 28, 1996 between the Registrant and
Trans-Pacific Shipping Co.
10.17 Uniform Time Charter dated May 9, 1995 between the
Registrant and Trans-Pacific Shipping Co. Filed as Exhibit
10.11 to Registrant's Form 10-K for the fiscal year ended
August 31, 1995, and incorporated herein by reference.
52
<PAGE>
10.18 Addendum No. 3 to M/V Jade Orient Uniform Time Charter
Agreement dated August 28, 1996 between the Registrant and
Trans-Pacific Shipping Co.
*10.19 1993 Stock Incentive Plan of the Registrant. Incorporated
by reference to Exhibit 10.7 to the Form S-1.
*10.20 Supplemental Executive Retirement Bonus Plan of the
Registrant. Incorporated by reference to Exhibit 10.8 to
the Form S-1.
*10.21 Assistant Secretary's Certificate dated November 25, 1995
amending the Supplemental Executive Retirement Bonus Plan
of the Registrant. Filed as Exhibit 10.6 to Registrant's
Form 10-Q for the quarterly period ended November 30, 1995,
and incorporated herein by reference.
*10.22 Deferred Bonus Agreement between the Company and an
executive officer. Filed as Exhibit 10.3 to Registrant's
Form 10-Q for the quarterly period ended May 31, 1996, and
incorporated herein by reference.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Powers of Attorney
27 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only and not filed.
*Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed by the Registrant
during the fourth quarter of the fiscal year ended August 31, 1996.
53
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
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.
SCHNITZER STEEL INDUSTRIES, INC.
Dated: November 22, 1996 By: /s/BARRY A. ROSEN
----------------- ----------------------
Barry A. Rosen
Vice President --
Finance and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant on
November 22, 1996 in the capacities indicated.
Signature Title
- --------- -----
Principal Executive Officer:
*LEONARD SCHNITZER
- ------------------- Chairman of the Board,
Leonard Schnitzer Chief Executive Officer and Director
Principal Financial Officer:
/s/ BARRY A. ROSEN
- -------------------- Vice President --
Barry A. Rosen Finance and Treasurer
Principal Accounting Officer:
*JAMES W. CRUCKSHANK
- -------------------- Controller and Assistant
James W. Cruckshank Treasurer
54
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SIGNATURES
Directors:
*CAROL S. LEWIS Director
- -------------------
Carol S. Lewis
*KENNETH M. NOVACK Director
- -------------------
Kenneth M. Novack
*ROBERT W. PHILIP Director
- -------------------
Robert W. Philip
*JEAN S. REYNOLDS Director
- -------------------
Jean S. Reynolds
*DORI SCHNITZER Director
- -------------------
Dori Schnitzer
*GARY SCHNITZER Director
- -------------------
Gary Schnitzer
*MANUEL SCHNITZER Director
- -------------------
Manuel Schnitzer
*ROBERT S. BALL Director
- -------------------
Robert S. Ball
*WILLIAM S. FURMAN Director
- -------------------
William S. Furman
*RALPH R. SHAW Director
- -------------------
Ralph R. Shaw
*By: /s/ BARRY A. ROSEN
--------------------------------
Attorney-in-fact, Barry A. Rosen
55
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of Schnitzer Steel Industries, Inc.
Our audits of the consolidated financial statements referred to in our report
dated September 27, 1996 Annual Report to Shareholders of Schnitzer Steel
Industries, Inc. (which report and consolidated financial statements are
included in this Annual Report on Form 10-K) also included an audit of the
Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our
opinion, the Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/S/PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Portland, Oregon
September 27, 1996
56
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED AUGUST 31, 1996, 1995, AND 1994
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at ----------------------------- Balance at
Beginning Charged to Charged to End of
Description of Period Expense Other Accts. Deductions Recoveries Period
- ------------------------------------- --------- ------- ------------ ---------- ---------- ---------------
Year Ended August 31, 1996
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 797 $ 229 $ $ (618) $ 12 $ 420
Lower-of-cost-or-market
inventory reserve 2 2
Year Ended August 31, 1995
Allowance for doubtful accounts 398 244 155 (1) 797
Lower-of-cost-or-market
inventory reserve 62 (60) 2
Year Ended August 31, 1994
Allowance for doubtful accounts 438 144 (184) 398
Lower-of-cost-or-market
inventory reserve 286 (224) 62
(1) Represents the allowance for doubtful accounts associated with Manufacturing Management, Inc. which the
Company purchased in March 1995
</TABLE>
.
57
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
INDEX TO EXHIBITS
Page No.
2.1 Agreement and Plan of Merger dated September 15, 1996
between the Registrant and Proler International Corp.
Incorporated by reference to Exhibit (c) (1) to
Registrant's Schedule 14D-1 filed September 20, 1996.
3.1 1993 Restated Articles of Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1,
Registration No. 33-69352 (the Form S-1).
3.2 Restated Bylaws of the Registrant. Filed as Exhibit 3.2 to
Registrant's Form 10-K for the fiscal year ended August
31, 1995, and incorporated herein by reference.
9.1 Schnitzer Steel Industries, Inc. Voting Trust and Buy-Sell
Agreement dated March 31, 1991. Incorporated by reference
to Exhibit 9.1 to the Form S-1.
9.2 First Amendment to Voting Trust and By-Sell Agreement
dated July 15, 1991. Incorporated by reference to Exhibit
9.2 to the Form S-1.
10.1 Lease Agreement dated September 1, 1988 between Schnitzer
Investment Corp. and the Registrant, as amended, relating
to the Corporate Headquarters. Incorporated by reference
to Exhibit 10.1 to the Form S-1.
10.2 Second Amendment of Lease dated as of October 18, 1995
between Schnitzer Investment Corp. and the Registrant,
relating to the Corporate Headquarters. Filed as Exhibit
10.5 to Registrant's Form 10-Q for the quarterly period
ended November 30, 1995, and incorporated herein by
reference.
10.3 Second Extension of Lease dated May 28, 1996 between
Schnitzer Investment Corp. and the Registrant, relating to
the Corporate Headquarters. Filed as Exhibit 10.1 to the
Registrant's Form 10-Q for the quarterly period ended May
31, 1996, and incorporated herein by reference.
10.4 Lease Agreement dated March 24, 1980 between Schnitzer
Investment Corp. and the Registrant, as amended, relating
to the Corporate Headquarters. Incorporated by reference
to Exhibit 10.2 to the Form S-1.
58
<PAGE>
Page No.
10.5 Third Amendment of Lease dated May 29, 1996 between
Schnitzer Investment Corp. and the Registrant, relating to
the Corporate Headquarters. Filed as Exhibit 10.2 to the
Registrant's Form 10-Q for the quarterly period ended May
31, 1996, and incorporated herein by reference.
10.6 Lease Agreement dated March 1, 1995 between Schnitzer
Investment Corp. and the Registrant, relating to the
Corporate Headquarters. Filed as Exhibit 10.3 to
Registrants Form 10-Q for the quarterly period ended
November 30, 1995, and incorporated herein by reference.
10.7 Lease Agreement dated April 20, 1995 between Schnitzer
Investment Corp. and the Registrant, relating to the
Corporate Headquarters. Filed as Exhibit 10.4 to
Registrant's Form 10-Q for the quarterly period ended
November 30, 1995, and incorporated herein by reference.
10.8 Lease Agreement dated September 1, 1988 between Schnitzer
Investment Corp. and the Registrant, as amended, relating
to the Portland scrap operations. Incorporated by
reference to Exhibit 10.3 to the Form S-1.
10.9 Second Amendment to Lease dated as of October 28, 1994
between Schnitzer Investment Corp. and the Registrant,
relating to Portland scrap operations. Filed as Exhibit
10.1 to Registrant's Form 10-Q for the quarterly period
ended November 30, 1995, and incorporated herein by
reference.
10.10 Lease Agreement dated September 1, 1988 between Schnitzer
Investment Corp. and the Registrant, as amended, relating
to the Sacramento scrap operation. Incorporated by
reference to Exhibit 10.4 to the Form S-1.
10.11 Amendment of lease dated as of February 8, 1995 between
Schnitzer Investment Corp. and the Registrant, relating to
the Sacramento scrap operations. Filed as Exhibit 10.2 to
Registrant's Form 10-Q for the quarterly period ended
November 30, 1995, and incorporated herein by reference.
10.12 Second Amended Shared Services Agreement dated as of
September 13, 1993 between the Registrant and certain
entities controlled by shareholders of the Registrant.
Incorporated by reference to Exhibit 10.5 to the Form S-1.
10.13 Amendment dated as of September 1, 1994 to Second Amended
Shared Services Agreement between the Registrant and
certain entities controlled by shareholders of the
Registrant. Filed as Exhibit 10.6 to Registrant's Form
10-K for the fiscal year ended August 31, 1995, and
incorporated herein by reference.
10.14 Uniform Time Charter dated May 27, 1993 between the
Registrant and Trans-Pacific Shipping Co. Incorporated by
reference to Exhibit 10.6 to the Form S-1. Page No.
59
<PAGE>
Page No.
10.15 Uniform Time Charter dated May 9, 1995 between the
Registrant and Trans-Pacific Shipping Co. Filed as Exhibit
10.10 to Registrant's Form 10-K for the fiscal year ended
August 31, 1995, and incorporated herein by reference.
10.16 Addendum No. 3 to M/V Jade Pacific Uniform time Charter 61 of 78
Agreement 57 of 75 dated August 28, 1996 between the
Registrant and Trans-Pacific Shipping Co.
10.17 Uniform Time Charter dated May 9, 1995 between the
Registrant and Trans-Pacific Shipping Co. Filed as Exhibit
10.11 to Registrant's Form 10-K for the fiscal year ended
August 31, 1995, and incorporated herein by reference.
10.18 Addendum No. 3 to M/V Jade Orient Uniform Time Charter 62 of 78
Agreement 59 of 75 dated August 28, 1996 between the
Registrant and Trans-Pacific Shipping Co.
*10.19 1993 Stock Incentive Plan of the Registrant. Incorporated
by reference to Exhibit 10.7 to the Form S-1.
*10.20 Supplemental Executive Retirement Bonus Plan of the
Registrant. Incorporated by reference to Exhibit 10.8 to
the Form S-1.
*10.21 Assistant Secretary's Certificate dated November 25, 1995
amending the Supplemental Executive Retirement Bonus Plan
of the Registrant. Filed as Exhibit 10.6 to Registrant's
Form 10-Q for the quarterly period ended November 30,
1995, and incorporated herein by reference.
*10.22 Deferred Bonus Agreement between the Company and an
executive officer. Filed as Exhibit 10.3 to Registrant's
Form 10-Q for the quarterly period ended May 31, 1996, and
incorporated herein by reference
21.1 Subsidiaries of Registrant. 63 of 78
23.1 Consent of Independent Accountants. 64 of 78
24.1 Powers of Attorney 65 of 78
27 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only and not filed. 78 of 78
60
<PAGE>
EXHIBIT 10.16
Addendum No. 3
To
M/V JADE PACIFIC Uniform Time Charter
Dated May 9, 1995
Between
Trans-Pacific Shipping Co.
And
Schnitzer Steel Industries, Inc.
Reference is made to that certain Uniform Time Charter entered into as of
May 9, 1996 (the "Charter Party") by and between Trans-Pacific Shipping Co.
("Owner") and Schnitzer Steel Industries, Inc. ("Charterer") whereby Owner let
and Charterer hired the vessel called M/V JADE PACIFIC (the "Vessel"). Reference
also is made to Addendum No. 2 to the Charter Party dated May, 9, 1995.
Owner acknowledges that the cost to drydock, maintain and operate the
Vessel has exceeded Owner's cost projections at the inception of the Charter
Party and that the hire rate specified in the Charter Party was predicated on
Owner's cost projections. The parties therefore agree that it is appropriate and
necessary for Owner to reimburse Charterer for costs Charterer incurred in
drydocking the Vessel, to refund to Charterer a portion of hire paid to date,
and to reduce the charter rate for the remaining term of the Charter Party.
In consideration thereof, Charterer's willingness to continue its
performance under the Charter Party, and the mutual agreements set forth herein,
Owner and Charterer agree to amend the Charter Party as follows:
1. Owner shall reimburse Charterer for the following expenses:
Drydock expenses $ 585,048.98
Agency Fees 120,000.00
Charter for period Vessel
in drydock 325,323.19
Charter rate overcharges 382,557.18
-------------
TOTAL $1,412,929.35
=============
2. Paragraph 6 of the Charter Party and paragraph 1 of Addendum No. 2 are
hereby amended to provide that for the remainder of the Charter Party, Charter
hire shall be calculated as the sum of the actual daily running cost of the
Vessel plus monthly payment of $64,108.00. Neither Owner nor its agents shall be
entitled to any additional compensation in the form of an agency fee or
otherwise.
3. All other terms and conditions of the Charter Party are to remain
unaltered.
Executed at Portland, Oregon on August 28, 1996.
--
TRANS-PACIFIC SHIPPING CO. SCHNITZER STEEL INDUSTRIES, INC.
By Lasco Shipping Co., As Agent
By:/s/Leonard Schnitzer By:/s/Robert Philip
------------------------------ ---------------------------
G:\AUP\ADD3.SSI
61
<PAGE>
EXHIBIT 10.18
Addendum No. 3
To
M/V JADE ORIENT Uniform Time Charter
Dated May 9, 1995
Between
Trans-Pacific Shipping Co.
And
Schnitzer Steel Industries, Inc.
Reference is made to that certain Uniform Time Charter entered into as of May 9,
1996 (the "Charter Party") by and between Trans-Pacific Shipping Co. ("Owner")
and Schnitzer Steel Industries, Inc."Charterer") whereby Owner let and Charterer
hired the vessel called M/V JADE ORIENT (the "Vessel"). Reference also is made
to Addendum No. 2 to the Charter Party dated May 9, 1995.
Owner acknowledges that the cost to drydock, maintain and operate the Vessel has
exceeded Owner's cost projections at the inception of the Charter Party and that
the hire rate specified in the Charter Party was predicated on Owner's cost
projections. The parties therefore agree that it is appropriate and necessary
for Owner to reimburse Charterer for costs Charterer incurred in drydocking the
Vessel, to refund to Charterer a portion of hire paid to date, and to reduce the
charter rate for the remaining term of the Charter Party.
In consideration thereof, Charterer's willingness to continue its performance
under the Charter Party, and the mutual agreements set forth herein, Owner and
Charterer agree to amend the Charter Party as follows:
1. Owner shall reimburse Charterer for the following
expenses:
Drydock expenses $ 770,176.34
Agency Fees 108,000.00
Charter for period Vessel
in drydock 547,704.04
Charter rate overcharges 321,439.77
-------------
TOTAL $1,747,321.15
=============
2. Paragraph 6 of the Charter Party and paragraph 1 of Addendum No. 2 are
hereby amended to provide that for the remainder of the Charter Party, Charter
hire shall be calculated as the sum of the actual daily running costs of the
Vessel plus monthly payments of $69,907.00. Neither Owner nor its agents shall
be entitled to any additional compensation in the form of an agency fee or
otherwise.
3. All other terms and conditions of the Charter Party are to remain
unaltered.
Executed at Portland, Oregon on August 28, 1996.
--
TRANS-PACIFIC SHIPPING CO. SCHNITZER STEEL INDUSTRIES, INC.
By Lasco Shipping Co., As Agent
By:/s/Leonard Schnitzer By:/s/Robert Philip
------------------------------ ---------------------------
G:\AUP\ADD3.SSI
62
<PAGE>
EXHIBIT 21.1
SCHNITZER STEEL INDUSTRIES, INC.
List of Subsidiaries
Subsidiary State of Incorporation
---------- ----------------------
Cascade Steel Rolling Mills, Inc. Oregon
Columbia Forge and Machine Works, Inc. Oregon
Crawford Street Corporation Oregon
Edman Corp. Oregon
General Metals of Tacoma Washington
Levi's Iron and Metal, Inc. Oregon
Manufacturing Management, Inc. Oregon
MMI International (Oregon), Inc. Oregon
MMI International (Guam), Inc. Guam
MMI International Far East Ltd. Korea
Mormil Corp. Oregon
Norprop, Inc. Oregon
Oregon Rail Marketing Co. Oregon
Schnitzer Leasing, Inc. Oregon
SSP Reclamation Company Oregon
63
<PAGE>
Consent of Independent Accountants
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-8 (No. 33-87008) of our report dated September 27, 1996,
except as to Note 13, which is as of November 15, 1996, appearing on page 30 of
the Schnitzer Steel Industries, Inc. Annual Report on Form 10-K for the year
ended August 31, 1996. We also consent to the incorporation by reference of our
report on the Financial Statement Schedule, which appears on page 56 of such
Annual Report on Form 10-K.
/S/PRICE WATERHOUSE LLP
- -----------------------
PRICE WATERHOUSE LLP
November 21, 1996
Portland, Oregon
64
<PAGE>
POWER OF ATTORNEY
(Form 10-K)
The undersigned hereby constitutes and appoints each of Robert W. Philip,
Kenneth M. Novack, Barry A. Rosen and James W. Cruckshank his true and lawful
attorney and agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Schnitzer Steel Industries, Inc. for the year ended
August 31, 1996 and any and all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each attorney and agent full
power and authority to do any and all acts and things necessary or advisable to
be done, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that the attorney and agent or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: October 29, 1996.
--
/s/Leonard Schnitzer
-----------------------------------
LEONARD SCHNITZER
SSI025.PA
65
<PAGE>
POWER OF ATTORNEY
(Form 10-K)
The undersigned hereby constitutes and appoints each of Robert W. Philip,
Kenneth M. Novack, Barry A. Rosen and James W. Cruckshank his true and lawful
attorney and agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Schnitzer Steel Industries, Inc. for the year ended
August 31, 1996 and any and all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each attorney and agent full
power and authority to do any and all acts and things necessary or advisable to
be done, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that the attorney and agent or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: October 28 1996.
--
/s/B.A. Rosen
------------------------------
BARRY A. ROSEN
SSI025.PA
66
<PAGE>
POWER OF ATTORNEY
(Form 10-K)
The undersigned hereby constitutes and appoints each of Robert W. Philip,
Kenneth M. Novack, Barry A. Rosen and James W. Cruckshank his true and lawful
attorney and agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Schnitzer Steel Industries, Inc. for the year ended
August 31, 1996 and any and all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each attorney and agent full
power and authority to do any and all acts and things necessary or advisable to
be done, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that the attorney and agent or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: October 29, 1996.
--
/s/James W. Cruckshank
------------------------------
JAMES W. CRUCKSHANK
SSI025.PA
67
<PAGE>
POWER OF ATTORNEY
(Form 10-K)
The undersigned hereby constitutes and appoints each of Robert W. Philip,
Kenneth M. Novack, Barry A. Rosen and James W. Cruckshank his true and lawful
attorney and agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Schnitzer Steel Industries, Inc. for the year ended
August 31, 1996 and any and all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each attorney and agent full
power and authority to do any and all acts and things necessary or advisable to
be done, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that the attorney and agent or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: October 30, 1996.
--
/s/Carol Lewis
---------------------------------
CAROL S. LEWIS
SSI025.PA
68
<PAGE>
POWER OF ATTORNEY
(Form 10-K)
The undersigned hereby constitutes and appoints each of Robert W. Philip,
Kenneth M. Novack, Barry A. Rosen and James W. Cruckshank his true and lawful
attorney and agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Schnitzer Steel Industries, Inc. for the year ended
August 31, 1996 and any and all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each attorney and agent full
power and authority to do any and all acts and things necessary or advisable to
be done, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that the attorney and agent or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: October 29, 1996.
--
/s/K. Novack
--------------------------------
KENNETH M. NOVACK
SSI025.PA
69
<PAGE>
POWER OF ATTORNEY
(Form 10-K)
The undersigned hereby constitutes and appoints each of Robert W. Philip,
Kenneth M. Novack, Barry A. Rosen and James W. Cruckshank his true and lawful
attorney and agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Schnitzer Steel Industries, Inc. for the year ended
August 31, 1996 and any and all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each attorney and agent full
power and authority to do any and all acts and things necessary or advisable to
be done, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that the attorney and agent or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: October 29, 1996.
--
/s/R.W. Philip
-----------------------------------
ROBERT W. PHILIP
SSI025.PA
70
<PAGE>
POWER OF ATTORNEY
(Form 10-K)
The undersigned hereby constitutes and appoints each of Robert W. Philip,
Kenneth M. Novack, Barry A. Rosen and James W. Cruckshank his true and lawful
attorney and agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Schnitzer Steel Industries, Inc. for the year ended
August 31, 1996 and any and all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each attorney and agent full
power and authority to do any and all acts and things necessary or advisable to
be done, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that the attorney and agent or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: October 30, 1996.
--
/s/Jean S. Reynolds
------------------------------
JEAN S. REYNOLDS
SSI025.PA
71
<PAGE>
POWER OF ATTORNEY
(Form 10-K)
The undersigned hereby constitutes and appoints each of Robert W. Philip,
Kenneth M. Novack, Barry A. Rosen and James W. Cruckshank his true and lawful
attorney and agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Schnitzer Steel Industries, Inc. for the year ended
August 31, 1996 and any and all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each attorney and agent full
power and authority to do any and all acts and things necessary or advisable to
be done, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that the attorney and agent or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: October 29, 1996.
--
/s/Dori Schnitzer
------------------------------
DORI SCHNITZER
SSI025.PA
72
<PAGE>
POWER OF ATTORNEY
(Form 10-K)
The undersigned hereby constitutes and appoints each of Robert W. Philip,
Kenneth M. Novack, Barry A. Rosen and James W. Cruckshank his true and lawful
attorney and agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Schnitzer Steel Industries, Inc. for the year ended
August 31, 1996 and any and all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each attorney and agent full
power and authority to do any and all acts and things necessary or advisable to
be done, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that the attorney and agent or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: October 30, 1996.
--
/s/Gary Schnitzer
------------------------------------
GARY SCHNITZER
SSI025.PA
73
<PAGE>
POWER OF ATTORNEY
(Form 10-K)
The undersigned hereby constitutes and appoints each of Robert W. Philip,
Kenneth M. Novack, Barry A. Rosen and James W. Cruckshank his true and lawful
attorney and agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Schnitzer Steel Industries, Inc. for the year ended
August 31, 1996 and any and all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each attorney and agent full
power and authority to do any and all acts and things necessary or advisable to
be done, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that the attorney and agent or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: October 29, 1996.
--
/s/Manuel Schnitzer
-----------------------------------
MANUEL SCHNITZER
SSI025.PA
74
<PAGE>
POWER OF ATTORNEY
(Form 10-K)
The undersigned hereby constitutes and appoints each of Robert W. Philip,
Kenneth M. Novack, Barry A. Rosen and James W. Cruckshank his true and lawful
attorney and agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Schnitzer Steel Industries, Inc. for the year ended
August 31, 1996 and any and all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each attorney and agent full
power and authority to do any and all acts and things necessary or advisable to
be done, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that the attorney and agent or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: October 31, 1996.
--
/s/Robert S. Ball
-------------------------------
ROBERT S. BALL
SSI025.PA
75
<PAGE>
POWER OF ATTORNEY
(Form 10-K)
The undersigned hereby constitutes and appoints each of Robert W. Philip,
Kenneth M. Novack, Barry A. Rosen and James W. Cruckshank his true and lawful
attorney and agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Schnitzer Steel Industries, Inc. for the year ended
August 31, 1996 and any and all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each attorney and agent full
power and authority to do any and all acts and things necessary or advisable to
be done, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that the attorney and agent or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: October 31, 1996.
--
/s/William A. Furman
------------------------------
WILLIAM A. FURMAN
SSI025.PA
76
<PAGE>
POWER OF ATTORNEY
(Form 10-K)
The undersigned hereby constitutes and appoints each of Robert W. Philip,
Kenneth M. Novack, Barry A. Rosen and James W. Cruckshank his true and lawful
attorney and agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of Schnitzer Steel Industries, Inc. for the year ended
August 31, 1996 and any and all amendments thereto, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each attorney and agent full
power and authority to do any and all acts and things necessary or advisable to
be done, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that the attorney and agent or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: October 30, 1996.
--
/s/Ralph R. Shaw
-----------------------------------
RALPH R. SHAW
SSI025.PA
77
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<PERIOD-END> AUG-31-1996
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<RECEIVABLES> 23,962
<ALLOWANCES> 420
<INVENTORY> 90,746
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0
0
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<CGS> 290,841
<TOTAL-COSTS> 309,701
<OTHER-EXPENSES> (1,661)
<LOSS-PROVISION> 229
<INTEREST-EXPENSE> 3,814
<INCOME-PRETAX> 30,789
<INCOME-TAX> 10,006
<INCOME-CONTINUING> 20,783
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,783
<EPS-PRIMARY> 2.24
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</TABLE>
