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, 1997 Commission File Number 0-22496
SCHNITZER STEEL INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
OREGON 93-0341923
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(State of Incorporation) (I.R.S. Employer Identification No.)
3200 N.W. Yeon Ave., P.O. Box 10047
Portland, OR 97296-0047
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(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
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(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, 1997 was:
<TABLE>
<CAPTION>
Shares Outstanding Held By Market Value
Title of Each Class -------------------------------- Held By
of Common Stock Affiliates Non-Affiliates Non-Affiliates
- ------------------- ---------- -------------- --------------
<S> <C> <C> <C>
Class A, $1 par value 76,100 5,668,726 $190,610,912
Class B, $1 par value 4,437,828 0 N/A
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders are incorporated herein by reference in Part III.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
TABLE OF CONTENTS
PART ITEM PAGE
I 1. BUSINESS...........................................................3
Overview.........................................................3
Acquisition of Proler International Corp.........................3
Acquisition of Manufacturing Management, Inc.....................4
Business Strategy................................................4
Scrap Operations.................................................6
Joint Ventures...................................................9
Steel Operations................................................10
Environmental Matters...........................................13
Employees.......................................................15
2. PROPERTIES........................................................16
3. LEGAL PROCEEDINGS.................................................16
4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.............................................16
4.(a) EXECUTIVE OFFICERS OF THE REGISTRANT..............................17
II 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS.....................................19
6. SELECTED FINANCIAL DATA...........................................20
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................21
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................27
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..........................49
III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT......................................................49
11. EXECUTIVE COMPENSATION............................................49
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT...........................................49
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................49
IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.............................................50
2
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
Overview
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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, Tacoma and Pasco, Washington and Anchorage, Alaska.
Additionally, as a result of its acquisition of Proler International Corp.,
effective November 29, 1996, through joint ventures, the Company participates in
the management of an additional 17 scrap collection and processing facilities,
including export terminals in Los Angeles, California, Everett, Massachusetts,
Providence, Rhode Island and Jersey City, New Jersey. The Company believes that
Scrap Operations has a strong competitive position in its markets 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), coiled rebar, wire rod, 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, efficient production processes, state-of-the-art
technology, well-located shipping and transportation facilities, and proximity
to California and other major western markets.
Acquisition of Proler International Corp.
- -----------------------------------------
On November 29, 1996, PIC Acquisition Corp. (PIC), a wholly owned subsidiary of
the Company, acquired approximately 86% of the outstanding shares of Proler
International Corp. (Proler) for $9 cash per share pursuant to a tender offer
for all of the outstanding shares of common stock of Proler. Subsequent to
November 30, 1996, PIC purchased additional shares, increasing its ownership to
approximately 94% of the outstanding shares. On December 6, 1996, the Company
completed the merger of PIC with Proler and, as a result, Proler became a wholly
owned subsidiary of the Company. As a result of the merger, all remaining
outstanding shares of Proler common stock were converted into the right to
receive the same $9 per share in cash paid in the tender offer. The aggregate
purchase price for Proler was $42.5 million.
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.
The acquisition of Proler was accounted for as a purchase and Proler's results
of operations have been included in the Company's financial statements since
November 29, 1996.
3
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SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
Acquisition of Manufacturing Management, Inc.
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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.
As part of the MMI acquisition, the Company also acquired MMI's Portland, Oregon
based 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.
Business Strategy
- -----------------
The Company's business strategy emphasizes continued growth of the ferrous scrap
business through additive acquisitions and joint ventures, and maintaining its
status as a low-cost producer of both steel scrap and finished steel products
through investments in state-of-the-art manufacturing facilities and increased
production efficiencies.
The Company considers itself, first and foremost, a ferrous scrap company, with
70% of its operating income, before corporate expenses and eliminations, derived
from Scrap Operations in fiscal 1997. Scrap Operations is one of the leading
processors in each of the markets in which it operates. Future acquisitions and
capital expenditures will focus largely on increasing the Company's position as
one of the premier scrap processors in the country. It is the Company's intent
to make acquisitions that will be immediately additive to the Company's
earnings.
The Company is able to react to changing steel scrap market conditions by
adjusting the price it pays for unprocessed scrap. The Company enters into scrap
sales contracts by selling forward 45 to 90 days and purchases unprocessed scrap
on a daily basis. The typical scrap supplier is a relatively small, local
business or manufacturer who sells scrap in limited quantities. The typical
supplier generally does not have the ability to inventory material and therefore
lacks the market leverage to influence prices. By knowing the price for which
the processed material will be sold and the costs involved in processing the
scrap, the Company is able to take advantage of this differential in timing
between purchases and sales and negotiate prices with suppliers that secure
profitable transactions. The Company's strategy is to manage costs so that it
can take advantage of rising price environments for processed scrap, and
mitigate the potential negative effects of falling prices.
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 ferrous scrap through
its existing network and through selective acquisitions of or joint ventures
with scrap processors and scrap suppliers. In November 1996, the Company
acquired Proler, a processor of scrap metal. Proler's scrap metal joint ventures
process approximately 2.5 million long tons of ferrous scrap per year. The
Company's purchase of MMI, another scrap processor, in March 1995 added
approximately 500,000 long tons per year to the Company's ferrous scrap
4
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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. A
Fresno, California scrap facility was acquired in 1989 to increase the Company's
access to scrap in the central valley of California. The Company has also made a
series of investments in other joint ventures which increase the Company's
sources of scrap supply. The Company's most significant joint venture, in this
regard, operates self-service used auto parts yards, primarily in California.
The Company's Oakland facility receives car bodies from this joint venture for
processing and sale as shredded scrap metal.
Invest in State-of-the-Art Processing and Manufacturing. The Company's objective
is to be a low cost producer of both steel scrap and finished steel products in
order to maximize the operating margin for both operations. To meet this
objective, the Company has focused on and will continue to emphasize the
efficient purchasing and processing of scrap. Additionally, the Company has made
significant investments in state-of-the art equipment to ensure that its
operations have cost effective technology to produce high quality products and
to maximize economies of scale. The Company continues to invest in equipment to
improve the efficiency and capabilities of its Scrap Operations. During fiscal
years 1992 through 1997, the Company spent $29.8 million on capital improvements
related to Scrap Operations. During this same time, the Company made capital
expenditures of $88.9 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 its first rolling mill (Rolling Mill #1) was
completed in August 1994. This equipment improves merchant bar product quality,
lowers processing costs, and has permitted the Company to expand its higher
margin merchant bar product line. The Company also intends to invest in
technology to improve its key operating systems over the next two years.
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. Additionally, in
February 1997, the Company completed the installation of a rod block at Rolling
Mill #2. The rod block has allowed 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 existing cut-to-length rebar products permits the
Company to increase its production of higher-margin merchant bar products at
Rolling Mill #1 and also increases 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 these products and to maximize
profits. Rolling Mill #2 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. The Company does
not expect to expand Steel Operations, either through significant capital
additions or acquisitions of other mini-mills, in the foreseeable future.
Capture Benefits of Integration. The Company has historically sought to capture
the potential benefits of business integration whenever possible. 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.
5
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
Scrap Operations
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The Company is one of the largest scrap processors in the United States, with
eleven wholly owned 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. Scrap Operations
also purchases 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 Company also operates collection and
processing facilities in Eugene, Bend, White City and Grants Pass, Oregon,
Sacramento and Fresno, California, Pasco, Washington and Anchorage, Alaska. 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
Eugene, White City, Grants Pass, Bend, Pasco and Anchorage facilities are
similar feeder yards, but their production is transferred to the Portland
facility or to Steel Operations.
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,
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1997 1996 1995 1994 1993
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Sales Vol.(1) Sales Vol.(1) Sales Vol.(1) Sales Vol.(1) Sales Vol.(1)
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ferrous Scrap
Customers: (dollar amounts in millions)
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Asian Steel
Producers and
Representatives $111.1 853 $131.8 858 $125.9 680 $75.9 461 $62.3 436
- --------------------------------------------------------------------------------------------------------------------
Steel Operations:
Supplied by
Company Scrap
Facilities 43.7 362 44.1 358 44.3 338 36.8 304 25.1 223
Purchased from
Others for Direct
Shipment(2) 14.1 132 9.9 92 10.4 91 17.5 139 23.4 233
--------- -------- --------- ------- --------- -------- -------- ------- --------- --------
Total
Steel Operations 57.8 494 54.0 450 54.7 429 54.3 443 48.5 456
- --------------------------------------------------------------------------------------------------------------------
Other US Steel
Producers 39.9 171 30.1 171 25.2 145 16.1 87 9.7 61
- --------------------------------------------------------------------------------------------------------------------
Total $208.8 1,518 $215.9 1,479 $205.8 1,254 $146.3 991 $120.5 953
====================================================================================================================
(1) In thousands of long tons (2,240 pounds).
(2) Consists of prepared scrap that is not processed by Scrap Operations.
</TABLE>
6
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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 and Taiwan. To serve these
customers more effectively, the Company operates a wholly-owned subsidiary, SSI
International Far East Ltd., in Seoul, South Korea. Additionally, the Company
uses 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 1997, one customer accounted for approximately 11% and Scrap Operations'
five largest customers accounted for 39% 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.
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 90 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 operating margin dollars per ton. However, the Company's
ability to fully maintain its operating margin 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 eleven 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. 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.
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 more easily 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 eleven 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
7
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SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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 before being
sold 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.
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 shipping businesses it is affiliated with 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), an affiliated 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. The predominant competitive factors impacting the
Company's scrap sales and its ability to obtain raw scrap are price, including
shipping costs, availability, reliability of service and product quality.
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 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.
8
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
Backlog. At August 31, 1997, the Company's Scrap Operations had a backlog of
firm orders of $31.2 million, as compared to $16.7 million at August 31, 1996
All of the backlog at August 31, 1997 is related to export shipments and is
expected to be shipped during 1997.
Joint Ventures
- --------------
The Company has invested in certain joint ventures which process and sell scrap
to third parties and other joint ventures that supply scrap to the Company's
operations.
I. Joint Venture Scrap Processors
In November 1996 the Company acquired Proler. Proler owns interests in three
joint ventures that are engaged in buying, processing, and selling primarily
ferrous metals. These joint ventures process and sell approximately 2.5 million
long tons of ferrous scrap per year. Through these joint ventures, the Company
participates in the management of 17 scrap collection and processing facilities,
including export terminals in Los Angeles, California, Everett, Massachusetts,
Providence, Rhode Island and Jersey City, New Jersey and 13 feeder yards. At the
feeder yards scrap metal is collected, processed and then transported to one of
the joint venture's export terminals for subsequent sale or sold directly to
domestic purchasers.
Scrap Processing and Supply. The joint ventures predominantly produce shredded
scrap and other grades of ferrous scrap, primarily heavy melting and premium
grades. The joint ventures process scrap by shredding, sorting, baling, shearing
or cutting the scrap into pieces suitable for melting. Processed scrap is either
inventoried for later shipment or shipped directly by rail, truck, ship or barge
to foreign or domestic steel mills.
Deep Water Terminal Facilities. Through its joint ventures, the Company
participates in the management of export terminals in Los Angeles, California,
Everett, Massachusetts, Providence, Rhode Island and Jersey City, New Jersey.
The joint ventures deliver by ship processed scrap to steel producers throughout
the world. As a result of owning or leasing these facilities, the joint ventures
are not subject to berthing delays often experienced by users of unaffiliated
terminal facilities.
Competition. The predominant competitive factors which impact the joint
ventures' ability to obtain scrap as a raw material and scrap sales are price,
including shipping costs, availability, reliability of service and product
quality.
II. 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, one yard in Reno, Nevada, one yard in Salt Lake City, Utah and
one yard in Summit, Illinois. 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 four yards in fiscal 1993, three yards in fiscal
1995, one yard in fiscal 1996, and two yards in fiscal 1997, and intends to
continue to open or acquire new yards as appropriate sites are identified and
acquired. During fiscal 1997, the Company purchased substantially all the car
bodies generated in California by this joint venture.
The Company is also a 50% partner 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 1997, the Company purchased substantially all of the ferrous scrap
9
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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 environmental remediation contractor.
The Company is also a partner in other joint ventures which provide the Company
access to ferrous scrap.
During fiscal 1997, the Company purchased 167,000 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.
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, wire rod,
coiled rebar 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,
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1997 1996 1995 1994 1993
----------------------------------------------------------------------------------------------
Sales Vol.(1) Sales Vol.(1) Sales Vol.(1) Sales Vol.(1) Sales Vol.(1)
---------- -------- -------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(dollar amounts in millions)
- -------------------------------------------------------------------------------------------------------------------
Rebar $104.9 341 $ 98.7 321 $ 78.3 255 $ 85.9 310 $ 73.0 286
- -------------------------------------------------------------------------------------------------------------------
Merchant bar 43.1 117 35.5 95 34.4 87 41.7 113 36.5 104
- -------------------------------------------------------------------------------------------------------------------
Wire rod 4.6 15
- -------------------------------------------------------------------------------------------------------------------
Coiled rebar 1.7 5
- -------------------------------------------------------------------------------------------------------------------
Specialty products 28.1 68 25.8 60 23.5 56 18.0 47 14.2 35
- -------------------------------------------------------------------------------------------------------------------
Total $182.4(2) 546 $160.0 476 $136.2(2) 398 $145.6(2) 470 $123.7 425
===================================================================================================================
(1) In thousands of short tons (2,000 pounds).
(2) Does not include billet sales of $1.3 million in 1997, $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 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. 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. Specialty products include fence posts and
other finished products. 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 was completed in February
1997. Demand for wire rod and coiled rebar on the West Coast has traditionally
been filled by suppliers outside of the region (both domestic and foreign),
creating what the Company
10
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
believes to be an attractive opportunity to capture market share and enhance
profitability. 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 also increased 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 Company expects
Steel Operations' total volume, particularly sales of higher-margin coiled rebar
and wire rod, to increase due to the addition of Rolling Mill #2.
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, 1997, Steel Operations sold its steel products
to approximately 320 customers primarily located in the 10 western states. In
that period, approximately 50% 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 13% of Steel Operations' revenues in fiscal 1997.
Steel Operations' 10 largest customers accounted for approximately 47% of its
revenues during fiscal 1997.
Scrap Supply. The Company believes it operates the only mini-mill in the 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, 1997.
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
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 1997, Steel Operations paid an average
of $.03 per kilowatt hour used. 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
Panenergy 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, 2004. 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.
11
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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 post-combustion equipment added to the furnace in 1995. This
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 produce 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, 1995, 1996 and 1997 the melt shop
produced 525,000, 493,000 and 586,000 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. Production was not constrained
in 1997. The Company continues to anticipate that the melt shop will produce
over 700,000 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 Rolling Mill #1. In
1994, Steel Operations completed the installation of in-line straightening,
stacking 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
products and to produce its merchant bar products more efficiently by automating
the straightening and bundling function. It has also 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 installed a rod block at Rolling Mill #2 which was completed in
February 1997. The rod block allows the Company to enhance its product mix
through the production of coiled rebar and wire rod. In addition, the ability of
Rolling Mill #2 to produce Steel Operations' existing cut-to-length rebar
products permits the Company to increase its production of higher-margin
merchant bar products at Rolling Mill #1 and also increases 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. Rolling Mill #2 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. See Environmental
Matters below regarding production limits under the Company's current air
quality operating permit.
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 are 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
12
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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 competes predominantly with the following 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. Steel Operations also competes for
sales of wire rod with the aforementioned North Star Steel Company mini-mill and
an Oregon Steel Mill, Inc. plant located in Pueblo, Colorado, along with other
domestic and foreign producers. 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 and 1997. 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.
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
material 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 for the estimated cost to cure environmental
liabilities. This reserve was carried over to the Company's financial statements
and at August 31, 1997 aggregated $20.5 million.
Schnitzer Steel of Tacoma (SST), MMI's subsidiary, owns and operates a scrap
facility located on the Hylebos Waterway, a part of Commencement Bay, which is
the subject of an ongoing environmental investigation and remediation project by
the U.S. Environmental Protection Agency (EPA) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA). SST and well
over 60 other parties were named potentially responsible parties (PRP's) for the
investigation and cleanup of contaminated sediment along the Hylebos Waterway.
SST and five other PRP's voluntarily have entered into an Administrative Order
of Consent with the EPA to fund a pre-remedial study of sediment contamination
and remediation alternatives. SST's share of the study, which is now expected to
be completed in 1998, is approximately $2 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
13
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
stormwater system has been installed and final paving was completed during
fiscal 1996. On an ongoing basis, the Company is required to monitor the
groundwater quarterly and maintain the paving.
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. Remediation of the site
has been performed and the Department of Ecology has begun the process of
certifying that clean-up of this site is complete. 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 has allegedly disposed of other materials.
In 1996, prior to the Company's acquisition of Proler, Proler recorded a
liability for the probable costs to remediate its wholly owned properties based
upon a consultant's estimates. The Company carried over the aggregate reserve to
its financial statements upon acquiring Proler and $9.6 million remained
outstanding on August 31, 1997. Also, Proler's joint ventures recorded
additional liabilities of $4.1 million for the probable costs to remediate their
properties based on the consultant's estimates.
Between 1982 and 1987, MRI Corporation (MRI), a wholly owned subsidiary of
Proler, operated a tin can shredding and detinning facility in Tampa, Florida.
In 1989 and 1992, the EPA conducted a preliminary site investigation of this
property and, in December 1996, added the site to the "National Priorities
List". MRI and Proler, along with several other parties, have been named as PRPs
for the site by the EPA. Additionally, Proler and/or this subsidiary have been
named or identified as PRPs at several other sites. Proler included the probable
costs associated with these sites in the aforementioned reserve.
As part of the Proler acquisition, the Company became a fifty-percent owner of
Hugo Neu-Proler Company (HNP). HNP has agreed, as part of its recent lease
renewal with the Port of Los Angeles, to be responsible for a multi-year, phased
remedial clean-up project involving certain environmental conditions on its
scrap processing facility at its Terminal Island site in Los Angeles, California
by the year 2001. Remediation will include limited excavation and treatment of
contaminated soils, paving, installation of a stormwater management system,
construction of a noise barrier and perimeter wall around the facility, and
groundwater monitoring. The probable costs to remediate this property are
included in the aforementioned reserve.
Additionally, other Proler joint venture sites with potential environmental
clean-up issues have been identified. The estimated potential clean-up costs
associated with these sites have also been included in the aforementioned
reserve.
After the shredding of automobile bodies and the separation of ferrous and
salable nonferrous metals, the remaining auto shredder residue ("fluff") must be
disposed. State and federal standards prescribe fluff sampling protocols which
require representative samples of fluff to be analyzed to determine if they are
likely to leach heavy metals, PCBs or other hazardous substances in excess of
acceptable levels. Fluff from the Company's scrap operations in Oakland and
Tacoma undergo an in-line chemical stabilization treatment before being sent to
a landfill. Fluff generated at all of the Company's facilities meets all
currently applicable contaminate leachate standards.
The fluff from the Company's sites is beneficially used as an alternative daily
landfill cover. 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 Oakland's 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 significant additional expense to the Company, although
there is no assurance that this will be the case.
14
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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 non-hazardous, solid waste. The
remaining volume of the Company's EAF dust 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 recycles EAF dust to produce commercial grade zinc and
lead.
The Company's steel mini-mill has applied for an operating permit under Title V
of the Clean Air Act Amendment (CAA) of 1990, which governs certain air quality
standards and expects such permit to be issued during fiscal 1998. The mini-mill
is currently authorized to produce approximately 600,000 tons of finished steel
per calendar year under its existing permit issued in 1992 under the State of
Oregon's Air Contaminant Discharge Permit program. The existing permit will be
replaced by the Title V federally enforceable operating permit, which is
expected to accommodate production of up to 850,000 tons per year.
As the mini-mill's production grows beyond current levels, the Company
anticipates that it will need to enhance its existing facilities to properly
control increased emissions in order to remain in compliance with the operating
permit. The Company is currently evaluating alternative methods for controlling
the growth in emissions. Any capital expenditures necessary to address this
issue will not have a material adverse effect on the Company.
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 or its subsidiaries to comply with environmental
requirements applicable to the Company, its subsidiaries and their 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 action 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.
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. Efforts are ongoing to be responsive to environmental
regulations.
The Company believes that it is in material compliance with currently applicable
environmental regulations as discussed above and does not anticipate any
substantial capital expenditures for new environmental control facilities during
fiscal 1998 or 1999.
Employees
As of August 31, 1997 the Company had 1,183 full-time employees, consisting of
544 employees at the Company's Scrap Operations, 565 employees at Steel
Operations, and 74 corporate administrative employees. Of these employees, 712
are covered by collective bargaining agreements with eleven unions. Steel
Operations' contract with the United Steelworkers of America covers 448 of these
employees and expires on February 1, 2000. The Company believes that its labor
relations generally are good.
15
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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.
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 by April 1999. 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, 1997.
16
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Office
- ---- --- ------
Leonard Schnitzer 72 Chairman of the Board and Chief Executive
Officer
Robert W. Philip 50 President
Kenneth M. Novack 51 Executive Vice President
Gary Schnitzer 55 Executive Vice President - California
Scrap Operations
Barry A. Rosen 52 Vice President - Finance and Treasurer
Kurt C. Zetzsche 58 President of Steel Operations
Edgar C. Shanks 49 Vice President - Taxation
James W. Cruckshank 42 Controller and Assistant Treasurer
Dori Schnitzer 43 Secretary
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 & 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 LLP
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 LLP.
17
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART I (CONTINUED)
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.
18
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Class A Common Stock is traded on the NASDAQ National Market
System under the symbol SCHN. The approximate number of shareholders of record
on September 30, 1997 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.
==============================================================================
Fiscal Year 1997
--------------------------------------------------
DIVIDENDS
HIGH SALES PRICE LOW SALES PRICE PER SHARE
- --------------------------------------------- ------------------ -------------
First Quarter $30.00 $24.25 $.05
- ------------------------------------------------------------------------------
Second Quarter 29.25 25.00 .05
- ------------------------------------------------------------------------------
Third Quarter 31.25 22.00 .05
- ------------------------------------------------------------------------------
Fourth Quarter 34.75 24.00 .05
==============================================================================
==============================================================================
Fiscal Year 1996
--------------------------------------------------
DIVIDENDS
HIGH SALES PRICE LOW SALES PRICE PER SHARE
- --------------------------------------------- ------------------ -------------
First Quarter $30.75 $26.00 $.05
- ------------------------------------------------------------------------------
Second Quarter 31.75 28.00 .05
- ------------------------------------------------------------------------------
Third Quarter 30.50 24.00 .05
- ------------------------------------------------------------------------------
Fourth Quarter 29.25 23.50 .05
==============================================================================
19
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended August 31,
1997 (1) 1996 1995 (2) 1994 1993
-------- -------- -------- -------- --------
(In millions, except per share, per ton and shipment data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $ 361.7 $ 339.3 $ 330.7 $ 261.7 $ 204.9
Cost of goods sold and other
operating expenses 314.8 290.8 284.5 234.3 188.1
Selling and administrative 21.2 18.9 16.2 13.2 13.3
Income from joint ventures 6.9 3.3 2.5 2.4 1.9
------- ------- ------- ------- -------
Income from operations 32.7 32.9 32.5 16.6 5.4
Interest expense (5.0) (3.8) (2.4) (1.0) (2.3)
Other income 4.5 1.7 3.9 0.9 0.6
------- ------- ------- ------- -------
Income before income taxes 32.2 30.8 34.0 16.5 3.7
Income tax provision (11.0) (10.0) (11.8) (5.8) (1.6)
------- ------- ------- ------- -------
Net income $ 21.2 $ 20.8 $ 22.2 $ 10.7 $ 2.1
======= ======= ======= ======= =======
Earnings per share $ 2.05 $ 2.24 $ 2.82 $ 1.47 $ 0.42
======= ======= ======= ======= =======
Dividends per common share $ 0.20 $ 0.20 $ 0.20 $ 0.15 $ --
======= ======= ======= ======= =======
OTHER DATA
Shipments (in thousands of tons)(3)
Ferrous scrap 1,518 1,479 1,254 991 953
Finished steel products 546 476 398 470 425
Average selling price per ton:
Ferrous scrap $ 138 $ 146 $ 154 $ 148 $ 126
Finished steel products 334 336 342 310 291
Depreciation and amortization $ 18.3 $ 14.0 $ 11.6 $ 9.3 $ 9.9
Capital expenditures 15.5 44.6 31.1 21.1 5.6
Year Ended August 31,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In millions)
BALANCE SHEET DATA:
Working capital $ 104.9 $ 92.4 $ 56.8 $ 48.2 $ 39.7
Total assets 428.0 337.5 280.3 164.1 148.8
Short-term debt 0.4 0.2 0.2 1.9 4.4
Long-term debt 92.9 44.5 64.7 2.8 44.5
Shareholders' equity 239.1 223.8 136.0 115.3 58.1
(1) Includes the results of operations of Proler from November 29, 1996 through
August 31, 1997. See Note 12 to the Consolidated Financial Statements.
(2) Includes the results of operations of MMI from March 17, 1995, the date of
acquisition, through August 31, 1995. See Note 13 to the Consolidated
Financial Statements.
(3) Tons for ferrous scrap are long tons (2,240 pounds) and for finished steel
products are short tons (2,000 pounds).
</TABLE>
20
<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 U.S. West
Coast. Increasing steel demand and prices have led to improved profitability
since fiscal 1993, although the Company experienced softening in its markets in
fiscal 1996 and 1997.
The Company's income from joint ventures for the year ended August 31, 1997 was
significantly higher than in prior years due to the acquisition of Proler,
effective November 29, 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 have had a significant
impact on the Company's scrap related revenue and income since then. 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 the Notes to Consolidated Financial Statements.
21
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
<TABLE>
<CAPTION>
Revenues
Year Ended August 31,
--------------------------------------------------------
(In millions)
1997 (1) 1996 1995 (2) 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Scrap Operations:
Ferrous $ 208.8 $ 215.9 $ 205.8 $ 146.4 $ 120.5
Nonferrous (3) 11.0 10.7 32.2 11.4 6.5
Other 16.6 6.8 6.1
------- ------- ------- ------- -------
4.0 2.7
Scrap Total 236.4 233.4 244.1 161.8 129.7
Sales to Steel Operations (4) (58.4) (54.1) (54.9) (54.7) (48.5)
------- ------- ------- ------- -------
Sales to Unaffiliated Customers 178.0 179.3 189.2 107.1 81.2
Steel Operations 183.7 160.0 141.5 154.6 123.7
------- ------- ------- ------- -------
Total $ 361.7 $ 339.3 $ 330.7 $ 261.7 $ 204.9
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Income from Operations
Year Ended August 31,
--------------------------------------------------------
(In millions)
1997 (1) 1996 1995 (2) 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Scrap Operations $ 27.4 $ 29.6 $ 26.3 $ 12.3 $ 6.5
Steel Operations 5.5 6.3 9.3 6.5 1.9
Joint Ventures 6.9 3.3 2.5 2.4 1.9
Corporate Expense and Eliminations (5) (7.2) (6.3) (5.6) (4.6) (4.9)
------- ------- ------- ------- -------
Income from Operations $ 32.6 $ 32.9 $ 32.5 $ 16.6 $ 5.4
======= ======= ======= ======= =======
(1) Includes the results of operations of Proler from November 29, 1996, the
date of acquisition, through August 31, 1997.
(2) Includes the results of operations of MMI from March 17, 1995, the date of
acquisition, through August 31, 1995.
(3) 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.
(4) Ferrous scrap sales from Scrap Operations to Steel Operations are made at a
negotiated market rate per ton.
(5) 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.
</TABLE>
22
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
Fiscal 1997 Compared to Fiscal 1996
Revenues for both scrap and steel increased, resulting in an overall increase in
the Company's revenues of $22.4 million to $361.7 million for fiscal 1997
compared with fiscal 1996. The Company achieved record shipments of both scrap
and finished steel products in fiscal 1997.
Scrap Operations generated revenues of $236.4 million, before intercompany
eliminations, during fiscal 1997 compared with $233.4 million in fiscal 1996,
representing an increase of $3.0 million (1%). Ferrous revenues declined,
however, despite a 39,000 ton (3%) increase in shipments, due to softer selling
prices for scrap. Sales to the Company's Steel Operations increased by 43,000
tons (10%) to 494,000 tons. Although the total number of scrap export shipments
were the same as last year, foreign scrap tonnage declined slightly, while
domestic third party sales tonnage remained relatively the same as last year.
Average ferrous scrap revenues per ton for the first three quarters of fiscal
1997 were lower than for the same period last year, resulting in a lower average
selling price for the year of $138 per ton compared with $146 for fiscal 1996.
The Company believes that, due to a temporary build-up in scrap inventories by
scrap processors and steel mills caused by a slackening in demand, the average
prices for ferrous scrap on the world market declined during this period. The
average selling price during the fourth quarter of fiscal 1997 was higher than
for the same period last year. Based on contracts signed to date, the Company
expects to see improvements in prices in the first quarter of fiscal 1998 over
prices realized during fiscal 1997. See "Forward Looking Statements". The
increase in other sales reflects the acquisition of Proler in November 1996.
Steel Operations' revenues increased $23.7 million (15%) to $183.7 million.
Higher volumes sold, offset by lower average selling prices, contributed to the
increase. The Company experienced increased tonnage sales in all product
categories, due in part to the addition of a new rolling mill in February 1996.
Average finished steel selling prices, excluding billets, declined from $336 to
$334 per ton, reflecting lower prices for all categories of the Company's
primary finished steel products. The expansion of steel-making capacity by the
Company's competitors and an influx of finished steel shipments from Mexico into
Southern California through the third quarter of fiscal 1997 were predominantly
responsible for a decline in average selling prices in the market on the U.S.
West Coast. The mix of products sold also changed during fiscal 1997, impacting
the average selling prices. With the addition of a new rod block on the
Company's newest rolling mill in February 1997, Steel Operations began producing
wire rod and coiled reinforcing bar (rebar) products. Sales of these products
during fiscal 1997 aggregated 20,400 tons. During fiscal 1997, the Company also
sold 5,600 tons of billets. No billets were sold in fiscal 1996.
Cost of Goods Sold. Overall, cost of goods sold increased $23.9 million (8%) to
$314.8 million and increased as a percentage of revenues from 86% in fiscal 1996
to 87% in fiscal 1997. Gross profit declined $1.5 million (3%) to $47.0 million.
Scrap Operations' cost of goods sold increased $4.0 (2%) million to $197.9
million due to increased tonnage sold. The average cost of goods sold per ton of
ferrous scrap declined as the Company managed purchase prices at the scale while
selling prices were declining. However, the average selling price of ferrous
scrap declined more quickly than the cost of goods sold per ton, resulting in an
overall decline in Scrap Operations' gross profit of $1.1 million, despite the
increase in tons sold.
Cost of goods sold for Steel Operations increased $24.4 million (16%) to $175.4
million due predominantly to higher tonnage sales. Cost of goods sold as a
percentage of revenues increased from 94% to 95% due to the decline in the
average selling price. The Company recognized higher depreciation expense in
fiscal 1997 compared with fiscal 1996, due to the addition of its new rod mill
in February 1996 and rod block in February 1997, increasing cost of goods sold
per ton. However, production efficiencies and, in some cases, lower production
costs positively impacted cost of goods sold. As a result, the average cost of
sales per ton of finished steel products remained
23
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
virtually unchanged. Steel Operations' gross profit declined $.7 million because
of the lower average selling prices, partially offset by the increase in
finished steel shipments.
Selling and Administrative Expenses. Selling and administrative expenses
increased $2.4 million (13%) in fiscal 1997 compared with fiscal 1996
predominantly as a result of increases to accommodate corporate growth and the
Proler acquisition.
Income from Joint Ventures. Income from joint ventures for fiscal 1997 increased
$3.6 million due to the Proler acquisition in November 1996. Aggregate income
for the Company's other joint ventures declined slightly as large projects which
were in process in fiscal 1996 were completed that year.
Interest Expense. Interest expense for fiscal 1997 increased by $1.2 million
(32%) because of additional debt incurred to finance the acquisition of Proler.
Average borrowings for fiscal 1997 were $96.1 million compared with $72.2
million for fiscal 1996. The average interest rate for fiscal 1997 was 5.7% and
for fiscal 1996 was 5.9%.
Other Income. Other income increased $2.9 million during the year ended August
31, 1997 compared with the prior fiscal year. During fiscal 1997, the Company
recognized a gain of approximately $3 million upon settlement of an interest
rate agreement. The Company initially entered into the agreement for the sole
purpose of locking in the interest rate on a planned private placement of debt,
which the Company subsequently decided against pursuing. The Company has not in
the past and does not intend in the future to enter speculative hedge
arrangements.
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. 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
24
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
$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.
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 1996 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 fourth quarter of fiscal 1996, 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.
Liquidity and Capital Resources
For the year ended August 31, 1997, cash generated by operations was $23.1
million compared with cash used by operations of $5.8 million for the same
period last year. The increase in cash generated this year is predominantly due
to the fact that inventories did not increase as significantly this year as they
did in fiscal 1996. In 1996, Scrap Operations' inventories rose due to the
timing of export shipments and Steel Operations experienced increases in
finished goods and supplies inventories related to the addition of a new rod and
bar mill.
Capital expenditures and expenditures for acquisitions totaled $57.9 million,
$44.6 million and $95.9 million for fiscal years 1997, 1996 and 1995,
respectively. Expenditures for fiscal 1997 included the acquisition of Proler
for $42.5 million and remaining payments for the new wire rod block completed in
February 1997. During fiscal 1996 and fiscal 1995, the Company incurred
significant capital outlays related to construction of a new rod and bar mill
which was placed into service in February 1996. Expenditures during fiscal 1995
also reflect the acquisition of MMI in March 1995 and final payments on an
in-line straightener for Steel Operations. The Company expects to spend
approximately $15 million on capital improvements during fiscal 1998.
25
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
As part of its acquisitions of Proler and MMI, the Company assumed environmental
liabilities aggregating $30.3 million as of August 31, 1997. The Company expects
to require significant future cash outlays as it incurs the actual costs
relating to the remediation of such environmental liabilities.
In June 1997, the Company completed a renegotiation of its unsecured revolving
credit agreement whereby it increased the facility to $200 million and extended
the maturity of the facility to June 2002. As of August 31, 1997, the Company
also had additional lines of credit available of $55 million, $35 million of
which was uncommitted. In the aggregate, the Company had borrowings outstanding
under these lines of $82.6 million. The increase in borrowings outstanding under
the lines since August 31, 1996 is predominantly due to the acquisition of
Proler in November 1996 offset by additional financing of approximately $7.7
million related to the Company's Steel Operations.
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 year.
In the longer term, the Company may seek to finance business expansion 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. 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. 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; and seasonality of results.
26
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
PART II (CONTINUED)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Schedule
Page
Report of Independent Accountants........................................28
Consolidated Balance Sheet - August 31, 1997 and 1996....................29
Consolidated Statement of Operations - Years ended
August 31, 1997, 1996, and 1995........................................30
Consolidated Statement of Shareholders' Equity - Years
ended August 31, 1997, 1996, and 1995..................................31
Consolidated Statement of Cash Flows - Years ended
August 31, 1997, 1996, and 1995........................................32
Notes to Consolidated Financial Statements...............................33
Report of Independent Accountants on Financial Statement Schedules.......55
Financial Statement Schedule - Years ended August 31, 1997,
1996, and 1995.........................................................56
Schedule II - Valuation and Qualifying Accounts and Reserves
All other schedules and exhibits are omitted, as the information is not
applicable or is not required.
27
<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 shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Schnitzer
Steel Industries, Inc. and its subsidiaries at August 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended August 31, 1997, 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.
PRICE WATERHOUSE LLP
Portland, Oregon
September 26, 1997
28
<PAGE>
<TABLE>
<CAPTION>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
August 31,
------------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 3,106 $ 1,896
Accounts receivable, less allowance for
doubtful accounts of $524 and $420 31,010 23,542
Accounts receivable from related parties 1,215 1,058
Inventories (Note 2) 95,154 90,746
Deferred income taxes (Note 6) 10,737 3,128
Prepaid expenses and other 3,168 4,118
-------------- --------------
TOTAL CURRENT ASSETS 144,390 124,488
-------------- --------------
NET PROPERTY, PLANT & EQUIPMENT (Note 3) 151,136 150,517
OTHER ASSETS:
Investment in joint venture partnerships (Note 11) 74,605 9,909
Advances to joint venture partnerships (Note 11) 7,145 4,163
Goodwill (Note 13) 42,230 43,445
Intangibles and other 8,480 4,967
-------------- --------------
$ 427,986 $ 337,489
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 4) $ 361 $ 254
Accounts payable 19,456 17,877
Accrued payroll liabilities 5,158 4,135
Deferred revenues 292 392
Current portion of environmental liabilities (Note 5) 5,787 2,202
Other accrued liabilities 8,438 6,360
-------------- --------------
TOTAL CURRENT LIABILITIES 39,492 31,220
-------------- --------------
DEFERRED INCOME TAXES (Note 6) 28,409 15,994
LONG-TERM DEBT LESS CURRENT PORTION 92,881 44,475
(Note 4)
ENVIRONMENTAL LIABILITIES,
NET OF CURRENT PORTION (Note 5) 24,530 20,736
OTHER LONG-TERM LIABILITIES (Note 8) 3,613 1,251
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Preferred stock--20,000 shares authorized, none issued
Class A common stock--75,000 shares $1 par value
authorized, 5,737 and 5,773 shares issued and outstanding 5,737 5,773
Class B common stock--25,000 shares $1 par value
authorized, 4,445 and 4,575 shares issued and outstanding 4,445 4,575
Additional paid-in capital 109,994 113,747
Retained earnings 118,885 99,718
-------------- --------------
239,061 223,813
-------------- --------------
$ 427,986 $ 337,489
============== ==============
The accompanying notes are an integral part of this statement
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
Year Ended August 31,
--------------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
REVENUES $ 361,753 $ 339,352 $ 330,711
------------------ ------------------ ------------------
COSTS AND EXPENSES:
Cost of goods sold and
other operating expenses 314,785 290,841 284,500
Selling and administrative 21,238 18,860 16,155
------------------ ------------------ ------------------
336,023 309,701 300,655
------------------ ------------------ ------------------
Income from joint ventures (Note 11) 6,876 3,291 2,511
------------------ ------------------ ------------------
INCOME FROM OPERATIONS 32,606 32,942 32,567
OTHER INCOME (EXPENSE):
Interest expense (5,026) (3,814) (2,441)
Gain on sale of assets 203 209 1,929
Other income (Note 4) 4,388 1,452 1,974
------------------ ------------------ ------------------
(435) (2,153) 1,462
------------------ ------------------ ------------------
INCOME BEFORE INCOME TAXES
32,171 30,789 34,029
------------------ ------------------ ------------------
Income tax provision (Note 6) (10,946) (10,006) (11,782)
------------------ ------------------ ------------------
NET INCOME $ 21,225 $ 20,783 $ 22,247
================== ================== ==================
EARNINGS PER SHARE $ 2.05 $ 2.24 $ 2.82
================== ================== ==================
The accompanying notes are an integral part of this statement
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
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 8/31/94 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 8/31/95 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 8/31/96 5,773 $ 5,773 4,575 $ 4,575 $ 113,747 $ 99,718 $ 223,813
Class B common stock converted
to Class A common stock 130 130 (130) (130)
Class A common stock repurchased (166) (166) (3,753) (3,919)
Net income 21,225 21,225
Dividends paid (2,058) (2,058)
--------- ---------- --------- --------- ---------- ----------- -----------
BALANCE AT 8/31/97 5,737 $ 5,737 4,445 $ 4,445 $ 109,994 $ 118,885 $ 239,061
========= ========== ========= ========= ========== =========== ===========
The accompanying notes are an integral part of this statement
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended August 31,
------------------------------------------------------------
1997 1996 1995
--------------- ---------------- ---------------
<S> <C> <C> <C>
OPERATIONS:
Net income $ 21,225 $ 20,783 $ 22,247
Noncash items included in income:
Depreciation and amortization 18,265 13,994 11,598
Deferred income taxes (2,211) 3,517 (1,308)
Equity in earnings of joint ventures
and other investments (6,876) (3,291) (2,511)
Gain on disposal of assets (180) (209) (1,929)
Cash provided (used) by assets and liabilities:
Accounts receivable (5,345) (6,564) 9,270
Inventories (2,267) (18,893) (13,008)
Prepaid expenses and other 2,414 (2,299) (121)
Accounts payable (3,929) (2,719) 3,951
Deferred revenue (100) (3,524) 3,898
Accrued expenses 4,507 (4,031) 931
Environmental liabilities (2,420)
Other assets and liabilities 51 (2,603) 667
----------- ----------- -----------
NET CASH PROVIDED (USED) BY OPERATIONS 23,134 (5,839) 33,685
----------- ----------- -----------
INVESTMENTS:
Payment for purchase of Proler (Note 12) (42,456)
Payment for purchase of MMI, net of
cash acquired (Note 13) (64,799)
Capital expenditures (15,486) (44,589) (31,158)
Advances to joint ventures (2,982) (324) (4,238)
Investments in joint ventures (78,392)
Distributions from joint ventures 96,658 2,370 750
Capitalization of losses on assets held for sale (1,689)
Proceeds from sale of assets 4,887 1,839 4,982
----------- ----------- -----------
NET CASH USED BY INVESTMENTS (39,460) (40,704) (94,463)
----------- ----------- -----------
FINANCING:
Proceeds from sale of Class A common stock 69,850
Repurchase of Class A common stock (3,919) (966)
Dividends declared and paid (2,058) (1,827) (1,578)
Increase in long-term debt 48,600 61,750
Reduction in long-term debt (25,087) (20,216) (2,181)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING 17,536 46,841 57,991
----------- ----------- -----------
NET INCREASE IN CASH 1,210 298 (2,787)
CASH AT BEGINNING OF PERIOD 1,896 1,598 4,385
----------- ----------- -----------
CASH AT END OF PERIOD $ 3,106 $ 1,896 $ 1,598
=========== =========== ===========
The accompanying notes are an integral part of this statement
</TABLE>
32
<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. Additionally, as a result of its acquisition of
Proler International Corp. effective November 29, 1996 (see Note 12), through
joint ventures, the Company participates in the management of additional scrap
collection and processing facilities in California, Massachusetts, Rhode Island,
New Jersey, New York, Arizona, New Hampshire and Maine.
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 seven joint ventures operating in the Western and Eastern United
States and a 33 1/3% interest in one joint venture in New Jersey, 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.
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, 1997 and 1996, accumulated amortization aggregated $3,670 and $2,456,
respectively. Goodwill is periodically reviewed by the Company for impairments
where the fair value may be less than the carrying value.
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 10,377,137 9,295,705 and 7,906,593, for fiscal years 1997,
1996 and 1995, respectively.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" (SFAS No. 128) which establishes standards for
computing and presenting earnings per share (EPS). SFAS No. 128 replaces the
presentation of primary and fully diluted EPS with a presentation of basic and
diluted EPS. Basic EPS is computed
33
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
by dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that would occur from any instrument which could result in
additional common shares being issued. SFAS No. 128 must be adopted for the
Company's fiscal 1998 and requires restatement of all prior-period EPS data
presented. The adoption will not materially affect the EPS reported during
fiscal 1997.
Interest and Income Taxes Paid
The Company paid $5,093, $5,016 and $2,719 in interest during fiscal years 1997,
1996 and 1995, respectively. For the same periods, the Company paid $7,283,
$10,703 and $12,431 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.
Note 2 - Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
August 31,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
Scrap metals $ 26,897 $ 21,006
Work in process 24,358 24,535
Finished goods 28,109 29,767
Supplies 15,790 15,438
-------- --------
$ 95,154 $ 90,746
======== ========
</TABLE>
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 $8,039 and
$8,215 at August 31, 1997 and 1996, respectively.
34
<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:
<TABLE>
<CAPTION>
August 31,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
Land and improvements $ 32,580 $ 31,235
Buildings and leasehold improvements 17,757 15,425
Machinery and equipment 212,380 195,367
Construction in progress 4,846 8,489
-------- --------
265,563 250,516
Less accumulated depreciation (114,427) (99,999)
-------- --------
$151,136 $150,517
======== ========
</TABLE>
Capitalized interest costs associated with construction were $292 and $1,112 in
fiscal years 1997 and 1996, respectively.
Note 4 - Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
August 31,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
Bank unsecured revolving credit facility,
$200,000 maximum $ 82,600 $ 41,500
Tax-exempt economic development revenue bonds
due January 2022, interest payable monthy
at variable rate (3.5% at August 31, 1997),
secured by a letter of credit 7,700
State of Oregon loan for energy conservation
equipment, secured by equipment, 7.89%
fixed-rate interest, principal and interest
installments ayable monthly through June 2011 2,188 2,273
Other 754 956
-------- --------
Total long-term debt 93,242 44,729
Less portion due within one year 361 254
-------- --------
Long-term debt less current portion $ 92,881 $ 44,475
======== ========
</TABLE>
35
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
At August 31, 1997, the Company had a $200,000 unsecured revolving credit
facility with its banks. Individual advances outstanding under the line bear
interest at floating rates. As of August 31, 1997, such rates averaged 5.8%.
Interest is payable upon maturity of each advance under the line. The facility
matures in June 2002, 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:
1998 $ 361
1999 180
2000 193
2001 207
2002 82,820
Thereafter 9,481
-------
$93,242
=======
In February 1997, the Company entered into an interest rate agreement for the
sole purpose of locking in the interest rate on a planned private placement of
debt. The Company subsequently decided against pursuing the private placement in
April 1997 and, thus, recognized the deferred gain on the agreement of
approximately $3 million. This amount is included in other income in the
accompanying statement of operations for the year ended August 31, 1997.
Note 5 - Environmental Liabilities:
In conjunction with the due diligence proceedings for the Company's acquisition
of Manufacturing Management, Inc. (MMI) in March 1995, 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 was included in MMI's statement
of operations prior to its acquisition by the Company. This reserve was carried
over to the Company's balance sheet and at August 31, 1997 aggregated $20.5
million.
Schnitzer Steel of Tacoma (SST), formerly General Metals of Tacoma, a subsidiary
of MMI, owns and operates a scrap facility located on the Hylebos Waterway, a
part of Commencement Bay, which is the subject of an ongoing environmental
investigation and remediation project by the U.S. Environmental Protection
Agency (EPA) under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA). SST and well over 60 other parties were named
potentially responsible parties (PRP) for the investigation and cleanup of
contaminated sediment along the Hylebos Waterway. SST and five other PRPs
voluntarily have entered into an Administrative Order of Consent with the EPA to
fund a pre-remedial study of sediment contamination and remediation
alternatives. SST's share of the study, which is now expected to be completed in
1998, is approximately $2 million. Any further potential liabilities, if any,
cannot be estimated at this time.
In 1996, prior to the Company's acquisition of Proler International Corp.
(Proler) (see Note 12), an independent third-party consultant was engaged to
estimate the costs to cure present and future environmental liabilities related
to Proler's wholly-owned and joint venture properties. Proler recorded a
liability of $8.6 million for the probable costs to remediate its wholly-owned
properties based upon the consultant's estimates, increasing its environmental
reserve to $9.8 million. The Company carried over the aggregate reserve to its
financial statements upon acquiring Proler and
36
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
$9.6 million remained outstanding on August 31, 1997. Also, Proler's joint
venture operations recorded additional liabilities of $4.1 million for the
probable costs to remediate their properties, based upon the consultant's
estimates, in 1996 prior to the Company's acquisition of Proler.
Between 1982 and 1987, MRI Corporation (MRI), a wholly-owned subsidiary of
Proler, operated a tin can shredding and detinning facility in Tampa, Florida.
In 1989 and 1992, the EPA conducted a preliminary site investigation of this
property and, in December 1996, added the site to the "National Priorities
List". MRI and Proler, along with several other parties have been named as PRPs
for the site by the EPA. Additionally, Proler and this subsidiary have been
named or identified as PRP's at several other sites. Proler included the
probable costs associated with this site in the aforementioned reserve.
As part of the Proler acquisition, the Company became a fifty-percent owner of
Hugo Neu-Proler Company (HNP). HNP has agreed, as part of its recent lease
renewal with the Port of Los Angeles, to be responsible for a multi-year, phased
remedial clean-up project involving certain environmental conditions on its
scrap processing facility at its Terminal Island site in Los Angeles, California
by the year 2001. Remediation will include limited excavation and treatment of
contaminated soils, paving, installation of a stormwater management system,
construction of a noise barrier and perimeter wall around the facility, and
groundwater monitoring. The probable costs to remediate this property are
included in the aforementioned reserve.
Note 6 - Income Taxes:
The provision for (benefit from) income taxes is as follows:
<TABLE>
<CAPTION>
August 31,
---------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 5,361 $ 7,235 $12,360
State 786 721 1,600
Deferred:
Federal 4,199 1,678 (2,011)
State 600 372 (167)
------- ------- -------
$10,946 $10,006 $11,782
======= ======= =======
</TABLE>
37
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
August 31,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
Segment held for sale $ 3,707 $
Inventory valuation methods 3,380 1,035
Employee benefit accruals 3,137 1,607
State income tax and other 513 486
-------- --------
Net current deferred tax assets $ 10,737 $ 3,128
======== ========
Accelerated depreciation
and basis differences $ 40,798 $ 26,957
Environmental liabilities (11,891) (8,638)
Net operating loss carry forwards (10,992)
Other (498) (325)
-------- --------
17,417 15,994
Deferred tax asset valuation allowance 10,992
-------- --------
Net non-current deferred tax liabilities $ 28,409 $ 15,994
======== ========
</TABLE>
The reasons for the difference between the effective income tax rate and the
statutory federal income tax rate are as follows:
<TABLE>
<CAPTION>
August 31,
---------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Federal statutory rate 35% 35% 35%
Foreign sales corporation (5) (5) (4)
State taxes and credits 3 2 3
Other 1 1 1
-- -- --
34% 33% 35%
== == ==
</TABLE>
38
<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 $9,296,
$7,943 and $3,309 for 1997, 1996 and 1995, 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
$13,856, $8,513 and $7,704 in 1997, 1996 and 1995, 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:
<TABLE>
<CAPTION>
Lease Current
Location: Expiration Annual Rent
--------- ---------- -----------
<S> <C> <C>
Scrap Operations:
Portland facility and marine terminal 2063 $1,056
Sacramento facility 2003 80
Administrative offices 2006 246
</TABLE>
<TABLE>
<CAPTION>
Minimum Sublease Net Minimum
Rents Income Rents
------- -------- -----------
<S> <C> <C> <C>
1998 $ 1,382 $ (38) $1,344
1999 1,294 (38) 1,256
2000 1,294 (38) 1,256
2001 1,294 (38) 1,256
2002 1,265 1,265
Thereafter 64,915
</TABLE>
The rent expense was $1,351, $1,274 and $1,315 for 1997, 1996 and 1995,
respectively.
The rents for Scrap Operations will be adjusted in 1999 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 then market rates.
39
<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 $1,046, $816 and
$872 in 1997, 1996, and 1995, 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.
For the year ended August 31, 1997, charges incurred for these sub-charters
aggregated $871 offset by income of $747. Charges incurred for these
sub-charters totaled $3,135 in fiscal 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. There
was no sub-charter activity in fiscal 1995.
In February 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. No payments to ECC were made
in fiscal 1997.
Note 8 - Employee Benefits:
In accordance with union agreements, the Company contributed to union pension
plans $2,164, $1,782 and $1,444, in 1997, 1996, and 1995, 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 totaled $1,028, $1,268 and $935 for
1997, 1996, and 1995, respectively.
40
<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:
<TABLE>
<CAPTION>
August 31,
----------------------------
1997 1996
---------- ----------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested $ 2,945 $ 2,669
Non-vested 463 333
---------- ----------
Accumulated benefit obligation 3,408 3,002
Effect of projected future compensation levels 678 544
---------- ----------
Projected benefit obligation 4,086 3,546
Plan assets at fair value, primarily
marketable securities 4,162 3,408
---------- ----------
Plan assets greater (less) than projected benefit obligation 76 (138)
Unrecognized prior service costs 71 75
Unrecognized net (gain) loss (395) 369
---------- ----------
Net pension (liability) asset $ (248) $ 306
========== ==========
</TABLE>
Components of the defined benefit net pension cost are as follows:
<TABLE>
<CAPTION>
August 31,
--------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service costs for benefits earned during the year $ 529 $ 367 $ 280
Interest cost on projected benefit obligation 257 219 186
Actual return on plan assets (299) (248) (192)
Net amortization and deferral 4 4 2
------ ------ ------
Net pension cost $ 491 $ 342 $ 276
====== ====== ======
</TABLE>
Assumptions used each year in determining the defined benefit net pension cost
are:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Weighted average discount rate 7.5% 7.5% 8.0%
Rate of increase in future compensation levels 4.5 4.5 4.5
Expected long-term rate of return on assets 9.0 9.0 8.0
</TABLE>
41
<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:
<TABLE>
<CAPTION>
August 31,
--------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Restricted trust fund $ 684 $ 459 $ 234
Deferred compensation expense 490 545 741
Long-term pension liability 1,343 1,249 1,308
Pension cost 149 136 149
</TABLE>
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 1,200,000 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.
The Company records stock-based compensation under the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related Interpretations. An alternative method of accounting exists
under Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 123) which requires the use of option
valuation models; however, these models were not developed for use in valuing
employee stock compensation awards. Under APB 25, because the exercise price of
the Company's employee stock options equaled the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information for fiscal years 1997 and 1996 regarding net income and
earnings per share is required by SFAS No. 123 and has been determined as if the
Company had accounted for its employee stock options under the fair value method
of that Statement. The fair value for these awards was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for both fiscal years 1997 and 1996: risk-free
interest rate of 6.6%, dividend yield of 1% and a weighted-average expected life
of the options of 7.5 years. The weighted-average volatility factors of the
expected market price of the Company's common stock were .43 and .46 for fiscal
years 1997 and 1996, respectively.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods. The effects on
results of operations and earnings per share is not expected to be indicative of
the effects on results of operations or earnings per share in future years. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------
1997 1996
------- -------
<S> <C> <C>
Pro forma net income $20,945 $20,736
Pro forma earnings per share 2.02 2.23
</TABLE>
42
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
A summary of the Company's stock option activity and related information for the
years ended August 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- -------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year 294,515 $21.10 180,627 $19.11 99,167 $18.37
Options granted 136,713 $25.00 113,888 $24.25 81,460 $20.00
Options canceled (1,500) $24.25
------- ------- -------
Outstanding - end of year 429,728 $22.33 294,515 $21.10 180,627 $19.11
======= ======= =======
Exercisable at end of year 114,561 55,955 19,832
======= ======= =======
Weighted-average fair value of
options granted during year $ 14.11 $ 14.37
======= =======
</TABLE>
Exercise prices for options outstanding as of August 31, 1997 ranged from $18 to
$25. The weighted-average remaining contractual life of those options is 8.4
years.
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.
The Scrap Operations segment sells to foreign customers, primarily in Asia,
resulting in export sales of $117,861, $137,701 and $140,046 in 1997, 1996 and
1995, respectively. In 1996, sales to one customer accounted for 12% of
consolidated revenues.
43
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 10 - Segment Information (continued):
<TABLE>
<CAPTION>
August 31,
----------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
Scrap operations $236,392 $233,484 $244,129
Steel operations 183,740 160,019 141,469
Intersegment sales (58,379) (54,151) (54,887)
-------- -------- --------
$361,753 $339,352 $330,711
======== ======== ========
Income from operations:
Scrap operations $ 27,399 $ 29,587 $ 26,282
Steel operations 5,493 6,303 9,252
Income from joint ventures 6,876 3,291 2,511
Corporate (7,162) (6,239) (5,478)
-------- -------- --------
$ 32,606 $ 32,942 $ 32,567
======== ======== ========
Total assets:
Scrap operations $208,266 $133,324 $122,545
Steel operations 194,649 191,823 147,059
Corporate 25,071 12,342 10,701
-------- -------- --------
$427,986 $337,489 $280,305
======== ======== ========
Depreciation and amortization expense:
Scrap operations $ 7,573 $ 6,891 $ 5,036
Steel operations 10,464 6,907 6,401
Corporate 228 196 161
-------- -------- --------
$ 18,265 $ 13,994 $ 11,598
======== ======== ========
Capital expenditures:
Scrap operations $ 6,295 $ 7,695 $ 5,375
Steel operations 8,834 36,323 25,638
Corporate 357 571 145
-------- ------------ ------------
$ 15,486 $ 44,589 $ 31,158
======== ========= =========
</TABLE>
44
<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:
A summary of combined operations of joint ventures in which the Company is a
partner is as follows:
<TABLE>
<CAPTION>
August 31,
--------------------------------
1997 1996
--------- --------
<S> <C> <C>
Current assets $ 78,711 $ 9,526
Noncurrent assets 66,482 24,527
--------- --------
$ 145,193 $ 34,053
========= ========
Current liabilities $ 39,231 $ 5,613
Noncurrent liabilities 6,146 7,874
Minority interest 1,509 1,762
Partners' equity 98,307 18,804
--------- --------
$ 145,193 $ 34,053
========= ========
</TABLE>
<TABLE>
<CAPTION>
August 31,
----------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues $352,515 $ 43,883 $ 57,377
======== ======== ========
Income from operations $ 14,399 $ 7,691 $ 5,910
======== ======== ========
Net income before taxes $ 14,156 $ 6,636 $ 5,019
======== ======== ========
</TABLE>
The Company performs some administrative services and provides operation and
maintenance of management information systems to some of these joint ventures.
These administrative charges totaled $214, $184 and $185 in 1997, 1996, and
1995, 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 $580, $309 and $385 from these advances in 1997, 1996 and 1995,
respectively.
45
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 12 - Acquisition of Proler International Corp.:
On November 29, 1996, PIC Acquisition Corp. (PIC), a wholly owned subsidiary of
the Company, acquired 4,079,000 shares of common stock of Proler International
Corp. (Proler), representing approximately 86% of the outstanding shares of
Proler, for $9 cash per share pursuant to a tender offer for all of the
outstanding shares of common stock of Proler. Subsequent to November 30, 1996,
PIC purchased an additional 342,600 shares, thereby increasing its ownership to
approximately 94% of the outstanding Proler shares. On December 6, 1996, the
Company completed the merger of PIC with Proler and, as a result, Proler became
a wholly-owned subsidiary of the Company. As a result of the merger, all
remaining outstanding shares of Proler common stock were converted into the
right to receive the same $9 per share in cash paid in the tender offer. The
Company borrowed funds to pay for the Proler shares under its existing credit
facilities.
The Company has accounted for this acquisition using the purchase method.
Accordingly, the purchase price has been allocated to the assets acquired and
the liabilities assumed based on their fair values as of the effective date of
the acquisition.
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and Proler as though the acquisition had
occurred at the beginning of the periods shown.
<TABLE>
<CAPTION>
For the Year Ended
August 31,
-------------------------------
1997 1996
--------- ---------
(in thousands)
<S> <C> <C>
Revenues $ 364,899 $ 353,096
========= =========
Net income $ 14,606 $ 11,650
========= =========
Earnings per share $ 1.41 $ 1.25
========= =========
</TABLE>
During the year ended August 31, 1997, Proler recorded a provision for
environmental liabilities of $8.6 million.
These pro forma results have been prepared for comparative purposes only and
include certain adjustments to give effect for the acquisition, together with
related income tax effects. They do not purport to be indicative of the results
of operations which actually would have resulted had the combination been in
effect at the beginning of the periods presented or of future results of
operations of the consolidated entities.
In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired $100,685
Cash paid for the stock 42,456
--------
Liabilities assumed $ 58,229
========
46
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 13 - 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.
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 include 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.
For the Year
Ended August 31, 1995
---------------------
Revenues $392,031
========
Net income $ 22,601
========
Earnings per share $ 2.86
========
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
========
47
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 14 - Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
Fiscal Year 1997
--------------------------------------------------------------
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 82,700 $ 76,599 $ 89,297 $113,157
Income from operations 4,553 2,767 10,899 14,387
Net income 2,781 1,378 8,424 8,642
Income per common share .27 .13 .81 .84
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1996
--------------------------------------------------------------
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
48
<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 1998 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 1998 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 1998 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 1998 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 1998 Annual Meeting of Shareholders and
is incorporated herein by reference.
49
<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 Consolidated Financial Statements and Schedule on page 27 of
this Report.
2. The following financial statement schedule is filed as part of
this report:
See Index to Consolidated Financial Statements and Schedule on page 27 of
this Report.
Schedules other than those listed on the Index to Consolidated Financial
Statements and Schedule 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 Buy-Sell Agreement
dated July 15, 1991. Incorporated by reference to Exhibit
9.2 to the Form S-1.
9.3 Second Amendment to Voting Trust and Buy -Sell Agreement
dated November 30, 1996.
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.
50
<PAGE>
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.
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 Fourth Amendment of Lease dated March 31, 1997 between
Schnitzer Investment Corp. and the Registrant, relating to
the Corporate Headquarters.
10.7 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.
10.8 Amendment of lease dated March 31, 1997 between Schnitzer
Investment Corp. and the Registrant relating to the
Corporate Headquarters.
10.9 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.
10.10 Lease Agreement dated February 18, 1997 between Schnitzer
Investment Corp and the Registrant relating to the
Corporate Headquarters.
10.11 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.
10.12 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.
10.13 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.
10.14 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.
10.15 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.
10.16 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.
51
<PAGE>
10.17 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.
10.18 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.
10.19 Addendum No. 3 to M/V Jade Pacific Uniform time Charter
Agreement dated August 28, 1996 between the Registrant and
Trans-Pacific Shipping Co. Filed as Exhibit 10.16 to
Registrant's Form 10-K for the fiscal year ended August
31, 1996, and incorporated by reference.
10.20 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.
10.21 Addendum No. 3 to M/V Jade Orient Uniform Time Charter
Agreement dated August 28, 1996 between the Registrant and
Trans-Pacific Shipping Co. Filed as Exhibit 10.18 to
Registrant's Form 10-K for the fiscal year ended August
31, 1996, and incorporated by reference.
*10.22 1993 Stock Incentive Plan of the Registrant.
*10.23 Supplemental Executive Retirement Bonus Plan of the
Registrant. Incorporated by reference to Exhibit 10.8 to
the Form S-1.
*10.24 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.
*10.25 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
* 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, 1997.
52
<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 18, 1997 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 18, 1997 in the capacities indicated.
Signature Title
- --------- -----
Principal Executive Officer:
*LEONARD SCHNITZER Chairman of the Board,
- ---------------------------------- Chief Executive Officer and Director
Leonard Schnitzer
Principal Financial Officer:
/s/ BARRY A. ROSEN Vice President --
- ---------------------------------- Finance and Treasurer
Barry A. Rosen
Principal Accounting Officer:
*JAMES W. CRUCKSHANK Controller and Assistant
- ---------------------------------- Treasurer
James W. Cruckshank
53
<PAGE>
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
54
<PAGE>
Report of Independent Accountants
on Financial Statement Schedule
To the Board of Directors
of Schnitzer Steel Industries, Inc.
Our audits of the consolidated financial statements referred to in our report
dated September 26, 1997, appearing on page 28 of the 1997 Annual Report to
Shareholders of Schnitzer Steel Industries, Inc. (which report and consolidated
financial statements are located 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.
PRICE WATERHOUSE LLP
Portland, Oregon
September 26, 1997
55
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED AUGUST 31, 1997, 1996, AND 1995
(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
- -------------------------------------- ---------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Year Ended August 31, 1997
Allowance for doubtful accounts $ 420 $ 63 $ 68(1) $ (27) $ $ 524
Lower-of-cost-or-market
inventory reserve 2 (2)
Year Ended August 31, 1996
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(2) 797
Lower-of-cost-or-market
inventory reserve 62 (60) 2
(1) Represents the allowance for doubtful accounts associated with Proler
International Corp., which the Company purchased in November 1996.
(2) Represents the allowance for doubtful accounts associated with
Manufacturing Management, Inc. which the Company purchased in March 1995.
</TABLE>
56
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
INDEX TO 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 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 Buy-Sell Agreement dated July 15,
1991. Incorporated by reference to Exhibit 9.2 to the Form S-1.
9.3 Second Amendment to Voting Trust and Buy-Sell Agreement dated November
30, 1996.
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.
57
<PAGE>
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 Fourth Amendment of Lease dated March 31, 1997 between Schnitzer
Investment Corp. and the Registrant, relating to the Corporate
Headquarters.
10.7 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.
10.8 Amendment of lease dated March 31, 1997 between Schnitzer Investment
Corp. and the Registrant relating to the Corporate Headquarters.
10.9 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.
10.10 Lease Agreement dated February 18, 1997 between Schnitzer Investment
Corp. and the Registrant relating to the Corporate Headquarters
10.11 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.
10.12 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.
10.13 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.
10.14 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.
10.15 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.
58
<PAGE>
10.16 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.
10.17 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.
10.18 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.
10.19 Addendum No. 3 to M/V Jade Pacific Uniform time Charter Agreement
dated August 28, 1996 between the Registrant and Trans-Pacific
Shipping Co. Filed as Exhibit 10.16 to Registrant's Form 10-K for the
fiscal year ended August 31, 1996, and incorporated herein by
reference.
10.20 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.
10.21 Addendum No. 3 to M/V Jade Orient Uniform Time Charter Agreement dated
August 28, 1996 between the Registrant and Trans-Pacific Shipping Co.
Filed as Exhibit 10.18 to Registrant's Form 10-K for the fiscal year
ended August 31, 1996, and incorporated herein by reference.
*10.22 1993 Stock Incentive Plan of the Registrant.
*10.23 Supplemental Executive Retirement Bonus Plan of the Registrant.
Incorporated by reference to Exhibit 10.8 to the Form S-1.
*10.24 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.
*10.25 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
59
SCHNITZER STEEL INDUSTRIES, INC.
SECOND AMENDMENT TO VOTING TRUST AND BUY-SELL AGREEMENT
-------------------------------------------------------
THIS SECOND AMENDMENT is entered into effective November 30, 1996,
among Schnitzer Steel Industries, Inc., an Oregon corporation (the "Company"),
the undersigned beneficial owners of Class B Common Stock of the Company (the
"Shareholders") and CAROL S. LEWIS, DORI SCHNITZER, GARY SCHNITZER AND RITA S.
PHILIP (the "Trustees").
1. The Agreement is amended to include the following new provision:
2.3 Conversion of Shares for Purposes of Charitable Donations. A
Shareholder may convert any number of shares of that Shareholder's Class B
Common Stock into Class A Common Stock, without complying with the
provisions of Sections 2.2.2 or 2.2.3 of this Agreement; provided, the
Class A Common Stock received in the conversion is immediately thereafter
transferred to any organization which is exempt from taxation under
Internal Revenue Code ss.501(c)(3); provided further, that no such
conversion will be permitted if, following the conversion, the remaining
number of shares of Class B Common Stock would be less than twenty-five
percent of the sum of the number of outstanding shares of Class B Common
Stock and Class A Common Stock.
2. Except as specifically amended by this Second Amendment, the Agreement
shall remain unmodified and in full force and effect.
3. This Second Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Second Amendment as of
the date written above.
THE COMPANY
SCHNITZER STEEL INDUSTRIES, INC.
/s/ R.W. PHILIP
--------------------------------
By: Robert W. Philip
Its: President
THE TRUSTEES
MANUEL SCHNITZER FAMILY GROUP
/s/ CAROL S. LEWIS
--------------------------------
Carol S. Lewis
MORRIS SCHNITZER FAMILY GROUP
/s/ DORI SCHNITZER
--------------------------------
Dori Schnitzer
GILBERT SCHNITZER FAMILY GROUP
/s/ GARY SCHNITZER
--------------------------------
Gary Schnitzer
LEONARD SCHNITZER FAMILY GROUP
/s/ RITA S. PHILIP
--------------------------------
Rita S. Philip
2
<PAGE>
THE SHAREHOLDERS
SCHNITZER STEEL INDUSTRIES, INC.
SECOND AMENDMENT TO VOTING TRUST AND BUY-SELL AGREEMENT
-------------------------------------------------------
MANUEL SCHNITZER FAMILY GROUP--SHAREHOLDER SIGNATURE PAGE
Manuel Schnitzer and
Edith Schnitzer, Trustees
U/A/D February 8, 1989,
with Manuel Schnitzer
/s/ EDITH SCHNITZER /s/ MANUEL SCHNITZER
- ---------------------------------- ----------------------------------
Edith Schnitzer, as Trustee Manuel Schnitzer, as Trustee
Edith Schnitzer and
Manuel Schnitzer, Trustees
U/A/D February 8, 1989,
with Edith Schnitzer
/s/ EDITH SCHNITZER /s/ MANUEL SCHNITZER
- ---------------------------------- ----------------------------------
Edith Schnitzer, as Trustee Manuel Schnitzer, as Trustee
Manuel Schnitzer and
Edith Schnitzer, Trustees
U/A/D February 8, 1989,
with Manuel Schnitzer; and
Edith Schnitzer and Manuel
Schnitzer, Trustees U/A/D
February 8, 1989, with Edith
Schnitzer, each trust as a
tenant in common
/s/ EDITH SCHNITZER /s/ MANUEL SCHNITZER
- ---------------------------------- ----------------------------------
Edith Schnitzer, as Trustee Manuel Schnitzer, as Trustee
/s/ CAROL S. LEWIS
- ----------------------------------
Carol S. Lewis
FIRST INTERSTATE BANK OF
OREGON, N.A. (formerly First
National Bank of Oregon) and
CAROL LEWIS, Trustees for
Carol Lewis, et al, under Trust FIRST INTERSTATE BANK OF
Agreement dated January 30, 1970 OREGON, N.A., as Trustee
NKA Wells Fargo Bank, N.A.
/s/ CAROL S. LEWIS /s/ MARCIA L. JORY, VP
- ---------------------------------- ----------------------------------
Carol S. Lewis, as Trustee By: Marcia L. Jory
Title: Vice President & Area Manager
3
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SECOND AMENDMENT TO VOTING TRUST AND BUY-SELL AGREEMENT
-------------------------------------------------------
MANUEL SCHNITZER FAMILY GROUP--SHAREHOLDER SIGNATURE PAGE
/s/ SCOTT LEWIS
- ----------------------------------
Scott Lewis
/s/ SCOTT LEWIS
- ----------------------------------
Scott Lewis, as Custodian
under the Oregon Uniform
Transfers to Minors Act,
F/B/O Zachary Lewis
/s/ LARRY LEWIS
- ----------------------------------
Larry Lewis
/s/ KATHLEEN LEWIS
- ----------------------------------
Kathleen Lewis
/s/ MARILYN S. EASLY
- ----------------------------------
Marilyn S. Easly
FIRST INTERSTATE BANK OF
OREGON, N.A. (formerly First
National Bank of Oregon) and
MARILYN EASLY, Trustees for
Marilyn Easly, et al, under Trust FIRST INTERSTATE BANK OF
Agreement dated January 30, 1970 OREGON, N.A., as Trustee
NKA Wells Fargo Bank, N.A.
/s/ MARILYN EASLY /s/ MARCIA L. JORY, VP
- ---------------------------------- ----------------------------------
Marilyn Easly, as Trustee By: Marcia L. Jory
Title: Vice President & Area Manager
/s/ DAVID S. EASLY
- ----------------------------------
David S. Easly
/s/ DANIELLE C. EASLY
- ----------------------------------
Danielle C. Easly
/s/ SEAN M. EASLY
- ----------------------------------
Sean M. Easly
4
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SECOND AMENDMENT TO VOTING TRUST AND BUY-SELL AGREEMENT
-------------------------------------------------------
MORRIS SCHNITZER FAMILY GROUP--SHAREHOLDER SIGNATURE PAGE
Mildred Schnitzer and
Dori Schnitzer, Trustees,
Trust A U/W/O Morris Schnitzer,
dated March 12, 1980, F/B/O
Mildred Schnitzer
/s/ MILDRED SCHNITZER /s/ DORI SCHNITZER
- ---------------------------------- ----------------------------------
Mildred Schnitzer, as Trustee Dori Schnitzer, as Trustee
Mildred Schnitzer and
Dori Schnitzer, Trustees
U/A/D April 17, 1989,
with Mildred Schnitzer
/s/ MILDRED SCHNITZER /s/ DORI SCHNITZER
- ---------------------------------- ----------------------------------
Mildred Schnitzer, as Trustee Dori Schnitzer, as Trustee
Jean S. Reynolds and Dori Schnitzer,
Trustees U/A with Jean S. Reynolds
dated November 30, 1992
/s/ JEAN S. REYNOLDS /s/ DORI SCHNITZER
- ---------------------------------- ----------------------------------
Jean S. Reynolds, as Trustee Dori Schnitzer, as Trustee
FIRST INTERSTATE BANK OF
OREGON, N.A. (formerly First
National Bank of Oregon) and
JEAN S. REYNOLDS, Trustees
for Jean S. Reynolds, et al,
under Trust Agreement dated FIRST INTERSTATE BANK OF
January 30, 1970 OREGON, N.A., as Trustee
NKA Wells Fargo Bank, N.A.
/s/ JEAN S. REYNOLDS /s/ MARCIA L. JORY, VP
- ---------------------------------- ----------------------------------
Jean S. Reynolds, as Trustee By: Marcia L. Jory, VP
Its: Vice President & Area Manager
/s/ SAMANTHA DAVIS
- ----------------------------------
Samantha Paige Davis
5
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SECOND AMENDMENT TO VOTING TRUST AND BUY-SELL AGREEMENT
-------------------------------------------------------
MORRIS SCHNITZER FAMILY GROUP--SHAREHOLDER SIGNATURE PAGE
Mildred Schnitzer and
Jean S. Reynolds, Trustees,
Trust B U/W/O Morris Schnitzer,
dated March 12, 1980, F/B/O
Samantha Paige Davis
/s/ JEAN S. REYNOLDS /s/ MILDRED SCHNITZER
- ---------------------------------- ----------------------------------
Jean S. Reynolds, as Trustee Mildred Schnitzer, as Trustee
/s/ JEAN S. REYNOLDS
- ----------------------------------
Jean S. Reynolds, as Custodian
under the California Uniform
Transfers to Minors Act, F/B/O
Alan Scott Davis
Mildred Schnitzer and Jean S.
Reynolds, Trustees, Trust B
U/W/O Morris Schnitzer,
dated March 12, 1980,
F/B/O Alan Scott Davis
/s/ JEAN S. REYNOLDS /s/ MILDRED SCHNITZER
- ---------------------------------- ----------------------------------
Jean S. Reynolds, as Trustee Mildred Schnitzer, as Trustee
/s/ N. DICKSON DAVIS
- ----------------------------------
N. Dickson Davis
/s/ DORI SCHNITZER
- ----------------------------------
Dori Schnitzer
FIRST INTERSTATE BANK OF
OREGON, N.A. (formerly First
National Bank of Oregon) and
DORI SCHNITZER, Trustees,
for Dori Schnitzer, et al,
under Trust Agreement dated FIRST INTERSTATE BANK OF
January 30, 1970 OREGON, N.A.
NKA Wells Fargo Bank, N.A.
/s/ DORI SCHNITZER /s/ MARCIA L. JORY, VP
- ---------------------------------- ----------------------------------
Dori Schnitzer, as Trustee By: Marcia L. Jory
Title: Vice President &
Area Manager
6
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SECOND AMENDMENT TO VOTING TRUST AND BUY-SELL AGREEMENT
-------------------------------------------------------
MORRIS SCHNITZER FAMILY GROUP--SHAREHOLDER SIGNATURE PAGE
Dane M. Brown Irrevocable Trust,
Susan Schnitzer, Trustee
U/A/D 4/10/95
/s/ SUSAN SCHNITZER
- ----------------------------------
Susan Schnitzer, as Trustee
/s/ SUSAN SCHNITZER
- ----------------------------------
Susan Schnitzer
FIRST INTERSTATE BANK OF
OREGON, N.A. (formerly First
National Bank of Oregon) and
SUSAN DEE SCHNITZER, Trustees
for Susan Dee Schnitzer, et al,
under Trust Agreement dated FIRST INTERSTATE BANK OF
January 30, 1970 OREGON, N.A.
NKA Wells Fargo Bank, N.A.
/s/ SUSAN SCHNITZER /s/ MARCIA L. JORY, VP
- ---------------------------------- ----------------------------------
Susan Schnitzer, as Trustee By: Marcia L. Jory
Title: Vice President & Area Manager
/s/ SUSAN SCHNITZER
- ----------------------------------
Susan Schnitzer, as Custodian
under the Oregon Uniform Transfers
to Minors Act, F/B/O
Matthew S. Goodman
/s/ SUSAN SCHNITZER
- ----------------------------------
Susan Schnitzer, as Custodian
under the Oregon Uniform Transfers
to Minors Act, F/B/O
Whitney M. Goodman
7
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SECOND AMENDMENT TO VOTING TRUST AND BUY-SELL AGREEMENT
-------------------------------------------------------
MORRIS SCHNITZER FAMILY GROUP--SHAREHOLDER SIGNATURE PAGE
/s/ SUSAN SCHNITZER
- ----------------------------------
Susan Schnitzer, as Custodian
under the Oregon Uniform Transfers
to Minors Act, F/B/O
Stephen S. Goodman
/s/ DORI SCHNITZER
- ----------------------------------
Dori Schnitzer, Trustee of
Schnitzer Trust 2-3-2 dated
December 27, 1991, F/B/O
Matthew S. Goodman
/s/ DORI SCHNITZER
- ----------------------------------
Dori Schnitzer, Trustee of
Schnitzer Trust 2-3-3 dated
December 27, 1991, F/B/O
Whitney M. Goodman
/s/ DORI SCHNITZER
- ----------------------------------
Dori Schnitzer, Trustee of
Schnitzer Trust 2-3-4 dated
December 27, 1991, F/B/O
Stephen S. Goodman
8
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SECOND AMENDMENT TO VOTING TRUST AND BUY-SELL AGREEMENT
-------------------------------------------------------
GILBERT SCHNITZER FAMILY GROUP--SHAREHOLDER SIGNATURE PAGE
Gilbert Schnitzer and
Thelma S. Schnitzer, Trustees
U/A/D February 7, 1989, with
Gilbert Schnitzer
/s/ GILBERT SCHNITZER /s/ THELMA S. SCHNITZER
- ---------------------------------- ----------------------------------
Gilbert Schnitzer, as Trustee Thelma S. Schnitzer, as Trustee
Thelma S. Schnitzer and
Gilbert Schnitzer, Trustees
U/A/D February 7, 1989, with
Thelma S. Schnitzer
/s/ GILBERT SCHNITZER /s/ THELMA S. SCHNITZER
- ---------------------------------- ----------------------------------
Gilbert Schnitzer, as Trustee Thelma S. Schnitzer, as Trustee
/s/ GARY SCHNITZER
- ----------------------------------
Gary Schnitzer
FIRST INTERSTATE BANK OF
OREGON, N.A. and GARY
SCHNITZER, Trustees for
Gary Schnitzer, et al, under
Trust Agreement dated FIRST INTERSTATE BANK
January 30, 1970 OF OREGON, N.A.
NKA Wells Fargo Bank, N.A.
/s/ GARY SCHNITZER /s/ MARCIA L. JORY, VP
- ---------------------------------- ----------------------------------
Gary Schnitzer, as Trustee By: Marcia L. Jory
Title: Vice President &
Area Manager
/s/ GREGORY SCHNITZER
- ----------------------------------
Gregory Schnitzer
/s/ GARY SCHNITZER
- ----------------------------------
Gary Schnitzer, Trustee
U/A/D January 2, 1974,
F/B/O Gregory Schnitzer
9
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SECOND AMENDMENT TO VOTING TRUST AND BUY-SELL AGREEMENT
-------------------------------------------------------
GILBERT SCHNITZER FAMILY GROUP--SHAREHOLDER SIGNATURE PAGE
/s/ GARY SCHNITZER, Trustee
- ----------------------------------
Gary Schnitzer, Trustee
U/A/D December 12, 1986,
F/B/O Gregory Schnitzer
Deborah S. Novack and
Kenneth M. Novack, Trustees
U/A/D 7/31/91, fbo
Deborah S. Novack
/s/ DEBORAH S. NOVACK /s/ K. M. NOVACK
- ---------------------------------- ----------------------------------
Deborah S. Novack, as Trustee Kenneth M. Novack, as Trustee
FIRST INTERSTATE BANK OF
OREGON, N.A. and DEBORAH NOVACK,
Trustees for Deborah Novack,
et al, under Trust Agreement FIRST INTERSTATE BANK OF
dated January 30, 1970 OREGON, N.A.
NKA Wells Fargo Bank, NA
/s/ DEBORAH S. NOVACK /s/ MARCIA L. JORY, VP
- ---------------------------------- ----------------------------------
Deborah S. Novack, as Trustee By: Marcia L. Jory, VP
Title: Vice President &
Area Manager
Kenneth M. Novack and
Deborah S. Novack, Trustees
U/A/D 7/31/91, fbo
Kenneth M. Novack
/s/ DEBORAH S. NOVACK /s/ K. M. NOVACK
- ---------------------------------- ----------------------------------
Deborah S. Novack, as Trustee Kenneth M. Novack, as Trustee
/s/ MELANIE NOVACK
- ----------------------------------
Melanie A. Novack
/s/ DEBORAH S. NOVACK
- ----------------------------------
Deborah S. Novack, Trustee
U/A/D July 1, 1974,
F/B/O Melanie A. Novack
10
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SECOND AMENDMENT TO VOTING TRUST AND BUY-SELL AGREEMENT
-------------------------------------------------------
GILBERT SCHNITZER FAMILY GROUP--SHAREHOLDER SIGNATURE PAGE
/s/ DEBORAH S. NOVACK
- ----------------------------------
Deborah S. Novack, Trustee
U/A/D December 12, 1986,
F/B/O Melanie A. Novack
/s/ DEBORAH S. NOVACK
- ----------------------------------
Deborah S. Novack, Trustee
U/A/D January 2, 1976,
F/B/O Melanie A. Novack
/s/ DEBORAH S. NOVACK
- ----------------------------------
Deborah S. Novack, Trustee
U/A/D December 12, 1986,
F/B/O Kevin P. Novack
/s/ DEBORAH S. NOVACK
- ----------------------------------
Deborah S. Novack, Trustee
U/A/D April 30, 1976,
F/B/O Kevin P. Novack
/s/ DEBORAH S. NOVACK
- ----------------------------------
Deborah S. Novack, as Custodian
under the Oregon Uniform
Transfers to Minors Act,
F/B/O Kevin P. Novack
11
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SECOND AMENDMENT TO VOTING TRUST AND BUY-SELL AGREEMENT
-------------------------------------------------------
LEONARD SCHNITZER FAMILY GROUP--SHAREHOLDER SIGNATURE PAGE
Leonard Schnitzer and
Lois T. Schnitzer, Trustees
U/A/D May 3, 1989, with
Leonard Schnitzer
/s/ LEONARD SCHNITZER /s/ LOIS SCHNITZER
- ---------------------------------- ----------------------------------
Leonard Schnitzer, as Trustee Lois T. Schnitzer, as Trustee
Lois T. Schnitzer and
Leonard Schnitzer, Trustees
U/A/D May 3, 1989, with
Lois T. Schnitzer
/s/ LEONARD SCHNITZER /s/ LOIS SCHNITZER
- ---------------------------------- ----------------------------------
Leonard Schnitzer, as Trustee Lois T. Schnitzer, as Trustee
Lois T. Schnitzer and
Leonard Schnitzer, Trustees
U/A/D May 3, 1989, with
Lois T. Schnitzer; and
Leonard Schnitzer and Lois T.
Schnitzer, Trustees U/A/D
May 3, 1989, with Leonard
Schnitzer, each trust to take
as a tenant in common
/s/ LEONARD SCHNITZER /s/ LOIS SCHNITZER
- ---------------------------------- ----------------------------------
Leonard Schnitzer, as Trustee Lois T. Schnitzer, as Trustee
Rita S. Philip and Robert W.
Philip, as Co-Trustees under
Trust Agreement with Rita S.
Philip dated 4/21/93
/s/ RITA S. PHILIP /s/ ROBERT W. PHILIP
- ---------------------------------- ----------------------------------
Rita S. Philip, as Trustee Robert W. Philip, as Trustee
12
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SECOND AMENDMENT TO VOTING TRUST AND BUY-SELL AGREEMENT
-------------------------------------------------------
LEONARD SCHNITZER FAMILY GROUP--SHAREHOLDER SIGNATURE PAGE
/s/ MICHELE PHILIP
- ----------------------------------
Michele Babette Philip
Rita S. Philip, Family
Trustee and Jill Schnitzer
Edelson, Independent Trustee
U/A/D December 22, 1994, F/B/O
Michele Babette Philip
/s/ RITA S. PHILIP /s/ JILL SCHNITZER
- ---------------------------------- ----------------------------------
Rita S. Philip, as Trustee Jill Schnitzer Edelson, Trustee
Rita S. Philip, Family
Trustee and Jill Schnitzer
Edelson, Independent Trustee
U/A/D December 22, 1994, F/B/O
Joshua Henry Philip
/s/ RITA S. PHILIP /s/ JILL SCHNITZER
- ---------------------------------- ----------------------------------
Rita S. Philip, as Trustee Jill Schnitzer Edelson, Trustee
/s/ GAYLE S. ROMAIN
- ----------------------------------
Gayle S. Romain
FIRST INTERSTATE BANK OF
OREGON, N.A. (formerly First
National Bank of Oregon) and
GAYLE ROSENCRANTZ, Trustees
for Gayle Rosencrantz, et al,
under Trust Agreement FIRST INTERSTATE BANK
dated January 30, 1970 OR OREGON, N.A.
NKA Wells Fargo Bank, N.A.
/s/ GAYLE S. ROMAIN /s/ MARCIA L. JORY, VP
- ---------------------------------- ----------------------------------
Gayle S. Romain By: Marcia L. Jory
Title: Vice President & Area Manager
/s/ LAURA H. ROSENCRANTZ
- ----------------------------------
Laura H. Rosencrantz
13
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SECOND AMENDMENT TO VOTING TRUST AND BUY-SELL AGREEMENT
-------------------------------------------------------
LEONARD SCHNITZER FAMILY GROUP--SHAREHOLDER SIGNATURE PAGE
Gayle S. Romain, Family
Trustee and Mardi S. Schnitzer,
Independent Trustee U/A/D
December 22, 1994, F/B/O
Laura H. Rosencrantz
/s/ GAYLE S. ROMAIN /s/ MARDI S. SCHNITZER
- ---------------------------------- ----------------------------------
Gayle S. Romain, as Trustee Mardi S. Schnitzer, as Trustee
/s/ BRYAN L. ROSENCRANTZ
- ----------------------------------
Bryan L. Rosencrantz
Gayle S. Romain, Family
Trustee and Mardi S. Schnitzer,
Independent Trustee U/A/D
December 22, 1994, F/B/O
Bryan L. Rosencrantz
/s/ GAYLE S. ROMAIN /s/ MARDI S. SCHNITZER
- ---------------------------------- ----------------------------------
Gayle S. Romain, as Trustee Mardi S. Schnitzer, as Trustee
/s/ SANDRA LEE SCHNITZER
- ----------------------------------
Sandra Lee Schnitzer
FIRST INTERSTATE BANK OF
OREGON, N.A. (formerly First
National Bank of Oregon) and
SANDRA SCHNITZER, Trustees for
Sandra Schnitzer, et al,
under Trust Agreement FIRST INTERSTATE BANK OF
dated January 30, 1970 OREGON, N.A.
NKA Wells Fargo Bank, N.A.
/s/ SANDRA SCHNITZER /s/ MARCIA L. JORY, VP
- ---------------------------------- ----------------------------------
Sandra Schnitzer, as Trustee By: Marcia L. Jory
Title: Vice President & Area Manager
14
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SECOND AMENDMENT TO VOTING TRUST AND BUY-SELL AGREEMENT
-------------------------------------------------------
LEONARD SCHNITZER FAMILY GROUP--SHAREHOLDER SIGNATURE PAGE
/s/ MARDI S. SCHNITZER
- ----------------------------------
Mardi S. Schnitzer
FIRST INTERSTATE BANK OF
OREGON, N.A. (formerly First
National Bank of Oregon) and
Mardi Schnitzer Lippman,
Trustees for Mardi Schnitzer
Lippman, et al,
under Trust Agreement FIRST INTERSTATE BANK OF
dated January 30, 1970 OREGON, N.A.
NKA Wells Fargo Bank, N.A.
/s/ MARDI S. SCHNITZER /s/ MARCIA L. JORY, VP
- ---------------------------------- ----------------------------------
Mardi S. Schnitzer, as Trustee By: Marcia L. Jory
Title: Vice President & Area Manager
Mardi S. Schnitzer, Family
Trustee, and Rita S. Philip
and Gayle S. Romain, Independent
Trustees U/A/D December 22,
1994, F/B/O David R. Lippman
/s/ MARDI S. SCHNITZER /s/ RITA S. PHILIP
- ---------------------------------- ----------------------------------
Mardi S. Schnitzer, as Trustee Rita S. Philip, as Trustee
/s/ GAYLE S. ROMAIN
- ----------------------------------
Gayle S. Romain, as Trustee
Mardi S. Schnitzer, Family
Trustee, and Rita S. Philip
and Gayle S. Romain, Independent
Trustees U/A/D December 22,
1994, F/B/O Marc A. Lippman
/s/ MARDI S. SCHNITZER /s/ RITA S. PHILIP
- ---------------------------------- ----------------------------------
Mardi S. Schnitzer, as Trustee Rita S. Philip, as Trustee
/s/ GAYLE S. ROMAIN
- ----------------------------------
Gayle S. Romain, as Trustee
15
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SECOND AMENDMENT TO VOTING TRUST AND BUY-SELL AGREEMENT
-------------------------------------------------------
LEONARD SCHNITZER FAMILY GROUP--SHAREHOLDER SIGNATURE PAGE
Jill Schnitzer Edelson
and Richard H. Edelson,
Trustees U/A/D 2/22/95,
F/B/O Jill Schnitzer Edelson
/s/ JILL SCHNITZER EDELSON /s/ RICHARD H. EDELSON
- ---------------------------------- ----------------------------------
Jill Schnitzer Edelson, as Trustee Richard H. Edelson, as Trustee
FIRST INTERSTATE BANK OF
OREGON, N.A. (formerly First
National Bank of Oregon) and
LOIS SCHNITZER, Trustees for
Jill Sophia Schnitzer, et al,
under Trust Agreement FIRST INTERSTATE BANK OF
dated January 30, 1970 OREGON, N.A.
NKA Wells Fargo Bank, N.A.
/s/ LOIS SCHNITZER /s/ MARCIA L. JORY, VP
- ---------------------------------- ----------------------------------
Lois Schnitzer, as Trustee By: Marcia L. Jory
Title: Vice President & Area Manager
Jill Schnitzer Edelson, Family
Trustee and Dina Evan Schnitzer,
Independent Trustee U/A/D
December 22, 1994, F/B/O
Brooke Danielle Edelson
/s/ JILL SCHNITZER EDELSON /s/ DINA EVAN SCHNITZER
- ---------------------------------- ----------------------------------
Jill Schnitzer Edelson, as Trustee Dina Evan Schnitzer, as Trustee
Jill Schnitzer Edelson, Family
Trustee and Dina Evan Schnitzer,
Independent Trustee U/A/D
December 22, 1994, F/B/O
Lauren Rachelle Edelson
/s/ JILL SCHNITZER EDELSON /s/ DINA EVAN SCHNITZER
- ---------------------------------- ----------------------------------
Jill Schnitzer Edelson, as Trustee Dina Evan Schnitzer, as Trustee
16
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
SECOND AMENDMENT TO VOTING TRUST AND BUY-SELL AGREEMENT
-------------------------------------------------------
LEONARD SCHNITZER FAMILY GROUP--SHAREHOLDER SIGNATURE PAGE
Dina Evan Schnitzer
Revocable Trust U/A/D 8/19/94,
Leonard E. Schnitzer, Gayle S.
Romain and Dina Evan Schnitzer,
Collectively as Trustee
/s/ LEONARD E. SCHNITZER /s/ DINA EVAN SCHNITZER
- ---------------------------------- ----------------------------------
Leonard E. Schnitzer, as Trustee Dina Evan Schnitzer, as Trustee
/s/ GAYLE S. ROMAIN
- ----------------------------------
Gayle S. Romain, as Trustee
FIRST INTERSTATE BANK OF
OREGON, N.A. (formerly First
National Bank of Oregon) and
LOIS SCHNITZER, Trustees for
Dina Evan Schnitzer, et al,
under Trust Agreement FIRST INTERSTATE BANK OF
dated January 30, 1970 OREGON, N.A.
NKA Wells Fargo Bank, N.A.
/s/ LOIS SCHNITZER /s/ MARCIA L. JORY, VP
- ---------------------------------- ----------------------------------
Lois Schnitzer, as Trustee By: Marcia L. Jory
Title: Vice President & Area Manager
17
FOURTH AMENDMENT OF LEASE
THIS FOURTH AMENDMENT OF LEASE is written and made in duplicate on the 31st
day of March, 1997, by and between SCHNITZER INVESTMENT CORP. (the "Landlord")
and SCHNITZER STEEL INDUSTRIES, INC., Successor in Interest to Schnitzer Steel
Products Co. (the "Tenant"). Each may be referred to from time to time as a
"Party" and collectively as the "Parties".
RECITALS
WHEREAS, under a certain indenture of Lease (the "Lease") dated March 24,
1980, as extended by the Extension of Lease dated April 19, 1985, an Amendment
to Lease dated June 4, 1987, a Second Extension of Lease dated April 15, 1988, a
Third Extension of Lease dated September 1, 1988, a Second Amendment of Lease
dated April 1, 1991, a Fourth Extension of Lease dated August 27, 1993, and a
Third Amendment of Lease dated May 29, 1996, which are, with the Lease,
incorporated by this reference, the Landlord leased certain real property to the
Tenant in Portland, Multnomah County, Oregon, as described in the Lease to the
Tenant, and;
WHEREAS, the Parties now wish to amend the Lease to provide for decreased
square footage effective January 1, 1997, and it is the purpose of this Fourth
Amendment of Lease to set forth all of the terms and conditions of the Parties'
agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained in this Fourth Amendment of Lease, the Parties covenant and agree as
follows:
1. Premises: Effective January 1, 1997, Paragraph 1. Premises of the Lease is
hereby amended to provide for 5,043 square feet of office space.
2. Rent: Effective January 1, 1997, Paragraph 3. Rent of the Lease is hereby
amended to provide for equal monthly installments of $5,253.00 each.
3. Proportionate Share: Effective January 1, 1997, Tenant's proportionate
share of operating expense increases as set forth under Paragraph 6 of the
Lease shall decrease to 30%.
4. Other Terms: Except as they may be modified by this Fourth Amendment of
Lease, all the other terms and conditions of the Lease shall remain in full
force and effect.
IN WITNESS WHEREOF, the Landlord and Tenant have signed this Fourth
Amendment of Lease as of the date first hereinabove written.
Landlord Tenant:
SCHNITZER INVESTMENT CORP. SCHNITZER STEEL INDUSTRIES, INC.
Successor in Interest to Schnitzer
Steel Products Co.
By: /s/ Linda Wakefield By: /s/ J.W. Cruckshank
------------------------------ ------------------------------
Title: Vice President Title: Corporate Controller
--------------------------- ---------------------------
AMENDMENT OF LEASE
THIS AMENDMENT OF LEASE is written and made in duplicate on the 31st day of
March, 1997, by and between SCHNITZER INVESTMENT CORP. (the "Landlord") and
SCHNITZER STEEL INDUSTRIES, INC. (the "Tenant"). Each may be referred to from
time to time as a "Party" and collectively as the "Parties".
RECITALS
WHEREAS, under a certain indenture of Lease (the "Lease") dated March 1,
1995, the Landlord leased certain real property at 3330 N.W. Yeon Avenue to
Tenant in Portland, Multnomah County, Oregon, as described in the Lease, and;
WHEREAS, the Lease provides for the Premises to be approximately 1,390
square feet of office space and the Parties now wish to amend the Lease to
provide for a rental adjustment due to a change in the square footage of the
Premises; and
WHEREAS, it is the purpose of this Amendment of Lease to set forth all of
the terms and conditions of the Parties' agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained in this Amendment of Lease, the Parties covenant and agree as follows:
1. Premises: The Lease is hereby amended to provide that the Premises consist
of approximately 2,001 square feet of office space.
2. Rent: Effective January 1, 1997, the Lease is hereby amended to provide for
equal monthly installments of $2,084.38 each.
3. Proportionate Share: Effective January 1, 1997, Tenant's proportionate
share of operating expense increases as set forth under Paragraph 19.1 of
the Lease shall increase to 11.9%.
4. Other Terms: Except as they may be modified by this Amendment of Lease, all
the other terms and conditions of the Lease shall remain in full force and
effect.
IN WITNESS WHEREOF, the Landlord and Tenant have signed this Amendment of
Lease as of the date first hereinabove written.
Landlord Tenant:
SCHNITZER INVESTMENT CORP. SCHNITZER STEEL INDUSTRIES,
By: /s/ LINDA M. WAKEFIELD By: /s/ J.W. CRUCKSHANK
------------------------------ ------------------------------
Title: Vice President Title: Corporate Controller
--------------------------- ---------------------------
OFFICE LEASE
This lease, made and entered into at Portland, Oregon, this 18th day of
February, 1997 by and between
LANDLORD: SCHNITZER INVESTMENT CORPORATION
and
TENANT: SCHNITZER STEEL INDUSTRIES
Landlord hereby leases to Tenant the following:
commercial space totalling 4,655 square feet of office space (the Premises) in
3330 N.W. Yeon (the building) at Yeon Business Center, Portland, Oregon, for a
term commencing, March 1, 1997 and continuing through February 28, 2002 at a
Monthly Base Rental as follows:
$4,848.96
Rent is payable in advance on the 1st day of each month commencing, March 1,
1997.
Landlord and Tenant covenant and agree as follows:
1.1 Delivery of Possession.
Should Landlord be unable to deliver possession of the Premises on the
date fixed for the commencement of the term, commencement will be
deferred and Tenant shall owe no rent until notice from Landlord
tendering possession to Tenant. If possession is not so tendered within
90 days following commencement of the term, then Tenant may elect to
cancel this lease by notice to Landlord within 10 days following
expiration of the 90-day period. Landlord shall have no liability to
Tenant for delay in delivering possession, nor shall such delay extend
the term of this lease in any manner.
2.1 Rent Payment.
Tenant shall pay the Base Rent for the Premises and any additional rent
provided herein without deduction or offset. Rent for any partial month
during the lease term shall be prorated to reflect the number of days
during the month that Tenant occupies the Premises. Additional rent means
amounts determined under Section 19 of this lease and any other sums
payable by Tenant to Landlord under this lease. Rent not paid when due
shall bear interest at the rate of one-and-one-half percent per month
until paid. Landlord may at its option impose a late charge of $.05 for
each $1 of rent for rent payments made more than 10 days late in lieu of
interest for the first month of delinquency, without waiving any other
remedies available for default. Failure to impose a late charge shall not
be a waiver of Landlord's rights hereunder.
3.1 Lease Consideration.
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Upon execution of the lease Tenant has paid the Base Rent for the first
full month of the lease term for which rent is payable and in addition
has paid the sum of N/A -
as lease consideration. Landlord may apply the lease consideration to pay
the cost of performing any obligation which Tenant fails to perform
within the time required by this lease, but such application by Landlord
shall not be the exclusive remedy for Tenant's default. If the lease
consideration is applied by Landlord, Tenant shall on demand pay the sum
necessary to replenish the lease consideration to its original amount. To
the extent not applied by Landlord to cure defaults by Tenant, the lease
consideration shall be applied against the rent payable for the last
month of the term. The lease consideration shall not be refundable.
4. Use.
Tenant shall use the Premises as business offices for Human Resources,
Benefits and Payroll and for no other purpose without Landlord's written
consent. In connection with its use, Tenant shall at its expense promptly
comply with all applicable laws, ordinances, rules and regulations of any
public authority and shall not annoy, obstruct, or interfere with the
rights of other tenants of the Building. Tenant shall create no nuisance
nor allow any objectionable fumes, noise, or vibrations to be emitted
from the Premises. Tenant shall not conduct any activities that will
increase Landlord's insurance rates for any portion of the Building or
that will in any manner degrade or damage the reputation of the Building.
4. Equipment.
Tenant shall install in the Premises only such office equipment as is
customary for general office use and shall not overload the floors or
electrical circuits of the Premises or Building or alter the plumbing or
wiring of the Premises or Building. Landlord must approve in advance the
location of and manner of installing any wiring or electrical, heat
generating or communication equipment or exceptionally heavy articles.
All telecommunications equipment, conduit, cables and wiring and any
additional air conditioning required because of heat generating equipment
or special lighting installed by Tenant shall be installed and operated
at Tenant's expense.
4.3 Signs
No signs, awnings, antennas, or other apparatus shall be painted on or
attached to the Building or anything placed on any glass or woodwork of
the Premises or positioned so as to be visible from outside the Premises
without Landlord's written approval as to design, size, location, and
color. All signs installed by Tenant shall comply with Landiord's
standards for signs and all applicable codes and all signs and sign
hardware shall be removed upon termination of this lease with the sign
location restored to its former state unless Landlord elects to retain
all or any portion thereof.
5.1 Utilities and Services.
Landlord will furnish water, electricity and elevator service and, during
the normal Building hours of 8:00 AM to 6:00 PM, Monday through Friday,
except holidays, will furnish heat and air conditioning (if the Building
is air conditioned). Janitorial service will be provided in accordance
with the regular schedule of the Building, which schedule and service may
change from time to time. Tenant shall comply with all government laws or
regulations regarding the use or reduction of use of utilities on the
Premises. Interruption of services or utilities shall not be deemed an
eviction or disturbance of Tenant's use and possession of the Premises,
render Landlord liable to Tenant for damages, or relieve Tenant from
performance of Tenant's obligations under this lease. Landlord shall take
all reasonable steps to correct any interruptions in service. Electrical
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service furnished will be 110 volts unless different service already
exists in the Premises. Tenant shall provide its own surge protection for
power furnished to computers.
5.2 Extra Usage.
If Tenant uses excessive amounts of utilities or services of any kind
because of operation outside of normal Building hours, high demands from
office machinery and equipment, nonstandard lighting, or any other cause,
Landlord may impose a reasonable charge for supplying such extra
utilities or services, which charge shall be payable monthly by Tenant in
conjunction with rent payments. In case of dispute over any extra charge
under this paragraph, Landlord shall designate a qualified independent
engineer whose decision shall be conclusive on both parties. Landlord and
Tenant shall each pay one-half of the cost of such determination.
6.1 Maintenance and Repair.
Landlord shall have no liability for failure to perform required
maintenance and repair unless written notice of such maintenance or
repair is given by Tenant and Landlord fails to commence efforts to
remedy the problem in a reasonable time and manner. Landlord shall have
the right to erect scaffolding and other apparatus necessary for the
purpose of making repairs, and Landlord shall have no liability for
interference with Tenant's use because of repairs and installations.
Tenant shall have no claim against Landlord for any interruption or
reduction of services or interference with Tenant's occupancy, and no
such interruption or reduction shall be construed as a constructive or
other eviction of Tenant. Repair of damage caused by negligent or
intentional acts or breach of this lease by Tenant, its employees or
invitees shall be at Tenant's expense.
6.2 Alterations
Tenant shall not make any alterations, additions, or improvements to the
Premises, change the color of the interior, or install any wall or floor
covering without Landlord's prior written consent. Any such improvements,
alterations, wiring, cables or conduit installed by Tenant shall at once
become part of the Premises and belong to Landlord except for removable
machinery and unattached movable trade fixtures. Landlord may at its
option require that Tenant remove any improvements, alterations, wiring,
cables or conduit installed by Tenant and restore the Premises to the
original condition upon termination of this lease. Landlord shall have
the right to approve the contractor used by Tenant for any work in the
Premises, and to post notices of nonresponsibility in connection with
work being performed by Tenant in the Premises.
7.1 Indemnity.
Tenant shall not allow any liens to attach to the Building or Tenant's
interest in the Premises as a result of its activities. Tenant shall
indemnify and defend Landlord and its managing agents from any claim,
liability, damage, or loss occurring on the Premises, arising out of any
activity by Tenant, its agents, or invitees or resulting from Tenant's
failure to comply with any term of this lease. Neither Landlord nor its
managing agent shall have any liability to Tenant because of loss or
damage to Tenant's property or for death or bodily injury caused by the
acts or omissions of other Tenants of the Building, or by third parties
(including criminal acts).
7.2 Insurance.
Tenant shall carry liability insurance with limits of not less than One
Million Dollars ($1,000,000) combined single limit bodily injury and
property damage which insurance shall have an endorsement naming Landlord
and Landlord's managing agent, if any, as an additional insured and
covering the liability insured under paragraph 7.1 of this lease. Tenant
shall furnish a certificate evidencing such insurance which shall state
that the coverage shall not be cancelled or materially changed without 10
days advance notice to Landlord and Landlord's managing
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agent, if any. A renewal certificate shall be furnished at least 10 days
prior to expiration of any policy.
8.1 Fire or Casualty.
"Major Damage' means damage by fire or other casualty to the Building or
the Premises which causes the Premises or any substantial portion of the
Building to be unusable, or which will cost more than 25 percent of the
pre-damage value of the Building to repair, or which is not covered by
insurance. In case of Major Damage, Landlord may elect to terminate this
lease by notice in writing to Tenant within 30 days after such date. If
this lease is not terminated following Major Damage, or if damage occurs
which is not Major Damage, Landlord shall promptly restore the Premises
to the condition existing just prior to the damage. Tenant shall promptly
restore all damage to tenant improvements or alterations installed by
Tenant or pay the cost of such restoration to Landlord if Landlord elects
to do the restoration of such improvements. Rent shall be reduced from
the date of damage until the date restoration work being performed by
Landlord is substantially complete, with the reduction to be in
proportion to the area of the Premises not usable by Tenant.
8.2 Waiver of Subrogation.
Tenant shall be responsible for insuring its personal property and trade
fixtures located on the Premises and any alterations or tenant
improvements it has made to the Premises. Neither Landlord, its managing
agent nor Tenant shall be liable to the other for any loss or damage
caused by water damage, sprinkler leakage, or any of the risks that are
or could be covered by a standard all risk insurance policy with an
extended coverage endorsement, or for any business interruption, and
there shall be no subrogated claim by one party's insurance carrier
against the other party arising out of any such loss.
9.1 Eminent Domain.
If a condemning authority takes title by eminent domain or by agreement
in lieu thereof to the entire Building or a portion sufficient to render
the Premises unsuitable for Tenant's use, then either party may elect to
terminate this lease effective on the date that possession is taken by
the condemning authority. Rent shall be reduced for the remainder of the
term in an amount proportionate to the reduction in area of the Premises
caused by the taking. All condemnation proceeds shall belong to Landlord,
and Tenant shall have no claim against Landlord or the condemnation award
because of the taking.
10.1 Assignment & Subletting.
This lease shall bind and inure to the benefit of the parties, their
respective heirs, successors, and assigns, provided that Tenant shall not
assign its interest under this lease or sublet all or any portion of the
Premises without first obtaining Landlord's consent in writing. This
provision shall apply to all transfers by operation of law including but
not limited to mergers and changes in control of Tenant. No assignment
shall relieve Tenant of its obligation to pay rent or perform other
obligations required by this lease, and no consent to one assignment or
subletting shall be a consent to any further assignment or subletting.
Landlord shall not unreasonably withhold its consent to any assignment or
subletting provided the effective rental paid by the subtenant or
assignee is not less than the current scheduled rental rate of the
Building for comparable space and the proposed Tenant is compatible with
Landlord's normal standards for the Building. If Tenant proposes a
subletting or assignment to which Landlord is required to consent under
this paragraph, Landlord shall have the option of terminating this lease
and dealing directly with the proposed subtenant or assignee, or any
third party. If an assignment or subletting is permitted, any cash
profit, or the net value of any other consideration received by Tenant as
a result of such
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transaction shall be paid to Landlord promptly following its receipt by
Tenant. Tenant shall pay any costs incurred by Landlord in connection
with a request for assignment or subletting, including reasonable
attorneys' fees.
11.1 Default.
Any of the following shall constitute a default by Tenant under this
lease:
(a) Tenant's failure to pay rent or any other charge under this
lease within 10 days after it is due, or failure to comply with any other
term or condition within 20 days following written notice from Landlord
specifying the noncompliance. If such noncompliance cannot be cured
within the 20-day period, this provision shall be satisfied if Tenant
commences correction within such period and thereafter proceeds in good
faith and with reasonable diligence to effect compliance as soon as
possible. Time is of the essence of this lease.
(b) Tenant's insolvency, business failure or assignment for the
benefit of its creditors, Tenant's commencement of proceedings under any
provision of any bankruptcy or insolvency law or failure to obtain
dismissal of any petition filed against it under such laws within the
time required to answer; or the appointment of a receiver for Tenant's
properties.
(c) Assignment or subletting by Tenant in violation of paragraph 10.
1.
(d) Vacation or abandonment of the Premises without the written
consent of Landlord or failure to occupy the Premises within 20 days
after notice tendering possession.
11.2 Remedies for Default.
In case of default as described in paragraph 11.1 Landlord shall have the
right to the following remedies which are intended to be cumulative and
in addition to any other remedies provided under applicable law:
(a) Landlord may at its option terminate the lease by notice to
Tenant. With or without termination, Landlord may retake possession of
the Premises and may use or relet the Premises without accepting a
surrender or waiving the right to damages. Following such retaking of
possession, efforts by Landlord to relet the Premises shall be sufficient
if Landlord follows its usual procedures for finding tenants for the
space at rates not less than the current rates for other comparable space
in the Building. If Landlord has other vacant space in the Building,
prospective tenants may be placed in such other space without prejudice
to Landlord's claim to damages or loss of rentals from Tenant.
(b) Landlord may recover all damages caused by Tenant's default
which shall include an amount equal to rentals lost because of the
default, lease commissions paid for this lease, and the unamortized cost
of any tenant improvements installed by Landlord to meet Tenant's special
requirements. Landlord may sue periodically to recover damages as they
occur throughout the lease term, and no action for accrued damages shall
bar a later action for damages subsequently accruing. Landlord may elect
in any one action to recover accrued damages plus damages attributable to
the remaining term of the lease. Such damages shall be measured by the
difference between the rent under this lease and the reasonable rental
value of the Premises for the remainder of the term, discounted to the
time of judgement at the prevailing interest rate on judgements.
(c) Landlord may make any payment or perform any obligation which
Tenant has failed to perform, in which case Landlord shall be entitled to
recover from Tenant upon demand all amounts so expended, plus interest
from the date of the expenditure at the rate of one-and-one-half percent
per month. Any such payment or performance by Landlord shall not waive
Tenant's default.
12.1 Surrender.
On expiration or early termination of this lease Tenant shall deliver all
keys to Landlord and surrender the Premises vacuumed, swept, and free of
debris and in the same condition as at the
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commencement of the term subject only to reasonable wear from ordinary
use. Tenant shall remove all of its furnishings and trade fixtures that
remain its property and restore all damage resulting from such removal.
Failure to remove shall be an abandonment of the property, and Landlord
may dispose of it in any manner without liability. If Tenant fails to
vacate the Premises when required, including failure to remove all its
personal property, Landlord may elect either: (i) to treat Tenant as a
tenant from month to month, subject to the provisions of this lease
except that rent shall be one-and-one-half times the total rent being
charged when the lease term expired; or (ii) to eject Tenant from the
Premises and recover damages caused by wrongful holdover.
13.1 Regulations.
Landlord shall have the right but shall not be obligated, to make, revise
and enforce regulations or policies consistent with this lease for the
purpose of promoting safety, health (including regulation or prohibition
of smoking), order, economy, cleanliness, and good service to all tenants
of the Building. All such regulations and policies shall be complied with
as if part of this lease.
14.1 Access.
During times other than normal Building hours Tenant's officers and
employees or those having business with Tenant may be required to
identify themselves or show passes in order to gain access to the
Building. Landlord shall have no liability for permitting or refusing to
permit access by anyone. Landlord shall have the right to enter upon the
Premises at any time by passkey or otherwise to determine Tenant's
compliance with this lease, to perform necessary services, maintenance
and repairs or alterations to the Building or the Premises, or to show
the Premises to any prospective tenant or purchasers. Except in case
emergency such entry shall be at such times and in such manner as to
minimize interference with the reasonable business use of the Premises by
Tenant.
14.2 Furniture and Bulky Articles.
Tenant shall move furniture and bulky articles in and out of the Building
or make independent use of the elevators only at times approved by
Landlord following at least 24 hours written notice to Landlord of the
intended move. Landlord will not unreasonably withhold its consent under
this paragraph.
15.1 Notices.
Notices between the parties relating to this lease shall be in writin,9,
effective when delivered, or if mailed, effective on the second day
following mailing, postage prepaid, to the address for ' the party stated
in this lease or to such other address as either party may specify by
notice to the other. Notice to Tenant may always be delivered to the
Premises. Rent shall be payable to Landlord at the same address and in
the same manner, but shall be considered paid only when received.
16.1 Subordination.
This lease shall be subject to and subordinate to any mortgages, deeds of
trust, or land sale contracts (hereafter collectively referred to as
encumbrances) now existing against the Building. At Landlord's option
this lease shall be subject and subordinate to any future encumbrance
hereafter placed against the Building (including the underlying land) or
any modifications of existing encumbrances, and Tenant shall execute such
documents as may reasonably be requested by Landlord or the holder of the
encumbrance to evidence this subordination.
16.2 Transfer of Building.
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If the Building is sold or otherwise transferred by Landlord or any
successor, Tenant shall attorn to the purchaser or transferee and
recognize it as the lessor under this lease, and, provided the purchaser
or transferee assumes all obligations hereunder, the transferor shall
have no further liability hereunder.
16.2 Estoppels
Either party will within 1 0 days after notice from the other execute,
acknowledge and deliver to the other party a certificate certifying
whether or not this lease has been modified and is in full force and
effect; whether there are any modifications or alleged breaches by the
other party; the dates to which rent has been paid in advance, and the
amount of any security deposit or prepaid rent; and any other facts that
may reasonably be requested. Failure to deliver the certificate within
the specified time shall be conclusive upon the party of whom the
certificate was requested that the lease is in full force and effect and
has not been modified except as may be represented by the party
requesting the certificate. If requested by the holder of any
encumbrance, or any ground lessor, Tenant will agree to give such holder
or lessor notice of and an opportunity to cure any default by Landlord
under this lease.
17.1 Attorneys' Fees.
In any litigation arising out of this lease, the prevailing party shall
be entitled to recover attorneys' fees at trial and on any appeal. If
Landlord incurs attorneys' fees because of a default by Tenant, Tenant
shall pay all such fees whether or not litigation is filed.
18.1 Quiet Enjoyment.
Landlord warrants that so long as Tenant complies with all terms of this
lease it shall be entitled to peaceable and undisturbed possession of the
Premises free from any eviction or disturbance by Landlord. Neither
Landlord not its managing agent shall have any liability to Tenant for
loss or damages arising out of the acts, including criminal acts, of
other tenants of the Building or third parties, nor any liability for any
reason which exceeds the value of its interest in the Building.
19.1 Additional Rent: Tax Adjustment.
Whenever for any July 1 - June 30 tax year the real property taxes levied
against the Building and its underlying land exceed those levied for the
1 996-1 997 tax year, then the monthly rental for the next' succeeding
calendar year shall be increased by one-twelfth of such tax increase
times Tenant's proportionate share. "Real property taxes" as used herein
means all taxes and assessments of any public authority against the
Building and the land on which it is located, the cost of contesting any
tax and any form of fee or charge imposed on Landlord as a direct
consequence of owning or leasing the Premises, including but not limited
to rent taxes, gross receipt taxes, leasing taxes, or any fee or charge
wholly or partially in lieu of or in substitution for ad valorem real
property taxes or assessments, whether now existing or hereafter enacted.
If any portion of the Building is occupied by a tax-exempt tenant so that
the Building has a partial tax exemption under ORS 307.1 12 or a similar
statute, then real property taxes shall mean taxes computed as if such
partial exemption did not exist. If a separate assessment or identifiable
tax increase arises because of improvements to the Premises, then Tenant
shall pay 100 percent of such increase.
19.2 Tenant's Proportionate Share.
"Tenant's proportionate share" as used herein means the area of the
Premises, divided by the total area of office space in the Building, with
area determined using one of the methods of building measurement defined
by the Building Owners and Managers Association (BOMA). Tenant's
proportionate share as of the lease commencement date shall be 27.5
percent.
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19.4 Additional Rent: Operating Expense Adjustment.
Tenant shall pay as additional rent its proportionate share, as defined
in paragraph 1 9.2, of the amount by which operating expenses for the
Building increase over those experienced by Landlord during the calendar
year 1 997 (base year). Effective January 1 of each year Landlord shall
estimate the amount by which operating expenses are expected to increase,
if any, over those incurred in the base year. Monthly rental for that
year shall be increased by one-twelfth of Tenant's share of the estimated
increase. Following the end of each calendar year, Landlord shall compute
the actual increase in operating expenses and bill Tenant for any
deficiency or credit Tenant with any excess collected. As used herein
"operating expenses" shall mean all costs of operating and maintaining
the Building as determined by standard real estate accounting practice,
including, but not limited to: all water and sewer charges; the cost of
natural gas and electricity provided to the Building; janitorial and
cleaning supplies and services; administration costs and management fees;
superintendent fees; security services, if any; insurance premiums;
licenses; permits for the operation and maintenance of the Building and
all of its component elements and mechanical systems; the annual
amortized capital improvement cost (amortized over such a period as
Landlord may select but not shorter than the period allowed under the
Internal Revenue Code and at a current market interest rate) for any
capital improvements to the Building required by any governmental
authority or those which have a reasonable probability of improving the
operating efficiency of the Building.
20.1 Complete Agreement.
This lease and the attached Exhibits and Schedules if any, constitute the
entire agreement of the parties and supersede all prior written and oral
agreements and representations. Neither Landlord nor Tenant is relying on
any representations other than those expressly set forth herein.
20.2 Space Leased as Is
Unless otherwise stated in this Lease, the Premises are leased as in the
condition now existing with no alterations or other work to be performed
by Landlord.
20.3 Captions.
The titles to the paragraphs of this lease are descriptive only and are
not intended to change or influence the meaning of any paragraph or to be
part of this lease.
20.4 Nonwaiver.
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Failure by Landlord to promptly enforce any regulation, remedy or right
of any kind under this Lease shall not constitute a waiver of the same
and such right or remedy may be asserted at any time after Landlord
becomes entitled to the benefit thereof notwithstanding delay in
enforcement.
20.5 Exhibits.
The following Exhibits are attached hereto and incorporated as a part of
this lease:
IN WITNESS WHEREOF, the duly authorized representatives of the parties have
executed this lease as of the day and the year first written above.
LANDLORD: SCHNITZER INVESTMENT CORP. By /s/ LINDA M. WAKEFIELD
----------------------
Address for notices:
P.O. Box 10047 Title: Vice President
------------------------- ------------------
Portland, OR 97296
-------------------------
TENANT: SCHNITZER STEEL INDUSTRIES By /s/ J.W. CRUCKSHANK
----------------------
Address for notices:
P.O. Box 10047 Title:
------------------------- ------------------
Portland, OR 97296
-------------------------
Page 9
SCHNITZER STEEL INDUSTRIES, INC.
1993 STOCK INCENTIVE PLAN
1. Purpose. The purpose of this 1993 Stock Incentive Plan (the "Plan") is
to enable Schnitzer Steel Industries, Inc. (the "Company") to attract and retain
the services of (1) selected employees, officers and directors of the Company or
of any subsidiary of the Company and (2) selected nonemployee consultants and
advisors to the Company.
2. Shares Subject to the Plan. Subject to adjustment as provided below and
in paragraph 13, the shares to be offered under the Plan shall consist of Class
A Common Stock of the Company, and the total number of shares of Class A Common
Stock that may be issued under the Plan shall not exceed 1,200,000 shares. The
shares issued under the Plan may be authorized and unissued shares or reacquired
shares. If an option, stock appreciation right or performance unit granted under
the Plan expires, terminates or is cancelled, the unissued shares subject to
such option, stock appreciation right or performance unit shall again be
available under the Plan. If shares sold or awarded as a bonus under the Plan
are forfeited to the Company or repurchased by the Company, the number of shares
forfeited or repurchased shall again be available under the Plan.
3. Effective Date and Duration of Plan.
(a) Effective Date. The Plan shall become effective when adopted by
the Board of Directors; provided, however, that prior to shareholder approval of
the Plan, any awards shall be subject to and conditioned on approval of the Plan
by a majority of the votes cast at a shareholders meeting at which a quorum is
present. Options, stock appreciation rights and performance units may be granted
and shares may be awarded as bonuses or sold under the Plan at any time after
the effective date and before termination of the Plan.
(b) Duration. The Plan shall continue in effect until all shares
available for issuance under the Plan have been issued and all restrictions on
such shares have lapsed. The Board of Directors may suspend or terminate the
Plan at any time except with respect to options, performance units and shares
subject to restrictions then outstanding under the Plan. Termination shall not
affect any outstanding options, any right of the Company to repurchase shares or
the forfeitability of shares issued under the Plan.
4. Administration. The Plan shall be administered by a committee of the
Board of Directors of the Company (the "Committee"), which shall determine and
designate from time to time the individuals to whom awards shall be made, the
amount of the awards, and the other terms and conditions of the awards. Subject
to the provisions of the Plan, the Committee may from time to time adopt and
amend rules and regulations relating to administration of the Plan, advance the
lapse of any waiting period, accelerate any exercise date, waive or modify any
restriction
1
<PAGE>
applicable to shares (except those restrictions imposed by law) and make all
other determinations in the judgment of the Committee necessary or desirable for
the administration of the Plan. The interpretation and construction of the
provisions of the Plan and related agreements by the Committee shall be final
and conclusive. The Committee may correct any defect or supply any omission or
reconcile any inconsistency in the Plan or in any related agreement in the
manner and to the extent it shall deem expedient to carry the Plan into effect,
and it shall be the sole and final judge of such expediency.
5. Types of Awards; Eligibility. The Committee may, from time to time, take
the following actions, separately or in combination, under the Plan: (i) grant
Incentive Stock Options, as defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), as provided in paragraphs 6(a) and 6(b); (ii)
grant options other than Incentive Stock Options ("Non-Statutory Stock Options")
as provided in paragraphs 6(a) and 6(c); (iii) award stock bonuses as provided
in paragraph 7; (iv) sell shares subject to restrictions as provided in
paragraph 8; (v) grant stock appreciation rights as provided in paragraph 9;
(vi) grant cash bonus rights as provided in paragraph 10; (vii) grant
performance units as provided in paragraph 11 and (viii) grant foreign qualified
awards as provided in paragraph 12. Any such awards may be made to employees,
including employees who are officers or directors, and to other individuals
described in paragraph 1 who the Committee believes have made or will make an
important contribution to the Company or its subsidiaries; provided, however,
that only employees of the Company shall be eligible to receive Incentive Stock
Options under the Plan. The Committee shall select the individuals to whom
awards shall be made and shall specify the action taken with respect to each
individual to whom an award is made. At the discretion of the Committee, an
individual may be given an election to surrender an award in exchange for the
grant of a new award. No employee may be granted options or stock appreciation
rights under the Plan for more than 100,000 shares of Class A Common Stock in
any calendar year.
6. Option Grants.
(a) General Rules Relating to Options.
(i) Terms of Grant. The Committee may grant options under the
Plan. With respect to each option grant, the Committee shall determine the
number of shares subject to the option, the option price, the period of the
option, the time or times at which the option may be exercised and whether the
option is an Incentive Stock Option or a Non-Statutory Stock Option. At the time
of the grant of an option or at any time thereafter, the Committee may provide
that an optionee who exercised an option with Class A Common Stock of the
Company shall automatically receive a new option to purchase additional shares
equal to the number of shares surrendered and may specify the terms and
conditions of such new options.
(ii) Exercise of Options. Except as provided in paragraph
6(a)(iv) or as determined by the Committee, no option granted under the Plan may
be exercised unless at the time of such exercise the optionee is employed by or
in the service of the Company or any
2
<PAGE>
subsidiary of the Company and shall have been so employed or provided such
service continuously since the date such option was granted. Absence on leave or
on account of illness or disability under rules established by the Committee
shall not, however, be deemed an interruption of employment or service for this
purpose. Unless otherwise determined by the Committee, vesting of options shall
not continue during an absence on leave (including an extended illness) or on
account of disability. Except as provided in paragraphs 6(a)(iv) and 13, options
granted under the Plan may be exercised from time to time over the period stated
in each option in such amounts and at such times as shall be prescribed by the
Committee, provided that options shall not be exercised for fractional shares.
Unless otherwise determined by the Committee, if the optionee does not exercise
an option in any one year with respect to the full number of shares to which the
optionee is entitled in that year, the optionee's rights shall be cumulative and
the optionee may purchase those shares in any subsequent year during the term of
the option.
(iii) Nontransferability. Except as provided below, each stock
option granted under the Plan by its terms shall be nonassignable and
nontransferable by the optionee, either voluntarily or by operation of law, and
each option by its terms shall be exercisable during the optionee's lifetime
only by the optionee. A stock option may be transferred by will or by the laws
of descent and distribution of the state or country of the optionee's domicile
at the time of death. A Non-Statutory Stock Option shall also be transferable
pursuant to a qualified domestic relations order as defined under the Code or
Title I of the Employee Retirement Income Security Act. The Committee may, in
its discretion, authorize all or a portion of a Non-Statutory Stock Option to be
on terms which permit transfer by the optionee to (A) the spouse, children or
grandchildren of the optionee, including stepchildren and adopted children
("Immediate Family Members"), (B) a trust or trusts for the exclusive benefit of
Immediate Family Members, or (C) a partnership or limited liability company in
which Immediate Family Members are the only partners or members, provided that
(X) there may be no consideration for any transfer, (Y) the stock option
agreement pursuant to which the options are granted or an amendment thereto must
expressly provide for transferability in a manner consistent with this
paragraph, and (Z) subsequent transfers of transferred options shall be
prohibited except by will or by the laws of descent and distribution. Following
any transfer, options shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer, provided that for
purposes of paragraphs 6(a)(v) and 13 the term "optionee" shall be deemed to
refer to the transferee. The continued employment requirement of paragraph
6(a)(ii) and the events of termination of employment of paragraph 6(a)(iv) shall
continue to be applied with respect to the original optionee, and following the
termination of employment of the original optionee the options shall be
exercisable by the transferee only to the extent, and for the periods specified,
and all other references to employment, termination of employment, life or death
of the optionee, shall continue to be applied with respect to the original
optionee.
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<PAGE>
(iv) Termination of Employment or Service.
(A) General Rule. Unless otherwise determined by the
Committee, in the event the employment or service of the optionee with the
Company or a subsidiary terminates for any reason other than because of physical
disability, death or retirement as provided in subparagraphs 6(a)(iv)(B), (C)
and (D), the option may be exercised at any time prior to the expiration date of
the option or the expiration of 30 days after the date of such termination,
whichever is the shorter period, but only if and to the extent the optionee was
entitled to exercise the option at the date of such termination.
(B) Termination Because of Total Disability. Unless
otherwise determined by the Committee, in the event of the termination of
employment or service because of total disability, the option may be exercised
at any time prior to the expiration date of the option or the expiration of 12
months after the date of such termination, whichever is the shorter period, but
only if and to the extent the optionee was entitled to exercise the option at
the date of such termination. The term "total disability" means a mental or
physical impairment which is expected to result in death or which has lasted or
is expected to last for a continuous period of 12 months or more and which
causes the optionee to be unable, in the opinion of the Company and two
independent physicians, to perform his or her duties as an employee, director,
officer or consultant of the Company and to be engaged in any substantial
gainful activity. Total disability shall be deemed to have occurred on the first
day after the Company and the two independent physicians have furnished their
opinion of total disability to the Company.
(C) Termination Because of Death. Unless otherwise
determined by the Committee, in the event of the death of an optionee while
employed by or providing service to the Company or a subsidiary, the option may
be exercised at any time prior to the expiration date of the option or the
expiration of 12 months after the date of such death, whichever is the shorter
period, but only if and to the extent the optionee was entitled to exercise the
option at the date of such termination and only by the person or persons to whom
such optionee's rights under the option shall pass by the optionee's will or by
the laws of descent and distribution of the state or country of domicile at the
time of death.
(D) Termination Because of Retirement. Unless otherwise
determined by the Committee, in the event of the termination of employment or
service because of (1) normal retirement after reaching age 65, (2) early
retirement after reaching age 55 and completing 10 years of service, or (3)
early retirement after completing 30 years of service without regard to age, the
option may be exercised at any time prior to the expiration date of the option
or the expiration of 12 months after the date of such termination, whichever is
the shorter period, but only if and to the extent the optionee was entitled to
exercise the option at the date of such termination.
(E) Amendment of Exercise Period Applicable to Termination.
The Committee, at the time of grant or at any time thereafter, may extend the
30-day and 12-
4
<PAGE>
month exercise periods any length of time not later than the original expiration
date of the option, and may increase the portion of an option that is
exercisable, subject to such terms and conditions as the Committee may
determine.
(F) Failure to Exercise Option. To the extent that the
option of any deceased optionee or of any optionee whose employment or service
terminates is not exercised within the applicable period, all further rights to
purchase shares pursuant to such option shall cease and terminate.
(v) Purchase of Shares. Unless the Committee determines
otherwise, shares may be acquired pursuant to an option granted under the Plan
only upon receipt by the Company of notice in writing from the optionee of the
optionee's intention to exercise, specifying the number of shares as to which
the optionee desires to exercise the option and the date on which the optionee
desires to complete the transaction, and if required in order to comply with the
Securities Act of 1933, as amended, containing a representation that it is the
optionee's present intention to acquire the shares for investment and not with a
view to distribution. Unless the Committee determines otherwise, on or before
the date specified for completion of the purchase of shares pursuant to an
option, the optionee must have paid the Company the full purchase price of such
shares in cash (including, with the consent of the Committee, cash that may be
the proceeds of a loan from the Company) or, with the consent of the Committee,
in whole or in part, in Class A Common Stock of the Company valued at fair
market value, restricted stock, performance units or other contingent awards
denominated in either stock or cash, deferred compensation credits, promissory
notes and other forms of consideration. The fair market value of Class A Common
Stock provided in payment of the purchase price shall be the closing price of
the Class A Common Stock as reported in The Wall Street Journal on the trading
day preceding the date the option is exercised, or such other reported value of
the Class A Common Stock as shall be specified by the Committee. No shares shall
be issued until full payment therefor has been made. With the consent of the
Committee, an optionee may request the Company to apply automatically the shares
to be received upon the exercise of a portion of a stock option (even though
stock certificates have not yet been issued) to satisfy the purchase price for
additional portions of the option. Each optionee who has exercised an option
shall immediately upon notification of the amount due, if any, pay to the
Company in cash amounts necessary to satisfy any applicable federal, state and
local tax withholding requirements. If additional withholding is or becomes
required beyond any amount deposited before delivery of the certificates, the
optionee shall pay such amount to the Company on demand. If the optionee fails
to pay the amount demanded, the Company may withhold that amount from other
amounts payable by the Company to the optionee, including salary, subject to
applicable law. With the consent of the Committee an optionee may satisfy this
obligation, in whole or in part, by having the Company withhold from the shares
to be issued upon the exercise that number of shares that would satisfy the
withholding amount due or by delivering to the Company Class A Common Stock to
satisfy the withholding amount. Upon the exercise of an option, the number of
shares reserved for issuance under the Plan shall be reduced by the number of
shares issued upon exercise of the option.
5
<PAGE>
(b) Incentive Stock Options. Incentive Stock Options shall be subject
to the following additional terms and conditions:
(i) Limitation on Amount of Grants. No employee may be granted
Incentive Stock Options under the Plan if the aggregate fair market value, on
the date of grant, of the Class A Common Stock with respect to which Incentive
Stock Options are exercisable for the first time by that employee during any
calendar year under the Plan and under any other incentive stock option plan
(within the meaning of Section 422 of the Code) of the Company or any parent or
subsidiary of the Company exceeds $100,000.
(ii) Limitations on Grants to 10 Percent Shareholders. An
Incentive Stock Option may be granted under the Plan to an employee possessing
more than 10 percent of the total combined voting power of all classes of stock
of the Company or of any parent or subsidiary of the Company only if the option
price is at least 110 percent of the fair market value of the Class A Common
Stock subject to the option on the date it is granted, as described in paragraph
6(b)(iv), and the option by its terms is not exercisable after the expiration of
five years from the date it is granted.
(iii) Duration of Options. Subject to paragraphs 6(a)(ii) and
6(b)(ii), Incentive Stock Options granted under the Plan shall continue in
effect for the period fixed by the Committee, except that no Incentive Stock
Option shall be exercisable after the expiration of 10 years from the date it is
granted.
(iv) Option Price. The option price per share shall be determined
by the Committee at the time of grant. Except as provided in paragraph 6(b)(ii),
the option price shall not be less than 100 percent of the fair market value of
the Class A Common Stock covered by the Incentive Stock Option at the date the
option is granted. The fair market value shall be deemed to be the closing price
of the Class A Common Stock as reported in The Wall Street Journal on the day
preceding the date the option is granted, or if there has been no sale on that
date, on the last preceding date on which a sale occurred, or such other value
of the Class A Common Stock as shall be specified by the Committee.
(v) Limitation on Time of Grant. No Incentive Stock Option shall
be granted on or after the tenth anniversary of the last action by the Board of
Directors approving an increase in the number of shares available for issuance
under the Plan, which action was subsequently approved within 12 months by the
shareholders.
(vi) Conversion of Incentive Stock Options. The Committee may at
any time without the consent of the optionee convert an Incentive Stock Option
to a Non-Statutory Stock Option.
(c) Non-Statutory Stock Options. Non-Statutory Stock Options shall be
subject to the following additional terms and conditions:
6
<PAGE>
(i) Option Price. The option price for Non-Statutory Stock
Options shall be determined by the Committee at the time of grant and may be any
amount determined by the Committee.
(ii) Duration of Options. Non-Statutory Stock Options granted
under the Plan shall continue in effect for the period fixed by the Committee.
7. Stock Bonuses. The Committee may award shares under the Plan as stock
bonuses. Shares awarded as a bonus shall be subject to the terms, conditions,
and restrictions determined by the Committee. The restrictions may include
restrictions concerning transferability and forfeiture of the shares awarded,
together with such other restrictions as may be determined by the Committee. The
Committee may require the recipient to sign an agreement as a condition of the
award, but may not require the recipient to pay any monetary consideration other
than amounts necessary to satisfy tax withholding requirements. The agreement
may contain any terms, conditions, restrictions, representations and warranties
required by the Committee. The certificates representing the shares awarded
shall bear any legends required by the Committee. The Company may require any
recipient of a stock bonus to pay to the Company in cash upon demand amounts
necessary to satisfy any applicable federal, state or local tax withholding
requirements. If the recipient fails to pay the amount demanded, the Company may
withhold that amount from other amounts payable by the Company to the recipient,
including salary or fees for services, subject to applicable law. With the
consent of the Committee, a recipient may deliver Class A Common Stock to the
Company to satisfy this withholding obligation. Upon the issuance of a stock
bonus, the number of shares reserved for issuance under the Plan shall be
reduced by the number of shares issued.
8. Restricted Stock. The Committee may issue shares under the Plan for such
consideration (including promissory notes and services) as determined by the
Committee. Shares issued under the Plan shall be subject to the terms,
conditions and restrictions determined by the Committee. The restrictions may
include restrictions concerning transferability, repurchase by the Company and
forfeiture of the shares issued, together with such other restrictions as may be
determined by the Committee. All Class A Common Stock issued pursuant to this
paragraph 8 shall be subject to a purchase agreement, which shall be executed by
the Company and the prospective recipient of the shares prior to the delivery of
certificates representing such shares to the recipient. The purchase agreement
may contain any terms, conditions, restrictions, representations and warranties
required by the Committee. The certificates representing the shares shall bear
any legends required by the Committee. The Company may require any purchaser of
restricted stock to pay to the Company in cash upon demand amounts necessary to
satisfy any applicable federal, state or local tax withholding requirements. If
the purchaser fails to pay the amount demanded, the Company may withhold that
amount from other amounts payable by the Company to the purchaser, including
salary, subject to applicable law. With the consent of the Committee, a
purchaser may deliver Class A Common Stock to the Company to satisfy this
7
<PAGE>
withholding obligation. Upon the issuance of restricted stock, the number of
shares reserved for issuance under the Plan shall be reduced by the number of
shares issued.
9. Stock Appreciation Rights.
(a) Grant. Stock appreciation rights may be granted under the Plan by
the Committee, subject to such rules, terms, and conditions as the Committee
prescribes.
(b) Exercise.
(i) Each stock appreciation right shall entitle the holder, upon
exercise, to receive from the Company in exchange therefor an amount equal in
value to the excess of the fair market value on the date of exercise of one
share of Class A Common Stock of the Company over its fair market value on the
date of grant (or, in the case of a stock appreciation right granted in
connection with an option, the excess of the fair market value of one share of
Class A Common Stock of the Company over the option price per share under the
option to which the stock appreciation right relates), multiplied by the number
of shares covered by the stock appreciation right or the option, or portion
thereof, that is surrendered. Payment by the Company upon exercise of a stock
appreciation right may be made in Class A Common Stock valued at fair market
value, in cash, or partly in Class A Common Stock and partly in cash, all as
determined by the Committee.
(ii) A stock appreciation right shall be exercisable only at the
time or times established by the Committee. If a stock appreciation right is
granted in connection with an option, the following rules shall apply: (1) the
stock appreciation right shall be exercisable only to the extent and on the same
conditions that the related option could be exercised; (2) upon exercise of the
stock appreciation right, the option or portion thereof to which the stock
appreciation right relates terminates; and (3) upon exercise of the option, the
related stock appreciation right or portion thereof terminates.
(iii) The Committee may withdraw any stock appreciation right
granted under the Plan at any time and may impose any conditions upon the
exercise of a stock appreciation right or adopt rules and regulations from time
to time affecting the rights of holders of stock appreciation rights. Such rules
and regulations may govern the right to exercise stock appreciation rights
granted prior to adoption or amendment of such rules and regulations as well as
stock appreciation rights granted thereafter.
(iv) For purposes of this paragraph 9, the fair market value of
the Class A Common Stock shall be the closing price of the Class A Common Stock
as reported in The Wall Street Journal, or such other reported value of the
Class A Common Stock as shall be specified by the Committee, on the trading day
preceding the date the stock appreciation right is exercised.
8
<PAGE>
(v) No fractional shares shall be issued upon exercise of a stock
appreciation right. In lieu thereof, cash may be paid in an amount equal to the
value of the fraction or, if the Committee shall determine, the number of shares
may be rounded downward to the next whole share.
(vi) Each stock appreciation right granted in connection with an
Incentive Stock Option and, unless otherwise determined by the Board of
Directors, each other stock appreciation right granted under the Plan by its
terms shall be nonassignable and nontransferable by the holder, either
voluntarily or by operation of law, except by will or by the laws of descent and
distribution of the state or country of the holder's domicile at the time of
death, and each stock appreciation right by its terms shall be exercisable
during the holder's lifetime only by the holder; provided, however, that a stock
appreciation right not granted in connection with an Incentive Stock Option
shall also be transferable pursuant to a qualified domestic relations order as
defined under the Code or Title I of the Employee Retirement Income Security
Act.
(vii) Each participant who has exercised a stock appreciation
right shall, upon notification of the amount due, pay to the Company in cash
amounts necessary to satisfy any applicable federal, state and local tax
withholding requirements. If the participant fails to pay the amount demanded,
the Company may withhold that amount from other amounts payable by the Company
to the participant including salary, subject to applicable law. With the consent
of the Committee a participant may satisfy this obligation, in whole or in part,
by having the Company withhold from any shares to be issued upon the exercise
that number of shares that would satisfy the withholding amount due or by
delivering Class A Common Stock to the Company to satisfy the withholding
amount.
(viii) Upon the exercise of a stock appreciation right for
shares, the number of shares reserved for issuance under the Plan shall be
reduced by the number of shares issued. Cash payments of stock appreciation
rights shall not reduce the number of shares of Class A Common Stock reserved
for issuance under the Plan.
10. Cash Bonus Rights.
(a) Grant. The Committee may grant cash bonus rights under the Plan in
connection with (i) options granted or previously granted, (ii) stock
appreciation rights granted or previously granted, (iii) stock bonuses awarded
or previously awarded and (iv) shares sold or previously sold under the Plan.
Cash bonus rights will be subject to rules, terms and conditions as the
Committee may prescribe. Unless otherwise determined by the Committee, each cash
bonus right granted under the Plan by its terms shall be nonassignable and
nontransferable by the holder, either voluntarily or by operation of law, except
by will or by the laws of descent and distribution of the state or country of
the holder's domicile at the time of death or pursuant to a qualified domestic
relations order as defined under the Code or Title I of the Employee Retirement
Income
9
<PAGE>
Security Act. The payment of a cash bonus shall not reduce the number of shares
of Class A Common Stock reserved for issuance under the Plan.
(b) Cash Bonus Rights in Connection With Options. A cash bonus right
granted in connection with an option will entitle an optionee to a cash bonus
when the related option is exercised (or terminates in connection with the
exercise of a stock appreciation right related to the option) in whole or in
part. If an optionee purchases shares upon exercise of an option and does not
exercise a related stock appreciation right, the amount of the bonus shall be
determined by multiplying the excess of the total fair market value of the
shares to be acquired upon the exercise over the total option price for the
shares by the applicable bonus percentage. If the optionee exercises a related
stock appreciation right in connection with the termination of an option, the
amount of the bonus shall be determined by multiplying the total fair market
value of the shares and cash received pursuant to the exercise of the stock
appreciation right by the applicable bonus percentage. The bonus percentage
applicable to a bonus right shall be determined from time to time by the
Committee but shall in no event exceed 75 percent.
(c) Cash Bonus Rights in Connection With Stock Bonus. A cash bonus
right granted in connection with a stock bonus will entitle the recipient to a
cash bonus payable when the stock bonus is awarded or restrictions, if any, to
which the stock is subject lapse. If bonus stock awarded is subject to
restrictions and is repurchased by the Company or forfeited by the holder, the
cash bonus right granted in connection with the stock bonus shall terminate and
may not be exercised. The amount and timing of payment of a cash bonus shall be
determined by the Committee.
(d) Cash Bonus Rights in Connection With Stock Purchases. A cash bonus
right granted in connection with the purchase of stock pursuant to paragraph 8
will entitle the recipient to a cash bonus when the shares are purchased or
restrictions, if any, to which the stock is subject lapse. Any cash bonus right
granted in connection with shares purchased pursuant to paragraph 8 shall
terminate and may not be exercised in the event the shares are repurchased by
the Company or forfeited by the holder pursuant to applicable restrictions. The
amount and timing of payment of a cash bonus shall be determined by the
Committee.
(e) Taxes. The Company shall withhold from any cash bonus paid
pursuant to paragraph 10 the amount necessary to satisfy any applicable federal,
state and local withholding requirements.
11. Performance Units. The Committee may grant performance units consisting
of monetary units which may be earned in whole or in part if the Company
achieves certain goals established by the Committee over a designated period of
time, but not in any event more than 10 years. The goals established by the
Committee may include earnings per share, return on shareholders' equity, return
on invested capital, and such other goals as may be established by the
Committee. In the event that the minimum performance goal established by the
Committee is not achieved at the conclusion of a period, no payment shall be
made to the participants. In the event
10
<PAGE>
the maximum corporate goal is achieved, 100 percent of the monetary value of the
performance units shall be paid to or vested in the participants. Partial
achievement of the maximum goal may result in a payment or vesting corresponding
to the degree of achievement as determined by the Committee. Payment of an award
earned may be in cash or in Class A Common Stock or in a combination of both,
and may be made when earned, or vested and deferred, as the Committee
determines. Deferred awards shall earn interest on the terms and at a rate
determined by the Committee. Unless otherwise determined by the Committee, each
performance unit granted under the Plan by its terms shall be nonassignable and
nontransferable by the holder, either voluntarily or by operation of law, except
by will or by the laws of descent and distribution of the state or country of
the holder's domicile at the time of death or pursuant to a qualified domestic
relations order as defined under the Code or Title I of the Employee Retirement
Income Security Act. Each participant who has been awarded a performance unit
shall, upon notification of the amount due, pay to the Company in cash amounts
necessary to satisfy any applicable federal, state and local tax withholding
requirements. If the participant fails to pay the amount demanded, the Company
may withhold that amount from other amounts payable by the Company to the
participant, including salary or fees for services, subject to applicable law.
With the consent of the Committee a participant may satisfy this obligation, in
whole or in part, by having the Company withhold from any shares to be issued
that number of shares that would satisfy the withholding amount due or by
delivering Class A Common Stock to the Company to satisfy the withholding
amount. The payment of a performance unit in cash shall not reduce the number of
shares of Class A Common Stock reserved for issuance under the Plan. The number
of shares reserved for issuance under the Plan shall be reduced by the number of
shares issued upon payment of an award.
12. Foreign Qualified Grants. Awards under the Plan may be granted to such
officers and employees of the Company and its subsidiaries and such other
persons described in paragraph 1 residing in foreign jurisdictions as the
Committee may determine from time to time. The Committee may adopt such
supplements to the Plan as may be necessary to comply with the applicable laws
of such foreign jurisdictions and to afford participants favorable treatment
under such laws; provided, however, that no award shall be granted under any
such supplement with terms which are more beneficial to the participants than
the terms permitted by the Plan.
13. Changes in Capital Structure. If the outstanding Class A Common Stock
of the Company is hereafter increased or decreased or changed into or exchanged
for a different number or kind of shares or other securities of the Company or
of another corporation by reason of any reorganization, merger, consolidation,
plan of exchange, recapitalization, reclassification, stock split-up,
combination of shares or dividend payable in shares, appropriate adjustment
shall be made by the Committee in the number and kind of shares available for
awards under the Plan. In addition, the Committee shall make appropriate
adjustment in the number and kind of shares as to which outstanding options and
stock appreciation rights, or portions thereof then unexercised, shall be
exercisable, so that the optionee's proportionate interest before and after the
occurrence of the event is maintained. Notwithstanding the foregoing, the
Committee shall have no obligation to effect any adjustment that would or might
result in the issuance of fractional shares, and any fractional shares resulting
from any adjustment may be disregarded or provided for in any manner
11
<PAGE>
determined by the Committee. Any such adjustments made by the Committee shall be
conclusive. In the event of dissolution of the Company or a merger,
consolidation or plan of exchange affecting the Company, in lieu of providing
for options and stock appreciation rights as provided above in this paragraph 13
or in lieu of having the options and stock appreciation rights continue
unchanged, the Committee may, in its sole discretion, provide a 30-day period
prior to such event during which optionees shall have the right to exercise
options and stock appreciation rights in whole or in part without any limitation
on exercisability and upon the expiration of which 30-day period all unexercised
options and stock appreciation rights shall immediately terminate.
14. Corporate Mergers, Acquisitions, etc. The Committee may also grant
options, stock appreciation rights, performance units, stock bonuses and cash
bonuses and issue restricted stock under the Plan having terms, conditions and
provisions that vary from those specified in this Plan provided that any such
awards are granted in substitution for, or in connection with the assumption of,
existing options, stock appreciation rights, stock bonuses, cash bonuses,
restricted stock and performance units granted, awarded or issued by another
corporation and assumed or otherwise agreed to be provided for by the Company
pursuant to or by reason of a transaction involving a corporate merger,
consolidation, acquisition of property or stock, separation, reorganization or
liquidation to which the Company or a subsidiary is a party.
15. Amendment of Plan. The Board of Directors may at any time, and from
time to time, modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or for any
other reason. Except as provided in paragraphs 6(a)(iv), 9 and 13, however, no
change in an award already granted shall be made without the written consent of
the holder of such award.
16. Approvals. The obligations of the Company under the Plan are subject to
the approval of state and federal authorities or agencies with jurisdiction in
the matter. The Company will use its best efforts to take steps required by
state or federal law or applicable regulations, including rules and regulations
of the Securities and Exchange Commission and any stock exchange on which the
Company's shares may then be listed, in connection with the grants under the
Plan. The foregoing notwithstanding, the Company shall not be obligated to issue
or deliver Class A Common Stock under the Plan if such issuance or delivery
would violate applicable state or federal securities laws.
17. Employment and Service Rights. Nothing in the Plan or any award
pursuant to the Plan shall (i) confer upon any employee any right to be
continued in the employment of the Company or any subsidiary or interfere in any
way with the right of the Company or any subsidiary by whom such employee is
employed to terminate such employee's employment at any time, for any reason,
with or without cause, or to decrease such employee's compensation or benefits,
or (ii) confer upon any person engaged by the Company any right to be retained
or employed by the Company or to the continuation, extension, renewal, or
modification of any compensation, contract, or arrangement with or by the
Company.
12
<PAGE>
18. Rights as a Shareholder. The recipient of any award under the Plan
shall have no rights as a shareholder with respect to any Class A Common Stock
until the date of issue to the recipient of a stock certificate for such shares.
Except as otherwise expressly provided in the Plan, no adjustment shall be made
for dividends or other rights for which the record date occurs prior to the date
such stock certificate is issued.
EFFECTIVE DATE: September 13, 1993.
AMENDED: January 6, 1997 and October 20, 1997.
13
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 Alaska Oregon
Joint Venture Operations, Inc. Delaware
Levi's Iron and Metal, Inc. Oregon
Manufacturing Management, Inc. Oregon
SSI International (Oregon), Inc. Oregon
SSI International (Guam), Inc. Guam
SSI International Far East Ltd. Korea
Mormil Corp. Oregon
MRI Corporation Delaware
Norprop, Inc. Oregon
Oregon Rail Marketing Co. Oregon
Proler Environmental Services, Inc. Delaware
Proler International Corp. Delaware
Proler Properties, Inc. Texas
Proleride Transport Systems, Inc. Delaware
Proler Recycling, Inc. Delaware
Schnitzer Leasing, Inc. Oregon
Schnitzer Steel of Tacoma Washington
SSP Reclamation Company Oregon
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-87008 and 333-21895) of Schnitzer Steel
Industries, Inc. of our report dated September 26, 1997 appearing on page 28 of
this Annual Report on Form 10-K. We also consent to the incorporation by
reference of our report on the Financial Statement Schedule, which appears on
page 55 of this Form 10-K.
PRICE WATERHOUSE LLP
November 18, 1997
Portland Oregon
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, 1997 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, 1997.
/s/ LEONARD SCHNITZER
-----------------------------------------
LEONARD SCHNITZER
<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, 1997 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, 1997.
/s/ K. NOVACK
-----------------------------------------
KENNETH M. NOVACK
<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, 1997 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, 1997.
/s/ R.W. PHILIP
-----------------------------------------
ROBERT W. PHILIP
<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, 1997 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, 1997.
/s/ DORI SCHNITZER
-----------------------------------------
DORI SCHNITZER
<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, 1997 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, 1997.
/s/ CAROL S. LEWIS
-----------------------------------------
CAROL S. LEWIS
<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, 1997 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, 1997.
/s/ GARY SCHNITZER
-----------------------------------------
GARY SCHNITZER
<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, 1997 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, 1997.
/s/ MANUEL SCHNITZER
-----------------------------------------
MANUEL SCHNITZER
<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, 1997 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, 1997.
/s/ JEAN S. REYNOLDS
-----------------------------------------
JEAN S. REYNOLDS
<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, 1997 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, 1997.
/s/ ROBERT S. BALL
-----------------------------------------
ROBERT S. BALL
<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, 1997 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, 1997.
/s/ W.A. FURMAN
-----------------------------------------
WILLIAM A. FURMAN
<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, 1997 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, 1997.
/s/ RALPH R. SHAW
-----------------------------------------
RALPH R. SHAW
<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, 1997 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, 1997.
/s/ B.A. ROSEN
-----------------------------------------
BARRY A. ROSEN
<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, 1997 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, 1997.
/s/ JAMES W. CRUCKSHANK
-----------------------------------------
JAMES W. CRUCKSHANK
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS FILED AS
PART OF THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 3,106
<SECURITIES> 0
<RECEIVABLES> 31,534
<ALLOWANCES> 524
<INVENTORY> 95,154
<CURRENT-ASSETS> 144,390
<PP&E> 265,563
<DEPRECIATION> 114,427
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<CURRENT-LIABILITIES> 39,492
<BONDS> 93,242
0
0
<COMMON> 10,182
<OTHER-SE> 228,879
<TOTAL-LIABILITY-AND-EQUITY> 427,986
<SALES> 361,753
<TOTAL-REVENUES> 361,753
<CGS> 314,785
<TOTAL-COSTS> 336,023
<OTHER-EXPENSES> (4,388)
<LOSS-PROVISION> 63
<INTEREST-EXPENSE> 5,026
<INCOME-PRETAX> 32,171
<INCOME-TAX> 10,946
<INCOME-CONTINUING> 21,225
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<NET-INCOME> 21,225
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