UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended May 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______.
Commission file number 0-22496
SCHNITZER STEEL INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
OREGON 93-0341923
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3200 N.W. Yeon Ave., P.O Box 10047
Portland, OR 97296-0047
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(503) 224-9900
----------------------------------------------------
(Registrant's telephone number, including area code)
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 [ ]
The Registrant had 5,555,026 shares of Class A Common Stock, par value of $1.00
per share and 4,430,328 shares of Class B Common Stock, par value of $1.00 per
share outstanding at July 1, 1998.
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
INDEX
-----
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet at May 31, 1998
and August 31, 1997.......................................................3
Consolidated Statement of Operations for the Three Months and
Nine Months Ended May 31, 1998 and 1997...................................4
Consolidated Statement of Shareholders' Equity for the
Year Ended August 31, 1997 and the Nine Months
Ended May 31, 1998........................................................5
Consolidated Statement of Cash Flows for the
Nine Months Ended May 31, 1998 and 1997...................................6
Notes to Financial Statements.................................................7
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................12
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K.............................................18
SIGNATURE PAGE...............................................................19
2
<PAGE>
<TABLE>
<CAPTION>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
May 31, 1998 August 31, 1997
------------ ---------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,666 $ 3,106
Accounts receivable, less allowance for
doubtful accounts of $485 and $524 30,043 31,010
Accounts receivable from related parties 499 1,215
Inventories (Note 2) 104,506 95,154
Deferred income taxes 10,737 10,737
Prepaid expenses and other 6,834 3,168
---------- ----------
TOTAL CURRENT ASSETS 154,285 144,390
---------- ----------
NET PROPERTY, PLANT AND EQUIPMENT 142,925 151,136
---------- ----------
OTHER ASSETS:
Investment in joint venture partnerships 105,578 74,605
Advances to joint venture partnerships 9,161 7,145
Goodwill 41,320 42,230
Intangibles and other 9,753 8,480
---------- ----------
$ 463,022 $ 427,986
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 7) $ 166 $ 361
Accounts payable 15,673 19,456
Accrued payroll liabilities 4,355 5,158
Current portion of environmental liabilities (Note 4) 5,152 5,787
Other accrued liabilities 9,107 8,730
---------- ----------
TOTAL CURRENT LIABILITIES 34,453 39,492
---------- ----------
DEFERRED INCOME TAXES 28,117 28,409
---------- ----------
LONG-TERM DEBT LESS CURRENT PORTION (Note7) 128,988 92,881
---------- ----------
ENVIRONMENTAL LIABILITIES,
NET OF CURRENT PORTION (Note 4) 23,030 24,530
---------- ----------
OTHER LONG-TERM LIABILITIES 3,311 3,613
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock--20,000 shares authorized, none issued
Class A common stock--75,000 shares $1 par value
authorized, 5,555 and 5,737 shares issued and outstanding 5,555 5,737
Class B common stock--25,000 shares $1 par value
authorized, 4,431 and 4,445 shares issued and outstanding 4,431 4,445
Additional paid-in capital 105,124 109,994
Retained earnings 130,013 118,885
----------- ----------
245,123 239,061
----------- ----------
$ 463,022 $ 427,986
=========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
For The Three Months Ended For The Nine Months Ended
May 31, May 31,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 80,918 $ 89,297 $ 268,216 $ 248,596
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of goods sold and
other operating expenses 71,296 76,230 237,567 219,434
Selling and administrative 5,520 4,888 16,150 15,443
----------- ----------- ----------- -----------
76,816 81,118 253,717 234,877
----------- ----------- ----------- -----------
INCOME FROM JOINT VENTURES 1,417 2,720 8,380 4,500
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 5,519 10,899 22,879 18,219
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (1,849) (1,551) (4,537) (3,583)
Other income 283 3,416 1,096 4,441
----------- ----------- ----------- -----------
(1,566) 1,865 (3,441) 858
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,953 12,764 19,438 19,077
Income tax provision (1,384) (4,340) (6,803) (6,494)
----------- ----------- ----------- -----------
NET INCOME $ 2,569 $ 8,424 $ 12,635 $ 12,583
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.26 $ 0.81 $ 1.25 $ 1.22
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE $ 0.26 $ 0.81 $ 1.25 $ 1.21
=========== =========== =========== ===========
The accompanying notes are an integral part of this statement.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
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 8/31/96 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
Net Income 12,635 12,635
Class B common stock converted
to Class A common stock 14 14 (14) (14)
Class A common stock repurchased (196) (196) (4,870) (5,066)
Dividends paid (1,507) (1,507)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT 5/31/98 5,555 $ 5,555 4,431 $ 4,431 $ 105,124 $ 130,013 $ 245,123
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
For The Nine Months Ended
May 31,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATIONS:
Net income $ 12,635 $ 12,583
Noncash items included in income:
Depreciation and amortization 14,123 13,055
Deferred income taxes (292) (2,211)
Equity in earnings of joint ventures
and other investments (8,380) (4,500)
Gain on disposal of assets (113) (65)
Cash provided (used) by assets and liabilities:
Accounts receivable 1,683 64
Inventories (9,352) (13,618)
Prepaid expenses and other (2,608) 1,855
Accounts payable (3,783) (5,987)
Deferred revenue (76) 3,327
Accrued expenses (351) 1,855
Environmental liabilities (2,135) (861)
Other assets and liabilities (1,491) (367)
---------- ----------
NET CASH (USED) PROVIDED BY OPERATIONS (140) 5,130
---------- ----------
INVESTMENTS:
Payment for purchase of Proler (42,456)
Capital expenditures (7,512) (10,499)
Advances to joint ventures (2,016) (4,396)
Investments in joint ventures (22,892) 18,721
Proceeds from sale of assets 2,986 4,859
Other (1,205) (1,057)
---------- ----------
NET CASH USED BY INVESTMENTS (30,639) (34,828)
---------- ----------
FINANCING:
Repurchase of Class A common stock (5,066) (2,350)
Dividends declared and paid (1,507) (1,551)
Increase in long-term debt 36,200 63,526
Reduction in long-term debt (288) (27,866)
---------- ----------
NET CASH PROVIDED BY FINANCING 29,339 31,759
---------- ----------
NET (DECREASE) INCREASE IN CASH (1,440) 2,061
CASH AT BEGINNING OF PERIOD 3,106 1,896
---------- ----------
CASH AT END OF PERIOD $ 1,666 $ 3,957
========== ==========
The accompanying notes are an integral part of this statement.
</TABLE>
6
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1998 and 1997
(in thousands, except per share amounts)
(Unaudited)
Note 1 - Summary Of Significant Accounting Policies:
Basis of Presentation
---------------------
The accompanying unaudited interim financial statements of Schnitzer
Steel Industries, Inc. (the Company) have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and note disclosures normally included in annual
financial statements have been condensed or omitted pursuant to those
rules and regulations. In the opinion of management, all adjustments,
consisting only of normal, recurring adjustments considered necessary
for a fair presentation, have been included. Although management
believes that the disclosures made are adequate to ensure that the
information presented is not misleading, it is suggested that these
financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's annual report
for the fiscal year ended August 31, 1997. The results for the nine
months ended May 31, 1998 are not necessarily indicative of the results
of operations for the entire year.
Earnings Per Share
------------------
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings Per share", which specifies the computation,
presentation and disclosure requirements for earnings per share
("EPS"). SFAS 128 replaces the presentation of primary and fully
diluted EPS with basic and diluted EPS. Basic EPS is computed based
upon the weighted average number of common shares outstanding during
the period. Diluted EPS reflects the potential dilution that would
occur if securities or other contracts to issue common stock were
exercised or converted into common stock. The following represents a
reconciliation from basic EPS to diluted EPS:
<TABLE>
<CAPTION>
Three Months Ended May 31, 1998
-------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS $ 2,569 9,985 $ 0.26
Options -- 62 =========
----------- -------------
Diluted EPS $ 2,569 10,047 $ 0.26
=========== ============= =========
Three Months Ended May 31, 1997
-------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS $ 8,424 10,343 $ 0.81
Options -- 28 =========
----------- -------------
Diluted EPS $ 8,424 10,371 $ 0.81
=========== ============= =========
</TABLE>
7
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1998 and 1997
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended May 31, 1998
-------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS $ 12,635 10,070 $ 1.25
Options -- 71 =========
----------- -------------
Diluted EPS $ 12,635 10,141 $ 1.25
=========== ============= =========
Nine Months Ended May 31, 1997
-------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS $ 12,583 10,340 $ 1.22
Options -- 59 =========
----------- -------------
Diluted EPS $ 12,583 10,399 $ 1.21
=========== ============= =========
</TABLE>
Note 2 - Inventories:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
May 31, 1998 August 31, 1997
------------ ---------------
(Unaudited) (Audited)
<S> <C> <C>
Scrap metals $ 25,864 $ 26,897
Work in process 11,783 24,358
Finished goods 50,690 28,109
Supplies 16,169 15,790
---------- ----------
$ 104,506 $ 95,154
========== ==========
</TABLE>
Scrap metal inventories are valued at LIFO; the remainder are at FIFO.
Interim LIFO calculations are based on the Company's estimates of
expected year-end inventory levels and costs. The cost of scrap metal
inventories exceeded the stated LIFO value by $8,039 at May 31, 1998
and August 31, 1997.
8
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1998 and 1997
(in thousands, except per share amounts)
(Unaudited)
Note 3 - Related Party Transactions:
Certain shareholders of the Company own significant interests 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 shipping companies to
transport scrap metal to foreign markets. 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. Charges incurred for these charters were
$1,522 and $1,841 for the three months ended May 31, 1998 and 1997,
respectively, and $5,836 and $6,332 for the nine months ended May 31,
1998 and 1997, respectively.
The Company purchased scrap metals from certain of its joint venture
operations totaling $4,452 and $3,879 for the three months ended May
31, 1998 and 1997, respectively, and $12,307 and $9,019 for the nine
months ended May 31, 1998 and 1997, respectively.
The Company leases certain land and buildings from a real estate
company which is a related entity. The rent expense was $338 and $387
for the three months ended May 31, 1998 and 1997, respectively, and
$998 and $1,098 for the nine months ended May 31, 1998 and 1997,
respectively.
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 costs plus a 15% margin for overhead and profit. The
administrative charges totaled $233 and $285 for the three months ended
May 31, 1998 and 1997, respectively, and $969 and $795 for the nine
months ended May 31, 1998 and 1997, respectively.
Transactions Affecting Other Income (Expense)
---------------------------------------------
The vessels discussed above are periodically sub-chartered to third
parties. In this case, a related shipping agency company acts as the
Company's agent in the collection of income and payment of expenses
related to sub-charter activities. Charges incurred for these
sub-charters were $123 for the three months ended May 31, 1998, and
$743 and $871 for the nine months ended May 31, 1998 and 1997,
respectively. There was no subcharter income for the three months ended
May 31, 1998 and 1997. These charges were offset by income of $408 and
$747 for the nine months ended May 31, 1998 and 1997, respectively.
9
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1998 and 1997
(in thousands, except per share amounts)
(Unaudited)
Note 4 - Environmental Liabilities:
During fiscal 1995, in conjunction with the due diligence proceedings
for the Company's acquisition of Manufacturing Management, Inc. (MMI),
the Company hired an independent third-party consultant to estimate the
costs to cure both current and future potential environmental
liabilities. The cumulative provision for the total cost 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 May 31, 1998 aggregated $20,200.
A portion of the liability recorded in fiscal 1995 relates to MMI's
status as a potentially responsible party (PRP) for the investigation
and cleanup of sediment along the Hylebos Waterway, on which the
Schnitzer Steel of Tacoma (SST) scrap yard is located. SST and five
other PRPs voluntarily entered into an Administrative Order of Consent
with the Environmental Protection Agency (EPA) to fund a pre-remedial
study of sediment contamination and remediation alternatives. SST's
share of the study, which is expected to be complete in 1998, is
approximately $2,000. 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 5), an independent third party consultant was
engaged to estimate the costs to cure present and future potential
liabilities related to Proler's wholly-owned and joint venture
properties. Proler recorded a liability of $8,600 for the probable
costs to remediate its wholly-owned properties based upon the
consultant's estimates, increasing its environmental reserves to
$9,800. The Company carried over the aggregate reserve to its financial
statements upon acquiring Proler and $8,000 remained outstanding on May
31, 1998. Concurrently, based upon the consultant's estimates, Proler's
joint venture operations recorded additional liabilities of $4,100 for
the probable costs to remediate their properties. The liability was
recorded 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 this site by the EPA. Proler
included the probable costs associated with this site in the
aforementioned reserve. Additionally, Proler and this subsidiary have
been named or identified as PRPs at several other sites.
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
lease renewal with the Port of Los Angeles, to be responsible for a
multi-year, remedial clean-up project involving certain environmental
conditions 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.
Certain of the Company's joint ventures have completed acquisitions or
made investments in joint ventures. Prior to the closing of these
transactions, the joint ventures caused environmental liabilities
totaling approximately $5.0 million to be recorded on the books of
these new entities.
10
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MAY 31, 1998 and 1997
(in thousands, except per share amounts)
(Unaudited)
Note 5 - Acquisition of Proler International Corp.:
Between November 29, 1996 and December 6, 1996, PIC Acquisition Corp.
(PIC), a wholly-owned subsidiary of the Company, acquired 100% of the
common stock of Proler. 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.
The Company 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 estimated 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 period shown.
For the Nine Months Ended
May 31, 1997
-------------------------
Revenues $ 251,742
Net income $ 5,964
===========
Earnings per share $ .57
===========
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 period presented or of future results of operations of the
consolidated entities.
Note 6 - Disposal of Lathrop, California Facility:
In May 1998, the Company disposed of a tin scrap processing facility in
Lathrop, California. The facility was acquired as part of the Proler
acquisition (Note 5). The sale resulted in a gain of $1.1 million, of
which $.8 million was recorded as a reduction in cost of goods sold and
$.3 million as a gain on sale of assets for the three months ended May
31, 1998.
Note 7 - Interest Rate Instruments:
In February 1998, the Company entered into interest rate swap
agreements with two of its banks for the purpose of managing its
exposure to adverse movements in interest rates and lowering the cost
of various debt instruments. The Company does not use financial
instruments for trading purposes, and is not a party to leveraged
derivatives. Pursuant to the swap agreements, the Company exchanged its
floating rate interest obligations on $50,000 notional principal amount
for a fixed interest obligation of 5.55% for three years. The
differential paid or received on interest rate agreements is recognized
as an adjustment to interest expense.
11
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company operates in two business segments. Scrap Operations
collects, processes and recycles steel scrap through facilities in
Oregon, Washington, Alaska and California. Additionally, the Company
participates, through joint ventures, in the management of 29 scrap
collection and processing facilities, including export terminals in Los
Angeles, California; Everett, Massachusetts; Portland, Maine;
Providence, Rhode Island and Jersey City, New Jersey. Steel Operations
operates a mini-mill in Oregon which produces steel reinforcing bar,
merchant bar, coiled rebar and wire rod. Mill depots are maintained in
California.
Results of Operations
The Company's revenues and operating results by business segment are
summarized below (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
--------------------------- ---------------------------
May 31, 1998 May 31, 1997 May 31, 1998 May 31, 1997
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Scrap Operations:
Ferrous sales $ 40,497 $ 47,325 $ 143,361 $ 132,156
Nonferrous sales 7,998 7,484 20,005 18,944
Other sales 3,672 5,456 12,267 11,738
--------- --------- --------- ---------
Total sales 52,167 60,265 175,633 162,838
Ferrous sales to Steel Operations (16,430) (18,161) (44,546) (40,909)
Steel Operations 45,181 47,193 137,129 126,667
--------- --------- --------- ---------
Total $ 80,918 $ 89,297 $ 268,216 $ 248,596
========= ========= ========= =========
INCOME FROM OPERATIONS:
Scrap Operations $ 2,866 $ 8,261 $ 13,886 $ 15,126
Steel Operations 3,137 1,518 5,775 3,712
Joint ventures 1,417 2,720 8,380 4,500
Corporate expense & eliminations (1,901) (1,600) (5,162) (5,119)
--------- --------- --------- ---------
Total $ 5,519 $ 10,899 $ 22,879 $ 18,219
========= ========= ========= =========
NET INCOME $ 2,569 $ 8,424 $ 12,635 $ 12,583
========= ========= ========= =========
</TABLE>
12
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
--------------------------- ---------------------------
May 31, 1998 May 31, 1997 May 31, 1998 May 31, 1997
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
SHIPMENTS:
SCRAP OPERATIONS
Ferrous scrap (long tons):
To Steel Operations 148 149 379 353
To unaffiliated customers 200 221 746 722
--------- --------- --------- ---------
Total 348 370 1,125 1,075
========= ========= ========= =========
Export tons 117 177 547 583
========= ========= ========= =========
STEEL OPERATIONS
Finished steel products (short tons) 131 140 392 378
========= ========= ========= =========
</TABLE>
Revenues. Consolidated revenues for the three months ended May 31, 1998
decreased $8.4 million (9%) over the same quarter last year. For the
nine months ended May 31, 1998, consolidated revenues increased $19.6
million (8%) over the same period last year. Revenue increases for the
nine months ended May 31, 1998 were generated by both Scrap and Steel
Operations.
Revenues from Scrap Operations, before intercompany eliminations,
decreased $8.1 million (13%) for the three months ended May 31, 1998,
reflecting a decrease in ferrous tons shipped at lower average selling
prices. Ferrous scrap revenues decreased $6.8 million (14%). Average
selling prices decreased $11 to $117 per ton compared to the quarter
ended May 31, 1997. This decrease in average selling price is primarily
attributable to the decline in export prices related to the Asian
financial crisis. Ferrous tons shipped to Steel Operations decreased
1%. For the nine months ended May 31, 1998, Scrap Operations' revenues,
before intercompany eliminations, were $12.8 million (8%) over the same
period last year. The increase is due to a 5% increase in ferrous tons
shipped, at a 4% higher average selling price.
For the three months ended May 31, 1998, Steel Operations' revenues
decreased by $2.0 million (4%) to $45.2 million. The Company's sales of
finished steel decreased 9,000 tons, primarily as a result of adverse
weather conditions in California. The effect of decreased tonnage
shipped was partially offset by an increase in average selling price
for finished steel products of $7 per ton (2%) to $344 per ton over the
same period last year. Revenues also increased due to increased sales
of wire rod and coiled rebar. These products were first introduced into
the product mix during the third quarter of 1997 and production of
these higher priced items has risen steadily since that time. For the
three and nine months ended May 31, 1998, the Company sold 12,700 tons
and 41,100 tons of these new products, respectively. This compares to
5,300 tons for the three and nine months ended May 31, 1997. For the
nine months ended May 31, 1998, revenues from Steel Operations
increased 8% to $137.1 million. Finished steel shipments increased
14,000 tons (4%) to 392,000 tons. Increased tonnage shipped, coupled
with a slight increase in selling prices resulted in higher sales for
the period. Additionally, a change in product mix to higher priced
products contributed to the increase in revenue and average selling
price.
13
<PAGE>
SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
Cost of Goods Sold. Overall cost of goods sold decreased $4.9 million
(6%) during the third quarter of fiscal 1998 compared with the third
quarter of fiscal 1997. Cost of goods sold as a percentage of revenues
increased from 85% to 88%. Gross profit in total decreased by $3.4
million (26%) primarily as a result of decreases in export prices
realized by Scrap Operations. For the nine months ended May 31, 1998,
consolidated cost of goods sold increased $18.1 million, compared with
the same period last year. Cost of goods sold as a percentage of
revenues increased from 88% to 89% for the same period, and gross
profit increased $1.5 million (5%), due to an increase in scrap and
finished steel tons shipped at higher average selling prices.
For the three months ended May 31, 1998, cost of goods sold for Scrap
Operations decreased $2.8 million and increased as a percentage of
revenues from 82% to 89%. Scrap Operations' gross profit decreased from
$11 million to $5.7 million. The decrease was due to the impact of
reduced tonnage shipped and lower average selling prices. For the nine
months ended May 31, 1998, Scrap Operations' average ferrous scrap cost
of goods sold increased 5% to $112 per ton. Cost of goods sold as a
percentage of revenues increased slightly from 86% to 87%. The increase
in tonnage and selling prices, offset by increased cost of raw scrap
resulted in a $.7 million (3%) decrease in gross profit to $22.7
million.
As a part of its acquisition of Proler (Note 5), the Company acquired a
tin scrap processing facility in Lathrop, California that was sold in
May 1998. The Company had recorded an environmental reserve for the
property when it was acquired. The remaining reserve was reversed upon
sale of the facility. The sale resulted in a gain of $1.1 million, of
which $.8 million is recorded as a reduction of cost of goods sold and
$.3 million as gain on sale of assets for the three months ended May
31, 1998.
Steel Operations' cost of goods sold for the third quarter of fiscal
1998 decreased $3.8 million (9%) to $41.1 million and decreased as a
percentage of revenue from 95% to 91%. The decrease in cost of goods
sold is attributable to a decrease in finished steel shipments, a
change in the mix of products shipped, and lower scrap prices. Cost of
goods sold per ton, excluding billet sales, decreased from $318 to $308
per ton. Gross profit increased 78% from $2.3 million to $4.1 million
as a result of a change in the mix of products shipped and increased
plant efficiencies. For the nine months ended May 31, 1998, Steel
Operations' average cost of goods sold per ton decreased from $320 to
$319. Cost of sales as a percentage of revenues dropped from 95% to
94%. These reductions were the result of increased rolling mill
efficiencies.
Income from Joint Ventures. The Company's joint ventures generated
$93.9 million of revenues and contributed $1.4 million to income for
the quarter ended May 31, 1998. This compares with $92.2 million of
revenues, and $2.7 million contribution to income for the same period
last year. The Joint Ventures in the Scrap Processing Business shipped
601,000 tons and 619,000 tons for the same periods, respectively. For
the nine months ended May 31, 1998, the joint ventures generated $287.8
million of revenues and contributed $8.4 million to income. This
compares with $261.8 million of revenues and $4.5 million contribution
to income for the same period last year. The Joint Ventures in the
Scrap Processing Business shipped 1.8 million tons for each of the nine
months ended May 31, 1998 and 1997. Income from Joint Ventures
decreased from $2.7 million for the quarter ended May 31, 1997 to $1.4
million for the quarter ended May 31, 1998. The decrease was due
primarily to the Joint Ventures in the Scrap Processing business being
negatively impacted by the Asian financial crisis. The revenues,
contribution to income, and tons shipped for the nine months ended May
31, 1997 in the discussion above include activity which occurred prior
to the Company's acquisition of Proler.
14
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SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
The increase in income from joint ventures fiscal year to date compared
to the same period last year is primarily attributable to the Proler
joint ventures, which the company acquired in November 1996. Income for
the nine months ended May 31, 1997 includes only six months of earnings
from these operations.
Export Sales. The Company to date has been able to ship and receive
payment for all export sales that it has booked and it anticipates this
will continue to be the case. However, the Company has experienced, and
for the near term expects to experience, reduced margins on export
sales. Selling prices for export scrap to Asia have dropped over $40
per ton since the first of the fiscal year, and while the Company is
adjusting buying prices, it has not yet been able to drop the buying
price enough to make up for the drop in selling prices. Additionally,
the Company continues to see softening in demand for scrap in certain
regions of Asia.
In addition to lowering its scrap purchase price, the Company has
increased its domestic sales volume and has begun selling to Asian
countries it has not historically sold to. Concurrently, the Company
has implemented a variety of cost control measures. With the increased
emphasis on domestic sales, the Company believes that fiscal 1998 sales
to Asia will be less than 60% of tonnage sold, which has been the
average over the last several years. The Company's Joint Ventures in
the Scrap Processing Business are less dependent upon Asian sales,
expecting to ship approximately 45% of total tonnage to Asia this
fiscal year. The Company believes the joint ventures in the Northeast
are particularly well positioned over the next several years to take
advantage of increasing capacity and demand for scrap in the steel
producing areas in the Eastern United States.
While the Company cannot predict how long the Asian crisis will impact
its business operations, it believes that the factors cited above will
serve to help minimize the financial impact.
Other Income (Expense). 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 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 three and nine months ended May 31,
1997.
Interest Expense. Interest expense increased from $1.5 million for the
three months ended May 31, 1997 to $1.8 million for the same period
this year primarily as a result of higher average borrowings. For the
nine months ended May 31, 1998, compared to the same period last year,
interest expense increased $.9 million to $4.5 million. This occurred
because average borrowings in the first quarter of 1998 were higher
than during the first quarter of 1997, primarily as a result of the
Proler acquisition.
15
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SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
Year 2000. The Company continues to assess the potential impact that
the Year 2000 issue will have on its reporting systems and operations.
The Company has determined that the operating and financial software
systems it is currently implementing are Year 2000 compliant. The
Company will test new systems for Year 2000 compliance as they are
implemented. Additionally, the Company does not believe that the cost
of bringing any of its retained software into year 2000 compliance will
be material. The Company does not believe that it is substantially
reliant on any one customer or supplier and therefore does not believe
that the Year 2000 compliance of such companies will have a significant
impact on the Company. The Company does not anticipate that the Year
2000 issue will have a significant impact on its financial position or
results of operations.
Liquidity and Capital Resources. Cash used by operations for the nine
months ended May 31, 1998 was $140,000, compared with cash provided of
$5.1 million for the same period last year. The decrease in cash flow
is primarily attributable to the growth in inventories and a reduction
in accounts payable compared to the same period last year.
Capital expenditures for the three months ended May 31, 1998 totaled
$2.8 million compared with $2.4 million during the same period last
year. For the nine months ended May 31, 1998 and 1997, capital
expenditures totaled $7.5 million and $10.5 million, respectively. The
Company anticipates spending approximately $3.5 million on capital
expenditures during the remainder of fiscal 1998.
As a result of certain acquisitions, the Company carries environmental
reserves totaling $28.2 million. The Company expects to require
significant future cash outlays as it incurs the actual costs related
to the remediation of such environmental liabilities.
As of May 31, 1998, the Company had an unsecured revolving line of
credit totaling $200 million maturing in 2002. The Company had
additional unsecured lines of credit available of $55 million, of which
$20 million was committed. In the aggregate, the Company had borrowings
outstanding under these lines totaling $118.8 million at May 31, 1998.
Pursuant to a stock repurchase program announced by the Company in May
1994 and amended in April 1998, the Company is authorized to repurchase
up to 1.6 million shares of its stock when the market price of the
Company's stock is not reflective of management's opinion of an
appropriate valuation of the stock. Management believes that
repurchasing shares under these conditions enhances shareholder value.
As of May 31, 1998, a total of 448,300 shares had been purchased under
this program. During the nine months ended May 31, 1998, the Company
repurchased 196,000 shares of its stock for a total of $5.1 million.
The Company believes that the current cash balance, internally
generated funds, and existing credit facilities will provide adequate
financing for capital expenditures, working capital, stock repurchases,
and debt service requirements for the next twelve months. In the longer
term, the Company may seek to finance business expansion, including
potential acquisitions, with additional borrowing arrangements or
additional equity financing.
16
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SCHNITZER STEEL INDUSTRIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued):
Forward Looking Statements. Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward looking
statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Act of 1934, all of which are
subject to risks and uncertainties. One can identify these forward
looking statements through the use of words such as "expect,"
"believe," and other words which convey a similar meaning. One can also
identify these statements as they do not relate strictly to historical
or current facts. They are likely to address the Company's business
strategy, financial projections and results and other global factors
affecting the Company's financial prospects. An example of this is the
current financial crisis facing certain Asian countries and Year 2000
compliance matters. Other factors that could cause actual results to
differ materially are the following: supply and demand conditions; the
Company's ability to mitigate the effects of the Asian situation and
foreign fiscal policies on its profitability; railroad service
difficulties; competitive factors and pricing pressures from national
steel companies; imports of foreign steel; availability of scrap
supply; fluctuations in scrap prices and seasonality of results. One
should understand that it is not possible to predict or identify all
factors that could cause actual results to differ from the Company's
forward looking statements. Consequently, the reader should not
consider any such list to be a complete statement of all potential
risks or uncertainties. Further, the Company does not assume any
obligation to update any forward looking statement.
17
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SCHNITZER STEEL INDUSTRIES, INC.
PART II
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
3.2 Restated Bylaws of the Registrant
(b) Reports on Form 8-K
None
18
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SCHNITZER STEEL INDUSTRIES, INC.
SIGNATURE
Pursuant to the requirements 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.
(Registrant)
Date: July 15, 1998 By: /s/ BARRY A. ROSEN
------------- -------------------------------------
Barry A. Rosen
Vice President, Finance
19
RESTATED BYLAWS
OF
SCHNITZER STEEL INDUSTRIES, INC.
ARTICLE I
SHAREHOLDERS MEETINGS AND VOTING
1.1 Annual Meeting. The annual meeting of the shareholders shall be held
during the month of January of each year, unless a different date or time is
fixed by the Board of Directors and stated in the notice of the meeting. The
failure to hold an annual meeting on the date stated herein shall not affect the
validity of any corporate action.
1.2 Special Meetings. Special meetings of the share holders, for any
purposes, unless otherwise prescribed by statute, may be called by the Chairman
of the Board, President, Secretary or the Board of Directors and shall be called
by the Chairman of the Board, President or Secretary upon the written demand,
describing the purposes for which the meeting is to be held, signed, dated and
delivered to the Secretary, of the holders of not less than one-tenth of all the
votes entitled to be cast on any issue proposed to be considered at the meeting.
1.3 Place of Meetings. Meetings of the shareholders shall be held at any
place in or out of Oregon designated by the Board of Directors. If a meeting
place is not designated by the Board of Directors, the meeting shall be held at
the Corporation's principal office.
1.4 Notice of Meetings. Written or printed notice stating the date, time
and place of the meeting and, in the case of a special meeting or a meeting for
which special notice is required by law, the purposes for which the meeting is
called shall be mailed by the Corporation to each shareholder entitled to vote
at the meeting and, if required by law, to any other shareholders entitled to
receive notice, at the shareholder's address shown in the Corporation's record
of shareholders, with postage prepaid, not less than 10 nor more than 60 days
before the meeting date, either personally or by mail, by or at the direction of
the President, Secretary, or Assistant Secretary, or the officer or persons
calling the meeting, to each shareholder of record entitled to vote at such
meeting. Notice shall be effective when mailed if it is mailed postpaid and is
correctly addressed to the shareholder's address as it appears on the stock
transfer books of the Corporation.
1.5 Waiver of Notice. A shareholder may at any time waive any notice
required by law, these Bylaws or the Corporation's Articles of Incorporation.
The waiver shall be in writing, be
<PAGE>
signed by the shareholder entitled to the notice and be delivered to the
Corporation for inclusion in the minutes for filing with the corporate records.
A shareholder's attendance at a meeting waives objection to (i) lack of notice
or defective notice of the meeting, unless the shareholder at the beginning of
the meeting objects to holding the meeting or transacting business at the
meeting, and (ii) consideration of a particular matter at the meeting that is
not within the purposes described in the meeting notice, unless the shareholder
objects to considering the matter when it is presented.
1.6 Fixing of Record Date. The Board of Directors may fix a future date as
the record date to determine the shareholders entitled to notice of a
shareholders' meeting, demand a special meeting, vote, take any other action or
receive payment of any share or cash dividend or other distribution. This date
shall not be more than 70 days nor, in the case of a meeting, less than 10 days
before the meeting or action requiring a determination of shareholders. The
record date for any meeting, vote or other action of the shareholders shall be
the same for all voting groups. If not otherwise fixed by the Board of
Directors, the record date to determine shareholders entitled to notice of and
to vote at an annual or special shareholders' meeting is the close of business
on the day before the first notice is first mailed or delivered to a
shareholder. If not otherwise fixed by the Board of Directors, the record date
to determine shareholders entitled to receive payment of any share or cash
dividend or other distribution is the close of business on the day the Board of
Directors authorizes the share or cash dividend or other distribution.
1.7 Shareholders' List for Meeting. After a record date for a meeting is
fixed, the Corporation shall prepare an alphabetical list of all shareholders
entitled to notice of the shareholders' meeting. The list shall be arranged by
voting group and within each voting group by class or series of shares and show
the address of and number of shares held by each shareholder. The shareholders'
list shall be available for inspection by any shareholder, upon proper demand as
may be required by law, beginning two business days after notice of the meeting
is given and continuing through the meeting, at the Corporation's principal
office or at a place identified in the meeting notice in the city where the
meeting will be held. The Corporation shall make the shareholders' list
available at the meeting, and any shareholder or the shareholder's agent or
attorney shall be entitled to inspect the list at any time during the meeting or
any adjournment. Refusal or failure to prepare or make available the
shareholders' list does not affect the validity of action taken at the meeting.
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1.8 Quorum; Adjournment.
(1) Shares entitled to vote as a separate voting group may take action
on a matter at a meeting only if a quorum of those shares exists with respect to
that matter. A majority of the votes entitled to be cast on the matter by the
voting group constitutes a quorum of that voting group for action on that
matter.
(2) A majority of votes represented at the meeting, although less than
a quorum, may adjourn the meeting from time to time to a different time and
place without further notice to any shareholder of any adjournment. At an
adjourned meeting at which a quorum is present, any business may be transacted
that might have been transacted at the meeting originally held.
(3) Once a share is represented for any purpose at a meeting, it shall
be present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for the
adjourned meeting. A new record date must be set if the meeting is adjourned to
a date more than 120 days after the date fixed for the original meeting.
1.9 Voting Requirements; Action Without Meeting.
(1) If a quorum exists, action on a matter, other than the election of
directors, by a voting group is approved if the votes cast within the voting
group favoring the action exceed the votes cast opposing the action, unless a
greater number of affirmative votes is required by law or the Articles of
Incorporation. Unless otherwise provided in the Articles of Incorporation,
directors are elected by a plurality of the votes cast by the shares entitled to
vote in the election at a meeting at which a quorum is present.
(2) Action required or permitted by law to be taken at a shareholders'
meeting may be taken without a meeting if the action is taken by all the
shareholders entitled to vote on the action. The action must be evidenced by one
or more written consents describing the action taken, signed by all the
shareholders entitled to vote on the action and delivered to the Secretary for
inclusion in the minutes for filing with the corporate records. Shareholders'
action taken by written consent is effective when the last shareholder signs the
consent, unless the consent specifies an earlier or later effective date.
1.10 Proxies. A shareholder may vote shares in person or by proxy. A
shareholder may appoint a proxy by signing an appointment form either personally
or by the shareholder's attorney-in-fact. An appointment of a proxy is effective
when received by the Secretary or other officer of the Corporation
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<PAGE>
authorized to tabulate votes. An appointment is valid for 11 months unless a
different period is provided in the appointment form. An appointment is
revocable by the shareholder unless the appointment form conspicuously states
that it is irrevocable and the appointment is coupled with an interest that has
not been extinguished.
ARTICLE II
BOARD OF DIRECTORS
2.1 Duties of Board of Directors. All corporate powers of the Corporation
shall be exercised by or under the authority of its Board of Directors; the
business and affairs of the Corporation shall be managed under the direction of
its Board of Directors.
2.2 Number, Term and Qualification. The number of directors of the
Corporation shall be at least three and no more than thirteen. Within this
range, the number of directors shall be determined from time to time by the
Board of Directors. The term of a director shall expire at the next annual
meeting of shareholders after his or her election. No reduction in the number of
directors shall shorten the term of any incumbent director. Despite the
expiration of a director's term, the director shall continue to serve until the
director's successor is elected and qualified or the number of directors is
decreased. Directors need not be residents of Oregon or shareholders of the
Corporation.
2.3 Board Member Nominating Committee. When there is a vacancy on the Board
of Directors to be filled by the Board, the Chairman of the Board shall appoint
a Board Member Nominating Committee consisting of three Board members. The Board
Member Nominating Committee will make recommendations to the Board as to
nominees qualified to fill the vacancy on the Board. In making its
recommendations, the Board Member Nominating Committee will take into account
Board membership qualification criteria established by the Board.
2.4 Regular Meetings. A regular meeting of the Board of Directors shall be
held without notice other than this Bylaw immediately after, and at the same
place as, the annual meeting of shareholders. The Board of Directors may provide
by resolution the time and place for the holding of additional regular meetings
in or out of Oregon without other notice than the resolution.
2.5 Special Meetings. Special meetings of the Board of Directors may be
called by or at the request of the Chairman of the Board, the President or any
two directors. The person or
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<PAGE>
persons authorized to call special meetings of the Board of Directors may fix
any place in or out of Oregon as the place for holding any special meeting of
the Board of Directors called by them.
2.6 Notice. Notice of the date, time and place of any special meeting of
the Board of Directors shall be given at least three days prior to the meeting
by notice communicated in person, by telephone, telegraph, teletype, other form
of wire or wireless communication, mail or private carrier. If written, notice
shall be effective at the earliest of (a) when received, (b) five days after its
deposit in the United States mail, as evidenced by the postmark, if mailed
postpaid and correctly addressed, or (c) on the date shown on the return
receipt, if sent by registered or certified mail, return receipt requested and
the receipt is signed by or on behalf of the addressee. Notice by all other
means shall be deemed effective when received by or on behalf of the director.
Notice of any regular or special meeting need not describe the purposes of the
meeting unless required by law or the Articles of Incorporation.
2.7 Waiver of Notice. A director may at any time waive any notice required
by law, these Bylaws or the Articles of Incorporation. Except as set forth
below, the waiver must be in writing, be signed by the director entitled to the
notice, specify the meeting for which notice is waived and be filed with the
minutes or corporate records. A director's attendance at or participation in a
meeting waives any required notice to the director of the meeting unless the
director at the beginning of the meeting, or promptly upon the director's
arrival, objects to holding the meeting or transacting business at the meeting
and does not thereafter vote for or assent to action taken at the meeting.
2.8 Quorum. A majority of the number of directors fixed in accordance with
Section 2.2 of these Bylaws shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors. If less than a quorum is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time without further notice.
2.9 Manner of Acting. The act of the majority of the directors present at a
meeting at which a quorum is present shall be the act of the Board of Directors,
unless a different number is provided by law, the Articles of Incorporation or
these Bylaws.
2.10 Meeting by Telephone Conference; Action Without Meeting.
(1) Directors may participate in a regular or special meeting by, or
conduct the meeting through, use of any means of
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<PAGE>
communications by which all directors participating may simultaneously hear each
other during the meeting. Participation in a meeting by this means shall
constitute presence in person at the meeting.
(2) Any action that is required or permitted to be taken at a meeting
of the Board of Directors may be taken without a meeting if one or more written
consents describing the action taken are signed by all of the directors entitled
to vote on the matter and included in the minutes or filed with the corporate
records reflecting the action taken. The action shall be effective when the last
director signs the consent, unless the consent specifies an earlier or later
effective date.
2.11 Vacancies. Any vacancy on the Board of Directors, including a vacancy
resulting from an increase in the number of directors, may be filled by the
shareholders, the Board of Directors, the remaining directors if less than a
quorum (by the affirmative vote of a majority thereof) or by a sole remaining
director. Any vacancy not filled by the directors shall be filled by election at
an annual meeting or at a special meeting of shareholders called for that
purpose. A vacancy that will occur at a specified later date, by reason of a
resignation or otherwise, may be filled before the vacancy occurs, but the new
director may not take office until the vacancy occurs.
2.12 Compensation. By resolution of the Board of Directors, the directors
may be paid reasonable compensation for services as directors and their expenses
of attending meetings of the Board of Directors. No such payment shall preclude
any director from serving the Corporation in any other capacity and receiving
compensation for such service.
2.13 Presumption of Assent. A director who is present at a meeting of the
Board of Directors or a committee of the Board of Directors shall be deemed to
have assented to the action taken at the meeting unless (a) the director's
dissent or abstention from the action is entered in the minutes of the meeting,
(b) the director delivers a written notice of dissent or abstention to the
action to the presiding officer of the meeting before any adjournment or to the
Corporation immediately after the adjournment of the meeting or (c) the director
objects at the beginning of the meeting or promptly upon the director's arrival
to the holding of the meeting or transacting business at the meeting. The right
to dissent or abstain is not available to a director who voted in favor of the
action.
2.14 Resignation. Any director may resign by delivering written notice to
the Board of Directors, its chairperson or the Corporation. Unless the notice
specifies a later effective date, a resignation notice shall be effective upon
the earlier of (a) receipt, (b) five days after its deposit in the United States
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<PAGE>
mails, if mailed postpaid and correctly addressed, or (c) on the date shown on
the return receipt, if sent by registered or certified mail, return receipt
requested, and the receipt is signed by addressee. Once delivered, a resignation
notice is irrevocable unless revocation is permitted by the Board of Directors.
ARTICLE III
COMMITTEES OF THE BOARD
3.1 Committees. The Board of Directors may create one or more committees
and appoint members of the Board of Directors to serve on them. Each committee
shall have two or more members. The creation of a committee and appointment of
members to it must be approved by a majority of all directors in office when the
action is taken. Subject to any limitation imposed by the Board of Directors or
by law, each committee may exercise all the authority of the Board of Directors
in the management of the Corporation. A committee may not take any action that a
committee is prohibited from taking by the Oregon Business Corporation Act,
including ORS 60.354 or any successor provision.
3.2 Changes of Size and Function. Subject to the provisions of law, the
Board of Directors shall have the power at any time to change the number of
committee members, fill committee vacancies, change any committee members and
change the functions and terminate the existence of a committee.
3.3 Conduct of Meetings. Each committee shall conduct its meetings in
accordance with the applicable provisions of these Bylaws relating to meetings
and action without meetings of the Board of Directors. Each committee shall
adopt any further rules regarding its conduct, keep minutes and other records
and appoint subcommittees and assistants as it deems appropriate.
3.4 Compensation. By resolution of the Board of Directors, committee
members may be paid reasonable compensation for services on committees and their
expenses of attending committee meetings.
ARTICLE IV
OFFICERS
4.1 Appointment. The Board of Directors at its first meeting following its
election each year shall appoint a President and a Secretary. At this meeting,
or at any other time, the Board of Directors may appoint one of its members as
Chairman of the Board and one or more Vice Presidents and a Treasurer. The Board
of Directors also may appoint any other officers, assistant officers and agents
it deems necessary or
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<PAGE>
appropriate. Any two or more offices may be held by the same person.
4.2 Compensation. The Corporation may pay its officers reasonable
compensation for their services as fixed from time to time by resolution of the
Board of Directors, and no officer shall be prevented from receiving such salary
by reason of the fact that he is also a director of the Corporation.
4.3 Term. The term of office of all officers commences upon their
appointment and continues until the first annual meeting of the Board of
Directors following their appointment and thereafter until their successors are
appointed or until their resignation or removal. Any vacancy in an office of the
Corporation may be filled by the Board of Directors.
4.4 Removal. Any officer or agent appointed by the Board of Directors may
be removed by the Board of Directors at any time with or without cause, but such
removal shall not prejudice the contract rights of the person so removed.
4.5 Chairman of the Board. The Chairman of the Board, if that office is
filled, shall preside at all meetings of the Board of Directors and shall
perform any duties and responsibilities prescribed from time to time by the
Board of Directors, including but not limited to powers and duties similar to
those of the President.
4.6 President. The Board of Directors may appoint one or more persons to
the Office of the President. One of them shall be designated the chief executive
officer of the Corporation who, subject to the control of the Board of
Directors, shall in general supervise and control all of the business and
affairs of the Corporation. A President shall preside at all meetings of the
shareholders and at all meetings of the Board of Directors when the Chairman of
the Board of Directors is not present. A President may sign, with the Secretary
or any Assistant Secretary, certificates for shares of the Corporation. A
President may also sign, with the Secretary or any other officer of the
Corporation authorized by the Board of Directors to sign with a President, any
deeds, mortgages, bonds, contracts, or other instruments which the Board of
Directors has authorized to be executed, except in cases where the Board of
Directors or these Bylaws shall expressly delegate the signing and execution of
such a document to some other officer or agent of the Corporation or where
signing or execution other than by a President as described above shall be
required by law. In general, a President shall perform all duties incident to
the office of President, and such other duties as may be prescribed by the Board
of Directors from time to time.
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<PAGE>
4.7 Vice Presidents. In the absence of the President or in the event of his
death, inability or refusal to act, the Vice President (or in the event there be
more than one Vice President, the Vice Presidents in the order designated at the
time or their election, or in the absence of any designation, then in the order
of their election) shall perform the duties of the president, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the President. Any Vice President may sign, with the Secretary or an Assistant
Secretary, certificates for shares of the Corporation, and shall perform such
other duties as from time to time may be assigned to the Vice President by the
President or by the Board of Directors. The Board of Directors or the President
may confer a special title upon a Vice President.
4.8 Secretary. The Secretary shall (a) have the responsibility for
preparing minutes of the shareholders' and of the Board of Directors' meetings
in one or more books provided for that purpose; (b) see that all notices are
duly given in accordance with the provision of these Bylaws or as required by
law; (c) be custodian of the corporate records and have the responsibility for
authenticating records of the Corporation; (d) be the custodian of the seal of
the Corporation and see that the seal of the Corporation is affixed to all
documents the execution of which on behalf of the Corporation under its seal is
duly authorized; (e) sign with the President, or Vice President, certificates
for shares of the Corporation; and (f) in general perform all duties incident to
the office of Secretary and such other duties as from time to time may be
assigned to the Secretary by the President or by the Board of Directors.
4.9 Treasurer. If required by the Board of Directors, the Treasurer shall
give a bond for the faithful discharge of the Treasurer's duties, in such sum
and with such security or securities as the Board of Directors shall determine.
The Treasurer shall (a) have charge and custody of and be responsible for all
funds and securities of the Corporation, (b) receive and give receipts for
moneys due and payable to the Corporation from any source whatsoever and (c)
deposit all such moneys in the name of the Corporation in such banks, trust
companies or other depositaries as shall be selected in accordance with the
provisions of Article VII of these Bylaws. In general, the Treasurer shall
perform all of the duties incident to the office of Treasurer and such other
duties as from time to time may be assigned to the Treasurer by the President or
by the Board of Directors.
-9-
<PAGE>
ARTICLE V
INDEMNIFICATION
The Corporation shall indemnify, to the fullest extent not prohibited by
law, any current or former director or officer of the Corporation who is made,
or threatened to be made, a party to an action, suit or proceeding, whether
civil, criminal, administrative, investigative or other (including an action,
suit or proceeding by or in the right of the Corporation) by reason of the fact
that such person is or was a director, officer, employee or agent of the
Corporation or a fiduciary within the meaning of the Employee Retirement Income
Security Act of 1974 with respect to any employee benefit plan of the
Corporation, or serves or served at the request of the Corporation as a
director, officer, employee or agent, or as a fiduciary of an employee benefit
plan, of another corporation, partnership, joint venture, trust or other
enterprise. The Corporation shall pay all expenses incurred by any such person
defending such proceeding in advance of its final disposition at the written
request of such person if the person furnishes the Corporation (a) a written
statement of a good faith belief that he or she is entitled to indemnification
and (b) a written undertaking to repay such advance if it is ultimately
determined by a court that such person is not entitled to be indemnified. No
amendment to these Bylaws that limits the Corporation's obligation to indemnify
directors and officers of the Corporation shall have any effect on such
obligation for any act or omission which occurs prior to the later of the
effective date of the amendment or the date notice of the amendment is given to
the officer or director. This Article shall not be deemed exclusive of any other
provisions for indemnification or advancement of expenses of directors,
officers, employees, agents and fiduciaries that may be included in the
Corporation's Articles of Incorporation or any statute, agreement, general or
specific action of the Board of Directors, vote of shareholders or other
document or arrangement.
ARTICLE VI
ISSUANCE OF SHARES
6.1 Adequacy of Consideration. Before the Corporation issues shares, the
Board of Directors shall determine that the consideration received or to be
received for the shares to be issued is adequate. The authorization by the Board
of Directors of the issuance of shares for stated consideration shall evidence a
determination by the Board that such consideration is adequate.
-10-
<PAGE>
6.2 Certificates for Shares.
(1) Certificates representing shares of the Corporation shall be in
any form determined by the Board of Directors consistent with the requirements
of the Oregon Business Corporation Act and these Bylaws. The certificates shall
be signed by the President or a Vice President and by the Secretary or an
Assistant Secretary and may be sealed with the seal of the Corporation, if any,
or a facsimile thereof. All certificates for shares shall be consecutively
numbered or otherwise identified. The signatures of officers upon a certificate
may be facsimiles if the certificate is countersigned by a transfer agent or any
assistant transfer agent or registered by a registrar, other than the
Corporation itself or an employee of the Corporation.
(2) Every certificate for shares of stock that are subject to any
restriction on transfer or registration of transfer pursuant to the Articles of
Incorporation, the Bylaws, securities laws, shareholders' agreements or any
agreement to which the Corporation is a party shall have conspicuously noted on
the face or back of the certificate either the full text of the restriction or a
statement of the existence of the restriction and that the Corporation retains a
copy of the full text. Every certificate issued when the Corporation is
authorized to issue more than one class or series within a class of shares shall
set forth on its face or back either (a) a summary of the designations, relative
rights, preferences and limitations of the shares of each class and the
variations in rights, preferences and limitations for each series authorized to
be issued and the authority of the Board of Directors to determine variations
for future series or (b) a statement of the existence of those designations,
relative rights, preferences and limitations and a statement that the
Corporation will furnish a copy thereof to the holder of the certificate upon
written request and without charge.
(3) The name and address of the person to whom the shares represented
by the certificates are issued, with the number of shares and the date of issue,
shall be entered on the stock transfer books of the Corporation. All
certificates surrendered to the Corporation for transfer shall be canceled. The
Corporation shall not issue a new certificate for previously issued shares until
the former certificate or certificates for those shares are surrendered and
canceled; except that in case of a lost, destroyed or mutilated certificate, a
new certificate may be issued on terms the Board of Directors prescribes.
6.3 Transfer of Shares. Transfer of shares of the Corporation shall be made
only on the stock transfer books of the Corporation by the holder of record of
the shares or by the holder's legal representative, who shall furnish proper
evidence
-11-
<PAGE>
of authority to transfer, or by the holder's attorney with regard to the shares
authorized by a duly executed power of attorney filed with the Secretary or the
transfer agent of the Corporation, and on surrender for cancellation for such
shares. The Corporation shall deem the person in whose name shares stand on the
books of the Corporation to be the owner of those shares for all purposes.
6.4 Transfer Agent and Registrar. The Board of Directors may from time to
time appoint one or more transfer agents and one or more registrars for the
shares of the Corporation, with powers and duties determined by the Board of
Directors.
6.5 Officer Ceasing to Act. If the person who signed a share certificate,
either manually or in facsimile, no longer holds office when the certificate is
issued, the certificate is nevertheless valid.
ARTICLE VII
CONTRACTS, LOANS, CHECKS AND OTHER INSTRUMENTS
7.1 Contracts. Except as otherwise provided by law, the Board of Directors
may authorize any officers or agents to execute and deliver any contract or
other instrument in the name of and on behalf of the Corporation, and this
authority may be general or confined to specific instances.
7.2 Loans. The Corporation shall not borrow money and no evidence of
indebtedness shall be issued in its name unless authorized by the Board of
Directors. This authority may be general or confined to specific instances.
7.3 Checks, Drafts, Etc. All checks, drafts or other orders for the payment
of money and notes or other evidences of indebtedness issued in the name of the
Corporation shall be signed by the officers or agents of the Corporation and in
the manner designated by the Board of Directors.
7.4 Deposits. All funds of the Corporation not otherwise employed shall be
deposited to the credit of the Corporation in those banks, trust companies or
other depositaries as the Board of Directors or officers of the Corporation
designated by the Board of Directors select or be invested as authorized by the
Board of Directors.
-12-
<PAGE>
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.1 Fiscal Year. The business of the Corporation shall be conducted on a
fiscal year basis beginning with the first day of September and ending on the
last day of August of each year.
8.2 Dividends. The Board of Directors may from time to time declare, and
the Corporation may pay, dividends on its outstanding shares, in the manner and
upon the terms and conditions provided by law.
8.3 Seal. The Board of Directors shall provide a corporate seal which shall
be circular in form and shall have inscribed thereon the name of the Corporation
and the words "Corporate Seal, Oregon."
8.4 Severability. A determination that any provision of these Bylaws is for
any reason inapplicable, invalid, illegal or otherwise ineffective shall not
affect or invalidate any other provision of these Bylaws.
8.5 Amendments. Except as restricted by the Corporation's Articles of
Incorporation, these Bylaws may be amended or repealed and new Bylaws may be
adopted by the Board of Directors or the shareholders of the Corporation.
-13-
<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 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> AUG-31-1997 AUG-31-1998
<PERIOD-START> SEP-01-1996 SEP-01-1997
<PERIOD-END> MAY-31-1997 MAY-31-1998
<CASH> 0<F1> 1,666
<SECURITIES> 0<F1> 0
<RECEIVABLES> 0<F1> 31,027
<ALLOWANCES> 0<F1> 485
<INVENTORY> 0<F1> 104,506
<CURRENT-ASSETS> 0<F1> 154,285
<PP&E> 0<F1> 267,508
<DEPRECIATION> 0<F1> 124,583
<TOTAL-ASSETS> 0<F1> 463,022
<CURRENT-LIABILITIES> 0<F1> 34,453
<BONDS> 0<F1> 128,988
0<F1> 0
0<F1> 0
<COMMON> 0<F1> 9,986
<OTHER-SE> 0<F1> 235,137
<TOTAL-LIABILITY-AND-EQUITY> 0<F1> 463,022
<SALES> 248,596 268,216
<TOTAL-REVENUES> 248,596 268,216
<CGS> 219,434 237,746
<TOTAL-COSTS> 234,877 253,717
<OTHER-EXPENSES> (4,441) (1,096)
<LOSS-PROVISION> 63 (113)
<INTEREST-EXPENSE> 3,583 4,537
<INCOME-PRETAX> 19,077 19,438
<INCOME-TAX> 6,494 6,803
<INCOME-CONTINUING> 12,583 12,635
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 12,583 12,635
<EPS-PRIMARY> 1.22 1.25
<EPS-DILUTED> 1.21 1.25
<FN>
<F1> The restated balance sheet as of May 31, 1997 is not included in
this report.
</FN>
</TABLE>
