-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AlVqD4hON99yAmglDdsxNmQlLKYlIPAQRj75sNakZ8MrdHldgvMcUA5tLjVqlniG T2QYxzPpcgL2fdJwT0zLjA== /in/edgar/work/0000779334-00-000156/0000779334-00-000156.txt : 20001003 0000779334-00-000156.hdr.sgml : 20001003 ACCESSION NUMBER: 0000779334-00-000156 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000929 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIRMINGHAM STEEL CORP CENTRAL INDEX KEY: 0000779334 STANDARD INDUSTRIAL CLASSIFICATION: [3312 ] IRS NUMBER: 133213634 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-09820 FILM NUMBER: 731481 BUSINESS ADDRESS: STREET 1: 1000 URBAN CENTER DRIVE STREET 2: SUITE 300 CITY: BIRMINGHAM STATE: AL ZIP: 35242 BUSINESS PHONE: 2059701200 MAIL ADDRESS: STREET 1: P.O. BOX 1208 CITY: BIRMINGHAM STATE: AL ZIP: 35201-1208 10-K/A 1 0001.txt AMENDMENT TO 10K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 From the transition period from to Commission File Number 1-9820 BIRMINGHAM STEEL CORPORATION (Exact Name of Registrant as Specified in its Charter) Delaware 13-3213634 (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification Number) 1000 Urban Center Drive, Suite 300 Birmingham, Alabama 35242-2516 (Address of principal executive offices) (Zip Code) (205) 970-1200 (Registrant's telephone number, including area code) Securities Registered pursuant to Section 12 (b) of the Act: Name of Each Exchange Title of Each on Which Registered Class Common Stock, par value New York Stock $0.01 per share Exchange Securities Registered pursuant to Section 12 (g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| As of September 1, 2000, 31,055,126 shares of common stock of the registrant were outstanding. On such date the aggregate market value of shares (based upon the closing market price of the Company's common stock on the New York Stock Exchange on September 1, 2000) held by non-affiliates was $76,128,660. For purposes of this calculation only directors and officers are deemed to be affiliates. EXPLANATORY NOTE: This amendment to our annual report on Form 10-K for the year ended June 30, 2000 (1) includes additional exhibits in Item 14, (2) reflects a change to the Statements of Cash Flows, (Item 8), and the related amounts affected within Management's Discussion and Analysis, (Item 7), to appropriately present the impact of stock warrants issued in connection with recent restructuring of the Company's debt agreements, (3) adjusts Footnote 10 to the Consolidated Financial Statements to consistently present exercisable stock options outstanding at June 30, 2000, and (4) corrects for typographical errors in the Statements of Stockholder' Equity (Item 8) presentation of the Company's retained deficiency and in footnote (B) of Selected Consolidated Financial Data (Item 6) related to start-up cost in fiscal 1999. We have made no further changes to the previously filed form 10-K. All information in this form 10-K/A is as of June 30, 2000 and does not reflect any subsequent information or events other than the aforementioned changes. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended June 30, ----------------------------------------------------------------- 2000 1999(A) 1998(A) 1997 (A) 1996(A) --------- ---------- --------- --------- --------- (in thousands, except per share data) Statement of Operations Data: Net sales.......................................... $ 932,546 $ 980,274 $1,136,019 $ 978,948 $ 832,489 Cost of sales: Other than depreciation and amortization......... 829,415 840,339 963,354 846,910 730,447 Depreciation and amortization.................... 58,179 60,992 55,266 45,843 34,701 ------------------------------------------------------------- Gross profit..................................... 44,952 78,943 117,399 86,195 67,341 Start-up and restructuring costs and other unusual items (B)....................................... 210,476 50,735 34,238 10,633 23,907 Selling, general and administrative expense......... 49,226 46,126 48,645 36,670 37,731 ------------------------------------------------------------- Operating (loss) income............................. (214,750) (17,918) 34,516 38,892 5,703 Interest expense.................................... 51,687 35,265 29,008 20,195 12,036 Other income, net (C)............................... 3,039 11,288 13,968 5,260 3,975 Loss from equity investments (D).................... (11,915) (30,765) (18,326) (1,566) -- Minority interest in loss of subsidiary............. 7,978 5,497 1,643 2,347 -- ------------------------------------------------------------- (Loss) income from continuing operations before income taxes..................................... (267,335) (67,163) 2,793 24,738 (2,358) (Benefit from) provision for income taxes........... (41,001) (16,110) 1,164 10,321 (181) -------------------------------------------------------------- (Loss) income from continuing operations............ (226,334) (51,053) 1,629 14,417 (2,177) Discontinued operations: Reversal of loss (loss) on disposal of SBQ business, including estimated losses during the disposal period (net of income taxes of $78,704) (E).................................. 173,183 (173,183) -- -- -- ------------------------------------------------------------- (Loss) income before extraordinary item............. (53,151) (224,236) 1,629 14,417 (2,177) Loss on restructuring of debt (net of income taxes of $1,160).................. (1,669) -- -- -- -- ------------------------------------------------------------- Net (loss) income .................................. $ (54,820) $ (224,236) $ 1,629 $ 14,417 $ (2,177) ============================================================= Basic and diluted per share amounts: (Loss) income from continuing operations......... $ (7.51) $ (1.73) $ 0.05 $ 0.50 $ (0.08) Income (loss) on discontinued operations......... 5.75 (5.88) -- -- -- Loss on restructuring of debt.................... (0.06) -- -- -- -- ------------------------------------------------------------- Net (loss) income................................ $ (1.82) $ (7.61) $ 0.05 $ 0.50 $ (0.08) ============================================================= Dividends declared per share........................ $ 0.050 $ 0.175 $ 0.40 $ 0.40 $ 0.40 =============================================================
June 30, ------------------------------------------------------------- 2000 1999 (A) 1998 (A) 1997 (A) 1996 (A) ------------ --------- --------- --------- --------- Balance Sheet Data: Working capital..................................... $ 142,660 $ 110,467 $ 237,674 $ 228,882 $ 211,595 Total assets........................................ 959,857 970,737 1,244,778 1,210,989 927,987 Long-term debt less current portion................. 594,090 511,392 558,820 526,056 307,500 Stockholders' equity................................ 188,015 230,731 460,607 471,548 448,191
(A) The selected consolidated financial data for fiscal 1996 through 1999 has been restated to reflect the Company's special bar quality (SBQ) business within continuing operations. In fiscal 2000, subsequent to a change in management, which occurred after a proxy contest, new management announced the Company would no longer reflect its SBQ operations as discontinued operations. Refer to Note 2 to the Consolidated Financial Statements. (B) Includes start-up costs of $31,933, $50,735, $34,238, $10,633 and $16,409 in 2000, 1999, 1998, 1997 and 1996, respectively. In fiscal 2000, the Company recorded asset impairment, restructuring charges and other unusual items amounting to $178,543. Refer to Note 14 to the Consolidated Financial Statements. (C) Includes $4,414 in refunds from electrode suppliers in both 1999 and 1998 and $5,200 and $5,225 gain on sales of idle properties and equipment in 1999 and 1998, respectively. (D) Includes impairment losses for equity investees of $13,889, $19,275 and $12,383 in 2000, 1999 and 1998, respectively. Refer to Note 3 to the Consolidated Financial Statements. (E) In fiscal 1999, the Company reported the SBQ segment as discontinued operations based on former management's plan to sell the SBQ business. In the second quarter of fiscal 2000, the Company announced that it would no longer reflect the SBQ segment as discontinued operations based on new management's decision to re-establish its Cleveland-based American Steel & Wire. Refer to Note 2 to the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the status of the SBQ segment. < ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS Discontinued Operations and Closing of Memphis Melt Shop In August 1999, prior management of the Company announced a strategic restructuring plan to dispose of its special bar quality (SBQ) operations in order to focus on its core rebar, merchant product and scrap businesses. In its results for the fourth quarter of fiscal 1999, the Company recorded $173.2 million in charges for the estimated loss on the sale of the SBQ operations, which included a $56.6 million pre-tax provision for estimated losses during the expected one-year disposal period. In January 2000, the Company's new management decided to retain its SBQ rolling mill facilities in Cleveland, Ohio, which represent a substantial portion of the previously discontinued SBQ operations. As a result, the Company was required to re-establish the SBQ operations as part of continuing operations. The fiscal 2000 financial statements reflect the reversal of the $173.2 million charge and the reclassification of the SBQ operations as a component of continuing operations. The effect of reversing the previous charges in the second quarter of fiscal 2000 were substantially offset by re-establishing valuation allowances and other reserves as described under the caption "Start-Up and Restructuring Costs and Other Unusual Items". On December 28, 1999, the Company announced suspension of operations at its melt shop facility in Memphis, Tennessee as of January 1, 2000. Operations were suspended because of continued financial and operational difficulties encountered in meeting quality requirements for semi-finished billet supply at the Cleveland rolling mill operation. As part of the decision to idle the Memphis facility, the Company assessed the impairment of the facility and recorded an impairment charge of $85 million representing the difference between the carrying value of those assets and the estimated fair market value (based on an appraisal) less estimated costs to sell the facility. While the facility is idled, management expects to incur ongoing costs of approximately $1 million per month to maintain the facility and service outstanding lease and debt obligations. Management is actively pursuing a sale or other disposition of the Memphis facility, including joint venture opportunities. Long-Term Debt Amendments On May 15, 2000, the Company and its lenders executed amendments to its principal debt and letter of credit agreements to provide for the continuation of the Company's borrowing arrangements on a long-term basis. These amendments replace previous amendments, which were negotiated by the Company's prior management in October 1999. Refer to Note 7 to the Consolidated Financial Statements for information about the terms and provisions of the amendments. Information also is provided under the caption "Liquidity and Capital Resources--Financing Activities" below. GENERAL In December 1999, following a proxy contest, the Company's shareholders elected new management and reconstituted the Board of Directors. The financial results for the year ended June 30, 2000 reflect the influence of decisions implemented by prior management, as well as expenses associated with the proxy contest and severance of former members of management. The results also reflect wind-down costs related to the Memphis melt shop, which ceased operations as of January 1, 2000. New management has accomplished a number of significant achievements since December that have improved the overall financial condition of the Company and positioned the Company for improved financial results in the future. These achievements include: o Suspended operations at the Company's Memphis facility in December 1999, which had incurred start-up costs of more than $83 million in the last three years and had been a major drain on the Company's liquidity. Implementing this strategy reduced operating losses at the facility from approximately $3.5 million per month to approximately $1 million per month. o Reduced corporate office personnel, which is expected to reduce annual expenses by more than $2 million. o Finalized more flexible financing agreement with the Company's lenders, including new $25 million financing commitment. o Reduced inventories by $21 million from December 1999 to June 2000. o Reduced accounts payable by $20 million from December 1999 to June 2000 and thereby improved relationships with vendors. o Reduced SG&A spending to 4.1% of sales in the fourth quarter from 6.1% of sales in the first quarter. o Substantially completed capital spending and increased productivity and sales at the new Cartersville rolling mill which resulted in breakeven cash flow for the month of May 2000 at Cartersville. o Strengthened sales management for Cartersville and SBQ markets. o Implemented a turnaround plan at Cleveland, which resulted in breakeven cash flow for the month of June 2000. o Reached a new agreement with lenders of American Iron Reduction, LLC (AIR), which has reduced the Company's requirements for purchases of direct reduced iron (DRI) from the venture. o Paid or settled substantially all expenses associated with the proxy contest ($6.9 million). o Reached severance arrangements with all but two former members of management. o Sold interest in Pacific Coast Recycling, a non-strategic west coast scrap operation, generating $2.5 million cash flow and eliminating liabilities and guarantee obligations associated with the venture. Loss from continuing operations for fiscal 2000 was $226.3 million, or $7.51 per share, compared to a loss of $51.1 million, or $1.73 per share for fiscal 1999. The following table sets forth, for the years indicated, selected items in the consolidated statements of operations as a percentage of net sales. Years Ended June 30, ---------------------------- 2000 1999 1998 ------- ------- -------- Net sales......................................... 100% 100% 100% Cost of sales: Other than depreciation and amortization....... 89.0 85.7 84.8 Depreciation and amortization.................. 6.2 6.2 4.9 ------- -------- -------- Gross margin...................................... 4.8 8.1 10.3 Start-up and restructuring costs and other unusual items............................ 22.6 5.2 3.0 Selling, general and administrative expense... 5.3 4.7 4.3 Interest expense.................................. 5.5 3.6 2.5 Other income, net................................. 0.3 1.1 1.2 Loss from equity investments...................... (1.3) (3.1) (1.6) Minority interest in loss of subsidiary........... 0.9 0.6 0.1 (Benefit from) provision for income taxes......... (4.4) (1.6) 0.1 -------- -------- -------- Net (loss) income from continuing operations...... (24.3)% (5.2)% 0.2% ======== ======== ======== Results From Operations The following table sets forth, for the fiscal years indicated, trade shipments, product mix percentages and average selling prices per ton for the Company's rebar, merchant, rod/bar/wire and scrap operations:
2000 1999 1998 ----------------------- ------------------------- ------------------------- Tons % of Avg. Tons % of Avg. Tons % of Avg. Shipped Total Selling Shipped Total Selling Shipped Total Selling (000's) Sales Price (000's) Sales Price (000's) Sales Price ------- ----- -------- ------- ----- --------- --------- ----- ------- Rebar............. 1,459 46.8% $ 263 1,354 44.5% $ 275 1,432 43.0% $ 302 Merchants (A)..... 950 30.5 314 885 29.1 323 925 27.8 344 Rod/Bar/Wire 528 17.0 403 649 21.3 414 662 19.9 451 Other............. 177 5.7 239 155 5.1 261 310 9.3 265 ----- ----- ----- ----- ----- ------ Total......... 3,114 100.0% 3,043 100.0% 3,329 100.0% ===== ===== ===== ===== ===== ======
(A) Structural products are included with merchant products due to limited production in fiscal 2000. Structural products were not produced in fiscal 1999 or 1998. Net Sales Fiscal 2000 compared to fiscal 1999 In fiscal 2000, consolidated net sales decreased 4.9% to $932.5 million from $980.3 million in fiscal 1999. Rebar/merchant segment sales increased 1.3% to $719.2 million while SBQ segment sales decreased 21.1% to $213.3 million. Although rebar/merchant volumes were up 7.5% (in tons) over 1999, nearly all of the unit growth was offset by decreased selling prices which prevailed in the latter half of the year. The decrease in SBQ segment sales were attributable to lower volumes and pricing pressures. In addition, in the fourth quarter, the Company reduced shipments of lower margin industrial quality products and focused efforts on higher margin SBQ products. The decline in average selling prices in both segments was attributable to increased levels of steel imports and general market downward pressure on pricing during fiscal 2000. The Company's average selling price for rebar, merchant, and SBQ products decreased $12, $9, and $11, respectively, per ton in 2000 versus 1999. Fiscal 1999 compared to fiscal 1998 In fiscal 1999, net sales decreased 14% to $980.3 million from $1,136 million in fiscal 1998. Net sales for the rebar/merchant segment decreased 15.2% to $709.9 million, while SBQ segment net sales decreased 9.6% to $270.4 million. Volumes for rebar/merchant products decreased 5.0% to 2,239,000 tons, while SBQ segment sales volumes decreased 2.0% to 649,000 tons. The decrease resulted from a decline in average selling prices for rebar, merchant, and SBQ products. The decline in average selling prices and sales volume was attributable to unprecedented levels of steel imports and general market downward pressure on pricing during fiscal 1999. The Company's average selling price for rebar, merchant, and SBQ products decreased $27, $21, and $37, respectively, per ton in 1999 versus 1998. Cost of Sales Fiscal 2000 compared to fiscal 1999 As a percentage of net sales, consolidated cost of sales (other than depreciation and amortization) increased to 88.9% in fiscal 2000, compared to 85.7% in fiscal 1999. For the rebar/merchant segment, this percentage increased to 83.4% in fiscal 2000, compared to 80.1% in fiscal 1999. For the SBQ segment, this percentage increased to 107.8% in fiscal 2000, compared to 100.5% in fiscal 1999. The percentage increase in cost of sales resulted primarily because of lower average sales prices, along with higher raw material costs. In addition, for the rebar/merchant segment, fiscal 2000 includes a full year of operating lease costs for equipment at the Cartersville, Georgia facility, which became operational in the second half of fiscal 1999. For fiscal 2000, the SBQ segment recognized $3.8 million in inventory write-downs (primarily for lower of cost or market adjustments) during the second quarter. Depreciation and amortization expense for fiscal 2000 decreased $2.8 million compared to fiscal 1999, because of $4 million of depreciation expense reduction due to the shut down of the Memphis facility. Average scrap cost per ton for the rebar/merchant segment was $106 and $102 for fiscal 2000 and 1999, respectively. Conversion cost per ton for the rebar/merchant segment was $132 and $128 for fiscal 2000 and 1999, respectively. Average net billet cost per ton for the SBQ segment was $302 and $348 for fiscal 2000 and 1999, respectively. Average conversion cost per ton for the SBQ segment was $78 and $71 for fiscal 2000 and 1999, respectively. Fiscal 1999 compared to fiscal 1998 As a percentage of net sales, consolidated cost of sales (other than depreciation and amortization) increased to 85.7% in fiscal 1999, compared to 84.8% in fiscal 1998. For the rebar/merchant segment, this percentage decreased to 80.1% in fiscal 1999, compared to 82.2% in fiscal 1998. For the SBQ segment, this percentage increased to 100.5% in fiscal 1999, compared to 92.2% in fiscal 1998, primarily as a result of lower average sales prices. As a percent of net sales, depreciation and amortization expense for fiscal 1999 increased to 6.2% from 4.9% in fiscal 1998 primarily due to the start-up of operations at the Company's Cartersville, Georgia mid section mill. Average scrap cost per ton for the rebar/merchant segment was $102 and $133 for fiscal 1999 and 1998, respectively. Conversion cost per ton for the rebar/merchant segment was $128 and $123 for fiscal 1999 and 1998, respectively. Average net billet cost per ton for the SBQ segment was $348 and $351 for fiscal 1999 and 1998, respectively. Average conversion cost per ton for the SBQ segment was $71 and $67 for fiscal 1999 and 1998, respectively. Start-Up and Restructuring Costs and Other Unusual Items Fiscal 2000 compared to fiscal 1999 Start-up expense, restructuring cost and other unusual items were $210.5 million in fiscal 2000, compared to $50.7 million in fiscal 1999. Start-Up: Substantially all of the fiscal 2000 start-up costs relate to the Cartersville, Georgia mid-section mill (which began operations in March 1999) and continued efforts to optimize the Memphis melt shop (until operations were suspended). The Company will complete the start-up operational phase soon. In December 1999, the Company announced suspension of operations at the Memphis facility. The Company has completed the shut down at Memphis and expects to incur ongoing costs of approximately $1.0 million per month to maintain the facility until it is sold or otherwise disposed of. Restructuring Costs: Operating results, from continuing operations for fiscal 2000 were significantly impacted by the unwinding of discontinued operations accounting, which required the Company to reverse $251.9 million ($173.2 million after tax) of reserves which had been established in 1999 for estimated losses to be incurred on and until disposition of the SBQ operations. Although the discontinued operations reserves were reversed in the second quarter of fiscal 2000, most of the previous charges were restored through charges to continuing operations to fairly state SBQ assets, liabilities, and operating results. Following is a summary of asset impairment and restructuring charges for the SBQ operations, which offset a substantial portion of the income from reversal of the 1999 discontinued operations loss (in thousands): Asset impairment - Memphis facility.............................$ 85,000 Loss on purchase commitment - AIR................................ 40,238 Asset impairment - SBQ division goodwill......................... 22,134 Severance and termination benefits - Memphis..................... 2,473 -------- $149,845 ======== In addition, the $13.9 million 1999 write-down of the Company's investment in AIR (originally recognized as a part of the estimated loss on disposal) was restored as an allowance for permanent impairment in fiscal 2000. Management's decisions to shut-down the Memphis melt shop and actively pursue a strategy to sell its interest in AIR or sell the assets of AIR will result in significant future savings and improved operating results. Among other things, because the Memphis facility is an asset held for sale, annual depreciation of $7.8 million will not be charged to future operations. Monthly operating losses at Memphis are expected to decrease by approximately $2.5 million. Also, future purchases of DRI from AIR will be reflected in cost of sales at market cost, rather than at the higher contracted price the Company must pay under the DRI purchase contract with AIR. In addition, as a result of the write-off of SBQ division goodwill, annual amortization expenses will decrease by $1.1 million. Other costs: The Company also incurred other unusual charges during fiscal 2000, including the following (in thousands): Proxy solicitation costs........................................$ 6,887 Executive severance costs....................................... 6,298 Asset impairment - assets retired............................... 13,111 Debt amendment costs............................................ 2,402 ------- $28,698 ======= Proxy solicitation costs, principally consisting of legal, public relations and other consulting fees, were incurred in the Company's defense of a proxy contest led by The United Company Shareholder Group (the "United Group"). On December 2, 1999, the Company and the United Group reached a settlement appointing John D. Correnti as Chairman and Chief Executive Officer and reconstituting the Board of Directors to include a total of twelve directors, nine of which were appointed by the United Group and three of which were appointed by previous management. The charges include approximately $1.7 million to reimburse the United Group for certain of its costs in connection with the proxy contest, which was settled by issuing 498,733 shares of the Company's common stock to the United Company during the third quarter. As a result of the proxy contest, a total of six executives, including the former CEO, were severed during fiscal 2000. Those executives were covered by the Company's executive severance plan, which provides for specified benefits after a "change in control," as defined in the plan, among other triggering events. In conjunction with the May 15, 2000 amendments to the Company's borrowing agreements, the Company incurred $2.4 million in legal and financial consulting fees. For additional discussion of each of the above items refer to Note 14 to the Consolidated Financial Statements. Fiscal 1999 compared to 1998 Start-up costs amounted to $50.7 million in fiscal 1999, compared to $34.2 million in fiscal 1998. Substantially all of the startup costs in both years related to excess production costs at the Cartersville, Georgia mid-section mill (which began operations in March 1999) and the Memphis melt shop, which never sustained commercially viable levels of production prior to its shut-down as of January 1, 2000. Selling, General and Administrative Expenses ("SG&A") Fiscal 2000 compared to fiscal 1999 SG&A expenses were $49.2 million in fiscal 2000, an increase of 6.7% from $46.1 million in fiscal 1999. The increase related to higher salaries and benefits associated with increased headcount with the start-up of the Cartersville, Georgia mid-section mill and increased computer and telephone equipment lease expense. In December 1999 and January 2000, new management implemented a program to control SG&A costs by, among other things, decreasing the size of the corporate office staff and eliminating corporate positions in Cleveland and Memphis. These actions are expected to lead to reductions of $2 million per year in salaries and benefits expense. Fiscal 1999 compared to 1998 SG&A expenses were $46.1 million in fiscal 1999, a decrease of 5.3% from $48.7 million in fiscal 1998. The decrease relates to a $2 million non-recurring information technology charge in 1998 related to a decision to change software vendors for a major system upgrade. Interest Expense Fiscal 2000 compared to fiscal 1999 Interest expense, including debt issuance cost amortization, increased to $51.7 million for fiscal 2000 from $35.3 million in fiscal 1999. Interest expense was higher as a result of increased borrowings under the Company's revolving credit line and an increase in the Company's average borrowing rate (from 6.65% to 8.96%) for fiscal 1999 due to a series of modifications to the Company's long-term debt agreements in fiscal 2000. The recurring amortization of debt issue costs is also higher in 2000, reflecting the impact of amendment fees and other issuance costs incurred in connection with amending debt agreements in October 1999 and May 2000. Additionally, interest expense increased because of a decline in capitalized interest previously attributed to the mid-section mill project at the Cartersville, Georgia facility, which was placed in service in the third quarter of fiscal 1999. The Company expects interest expense will further increase in fiscal 2001 as a result of beginning the year with higher debt levels and higher interest rates on both fixed and variable rate debt. The Company is currently limited as to the amount of capital expenditures it can make under capital spending programs and does not expect significant levels of capital expenditures or capitalized interest during fiscal 2001. Refer to "Liquidity and Capital Resources - Financing Activities." Fiscal 1999 compared to 1998 Interest expense increased to $35.3 million for fiscal 1999 from $29.0 million in fiscal 1998. The increase in interest expense was primarily due to increased borrowings on the Company's revolving credit line during the year. Depressed selling prices and lower shipment volumes in the Company's SBQ operations reduced the Company's operating cash flows during the year. These factors, along with capital spending to complete the Company's capital projects at Cartersville and other facilities contributed to increased borrowing throughout fiscal 1999. The Company also amended its debt agreements during the second quarter of fiscal 1999, which, along with overall increases in market rates, led to an increase in the Company's average borrowing rate. The Company's average long-term borrowing rate was 6.79% in fiscal 1999 versus 6.64% in fiscal 1998. In fiscal 1999, the impact of the increase in total interest costs was offset, in part, by increased capitalized interest, principally associated with capital spending at Cartersville. Income Tax The effective tax rate in fiscal 2000 was 15.3%, as compared to 24.5% in fiscal 1999 and 41.7% in fiscal 1998. The establishment of a $59 million valuation allowance (principally related to federal and state net operating loss carryforwards), adversely impacted the 2000 effective tax rate. A valuation allowance was established to reserve the Company's net deferred tax assets to zero based on uncertainty about the Company's ability to realize future tax benefits through offset to future taxable income. In addition, the $22.1 million impairment charge for goodwill associated with the SBQ segment was not deductible for tax purposes, which led to a $7.7 million reduction in the tax benefit recognized for the fiscal 2000 loss. Likewise, the fiscal 1999 tax benefit was impacted by the establishment of valuation allowances for capital loss and state net operating loss carryforwards that were not assured of being realized. The Company's consolidated federal net operating loss for fiscal 2000 was approximately $158 million, which will be carried forward for a period of up to 20 years, along with previous years' losses of approximately $46 million, which will be carried forward for a period of up to 19 years, for a total carryforward of $204 million. None of these losses will be carried back, because available prior year taxes have been recovered through previous carryback claims. In fiscal 2000, the Company received refunds totaling $15.1 million, including $10.6 million in claims for carryback of federal net operating losses. The Company also has state net operating loss carryforwards of approximately $171 million, of which the majority will expire in 15 years. As a result of the sizeable net operating loss carryforwards, the Company does not expect to pay significant amounts of taxes in the foreseeable future. Other Income In fiscal 1999, operating results of the SBQ operations included a gain of $2.2 million from the sale of real estate in Cleveland, Ohio. The gain was offset by a one-time charge of $2.1 million to terminate a long-term raw materials purchase commitment with a third party supplier. The Company also received approximately $4.4 million in refunds from electrode suppliers that related to electrodes purchased in prior years. In fiscal 1998, the Company sold idle properties and equipment for approximately $26.9 million and recognized (pre-tax) gains of approximately $5.2 million. Liquidity and Capital Resources Operating Activities Net cash used in operating activities was $45.3 million in fiscal 2000, compared to net cash provided of $128.4 million in fiscal 1999. In fiscal 2000, margins deteriorated due to decreases in average selling prices, higher raw material costs as scrap costs escalated during the second and third quarters of fiscal 2000 and higher average conversion costs due to the impact of the Cartersville start-up and lower production of SBQ products. Additionally, in fiscal 2000, changes in operating assets and liabilities used cash of $3.0 million, principally due to a $16.0 million increase in inventories and a $16.8 million decrease in accounts payable, offset by a $30.2 million decrease in accounts receivable and other current assets, including the tax refunds mentioned above. In fiscal 1999, changes in operating assets provided cash of $90.6 million, principally due to a $83.1 million decrease in inventory and a $7.3 million decrease in accounts receivable and other current assets. Net cash provided by operating activities increased to $128.4 million in 1999 from $48.6 million in 1998. Although the Company's continuing operations experienced an improvement in gross margin during fiscal 1999, cash provided by operating activities increased principally because of improvements in managing accounts receivable and inventory levels. Days sales outstanding in accounts receivable remained relatively stable in 1999 and 1998. In an effort to reduce borrowings under the Company's revolving credit facility, the Company implemented inventory reduction programs at each of its rebar/merchant mini-mills, which were successful in reducing inventories by $41.9 million during fiscal 1999. Likewise, SBQ inventories declined $40.4 million during fiscal 1999. Investing Activities Net cash flows used in investing activities were $19.7 million in fiscal 2000, compared to $71.1 million in 1999. Expenditures related to capital projects decreased to $26 million in fiscal 2000, versus $141 million in 1999, principally related to the completion of the mid-section mill and caster projects at Cartersville. The increased capital expenditures in fiscal 1999 were offset in part from the proceeds of two sale-leaseback transactions involving equipment at Cartersville. The first included equipment with a carrying value of $7.8 million, was completed in December 1998, while the second, included equipment with a value of $67.3 million, was completed in June 1999. The Company expects additional capital expenditures will decrease to approximately $23 million in fiscal 2001, as the major capital improvement program at Cartersville is complete. Estimated costs to complete authorized projects under construction as of June 30, 2000, is approximately $6.6 million. Net cash flows used in investing activities were $77.7 million in fiscal 1998. Cash used in investing activities reflected investment in the Memphis melt shop offset by proceeds from a lease on certain equipment at the Memphis facility. Cash used in investing activities in 1998 also reflected a $15 million investment in Laclede Steel Company, which was written off in fiscal 1998, and $20 million in additional investments in Pacific Coast Recycling (PCR), a 50% owned joint venture established to operate in southern California as a collector, processor and seller of scrap. Cash used in investing activities in fiscal 1998 also included $30 million in proceeds from the sale of several idled facilities, property, plant and equipment and a 50% interest in Richmond Steel Recycling Limited. Through June 30, 1999, the Company had invested approximately $29.4 million in PCR, including loans of approximately $20 million. Due to conditions in the Asian scrap export market and PCR's inability to compete in the domestic scrap market, the Company wrote off its investment in PCR in fiscal 1999. On June 29, 2000, the Company sold its interest in PCR to Mitsui & Co. for $2.5 million and recognized a $2.1 million gain, partially recovering the 1999 write-down. (Refer to Note 3 to the Consolidated Financial Statements.) In fiscal 1997, the Company and Georgetown Industries, Inc. (GII), formed American Iron Reduction (AIR), located in Convent, Louisiana. The joint venture produces direct reduced iron (DRI), which is used as a substitute for high-grade scrap. Construction of the DRI facility was funded by a $177 million non-recourse project financing arrangement, proceeds from an $8 million industrial revenue bond and initial equity investments of $20 million by the venture partners in fiscal 1998. The Company made additional equity investments of $3.75 million during fiscal 1999. (Refer to Note 3 to the Consolidated Financial Statements.) Financing Activities Net cash provided by financing activities was $65.0 million in fiscal 2000, compared to cash used in financing activities of $57.2 million in fiscal 1999. In fiscal 2000, the Company increased outstanding borrowings under its Revolving Credit Agreement by $83 million to fund working capital needs and substantially increased interest payments. As of June 30, 2000, approximately $26.6 million was available to borrow under the $300 million revolving line of credit and $25 million was available under a new financing commitment (see below). In fiscal 1999, the Company's strategy of depleting inventory levels, coupled with the completion of the sale/leaseback transactions at Cartersville, enabled the Company to reduce outstanding borrowings under its Revolving Credit Agreement by $37.3 million and repay $10 million in short-term notes. On October 12, 1999, the Company reduced its quarterly cash dividend from $0.10 per share to $0.025 per share and in December 1999, the Company's Board of Directors decided to suspend quarterly dividend payments until the Company's profitability and cash flows improve and the restrictive covenants of its long-term debt obligations become less restrictive. On October 12, 1999, the Company executed amendments to its principal debt and letter of credit agreements. The October 1999 amendments waived all then existing covenant violations, and modified the financial and other covenants to provide the Company with additional flexibility to meet its operating plans. The amendments also provided for increased interest rates payable to the banks and Senior Noteholders, granted security interests in substantially all of the Company's assets to the lenders, and gave the lenders certain approval rights with respect to a potential sale of the SBQ segment. The Company also paid modification fees of approximately $1.1 million. As a result of the increased interest rates applicable to the amended debt facilities, the increased debt levels for fiscal 2000 and the reduction in capitalized interest, the Company's total interest expense increased approximately $16.4 million over the fiscal 1999 level of $35.3 million. The Company recognized an extraordinary loss on extinguishment of debt of approximately $1.7 million, or $.06 per share, related to the October 1999 debt restructuring in its financial results for fiscal 2000. Principally a result of non-recurring proxy solicitation, executive severance and other unexpected costs incurred as a direct result of the outcome of the December 1999 proxy fight at December 31, 1999 and at March 31, 2000, the Company was not in compliance with the minimum EBITDA coverage ratio and the fixed charge ratio covenant pertaining to its $150 million and $130 million Senior Notes, its $300 million Revolving Credit Agreement and letter of credit agreements underlying its capital lease and industrial revenue bond obligations. On May 13, 2000, the Company and its lenders executed amendments to the debt and letter of credit agreements as well as the leveraged lease agreement associated with the Company's Memphis melt shop facility. The May 2000 amendments waived any and all known and unknown covenant violations and modified the financial and other covenants to provide the Company with additional flexibility to meet its operating plan. Birmingham Southeast, LLC (BSE), an 85% owned consolidated subsidiary of the Company, received a new $25 million financing commitment from a group principally comprised of the Company's existing lenders. As of June 30, 2000, the Company had not used any of the available $25 million under this agreement. In connection wit the May 2000 amendments, the Company issued stock warrants in lieu of cash payments for modification fees and granted additional security interests in BSE's assets to the lenders. [As a result of these negotiations the Company agreed to achieve certain cash flow performance levels at the Cleveland SBQ operations beginning with the quarter ending September 30, 2000.] Management has taken actions to improve the operating cash flow of Cleveland. However, if the Cleveland operation does not achieve certain cash flow performance levels before September 30, 2000, or if the Cleveland operation is not sold on or before September 30, 2000, the Company may be required by its lenders to cease operations in Cleveland. If this occurs, the Company may incur charges related to asset impairment, severance and other exit costs, which may be material to the Company's operation. Although the Company has not adopted a formal plan to dispose of the Cleveland facility, management is pursuing opportunities to sell or otherwise dispose of the facility, either together with the Memphis facility or in separate transactions. Furthermore, considering the current economic conditions in the steel industry, the fair value of the Cleveland assets in an immediate liquidation may be less than their carrying value. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of Cleveland assets if management decides to terminate operations or sell the Cleveland facility. In addition, if the Company does not sell or otherwise dispose of the SBQ segment by January 31, 2001, the Company will incur a 100 basis point increase in the interest rates under the Revolving Credit Agreement and each of the Senior Notes, which would be reduced to 50 basis points upon a subsequent sale of the SBQ segment. Also, in the event the Company is unable to sell or restart the Memphis facility by January 31, 2001, the Company will incur increased rental expense on equipment subject to an operating lease at Memphis. Based upon the current level of the Company's operations and current industry conditions, the Company anticipates that it will have sufficient cash flow from operations for the next twelve months to meet day-to-day operating expenses and material commitments and remain in compliance with restrictive covenants in its principal debt and lease agreement. In addition, the Company anticipates that it will have sufficient resources to make all required interest and principal payments under its revolving credit agreements and Senior Notes through December 15, 2001. However, the Company is required to make significant principal repayments on December 15, 2001 and, accordingly, may be required to refinance its obligations under the Revolving Credit Agreement and Senior Notes on or prior to such date. Management is currently evaluating alternatives for refinancing substantially all of the Company's long-term debt. However, there can be no assurance that any such refinancing will be possible or, if possible, that acceptable terms could be obtained, particularly in view of the Company's high level of debt. On May 5, 2000, the Company restructured its obligation to purchase direct reduced iron (DRI) from American Iron Reduction (AIR). Both the Company and its joint venture partner (co-sponsor) have agreed to purchase AIR's DRI production during the remaining term of the AIR project finance agreements. Pursuant to the new agreements, the Company has agreed to purchase up to 300,000 metric tons of DRI per year (if tendered by AIR) which can be offset by one half of third party direct sales made by AIR. The lenders agreed to restructure the existing debt agreements with AIR and forgive any defaults by AIR as of the closing date. The Company intends to actively pursue a settlement of its obligations to purchase DRI from AIR. The Company is actively seeking a buyer for the AIR facility. Until the facility is sold the Company and the co-sponsor will remain obligated under the DRI purchase agreement. If future market prices for DRI continue to be less than the price the Company is obligated to pay, the Company will continue to incur losses on future merchant DRI activities. Currently, the market price of DRI is approximately $74 per ton less than the price the Company is required to pay under the AIR purchase commitment. Pursuant to the Company's current obligation to purchase DRI from AIR at its current level and assuming no change to the market price of DRI, the Company would absorb approximately $16.8 million per year in excess DRI costs. The Company established reserves of $40.2 million in the second quarter of fiscal 2000 to cover losses on future DRI purchases under the purchase commitment and the ultimate settlement of the contract, which management expects to be paid upon early termination of the contract. As is the case with all estimates that involve predictions of future outcomes, management's estimate of the loss on the DRI purchase commitment is subject to change. The principal factors which could cause the actual results to vary are the length of time the Company remains obligated under the purchase commitment until an acceptable sale of the AIR facility can be completed, the proceeds from the sale (which directly impact the amount of the termination payment), fluctuations in the market price of DRI and changes in AIR's production costs, which have increased significantly as a result of the recent rise in natural gas prices. In addition, pursuant to the agreements entered into with the Senior Noteholders, the Company is generally restricted from making payments to AIR in excess of the amounts presently required under its agreements related to AIR and may be restricted, subject to certain exceptions set forth in the agreements with the Senior Noteholders, to obtain the approval of its Senior Noteholders to enter into an agreement to terminate or settle any of its obligations relating to AIR. In July 1998, the Board authorized a stock repurchase program pursuant to which the Company may purchase up to 1.0 million shares of its common stock in the open market at prices not to exceed $20. As of December 24, 1998, the Company had purchased 476,700 shares of its stock pursuant to this program. The Company has no present intention to resume repurchases under the authorization in the near term and is prohibited from purchasing shares under its amended long-term debt agreements. Outlook The success of the Company in the near term will depend in large part, on the Company's ability to (a) minimize losses in its SBQ operations; (b) dispose of the Memphis facility; and (c) realize sufficient proceeds either from the sale or operations of the remaining SBQ operations in Cleveland to enable the Company to reduce its debt and return to profitability. However, management's outlook for the rebar/merchant operations, which have performed consistently in recent years, is positive. The Company believes that start-up costs at Cartersville will diminish through the first quarter of fiscal 2001. The Cartersville facility will enable expansion of the Company's merchant product line and leverage melting capacity throughout the organization. With continued emphasis on a shift in product mix towards higher-margin merchant products, the Company expects to be able to improve operating results at its rebar/merchant mini-mills by increasing volumes, reducing costs and improving gross margins. While the Company is confident of its ability to realize the benefits of rationalizing the SBQ operations, the level of benefits to be realized could be affected by a number of factors including, without limitations, (a) the Company's ability (i) to obtain any consents and approvals which may be required from its creditors to sell the SBQ assets, (ii) to find a strategic buyer or buyers willing to acquire the SBQ assets at prices that fairly value the assets, and (iii) to operate the Company as planned in light of the highly leveraged nature of the Company, and (b) changes in the condition of the steel industry in the United States. See "Risk Factors That May Affect Future Results; Forward-Looking Statements." Compliance with Environmental Laws and Regulations The Company is subject to federal, state and local environmental laws and regulations concerning, among other matters, waste water effluents, air emissions and furnace dust management and disposal. Company management is highly conscious of these regulations and supports an ongoing program to maintain the Company's strict adherence to required standards. The Company believes that it is currently in compliance with all known material and applicable environmental regulations. Impact of Inflation The Company has not experienced any material adverse effects on operations in recent years because of inflation, though margins can be affected by inflationary conditions. The Company's primary cost components are ferrous scrap, high quality semi-finished steel billets, energy and labor, all of which are susceptible to domestic inflationary pressures. Finished product prices, however, are influenced by nationwide construction activity, automotive production and manufacturing capacity within the steel industry and the availability of lower-priced foreign steel in the Company's market channels. While the Company has generally been successful in passing on cost increases through price adjustments, the effect of steel imports, severe market price competition and under-utilized industry capacity has in the past, and could in the future, limit the Company's ability to adjust pricing. Risk Factors That May Affect Future Results; Forward-Looking Statements Certain statements contained in this report are forward-looking statements based on the Company's current expectations and projections about future events. The words "believe," "expect," "anticipate" and similar expressions identify forward-looking statements. These forward-looking statements include statements concerning market conditions, financial performance, potential growth, future cash sources and requirements, competition, production costs, strategic plans (including asset sales and potential acquisitions), environmental matters, labor relations and other matters. These forward-looking statements are subject to a number of risks and uncertainties, which could cause the Company's actual results to differ materially from those expected results described in the forward-looking statements. Due to such risks and uncertainties, readers are urged not to place undue reliance on forward-looking statements. All forward-looking statements included in this document are based upon information available to the Company on the date hereof, and the Company undertakes no obligation to publicly update or revise any forward-looking statement. Moreover, new risk factors emerge from time-to-time and it is not possible for the Company to predict all such risk factors, nor can the Company assess the impact of all such risk factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those described or implied in any forward-looking statement. All forward-looking statements contained in this report are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Risks that could cause actual results to differ materially from expected results include, but are not limited to, the following: o Changes in market supply and demand for steel, including the effect of changes in general economic conditions; o Changes in U.S. or foreign trade policies affecting steel imports or exports; o Changes in the availability and costs of steel scrap, steel scrap substitute materials, steel billets and other raw materials or supplies used by the Company, as well as the availability and cost of electricity and other utilities; o Unplanned equipment failures and plant outages; o Actions by the Company's domestic and foreign competitors; o Excess production capacity at the Company or within the steel industry; o Costs of environmental compliance and the impact of governmental regulations; o Changes in the Company's relationship with its workforce; o The Company's highly leveraged capital structure and the effect of restrictive covenants in the Company's debt instruments on the Company's operating and financial flexibility; o Changes in interest rates or other borrowing costs, or the availability of credit; o Changes in the Company's business strategies or development plans, and any difficulty or inability to successfully consummate or implement as planned any projects, acquisitions, dispositions, joint ventures or strategic alliances; o The effect of unanticipated delays or cost overruns on the Company's ability to complete or start-up a project when expected, or to operate it as anticipated; and o The effect of existing and possible future litigation filed by or against the Company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA BIRMINGHAM STEEL CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) June 30, ----------------------- 2000 1999 --------- --------- ASSETS (Restated) Current assets: Cash and cash equivalents........................... $ 935 $ 935 Accounts receivable, net of allowance for doubtful accounts of $1,614 in 2000 and $1,207 in 1999........................... 93,652 104,462 Inventories.......................................... 177,835 161,801 Other current assets................................. 5,950 53,324 --------- --------- Total current assets............................... 278,372 320,522 Property, plant and equipment: Land and buildings................................... 299,572 242,893 Machinery and equipment.............................. 639,674 611,083 Construction in progress............................. 15,841 25,641 --------- --------- 955,087 879,617 Less accumulated depreciation........................ (316,790) (272,579) --------- --------- Net property, plant and equipment.................. 638,297 607,038 Excess of cost over net assets acquired................. 15,642 17,769 Other................................................... 27,546 25,408 --------- --------- Total assets....................................$ 959,857 $ 970,737 ========= ========= See accompanying notes. BIRMINGHAM STEEL CORPORATION CONSOLIDATED BALANCE SHEETS--(Continued) (in thousands, except per share data)
June 30, -------------------------- 2000 1999 ----------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY (Restated) Current liabilities: Accounts payable..................................................................... $ 79,535 $ 96,336 Accrued interest payable............................................................. 2,186 1,506 Accrued payroll expenses............................................................. 10,095 9,930 Accrued operating expenses........................................................... 11,485 10,636 Loss on purchase commitment.......................................................... 8,899 -- Other current liabilities............................................................ 23,381 24,978 Current portion of long-term debt.................................................... 131 10,125 Reserve for discontinued operations.................................................. -- 56,544 ---------- --------- Total current liabilities.......................................................... 135,712 210,055 Deferred liabilities.................................................................... 12,040 10,581 Reserve for loss on purchase commitment................................................. 30,000 -- Long-term debt, less current portion.................................................... 594,090 511,392 Minority interest in subsidiary......................................................... -- 7,978 Stockholders' equity: Preferred stock, par value $.01; authorized: 5,000 shares............................ -- -- Common stock, par value $.01; authorized: 75,000 shares; issued: 31,058 in 2000 and 29,836 in 1999.......................................... 310 298 Additional paid-in capital........................................................... 342,257 329,056 Treasury stock, 81 and 150 shares in 2000 and 1999, respectively, at cost............ (465) (791) Unearned compensation................................................................ (667) (718) Retained earnings (deficiency)...................................................... . (153,420) (97,114) ---------- -------- Total stockholders' equity......................................................... 188,015 230,731 ---------- -------- Total liabilities and stockholders' equity...................................... $ 959,857 $970,737 =========== ========
See accompanying notes. BIRMINGHAM STEEL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Years Ended June 30, ------------------------------------ 2000 1999 1998 --------- --------- ---------- (Restated) (Restated) Net sales.................................................................... $ 932,546 $ 980,274 $1,136,019 Cost of sales: Other than depreciation and amortization.................................. 829,415 840,339 963,354 Depreciation and amortization............................................. 58,179 60,992 55,266 --------- --------- ----------- Gross profit................................................................. 44,952 78,943 117,399 Start-up and restructuring costs and other unusual items..................... 210,476 50,735 34,238 Selling, general and administrative expense.................................. 49,226 46,126 48,645 --------- --------- ----------- Operating (loss) income...................................................... (214,750) (17,918) 34,516 Interest expense, including amortization of debt issuance costs.............. 51,687 35,265 29,008 Other income, net............................................................ 3,039 11,288 13,968 Loss from equity investments................................................. (11,915) (30,765) (18,326) Minority interest in loss of subsidiary...................................... 7,978 5,497 1,643 --------- --------- ----------- (Loss) income from continuing operations before income taxes................. (267,335) (67,163) 2,793 (Benefit from) provision for income taxes.................................... (41,001) (16,110) 1,164 --------- --------- ---------- (Loss) income from continuing operations..................................... (226,334) (51,053) 1,629 Discontinued operations: Reversal of loss (loss) on disposal of SBQ business, including estimated losses during the disposal period (net of income taxes of $78,704)...... 173,183 (173,183) -- --------- --------- ---------- (Loss) income before extraordinary item................................... (53,151) (224,236) 1,629 Loss on restructuring of debt (net of income taxes of $1,160)................ (1,669) -- -- --------- --------- ---------- Net (loss) income............................................................ $ (54,820) $(224,236) $ 1,629 ========= ========= ========== Weighted average shares outstanding.......................................... 30,118 29,481 29,674 ========= ========= ========== Basic and diluted per share amounts: (Loss) income from continuing operations.................................. $ (7.51) $ (1.73) $ 0.05 Income (loss) on discontinued operations.................................. 5.75 (5.88) -- Loss on restructuring of debt............................................. (0.06) -- -- --------- --------- ---------- Net (loss) income ........................................................ $ (1.82) $ (7.61) $ 0.05 ========= ========= ==========
See accompanying notes. BIRMINGHAM STEEL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended June 30, ---------------------------------- 2000 1999 1998 --------- --------- ---------- (Restated) (Restated) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income from continuing operations................................... $ (54,820) $(224,236) $ 1,629 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization............................................... 58,179 60,992 55,266 Provision for doubtful accounts receivable.................................. 908 376 41 Deferred income taxes (continuing operations)............................... (43,973) (1,673) (6,253) Minority interest in loss of subsidiary.................................... (7,978) (5,497) (1,643) Loss (gain) on sale of equity interests, idle facilities and equipment...... 909 1,149 (5,354) Loss from equity investments................................................ 11,915 30,765 18,326 (Reversal of loss) loss on discontinued operations.......................... (173,183) 173,183 -- Impairment of fixed assets and goodwill..................................... 120,245 -- -- Provision for loss on purchase commitment................................... 40,238 -- -- Other....................................................................... 5,289 2,736 4,036 Changes in operating assets and liabilities: Accounts receivable......................................................... 9,902 17,016 7,581 Inventories................................................................. (16,034) 83,131 (34,681) Other current assets........................................................ 20,279 (9,715) (572) Accounts payable............................................................ (16,801) 3,523 (1,425) Accrued liabilities......................................................... (1,242) (6,342) 9,981 Deferred liabilities........................................................ 848 2,950 1,697 --------- --------- ---------- Net cash (used in) provided by operating activities................... (45,319) 128,358 48,629 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment................................. (26,065) (140,677) (146,567) Proceeds from sale/leaseback............................................... -- 75,104 75,000 Proceeds from sale of equity investments, property, plant and equipment and idle facilities.................................. 2,120 -- 29,832 Equity investments.......................................................... -- (3,750) (35,016) Other non-current assets.................................................... 4,277 (1,748) (987) --------- --------- ---------- Net cash used in investing activities.................................. (19,668) (71,071) (77,738) See accompanying notes.
BIRMINGHAM STEEL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued) (in thousands)
0 Years Ended June 30, ------------------------------------ 2000 1999 1998 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net short-term borrowings and repayments........................ $ (10,125) $ (119) $ 10,000 Proceeds from issuance of long-term debt........................ -- -- 1,500 Borrowings under revolving credit facility...................... 963,330 2,478,944 2,056,773 Payments on revolving credit facility........................... (880,501) (2,526,245) (2,025,390) Debt issue and amendment costs paid............................. (6,232) (1,457) -- Proceeds from issuance of common stock.......................... -- -- 358 Stock compensation plan, net.................................... -- 1 -- Purchase of treasury stock...................................... -- (3,209) (2,318) Cash dividends paid............................................. (1,485) (5,169) (11,871) ----------- ---------- ----------- Net cash provided by (used in) financing activities........ 64,987 (57,254) 29,052 ----------- ---------- ----------- Net increase (decrease) in cash and cash equivalents....... -- 33 (57) Cash and cash equivalents at: Beginning of year............................................. 935 902 959 ----------- ---------- ----------- End of year................................................... $ 935 $ 935 902 ============ ========== ========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid during the year for: Interest (net of amounts capitalized)......................... $ 44,822 $ 49,301 $ 29,231 Income taxes paid (refunded), net............................. (15,104) (1,801) 6,132 NON CASH FINANCING AND INVESTING ACTIVITIES: Issuance of warrants to purchase 3,000,000 shares of common stock in connection with debt amendments................................... $ 8,250 $ -- $ --
See accompanying notes. BIRMINGHAM STEEL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands, except per share data) Years Ended June 30, 2000, 1999 and 1998 ----------------------------------------------------------------------------------------
Common Stock Additional Treasury Stock Retained Total -------------- Paid-in --------------- Unearned Earnings Stockholders' Shares Amount Capital Shares Amount Compensation (Deficiency) Equity ------ ------- --------- ------ ------ ------------ ----------- -------------- Balances at June 30, 1997.......29,736 $ 297 $331,139 (56) $ (996) $ (1,425) $ 142,533 $471,548 Options exercised, net of tax benefit....................... 44 1 720 24 385 (261) -- 845 Purchase of treasury stock...... -- -- -- (159) (2,318) -- -- (2,318) Reduction of unearned compensation.................. -- -- -- -- -- 774 -- 774 Net income...................... -- -- -- -- -- -- 1,629 1,629 Cash dividends declared, $.40 per share..................... -- -- -- -- -- -- (11,871) (11,871) ------ ----- -------- ----- ------ -------- -------- -------- Balances at June 30, 1998...... 29,780 298 331,859 (191) (2,929) (912) 132,291 460,607 Options exercised and shares issued (repurchased) under stock compensation plans, net.......................... 56 -- (108) 56 716 (615) -- (7) Purchase of treasury stock..... -- -- -- (477) (3,209) -- -- (3,209) Issuance of treasury shares to employee benefit plan........ -- -- (2,695) 462 4,631 -- -- 1,936 Reduction of unearned compensation................. -- -- -- -- -- 809 -- 809 Net loss....................... -- -- -- -- -- -- (224,236) (224,236) Cash dividends declared, $.175 per share................... -- -- -- -- -- -- (5,169) (5,169) ------ ----- -------- ----- ------ -------- -------- -------- Balances at June 30, 1999...... 29,836 298 329,056 (150) (791) (718) (97,114) 230,731 Options exercised and shares issued(repurchased) under stock compensation plans, net...... 146 1 844 69 326 (686) -- 485 Issuance of common stock to employee benefit plan......... 577 6 2,447 -- -- -- -- 2,453 Reduction of unearned compensation.................. -- -- -- -- -- 737 -- 737 Issuance of warrants........... -- -- 8,250 -- -- -- -- 8,250 Issuance of common stock to affiliates as reimbursement of proxy solicitation costs.. 499 5 1,660 -- -- -- -- 1,665 Net loss........................ -- -- -- -- -- -- (54,820) (54,820) Cash dividends declared, $.05 per share..................... -- -- -- -- -- -- (1,486) (1,486) ------ ----- -------- ----- ------ -------- -------- -------- Balances at June 30, 2000.......31,058 $ 310 $342,257 (81) $ (465) $ (667) $(153,420) $188,015 ====== ===== ======== ====== ====== ======== ======== ========
See accompanying notes. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000, 1999 and 1998 1. Description of the Business and Significant Accounting Policies Description of the Business Birmingham Steel Corporation (the Company) owns and operates facilities in the mini-mill sector of the steel industry. In addition, the Company owns an equity interest in a scrap collection and processing operation. From these facilities, which are located across the United States and Canada, the Company produces a variety of steel products including semi-finished steel billets, reinforcing bars, merchant products such as rounds, flats, squares and strips, along with, angles and channels, less than three inches wide and structural products including angles, channels, and beams that are greater than three inches wide. These products are sold primarily to customers in the steel fabrication, manufacturing and construction business. The Company has regional warehouse and distribution facilities that sell its finished products. In addition, the Company's SBQ (special bar quality) line of business, which was reported in discontinued operations prior to the second quarter of fiscal 2000 (see Note 2), produces high-quality rod, bar and wire that is sold primarily to customers in the automotive, agricultural, industrial fastener, welding, appliance and aerospace industries in the United States and Canada. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Equity Investments Investments in 50% or less owned affiliates where the Company has substantial influence over the affiliate are accounted for using the equity method of accounting. Under the equity method, the investment is carried at cost of acquisition plus additional investments and advances and the Company's share of undistributed earnings or losses since acquisition. The Company generally records its share of income and losses in equity investees on a one-month lag. Impairment losses are recognized when management determines that the investment or equity in earnings is not realizable. Revenue Recognition Revenue from sales of steel products is recorded at the time the goods are shipped or when title passes, if later. Cash Equivalents The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The carrying amounts reported in the accompanying consolidated balance sheets for cash and cash equivalents approximate their fair values. Inventories Inventories are stated at the lower of cost or market value. The cost of inventories is determined using the first-in, first-out method. Long-lived Assets and Depreciation The Company recognizes impairment losses on long-lived assets used in operations, including allocated goodwill, when impairment indicators are present and the undiscounted cash flows estimated to be generated by those assets are less than their carrying values. Long-lived assets held for disposal are valued at the lower of carrying amount or fair value less cost to sell. Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Estimated useful lives range from ten to thirty years for buildings and from five to twenty-five years for machinery and equipment. Excess of Cost Over Net Assets Acquired The excess of cost over net assets acquired (goodwill) is amortized on a straight-line basis over periods not exceeding twenty years. Accumulated amortization of goodwill was approximately $42,937,000 and $17,879,000 at June 30, 2000 and 1999, respectively. The carrying value of goodwill is reviewed if the facts and circumstances suggest that it may be impaired. If such review indicates that goodwill will not be recoverable based upon the undiscounted expected future cash flows over the remaining amortization period, the carrying value of the goodwill is reduced to its estimated fair value. In fiscal 2000, the Company recorded an impairment charge of $22,134,000 relating to the unamortized SBQ goodwill (see Note 14). Income Taxes Deferred income taxes are provided for temporary differences between taxable income and financial reporting income in accordance with FASB Statement No.109, Accounting for Income Taxes. Earnings per Share Earnings per share are presented in accordance with FASB Statement No. 128, Earnings Per Share. Basic earnings per share are computed using the weighted average number of outstanding common shares for the period, excluding unvested restricted stock. Diluted earnings per share are computed using the weighted average number of outstanding common shares and dilutive equivalents, if any. Options to purchase 827,000 shares of common stock at an average price of $17.21 per share were outstanding at June 30, 1998, but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. Because the Company reported net losses in fiscal 1999 and 2000, none of the options outstanding at the end of those years (see Note 10) were dilutive. In addition, warrants to purchase 3,000,000 shares of the Company's common stock at $3 per share (see Note 7) are not dilutive in fiscal 2000. Start-up Costs The Company recognizes start-up costs as expense when incurred. The Company considers a facility to be in "start-up" until it reaches commercially viable production levels. During the start-up period, costs incurred in excess of expected normal levels, including non-recurring operating losses, are classified as start-up costs in the Consolidated Statements of Operations. Credit Risk The Company extends credit, primarily on the basis of 30-day terms, to various companies in a variety of industrial market sectors. The Company does not believe it has a significant concentration of credit risk in any one geographic area or market segment. The Company performs periodic credit evaluations of its customers and generally does not require collateral. Historically, credit losses have not been significant. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Accounting Pronouncements The Financial Accounting Standards Board has issued FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (as amended by Statements No. 137 and 138). These pronouncements, which become effective in fiscal 2001, are not expected to have a material effect on the Company's financial position or results of operations because the Company does not presently use derivatives or engage in hedging activities. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"), which provides the Staff's views on applying generally accepted accounting principles to revenue recognition issues. The Company does not anticipate that the adoption of SAB 101 will have a material impact on the consolidated financial statements and will continue to analyze the impact of SAB 101. FASB Interpretation 44, Interpretation of APB Opinion 25 ("FIN 44"), was issued in March 2000. FIN 44 provides an interpretation of APB Opinion 25 on accounting for employee stock compensation and describes its application to certain transactions. FIN 44 is effective on July 1, 2000. It applies on a prospective basis to events occurring after that date, except for certain transactions involving options granted to non-employees, repriced fixed options, and modifications to add reload option features, which apply to awards granted after December 31, 1998. The provisions of FIN 44 are not expected to have a material effect on transactions entered into through June 30, 2000. 2. Discontinued Operations In fiscal 1999, prior management of the Company announced plans to sell the Company's SBQ operations, which includes rod, bar and wire facilities in Cleveland, Ohio; a high quality melt shop in Memphis, Tennessee; and the Company's 50% interest in American Iron Reduction, L.L.C. (AIR). Accordingly, as required by APB Opinion 30 and EITF 95-18, the operating results of the SBQ segment were reflected as discontinued operations in the Company's annual financial statements for fiscal 1999 and in the first quarter of fiscal 2000. On January 31, 2000, subsequent to a change in management that occurred after a prolonged proxy contest, new management announced the Company would no longer reflect its SBQ segment as discontinued operations. The change was required as a result of new management's decision to re-establish its Cleveland-based American Steel & Wire (AS&W) in the SBQ markets. Management's decision in the second quarter of fiscal 2000 to continue operating the AS&W facilities was based on the following considerations: o To date, the Company's attempts to sell the facility had not been successful, and management believed at that time that a sale in the prevalent economic climate would not generate sufficient proceeds to pay down a meaningful amount of the Company's long-term debt. o New management believes there is a viable long-term market for AS&W's high-quality rod, bar and wire products. o The Company had identified several potential sources of high-quality billets for the AS&W operations to replace the Memphis melt shop (which was shutdown in early January 2000) as its primary supply source. Furthermore, management concluded that a sale of the entire SBQ segment by May 2000, as had been previously anticipated by former management, was no longer likely based upon the results of selling efforts to date and then prevalent market conditions. In accordance with EITF 90-16, Accounting for Discontinued Operations Subsequently Retained, the results of operations of the SBQ segment are reported within continuing operations in fiscal 2000. In addition, the operating results of the SBQ segment for all prior years (previously reflected in discontinued operations) have been reclassified from discontinued operations to continuing operations. As a result of unwinding the discontinued operations accounting treatment of the SBQ segment, the Company reversed the previously established reserves for losses on disposal and operating losses, and their related tax effects, in the second quarter of fiscal 2000. The reversal of previously established reserves (net of tax) increased net income by $173,183,000 ($5.75 per share) in fiscal 2000. Significant components of the reversal are as follows (in thousands): Reserve for estimated loss on disposal....................... $ 195,343 Reversal of estimated SBQ operating losses during the expected disposal period............................... 56,544 Reversal of income tax benefit recognized in fiscal 1999..... (78,704) --------------- Net reversal $ 173,183 =============== Total SBQ segment assets, revenues and operating losses are summarized in Note 12 for the periods indicated. Total liabilities of the SBQ segment at June 30, 1999, were $93,268,000. As required by EITF 90-16, after reversing the fiscal 1999 reserves and allowances for losses on disposal, the Company evaluated the SBQ assets for impairment. The Company also reconsidered the adequacy of its reserves and provisions for contingencies, contract losses and other issues that arose during fiscal 2000 related to both the rebar/merchant and SBQ segments. The resulting charges and provisions are summarized in Note 14. In accordance with FASB Statement No. 121, Accounting for the Impairment for Long-Lived Assets and for Long-Lived Assets to be Disposed Of, management evaluated the Cleveland assets (as held for use) and determined that there was no impairment because estimated undiscounted cash flows from continuing the Cleveland operations exceeded the carrying value of the long-lived assets. Management has taken actions to improve the operating cash flow of Cleveland. However, if the Cleveland operation does not achieve certain cash flow performance levels before September 30, 2000, or if the Cleveland operation is not sold on or before September 30, 2000, the Company may be required by its lenders to cease operations in Cleveland. If this occurs, the Company may incur charges related to asset impairment, severance and other exit costs, which may be material to the Company's operations. Although the Company has not adopted a formal plan to dispose of the Cleveland facility, management is pursuing opportunities to sell or otherwise dispose of the facility, either together with the Memphis facility or in separate transactions. Furthermore, considering the current economic conditions in the steel industry, the fair value of the Cleveland assets in an immediate liquidation may be less than their carrying value. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of Cleveland assets if management decides to terminate operations or sell the Cleveland facility. 3. Investment in Affiliated Companies American Iron Reduction, L.L.C. Through June 30, 1999, the Company had made equity investments of $23,750,000 in American Iron Reduction LLC (AIR), a 50%-owned joint venture that operates a direct reduced iron (DRI) facility in Convent, Louisiana. DRI is a substitute for high-grade scrap that, until December 31, 1999, was used to produce high quality billets at the Company's Memphis facility. In the fourth quarter of fiscal 1999, the Company announced its intention to dispose of its investment in AIR as a part of its plan of disposal for the SBQ line of business. Given market conditions that existed in fiscal 1999 and continued to exist in the second quarter of fiscal 2000, the Company concluded that its investment in AIR was impaired and included the estimated loss on disposal of its investment in AIR ($13,889,000) in the fiscal 1999 loss on disposal of the SBQ business. In the second quarter of fiscal 2000, new management of the Company concluded that a sale of the entire SBQ segment was unlikely to occur in the near term, and the previously accrued loss on disposition, including the previous write-down of the Company's investment in AIR, was reversed. However, the Company continues to believe that the investment in AIR remains impaired. Accordingly, the previous write-down of the AIR investment has been reinstated (reclassified) as a component of continuing operations in fiscal 2000. The impairment loss is reflected in "Loss from equity investment" in the Consolidated Statements of Operations. The AIR project is financed on a non-recourse basis to the Company and the co-sponsor. In the fourth quarter of fiscal 1999, AIR defaulted on $178.9 million of non-recourse project finance debt. In connection with AIR's original project financing agreements, the Company and the co-sponsor each agreed to purchase 50% of AIR's annual DRI production (up to 600,000 metric tons), if tendered, at prices based on AIR's total production costs (excluding depreciation and amortization but including debt service payments under AIR's project finance obligations). The market price of DRI has fluctuated between $30 to $75 per ton less than the price that the co-sponsors were committed to pay under the original DRI purchase contracts. In the Company's Annual Report on Form 10-K for the year ended June 30, 1999, the Company disclosed that, although it intended to dispose of its interest in AIR as a part of its overall plan of disposal for the SBQ segment, the Company could remain obligated to purchase DRI from AIR after the disposal of the SBQ business. At the end of fiscal 1999, the Company had no viable strategy for terminating or settling the DRI purchase commitment. Furthermore, because of the length of the remaining term of the commitment at that time (approximately 8 years), prior management of the Company concluded that it could not reasonably predict DRI price movements over such a long period, and consequently it could not reasonably estimate the ultimate amount of loss, if any, on the DRI purchase commitment. The Company disclosed that if it were unable to find a buyer or another third-party to assume its obligations under the AIR purchase agreement, and future market prices for DRI remain less than the committed costs under the purchase agreement, the Company would incur losses on future merchant DRI sales. On the other hand, if the market price of DRI increases during the term of the purchase commitment, the Company could generate trading profits from merchant DRI sales. Total purchases of DRI from AIR were $26,609,000 (175,000 metric tons), $43,683,000 (297,000 metric tons) and $24,178,000 (177,000 metric tons) for 2000, 1999 and 1998, respectively. On May 5, 2000, the Company, the co-sponsor, and AIR's lenders announced a financial restructuring that, among other things, defers interest and principal payment on AIR's debt and reduces the amount of annual DRI purchase requirements by the co-sponsors. The revised agreements also provide a framework for the co-sponsors to pursue a sale of the facility and terminate their continuing obligations under the purchase contract. Management intends to vigorously pursue disposition strategies for the AIR facility and expects to sell the facility in one to two years. Under the revised AIR financing and purchase agreements, the Company will continue to be obligated to purchase approximately 300,000 metric tons per year, which can be offset by third-party direct sales by AIR. Management expects that during this time, the spread between the Company's committed cost under the DRI purchase contract and the market price of DRI will be in a range of $30 to $75 per ton, contingent upon a number of factors including the actual monthly production volume, raw material cost and other production costs. The estimated loss on the purchase commitment is based on the lower end of the range of DRI market prices and could be more. Management expects to resell a portion of its share of AIR's production to third-parties in the merchant DRI market with the remainder to be used as raw materials in the Company's core mini-mill operations. The Company expects to continue incurring losses on DRI purchases, at least for the near term. In addition, management expects that the Company will incur a loss on terminating its obligations under the DRI purchase contracts when AIR's production facility is sold. Accordingly, the Company recorded a $40,238,000 loss (see Note 14) on the AIR purchase commitment in the second quarter of fiscal 2000, of which $30,000,000 is classified as non-current and the remainder is classified as a current liability. As is the case with all estimates that involve predictions of future outcomes, management's estimate of the loss on the DRI purchase commitment is subject to change. The principal factors which could cause the actual results to vary are the length of time the Company remains obligated under the purchase commitment until an acceptable sale of the AIR facility can be completed, the proceeds from the sale (which directly impact the amount of the termination payment), fluctuations in the market price of DRI and changes in AIR's production costs, which have increased significantly as a result of the recent rise in natural gas prices. Assuming that the co-sponsors are unable to sell the AIR facility before expiration of the purchase contracts, the fixed and determinable portion of the Company's DRI purchase commitment, representing 50% of AIR's debt service on project finance indebtedness through February 2013, is scheduled as follows (in thousands): Fiscal Year Ending June 30: 2001....................... $ 3,742 2002....................... 2,197 2003....................... 4,857 2004....................... 17,850 2005....................... 17,908 Thereafter................. 138,037 ------------- $ 184,591 Laclede Steel Company On September 24, 1997, the Company purchased approximately 25% of the outstanding shares of Laclede Steel Company (LCLD), a public company, for $14,953,000. Through June 30, 1998, the Company accounted for its investment in LCLD using the equity method. For the period from September 24, 1997 through June 30, 1998, the Company recognized $2,715,000 in losses on its investment in LCLD. In June 1998, the Company determined that the remaining carrying amount of its investment in LCLD was impaired because, among other things: the market price of LCLD common shares had declined significantly since the Company made its investment; LCLD had continued to incur operating losses; and LCLD announced a restructuring plan that had a material effect on its financial position and future results of operations. Accordingly, the Company recognized a $12,383,000 impairment loss in the fourth quarter of fiscal 1998. The loss is included in "Loss from equity investments" in the Consolidated Statements of Operations. Pacific Coast Recycling, LLC On September 18, 1996, the Company and an affiliate of Mitsui & Co., Ltd. formed Pacific Coast Recycling, LLC (Pacific Coast), a 50/50 joint venture established to operate in southern California as a collector, processor and seller of scrap. Through June 30, 1999, the Company invested approximately $29,400,000 in Pacific Coast, including loans of $20,150,000, and recognized losses of $4,930,000 and $3,144,000 in fiscal 1999 and 1998, respectively, in applying the equity method. During fiscal 1999, management and the Board of Directors determined that Pacific Coast was no longer a strategic fit for the Company's core mini-mill operations and decided not to continue its support of the operations. The Company then re-evaluated the carrying amount of its investment and concluded that it should be written down in the fourth quarter of fiscal 1999. The provision for loss of $19,275,000 is reflected in "Loss from equity investments" in the accompanying Consolidated Statements of Operations. On June 29, 2000, the Company sold its interest in Pacific Coast for $2,500,000 and was relieved of all liabilities and guarantee obligations associated with Pacific Coast. The resulting gain of $2,100,000 was recognized in the fourth quarter of fiscal 2000 and is included in "Loss from equity investments" in the Consolidated Statements of Operations. Richmond Steel Recycling Limited The Company also owns a 50% interest in Richmond Steel Recycling Limited (RSR), a scrap processing facility located in Richmond, British Columbia, Canada, which is accounted for using the equity method. The investment in and equity in earnings of RSR are not significant. 4. Inventories Inventories were valued at the lower of cost (first-in, first-out) or market, as summarized in the following table (in thousands): June 30, 2000 1999 --------- --------- Raw materials and mill supplies........................ $ 45,328 $ 52,658 Work-in-progress....................................... 42,168 40,928 Finished goods......................................... 90,339 68,215 --------- --------- $ 177,835 $ 161,801 ========= ========= 5. Capitalized Interest and Interest Expense Capitalized interest on qualifying assets under construction and total interest incurred were as follows (in thousands): Years Ended June 30, 2000 1999 1998 ------- ------- ------- Capitalized interest ........................ $ 1,216 $ 4,965 $ 6,486 Total interest incurred...................... 52,903 40,229 35,494 6. Short-Term Borrowing Arrangements The following information relates to the Company's borrowings under short-term credit facilities (in thousands): Years Ended June 30, 2000 1999 1998 ------- -------- ------- Maximum amount outstanding.................. $10,000 $20,000 $35,000 Average amount outstanding.................. $ 864 $14,780 $ 9,951 Weighted average interest rate.............. 6.4% 5.9% 6.0% 7. Long-Term Debt Long-term debt consists of the following (in thousands): June 30, ----------------------- 2000 1999 --------- --------- Senior Notes, $130,000 face amount; interest at 10.03% and 7.83% at June 30, 2000 and 1999, respectively, due in 2005............. $ 130,000 $ 130,000 Senior Notes, $150,000 face amount; interest at 9.80% and 7.60% at June 30, 2000 and 1999, respectively, due in 2002 and 2005.......... 150,000 150,000 $300,000 Revolving line of credit, payable in 2002; weighted average interest of 8.72% and 6.88% at June 30, 2000 and 1999, respectively, payable in 2002............................. 269,465 186,635 Capital lease obligations, interest rates principally ranging from 43% to 45% of bank prime, payable in 1999 and 2001. 2,500 12,500 Promissory Note, interest at 5.0%, payable in installments through 2008................... 1,256 1,382 Industrial Revenue Bonds, interest rates principally ranging from 44% to 45% of bank prime, payable in 2025 and 2026. 41,000 41,000 --------- --------- 594,221 521,517 Less: current portion.......................... (131) (10,125) --------- --------- $ 594,090 $ 511,392 ========= ========= Approximately $26,632,000 under the $300,000,000 revolving line of credit and $25 million in new funding commitments (see below) was available to borrow as of June 30, 2000. The aggregate fair value of the Company's long-term debt obligations is approximately $591,238,000 compared to the carrying value of $594,221,000 at June 30, 2000. The fair value of the Company's fixed-rate Senior Notes is estimated using discounted cash flow analysis, based on the Company's incremental borrowing rate for similar types of borrowings. The discounted present value calculation does not include prepayment penalties that might be paid under the debt agreements and thus prevent the Company from realizing any of the implied gain. Future maturities of long-term debt are as follows (in thousands): Fiscal Year Ending June 30: 2001...................................... $ 131 2002...................................... 298,103 2003...................................... 105,645 2004...................................... 29,652 2005...................................... 29,660 Thereafter................................ 131,030 --------- $ 594,221 ========= The above principal maturity schedule will be accelerated when and if the SBQ assets are sold, as the net proceeds from any sales are required to be used to pay down part of the Company's outstanding debt. On October 13, 1999, the Company amended its principal debt and letter of credit agreements to provide for the continuation of the Company's borrowing arrangements on a long-term basis. Among other things, the Company granted its lenders a security interest in substantially all assets of the Company and agreed to pay modification fees and generally higher interest rates. The financial covenants also were amended. On May 15, 2000, the Company executed new amendments to provide more operating flexibility, generally less restrictive financial covenants and $25 million in new funding commitments from the lenders. The May 15, 2000 refinancing agreements require the Company to maintain a minimum EBITDA on a quarterly basis, a minimum fixed charge coverage amount on a quarterly basis and a positive quarterly EBITDA (beginning with the quarter ending September 30, 2000) at the Cleveland SBQ facility. In addition, quarterly dividend and all other restricted payments, as defined, are limited to the lesser of $750,000 or 50% of income from continuing operations. The May amendments generally did not affect the interest rates or spreads on the Company's debt. The lenders agreed that a change in control did not occur as a result of the December 1999 proxy contest and resulting change in management. In addition, the May amendments allow the Company to retain up to $100 million of proceeds from any future issuance of new equity. In exchange for the financing agreement modifications and the new $25 million funding commitment, the lenders received warrants to purchase 3 million shares of the Company's common stock, which may be exercised anytime during the 10-year term of the warrants. The warrants are exercisable at a price of $3 per share. The Company recorded the fair value of the warrants as an equity transaction in the quarter ended June 30, 2000. The fair value of the warrants was estimated to be $8,250,000 at the date of grant using a Black-Scholes option pricing model with the weighted-average assumptions of a 6.68% risk free interest rate, a 45.6% expected volatility, and a 10-year expected life. A portion of the warrant value was recognized as debt amendment costs in the fourth quarter of fiscal 2000, with the remainder to be amortized over the remaining terms of the related debt as a component of interest expense. Following is a summary of significant provisions of the Company's principal debt and letter of credit agreements, as amended in May 2000: Revolving Credit Agreement--As amended, the Revolving Credit Agreement continues to provide for maximum outstanding borrowings of $300,000,000 until maturity in March 2002. Availability under the facility will be reduced when (and if) SBQ assets are sold. Interest is variable, based on either the London Interbank Offer Rate (LIBOR) or the lenders' prime rates in effect from time to time. The spread for LIBOR base rate borrowings under the Revolving Credit Agreement is 2.25% for outstanding borrowings up to $235,000,000 (2% for LIBOR based borrowings in excess of $235,000,000). The spread for prime rate borrowings is .75% for outstanding borrowings up to $235,000,000 (.5% for prime rate borrowings in excess of $235,000,000). Senior Notes--The weighted average interest rates on the Senior Notes, which remain fixed for the terms of the obligations, are 10.03% on the $130,000,000 Senior Notes and 9.8% on the $150,000,000 Senior Notes. Scheduled principal payments on the Senior Notes were not affected by the October 1999 or the May 2000 amendments, except that a portion of the net proceeds from a sale of SBQ assets, if any, must be applied to reduce the principal. For accounting purposes the October 1999 modification of the Senior Note obligations was accounted for as a debt extinguishment. The extinguishment loss of approximately $1,669,000 (net of tax), or $.06 per share, is classified as an extraordinary item in the Consolidated Statements of Operations. $25 Million Revolving Loan-- The new $25 million commitment is secured by substantially all of the assets of the Company's Cartersville and Jackson mini-mill facilities, and bears interest at the rate of LIBOR plus 4%. The new loan provisions allow up to $10 million to be used for corporate purposes, with the remaining $15 million restricted for capital expenditures, maintenance and working capital for the Cartersville and Jackson facilities. As of June 30, 2000, the Company was in compliance with all of its debt covenants. Based upon the current level of the Company's operations and current industry conditions, the Company anticipates that it will have sufficient resources to make all required interest and principal amounts under the Revolving Credit Agreement, Senior Notes and $25 Million Revolving Loan through December 15, 2001. However, the Company is required to make significant principal repayments on December 15, 2001 and, accordingly, may be required to refinance substantially all of its long-term debt obligations on or prior to such date. There can be no assurance that any such refinancing would be possible at such time, or, if possible, that acceptable terms could be obtained, particularly in view of the Company's high level of debt. If principal debt agreements are refinanced, the Company would likely incur a material debt extinguishment loss consisting of unamortized debt issue costs, write-offs and other costs. 8. Commitments The Company leases office space and certain production equipment under operating lease agreements. Following is a schedule by year of future minimum rental payments, net of minimum rentals on subleases, required under operating leases that have initial lease terms in excess of one year (in thousands): Consolidated Total ------------------ Fiscal Year Ending June 30, 2001............................................ $ 20,499 2002............................................ 19,896 2003............................................ 19,088 2004............................................ 18,320 2005............................................ 18,125 Thereafter...................................... 90,691 --------- $ 186,619 ========= Rental expense under operating lease agreements charged to operations was $20,545,000, $9,066,000 and $3,986,000 in fiscal 2000, 1999 and 1998, respectively. In fiscal 1999, the Company executed two sale/leaseback transactions for equipment at the Cartersville facility. Total proceeds from those transactions were $75,104,000, which approximated the fair value of the equipment. The Company has options to purchase the equipment both prior to and at the end of the lease terms, which range from eight to ten years, for amounts that are expected to approximate fair market value at the exercise dates of the options. Under a 1995 contract with Electronic Data Systems (EDS), an information management and consulting firm, the Company is obligated to pay $2,941,000 per year through 2005 for information systems development, technical support and consulting services. 9. Income Taxes Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows (in thousands): June 30, ------------------------------ 2000 1999 ------------- ------------ Deferred tax liabilities: Restated Tax depreciation in excess of book depreciation......................... $ (47,855) $ (87,081) Deferred tax assets: Allowance for loss on disposal of discontinued operations............ - 60,214 Reserve for operating losses of discontinued operations............... - 21,478 Federal net operating loss carryforwards......................... 71,636 15,144 State net operating loss carryforwards.... 6,599 3,742 AMT credit carryforwards.................. 5,388 7,988 Deferred compensation..................... 3,676 3,339 Workers' compensation..................... 982 1,155 Inventories............................... 1,315 2,415 Equity investments........................ 18,710 17,157 Other, net................................ 8,205 6,754 --------- ---------- Gross deferred tax assets................. 116,511 139,386 Less valuation allowance.................. (68,656) (17,349) --------- ---------- Deferred tax assets....................... 47,855 122,037 --------- ---------- Net deferred tax asset.................... $ -- $ 34,956 ========= ========== Balance sheet classification: Other current assets...................... $ -- $ 27,318 Other non-current assets ................. -- 7,638 --------- ---------- $ -- $ 34,956 ========= ========== The provisions for income taxes consisted of the following (in thousands): Years Ended June 30, ------------------------------------------- 2000 1999 1998 ---------- ----------- --------- Continuing Operations: (Restated) (Restated) Current: Federal............... $ 2,806 $ (15,428) $ 5,819 State................. 166 991 1,598 ---------- ----------- --------- 2,972 (14,437) 7,417 Deferred: Federal............... (31,555) (296) (4,785) State................. (12,418) (1,377) (1,468) ---------- ----------- --------- (43,973) (1,673) (6,253) ---------- ----------- --------- $ (41,001) $ (16,110) $ 1,164 ========== =========== ========= Discontinued Operations: Current: Federal............... $ (219) $ 219 $ -- State................. (6) 6 -- ---------- ----------- --------- (225) 225 -- Deferred: Federal............... 75,202 (75,202) -- State................. 3,727 (3,727) -- ---------- ----------- --------- 78,929 (78,929) -- ---------- ----------- --------- $ 78,704 $ (78,704) $ -- ========== =========== ========= The provisions for (benefit from) income taxes applicable to continuing operations differ from the statutory tax amounts as follows (in thousands): Years Ended June 30, ----------------------------------- 2000 1999 1998 --------- --------- --------- (Restated) (Restated) Tax at statutory rate (35% for 2000 and 1999) during the year....... $ (93,567) $ (23,507) $ 950 State income taxes, net............. (8,177) (2,256) 82 Amortization of non-deductible goodwill........................ 125 683 663 Writeoff of non-deductible goodwill. 7,747 -- -- Valuation allowance................. 58,965 9,691 -- Other............................... (6,094) (721) (531) --------- ---------- --------- $ (41,001) $ (16,110) $ 1,164 ========= ========== ========= The Company's federal net operating loss for fiscal 2000 was approximately $158,000,000, all of which will be carried forward, and may be used to reduce taxes due in future periods for up to 20 years, along with the previous years' losses of approximately $46 million, which will be carried forward for a period of up to 19 years, for a total carryforward of $204 million. Alternative minimum tax credit carryforwards of $5,388,000 may be carried forward indefinitely. In addition, the Company has state net operating loss carryforwards of approximately $171,000,000, the majority of which will expire in 15 years. In 1999, the Company provided a valuation allowance in the tax provision applicable to continuing operations in the amount of $9,691,000 (restated) for capital loss carryforwards that could not be used to offset regular taxable income. In addition, the Company provided a valuation allowance in the tax provision applicable to discontinued operations in the amount of $7,658,000 (restated) related primarily to state net operating loss carryforwards which will most likely expire before being utilized. In fiscal 2000, after the unwinding discontinued operations accounting for the SBQ segment (see Note 2), the Company restored the 1999 valuation allowance for state net operating loss carryforwards by decreasing the tax benefit from continuing operations. In addition, the Company further increased the valuation allowance for deferred tax assets by $51,307,000 in fiscal 2000 because, in light of recent trends and circumstances, management concluded that the net deferred tax assets might not be realized. 10. Stock Compensation Plans The Company has five stock compensation plans that provide for the granting of stock options, stock appreciation rights and restricted stock to officers, directors and employees. The exercise price of stock option awards issued under these plans equals or exceeds the market price of the Company's common stock on the date of grant. Stock options under these plans are exercisable one to five years after the grant date, usually in annual installments. No stock appreciation rights have been issued. Until January 14, 2000, the Company maintained a stock accumulation plan, which provided for the purchase of restricted stock with a three-year vesting period to participants in lieu of a portion of their cash compensation. The status of the Company's stock compensation plans is summarized below as of June 30, 2000: Total Number of Options or Shares ----------------------------------------- Reserved for Available for Issuance Future Grant Under Authorized or Purchase the Plan ------------ ------------- --------- 1986 Stock Option Plan............... 900,000 -- 17,409 1990 Management Incentive Plan....... 900,000 40,700 545,625 1995 Stock Accumulation Plan......... 500,000 -- 47,105 1996 Director Stock Option Plan...... 100,000 26,500 72,000 1997 Management Incentive Plan....... 900,000 293,631 554,944 2000 Management Incentive Plan....... 2,900,000 717,500 2,182,500 The Company records stock-based compensation under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and related Interpretations. An alternative method of accounting exists under FASB Statement No. 123, Accounting for Stock-Based Compensation, which requires the use of option valuation models; however, these models were not developed for use in valuing employee stock compensation awards. Under APB No. 25, because the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized for stock options. The Company recognizes compensation expense on grants of restricted stock and stock grants under the 1995 Stock Accumulation Plan based on the intrinsic value of the stock on the date of grant amortized over the vesting period. Total compensation expense recognized for stock-based employee compensation awards was $621,000, $541,000, and $721,000 in 2000, 1999, and 1998, respectively. As required by Statement No. 123, the Company has determined pro forma net income and earnings per share as if it had accounted for its employee stock compensation awards using the fair value method of that Statement. The fair value for these awards was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: 2000 1999 1998 ------ ------ ------- Risk free interest rate.................. 6.18% 5.76% 5.38% Dividend yield........................... 0.00% 2.48% 2.15% Volatility factor........................ 69.5% 60.4% 54.2% Weighted average expected life: Stock options......................... 5 years 5 years 5 years Restricted stock awards............... 3 years 4 years 4 years The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock compensation awards have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock compensation awards. For purposes of pro forma disclosures, the estimated fair value of the stock compensation awards is amortized to expense over the appropriate vesting period. The effect on results of operations and earnings per share is not expected to be indicative of the effects on the results of operations and earnings per share in future years. The pro forma calculations include stock compensation awards granted beginning in fiscal 1996. The Company's pro forma information follows (in thousands, except for per share information): Years Ended June 30, -------------------------------- 2000 1999 1998 --------- --------- ------- Pro forma: (Loss) income from continuing operations.................... $(228,301) $ (51,522) $ 2,225 (Loss) income per share from continuing operations......... (7.58) (1.75) 0.07 Net (loss) income................. (56,787) (224,705) 1,061 Net (loss) income per share....... (1.89) (7.62) 0.04 A summary of the Company's stock option activity and related information for the years ended June 30 is as follows:
2000 1999 1998 ------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Number of Exercise Number of Exercise Number of Exercise Options Price Options Price Options Price ---------- ------------------------------------------------------ Outstanding--beginning of year.............. 1,654,621 $10.99 1,009,165 $16.89 851,876 $16.35 Granted..................................... 2,347,500 4.62 964,000 5.95 258,000 18.50 Exercised................................... (29,500) 4.76 -- -- (51,111) 9.45 Canceled.................................... (593,440) 11.61 (318,544) 14.23 (49,600) 16.70 --------- --------- --------- Outstanding--end of year..................... 3,379,181 6.51 1,654,621 10.99 1,009,165 16.89 ========= ========= ========= Exercisable at end of year.................. 844,681 10.86 455,463 16.90 445,493 16.04 ========= ========= ========= Weighted-average fair value of options granted during year...................... $ 2.43 $ 2.86 $ 8.28 ====== ====== ======
Summary information about the Company's stock options outstanding at June 30, 2000 is as follows:
Options Options Outstanding Exercisable --------------------------------- ---------------------- Weighted Average Remaining Weighted Weighted Contractual Average Average Number of Term (in Exercise Number of Exercise Range of Exercise Prices Options Years) Price Options Price - ------------------------ ------------------------------------------------------------ $4.00 - $6.31................ 2,816,700 9.39 $4.65 396,200 $ 5.03 $7.94 - $9.62................ 107,800 7.75 9.52 68,400 9.58 $15.38 - $20.00.............. 452,181 4.91 17.23 377,581 17.08 $31.88....................... 2,500 3.72 31.88 2,500 31.88 --------- ------- $4.00 - $31.88............... 3,379,181 8.73 6.51 844,681 10.86 ========= =======
In addition to the stock option activity presented in the preceding table, the Company granted 100,000, 61,720 and 7,550 shares of restricted stock to employees in 2000, 1999 and 1998, respectively. The weighted average fair value of these awards was $2.82 in 2000, $7.35 in 1999 and $15.93 in 1998. The Company also issued 32,195, 60,505 and 30,187 shares to employees in 2000, 1999 and 1998, respectively, under the Stock Accumulation Plan. 11. Deferred Compensation and Employee Benefits The Company maintains a defined contribution 401(K) plan that covers substantially all non-union employees. The Company makes both discretionary and matching contributions to the plan based on employee compensation and contributions. Company contributions charged to operations amounted to $6,206,000, $4,777,000 and $3,488,000 in fiscal 2000, 1999 and 1998, respectively. Certain officers and key employees participate in the Executive Retirement and Compensation Deferral Plan (ERCDP), a non-qualified deferred compensation plan, which allows participants to defer specified percentages of base and bonus pay, and provides for Company contributions. Under the ERCDP agreement, the Company recognizes compensation costs as contributions become vested. Investment performance gains and losses on each participant's plan account result in additional compensation costs to the Company. To fund its obligation under this Plan, the Company has purchased life insurance policies on covered employees. The Company's obligations to participants in the Plan are reported in deferred liabilities. Other than the plans referred to above, the Company provides no post-retirement or post-employment benefits to its employees that would be subject to the provisions of FASB Statements No. 106 or No. 112. 12. Segment Information Birmingham Steel Corporation has two reportable segments: merchant/rebar and special bar quality ("SBQ"). The Company's rebar/merchant segment consists of six operating units that produce and/or sell steel reinforcing bar products used in construction of concrete structures and merchant steel products comprised of rounds, squares, flats, strip, angles and channels used in steel fabrication products. The SBQ segment consists of one operating unit that produces high-quality rod, bar and wire products for customers in the automotive, agricultural, industrial fastener, welding, appliance and aerospace industries. The SBQ segment also includes a melt shop facility in Memphis, Tennessee designed to supply high quality billets to the SBQ production facility. This melt shop is currently idled and is an asset held for sale. The Company's reportable segments are differentiated based on the chemical and finished surface qualities of products produced, the markets that each segment serves and differences in expected long-term profitability. Each of the operating units in both segments is managed separately because of their geographic locations in the United States. The Company uses profit or loss from continuing operations and profit before tax to measure segment performance. Inter-segment sales are generally priced at the lower of market price or cost plus $25 and corporate administrative expenses are allocated to segments based on assets employed and tons shipped. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Information about the Company's reportable segments is as follows (in thousands): Year Ended June 30, 2000 Total Rebar/ Reportable Merchant SBQ Segment - ------------ ----------- ----------- Net sales................................ $ 719,286 $ 213,260 $ 932,546 Intersegment revenues.................... 31,074 3,828 34,902 Start-up costs and unusual items reflected in segment profit (loss)..... 29,648 165,241 194,889 Depreciation and amortization............ 42,294 15,885 58,179 Interest expense......................... 37,807 13,880 51,687 Income (loss) from equity investments.... 1,974 (13,889) (11,915) Segment (loss)........................... (9,714) (244,699) (254,413) Segment assets........................... 1,330,362 291,084 1,621,446 Segment equity investments............... 3,895 -- 3,895 Expenditures for long-lived assets....... 22,281 3,784 26,065 Year Ended June 30, 1999 Net sales................................ $ 709,876 $ 270,398 $ 980,274 Intersegment revenues.................... 3,910 612 4,522 Start-up costs and unusual items reflected in segment profit (loss)..... 12,854 37,881 50,735 Depreciation and amortization............ 40,227 20,765 60,992 Interest expense......................... 24,249 11,016 35,265 Loss from equity investments............. (24,563) (6,202) (30,765) Segment profit (loss).................... 43,178 (85,261) (42,083) Segment assets........................... 1,296,059 263,316 1,559,375 Segment equity investments............... 4,015 -- 4,015 Expenditures for long-lived assets....... 121,808 18,869 140,677 Year Ended June 30, 1998 Net sales................................ $ 836,875 $ 299,144 $1,136,019 Intersegment revenues.................... 20,471 159 20,630 Start-up costs and unusual items reflected in segment profit (loss).... 1,305 32,933 34,238 Depreciation and amortization............ 37,954 17,312 55,266 Interest expense......................... 17,261 11,747 29,008 Loss from equity investments............. (18,326) -- (18,326) Segment profit (loss).................... 46,049 (40,112) 5,937 Segment assets........................... 1,208,517 488,841 1,697,358 Segment equity investments............... 27,957 17,998 45,955 Expenditures for long-lived assets....... 66,615 79,952 146,567 Reconciliations Years Ended June 30, ----------------------------------- Revenues 2000 1999 1998 ----------------------------------- Total external revenues for reportable segments................................. $ 932,546 $ 980,274 $1,136,019 Intersegment revenues for reportable segments............................... 34,902 4,522 20,630 Elimination of intersegment revenues..... (34,902) (4,522) (20,630) ---------- ---------- ---------- Total consolidated revenues............... $ 932,546 $ 980,274 $1,136,019 ========== ========== ========== Segment Profit (loss) Total segment (loss) profit................ $ (254,413) $ (42,083) $ 5,937 Unallocated unusual items.................. (15,587) (267) -- Other unallocated income (expense)......... 2,665 (24,813) (3,144) ---------- ---------- ---------- (Loss) income from continuing operations before tax............................. $ (267,335) $ (67,163) $ 2,793 ========== ========== ========== Assets Total assets for reportable segments....... $1,621,446 $1,559,375 $1,697,358 Elimination of intercompany balances....... (458,788) (419,363) (355,107) Other eliminations......................... (202,800) (169,276) (97,472) ---------- ---------- ---------- Total assets............................... $ 959,858 $ 970,736 $1,244,779 ========== ========== ========== Products and Geographic Areas Net sales to external customers, by product type and geographic area were as follows for the periods indicated (in thousands): Years Ended June 30, ----------------------------------- 2000 1999 1998 ----------------------------------- Rebar/Merchant Segment: By product class: Reinforcing bar....................... $ 383,716 $ 386,421 $ 439,160 Merchant products..................... 295,677 283,942 316,184 Semi-finished billets................. 27,169 27,610 70,562 Strand, mesh, and other............... 12,724 11,903 10,969 ---------- --------- --------- $ 719,286 $ 709,876 $ 836,875 ========== ========= ========= By geographic area: United States......................... $ 670,954 $ 672,034 $ 778,262 Canada................................ 47,917 37,440 57,961 All other............................. 415 402 652 ---------- ---------- ---------- $ 719,286 $ 709,876 $ 836,875 ========== ========= ========== SBQ Segment: By product class: High-quality rod, bar and wire....... $ 209,040 $ 267,116 $ 296,774 High-quality semi-finished billets.... 679 1,955 -- Other................................. 3,541 1,327 2,370 --------- --------- ---------- $ 213,260 $ 270,398 $ 299,144 ========= ========= ========== By geographic area: United States......................... $ 203,712 $ 266,310 $ 295,326 Canada................................ 9,363 4,088 3,818 All other............................. 185 -- -- --------- --------- ---------- $ 213,260 $ 270,398 $ 299,144 ========= ========= ========== Substantially all of the Company's long-lived tangible assets are located in the Continental United States. Revenues in the preceding table are attributed to countries based on the location of the customers. No single customer accounted for 10% or more of consolidated net sales. 13. Contingencies Environmental The Company is subject to federal, state and local environmental laws and regulations concerning, among other matters, waste water effluents, air emissions and furnace dust management and disposal. The Company believes that it is currently in compliance with all known material and applicable environmental regulations. Legal Proceedings The Company is involved in litigation relating to claims arising out of its operations in the normal course of business. Various forms of insurance generally cover such claims. In the opinion of management, any uninsured or unindemnified liability resulting from existing litigation would not have a material effect on the Company's business, its financial position, liquidity or results of operations. 14. Start-Up and Restructuring Costs and Other Unusual Items Start-up and restructuring costs and other unusual items consist of the following (in thousands): Years Ended June 30, ----------------------------------------- 2000 1999 1998 ----------- ------------ ---------- Start-up expenses: Memphis...........................$ 15,396 $ 37,881 $ 30,515 Cartersville...................... 16,537 12,817 1,305 Other............................. -- 37 2,418 Asset impairment: Memphis facility.................. 85,000 -- -- Assets retired.................... 13,111 -- -- Intangible write-off.............. 22,134 -- -- Restructuring charges: Severance and termination benefits (Memphis).............. 2,473 -- -- Loss on purchase commitment....... 40,238 -- -- Other unusual items: Proxy solicitation costs.......... 6,887 -- -- Executive severance costs......... 6,298 -- -- Debt amendment costs............. 2,402 -- -- ----------- ---------- ---------- $ 210,476 $ 50,735 $ 34,238 =========== ========== ========== Summarized by segment: Rebar/Merchant.................... $ 29,648 $ 12,854 $ 32,933 SBQ............................... 165,241 37,881 1,305 Corporate - unallocated........... 15,587 -- -- ---------- ---------- ---------- $ 210,476 $ 50,735 $ 34,238 ========== ========== ========== Year Ended June 30 Liabilities and Reserves: 2000 ----------------- Balance at beginning of year................... $ -- Accruals for restructuring liabilities, proxy, executive severance and debt amendment................................... 59,298 Cash payments.................................. (13,078) Proxy expenses settled with common stock....... (1,665) Effect of revised estimates.................... (1,000) ----------------- Balance at end of year......................... $ 43,555 ================= Of this amount, $30 million is classified as non-current as of June 30, 2000. A narrative description of the significant items summarized in the preceding tables follows: Start-up: The Company considers a facility to be in start-up until it reaches commercially viable production levels. During start-up, costs incurred in excess of expected normal levels, including non-recurring operating losses, are classified as start-up. Asset Impairment: On December 28, 1999, the Company announced the suspension of operations at its melt shop facility in Memphis, Tennessee as of January 1, 2000. The results of the Company's impairment review indicated that the Memphis facility was impaired. Accordingly, in the second quarter of fiscal 2000, the Company recorded an impairment charge of $85 million representing the difference between the carrying value of those assets and the estimated fair market value (based on an appraisal) less estimated costs to sell the facility. Management is actively pursuing a sale or other disposition of the Memphis facility, including joint venture opportunities. As a result of the Company's decision to continue SBQ rolling operations in Cleveland using third party billet sources, there is no operational requirement to continue billet production in Memphis. Accordingly, Memphis is considered an asset held for disposition effective January 1, 2000, and depreciation expense has not been recognized since that date. The effect of suspending depreciation on the Memphis facility decreased depreciation expense by $4,000,000 in the last half of fiscal 2000. Management is actively pursuing sale or other disposition of the Memphis facility at this time. Management is unable to reasonably predict when a sale or disposition will occur. Considerable management judgment is necessary to estimate fair value, accordingly, the ultimate loss on disposition of the facility could vary significantly from the estimates used in determining the impairment loss. The adjusted carrying value of the Memphis facility, which is reflected in property, plant and equipment, is $70.8 million at June 30, 2000. Assets Retired: In the second quarter of fiscal 2000, the Company wrote off equipment taken out of service from the rebar/merchant segment and recognized losses of $13.1 million. Intangible Write-off: The $22.1 million impairment charge for intangible assets represents the unamortized balance of goodwill related to the SBQ division as of December 31, 1999. This goodwill was previously written down as a part of the 1999 provision for loss on discontinued operations. After reversing the loss on disposition (as described in Note 2), the Company effectively restored the previous charge as a component of continuing operations (as required by EITF 90-16). Thus, the second quarter of fiscal 2000 goodwill charge is principally a reclassification within the income statement and had no impact on cash flows or on stockholder's equity. The goodwill remains impaired because the estimated undiscounted cash flows of the SBQ division are insufficient to cover the net carrying amount of the entire division's assets, considering recent changes in management's operating strategy and its plan for continuing only the Cleveland facility as a part on ongoing operations. Severance and Termination Benefits: In connection with the shut down of the Memphis facility, the Company accrued severance and other employee related exit costs of approximately $2.5 million in the second quarter of fiscal 2000. The Memphis shut down resulted in the termination of approximately 250 employees, including management, administrative, and labor positions. In accordance with EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity, the Company established a liability for severance and other related costs associated with involuntary termination of employees. The affected employees were notified of their terminations and their severance benefits prior to December 31, 1999. Most of the Memphis employees were terminated as of December 31, 1999. Remaining employees have substantially completed mill clean-up and other exit activities as of June 30, 2000 and substantially all severance benefits have been paid. Loss on purchase commitment: Refer to Note 3 for a discussion of the accrued loss on the Company's DRI purchase commitment. Proxy Solicitation Costs: These costs, principally consisting of legal, public relations and other consulting fees, were incurred in the Company's defense of a proxy contest led by The United Company Shareholder Group (the "United Group"). On December 2, 1999, the Company and United Group reached a settlement appointing John D. Correnti as Chairman and Chief Executive Officer and appointing nine new board members approved by the United Group. The charges include approximately $1.7 million to reimburse the United Group for certain of its costs in connection with the proxy fight. As agreed, the Company settled this obligation by issuing 498,733 unregistered shares of the Company's common stock. Executive Severance Costs: Several current and former key executives of the Company were covered by the Company's executive severance plan, which provides for specified benefits after a change in control of a majority of the Board of Directors of the Company, among other triggering events. As a result of the proxy contest, through June 30, 2000, seven executives, including the former CEO, covered by the Plan, were severed. The Company is currently engaged in litigation with the former CEO and one other covered executive concerning the amount and payment of severance benefits. The Company has accrued its best estimate of the ultimate settlement amounts and does not expect to incur any further executive severance expenses associated with the proxy contest. Debt Amendment Costs: In conjunction with the May 2000 amendments to the Company's borrowing agreements (see Note 7), the Company incurred $2.4 million in legal and financial consulting fees. 15. Other Income In fiscal 1999, operating results of the SBQ operations included a gain of $2.2 million from the sale of real estate in Cleveland, Ohio. The Company also received approximately $4.4 million in refunds from electrode suppliers that related to electrodes purchased in prior years. The gain was offset by a one-time charge of $2.1 million to terminate a long-term raw materials purchase commitment with a third party supplier. In fiscal 1998, the Company sold idle properties and equipment for approximately $26.9 million and recognized (pre-tax) gains of approximately $5.2 million. The Company also received approximately $4.4 million in refunds from electrode suppliers that related to electrodes purchased in prior years. These amounts are included in "Other income, net" in the Consolidated Statements of Operations. 16. Shareholder Rights Plan On January 16, 1996, the Company's Board of Directors adopted a shareholder rights plan. Under the plan, Rights to purchase stock, at a rate of one Right for each share of common stock held, were distributed to stockholders of record on January 19, 1996. The Rights generally become exercisable after a person or group (i) acquires 10% or more of the Company's outstanding common stock or (ii) commences a tender offer that would result in such a person or group owning 10% or more of the Company's common stock. When the Rights first become exercisable, a holder will be entitled to buy from the Company a unit consisting of one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company at a purchase price of $74. In the event that a person acquires 10% or more of the Company's common stock, each Right not owned by the 10% or more stockholder would become exercisable for common stock of the Company having a market value equal to twice the exercise price of the Right. Alternatively, after such stock acquisition, if the Company is acquired in a merger or other business combination or 50% or more of its assets or earning power are sold, each Right not owned by the 10% or more stockholder would become exercisable for common stock of the party which has engaged in a transaction with the Company having a market value equal to twice the exercise price of the Right. Prior to the time that a person acquires 10% or more of the Company's common stock, the Rights are redeemable by the Board of Directors at a price of $.01 per right. The Rights expire on January 16, 2006, except as otherwise provided in the plan. REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Birmingham Steel Corporation We have audited the accompanying consolidated balance sheets of Birmingham Steel Corporation as of June 30, 2000 and 1999, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended June 30, 2000. Our audits also included the financial statement schedule listed in the index at Item 14 (a) 2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The 1999 and 1998 financial statements of Pacific Coast Recycling, LLC (a 50% owned joint venture), has been audited by other auditors whose report, which has been furnished to us, included an explanatory paragraph describing an uncertainty regarding the ability of Pacific Coast Recycling, LLC to continue as a going concern. Our opinion on the 1999 and 1998 consolidated financial statements and schedule, insofar as it relates to data included for Pacific Coast Recycling, LLC, is based solely on the report of other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and, for 1999 and 1998, the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Birmingham Steel Corporation at June 30, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Birmingham, Alabama August 10, 2000 INDEPENDENT AUDITORS' REPORT The Members Pacific Coast Recycling, LLC: We have audited the balance sheets of Pacific Coast Recycling, LLC as of June 30, 1999 and 1998, and the related statements of operations, members' capital (deficit) and cash flows for the years ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pacific Coast Recycling, LLC as of June 30, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The financial statements have been prepared assuming that Pacific Coast Recycling, LLC will continue as a going concern. As discussed in note 3 to the financial statements, the Company has suffered recurring losses from operations, has a net capital deficiency and as of June 30, 1999, the members have stated that they will no longer provide letters confirming their continuing financial support of the Company. These parent companies provide a significant amount of the operations of the Company as described in note 9 to the financial statements. These circumstances raise substantial doubt about the entity's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP Los Angeles, CA July 30, 1999 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 23.1 Consent of Ernst & Young LLP, Independent Auditors* 23.2 Accountants' Consent (KPMG LLP)* * Being filed herewith 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. BIRMINGHAM STEEL CORPORATION /S/ John D. Correnti 9/28/00 - ----------------------------------- John D. Correnti Date Chairman of the Board 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 and in the capacities and on the dates indicated. /s/ John D. Correnti 9/28/00 /s/ James A. Todd, Jr. 9/28/00 - ------------------------------- ------------------------------------ John D. Correnti Date James A. Todd, Jr. Date Chairman of the Board, Chief Chief Administrative Officer, Executive Officer, Director Director /s/ Donna M. Alvarado 9/28/00 /s/ Steven R. Berrard 9/28/00 - ------------------------------- ------------------------------------- Donna M. Alvardao Steven R. Berrard Director Director /s/ Alvin R. Carpenter 9/28/00 /s/ C. Stephen Clegg 9/28/00 - ------------------------------- ------------------------------------- Alvin R. Carpenter C. Stephen Clegg Director Director /s/ Jerry E. Dempsey 9/28/00 /s/ Robert M. Gerrity 9/28/00 - ------------------------------- ------------------------------------- Jerry E. Dempsey Robert M. Gerrity Director Director /s/ James W. McGlothlin 9/28/00 /s/ Richard de J. Osborne 9/28/00 - -------------------------------- ------------------------------------- James W. McGlothlin Richard de J. Osborne Director Director /s/ Robert H. Spilman 9/28/00 /s/ J. Daniel Garrett 9/28/00 - ------------------------------- ------------------------------------- Robert H. Spilman J. Daniel Garrett Director Chief Financial Officer, Vice President - Finance /s/ Brant R. Holladay 9/28/00 - -------------------------------- Brant R. Holladay Controller Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference (i) in the Registration Statement (Form S-8 No. 33-16648) pertaining to the Birmingham Steel Corporation 1986 Stock Option Plan; (ii) in the Registration Statement (Form S-8 No. 33-23563) pertaining to the Birmingham Steel Corporation 401 (k) Plan; (iii) in the Registration Statement (Form S-8 No. 33-30848) pertaining to the Birmingham Steel Corporation 1989 Non-Union Stock Option Plan; (iv) in the Registration Statement (Form S-8 No. 33-41595) pertaining to the Birmingham Steel Corporation 1990 Management Incentive Plan; (v) in the Registration Statement (Form S-8 No. 33-51080) pertaining to the Birmingham Steel Corporation 1992 Non-Union Employe's Stock Option Plan; (vi) in the Registration Statement (Form S-8 No. 33-64069) pertaining to the Birmingham Steel Corporation 1995 Stock Accumulation Plan; (vii) in the Registration Statement (Form S-8 No. 333-34291) pertaining to the Birmingham Steel Corporation 1996 Director Stock Option Plan; (viii) in the Registration Statement (Form S-8 No. 333-46771) pertaining to the Birmingham Steel Corporation 1997 Management Incentive Plan; and (ix) in the Registration Statement (Form S-8 No. 333-90365) pertaining to the Birmingham Steel Corporation 1999 Director Compensation Plan of our report dated August 10, 2000, included in the Annual Report on Form 10-K of Birmingham Steel Corporation for the year ended June 30, 2000, with respect to the consolidated financial statements and schedule, as amended, included in this Form 10-K/A. /s/ Ernst & Young LLP Birmingham, Alabama September 26, 2000 Exhibit 23.2 CONSENT OF KPMG LLP, INDEPENDENT AUDITORS The Members Pacific Coast Recycling, LLC: We consent to the incorporation by reference in the registration statements (No's 33-16648, 33-23563, 33-30848, 33-41595, 33-51080, 33-64069, 333-34291 and 333-46771) on Forms S-8 of Birmingham Steel Corporation of our report dated July 30, 1999, with respect to the balance sheets of Pacific Coast Recycling LLC as of June 30, 1999 and 1998 and the related statements of operations, members' capital (deficit) and cash flows for the years then ended, which report appears in the Form 10-K of Birmingham Steel Corporation dated June 30, 1999. /s/ KMPG LLP Los Angeles, California September 28, 2000 -----END PRIVACY-ENHANCED MESSAGE-----