ITEM 1. BUSINESS
AMERISTEEL CORPORATION ("the Company"), formerly known as Florida Steel Corporation, operates four union-free minimills located in the southeastern United States that produce steel concrete reinforcing bar ("rebar"), merchant bars, and rods. The Company also operates the largest rebar fabricating group in the U.S.. Rebar is used primarily for strengthening concrete in highway and building construction and other construction applications. Merchant bars and light structural shapes ("merchant bars"), which include rounds, squares, flats, angles and channels, are used in a wide variety of applications including floor and roof joists, transmission towers, and farm equipment. Rods are used in a variety of applications, including the manufacture of welded wire fabric and nails.
Approximately two-thirds of the Company's mill rebar production is sold directly to distributors and independent fabricating companies in stock lengths and sizes. Approximately one-third is transferred to the Company's 13 fabricating plants where value is added by cutting and bending the rebar to meet engineering, architectural or other end-product specifications. Merchant bars and rods generally are sold by the mills to fabricators, steel service centers and original equipment manufacturers in stock lengths and sizes. For the year ended March 31, 1996, approximately 31% of the Company's sales revenues were derived from merchant bar, 25% from stock rebar, 24% from fabricated rebar, 13% from other products and 7% from rods.
The Company currently operates minimills located in Jacksonville, Florida; Charlotte, North Carolina; and Jackson and Knoxville, Tennessee. Minimills are steel mills that use electric arc furnaces to melt scrap steel and cast the resulting molten steel into long strands called billets in a continuous casting process. Billets are then reheated and rolled into rebar, merchant bars, and rods. The Company estimates that it currently has annual steel melting capacity of 2.0 million tons and finished product rolling capacity of 1.7 million tons. The Company's operating strategy is focused on improving its position as a low-cost producer of rebar and merchant products.
Since the acquisition by Kyoei Steel, Ltd. ("Kyoei") in late 1992, discussed below, the Company has spent over $80 million on capital improvements to modernize and upgrade its production facilities. The Company continued that program in fiscal 1996, spending $37 million on equipment upgrades. With expanded, more efficient production from the Jackson, Knoxville, Jacksonville and Charlotte mills, the Company was able to close its high cost Tampa rolling mill in September 1995.
As of April 1, 1996, the Company changed its name from Florida Steel Corporation (which it had used since 1956) to AmeriSteel Corporation in order to reflect that the Company's operations extend substantially beyond the boundaries of the State of Florida, as they have done for many years.
The predecessor of the Company was formed in 1937 as a rebar fabricator. In 1956, it merged with five steel fabricators in Florida to form the Company, which then commenced construction of its first minimill.
Approximately 89% of the Company's common stock is held by FLS Holdings, Inc. ("Holdings" or "FLS"), whose only business is to own Company common stock. In turn, since a merger in December 1992 (the "Acquisition"), Holdings has been 100% owned by Kyoei, one of Japan's leading manufacturers of steel bars.
After the Acquisition, the Company changed its fiscal year-end from September 30 to March 31 in order to have its year-end coincide with that of Kyoei. Accordingly, all references to "fiscal year" since 1993 refer to a year ended March 31.
FINANCING
As a result of the Acquisition and subsequent events, the Company's three largest financial obligations that are currently outstanding are $100,000,000 11-1/2% First Mortgage Notes due 2000 (the "First Mortgage Notes"), a $140,000,000 Revolving Credit Agreement (the "New Revolving Credit Agreement"), and a $50,000,000 Junior Subordinated Intercompany Note due December 21, 2002 owing to Holdings.
The First Mortgage Notes are secured by the real property, equipment and other collateral at the Company's minimills.
The New Revolving Credit Agreement was entered into as of June 9, 1995 and replaced a $100,000,000 facility of like kind. This obligation is secured by the Company's inventory and receivables and expires on June 9, 1998.
During fiscal 1996, the Company redeemed the remaining $13,000,000 of 14.5% Subordinated Debentures due 2000 that were outstanding.
PRODUCTION AND FACILITIES
STEEL PRODUCTION. Minimills are steel mills that use electric arc furnaces to melt scrap steel and cast the resulting molten steel into long strands called billets in a continuous casting process. The billets are typically transferred to a rolling mill where they are reheated, passed through roughing mills for size reduction and then rolled into rebar, merchant bars, or rods. These products emerge from the rolling mill and are allowed to cool uniformly on a cooling bed. Most merchant products then pass through automated straightening and stacking equipment. Rebar and merchant products are neatly bundled prior to shipment to customers by rail or truck.
Steel can be produced at significantly lower costs by minimills than by integrated steel operations. Integrated steel mills, which typically process iron ore and other raw materials in blast furnaces to produce steel, generally use costlier raw materials, consume more energy, consist of older facilities that are more labor intensive and employ a larger and more highly paid labor force. In general, minimills serve localized markets and produce a limited line of commodity steel products.
The domestic minimill steel industry currently has excess production capacity. This excess capacity has resulted in competitive product pricing and cyclical pressures on industry profit margins. The high fixed costs of operating a minimill encourage mill operators to maintain high levels of output even during periods of reduced demand which exacerbates the pressures on profit margins. In this environment, efficient production and cost controls are important to domestic minimill steel producers.
The Company's Jackson, Tennessee; Jacksonville, Florida and Charlotte, North Carolina minimills operate their melting facilities seven days per week, the Knoxville mill five days per week, and have an annual aggregate melting capacity of approximately 2.0 million tons. The Jackson, Charlotte and Jacksonville mills operate their rolling facilities seven days per week. The Knoxville, Tennessee minimill operates its rolling facility five days per week. On June 15, 1994, the Tampa melting facility was closed and on September 25, 1995 the Tampa rolling facility was closed.
The following table sets forth the estimated annual production capacity and actual production of the Company's four minimills in thousands of tons at March 31, 1996.
(a) Purchase Date
JACKSON MINIMILL. The Jackson minimill produces mostly merchant bars and some rebar. This minimill is the Company's largest single producer of merchant bars. The merchant bars are marketed primarily in the southeastern United States, as well as into southern Illinois, Indiana, and Ohio.
The Jackson minimill, constructed in 1981, is the newest of the Company's steel making facilities. Jackson's melting equipment includes an electric arc furnace, a continuous caster, and material handling equipment. The rolling mill consists of a reheat furnace, 16 in-line mill stands, a cooling bed, an in-line straightener, a cut-to-length product shear, an automatic stacker, and associated shipping and material handling facilities. The mill is currently installing new quick-change mill stands that will decrease change time, increase production and lower conversion costs.
The facility has 294 employees.
JACKSONVILLE MINIMILL. The Jacksonville minimill produces rebar and rods. The rebar is marketed primarily in Florida, the nearby Gulf Coast states and Puerto Rico, with coiled and 3/8 inch diameter rebar, being shipped throughout the Company's marketing area. The rod products are sold throughout the southeastern United States.
Jacksonville's melting equipment consists of an electric arc furnace, continuous caster, and material handling equipment. The rolling mill includes a reheat furnace, a #1-stand in-line mill, a 10-stand rod block, two cooling beds, a cut-to-length product shear, and associated shipping and material handling facilities. During fiscal 1996 a new transformer was installed in the melt shop and a new cooling bed was installed in the rolling mill to increase capacity and lower conversion cost.
The facility has 265 employees.
CHARLOTTE MINIMILL. The Charlotte minimill produces rebar and merchant bars. Rebar produced in Charlotte is marketed in the states from South Carolina to Pennsylvania. Merchant bar produced in Charlotte is marketed along the eastern seaboard states from Florida to Pennsylvania.
Charlotte melting equipment includes an electric arc furnace, a continuous scrap feeding and preheating system and a ladle refining station, all of which were installed in 1989. The melting facilities also include a continuous caster and material handling equipment. Charlotte's rolling mill, which was upgraded in 1988, includes a reheat furnace, 15 in-line mill stands, a cooling bed, a cut-to-length shear, and an automated material bundling unit. The rolling mill is currently installing new finishing end equipment that will improve merchant bar quality, increase production and lower conversion costs.
The facility has 282 employees.
KNOXVILLE MINIMILL. The Knoxville minimill, which the Company acquired in 1987, produces almost exclusively rebar and some merchant bars. The rebar is marketed throughout the Ohio Valley, including all areas of Ohio and Kentucky and parts of Illinois, Indiana, Virginia, West Virginia, Tennessee and rebar is sold in portions of North and South Carolina, Georgia and Alabama.
Knoxville melting equipment includes two electric arc furnaces, a continuous caster, and material handling equipment. The rolling mill, which was installed in 1986, consists of a reheat furnace, 16 in-line mill stands, a cooling bed, a cut-to-length shear line and associated shipping and material handling facilities.
The facility has 209 employees.
FABRICATION. The Company's 13 fabricating plants are located throughout the southeastern United States and have an annual capacity of 334 thousand tons. The following table shows the plant locations and approximate annual tonnage on a two-shift per day, five days per week operating basis.
OTHER OPERATIONS. The Company's railroad spike operations, located in Lancaster, South Carolina and Paragould, Arkansas, forge steel squares into railroad spikes that are sold on an annual contract basis to various railroad companies. The Company's facility in New Orleans, Louisiana, produces wire from steel rod. The wire is then either manufactured into welded wire fabric for concrete pavement or converted into collated nails for use in high-speed nail machines.
CAPITAL EXPENDITURES
Over the years, the Company has expanded capacity by means of modernizing and upgrading facilities together with selective acquisitions. Capital expenditures were $36.9 million for the year ended March 31, 1996, $25.8 million for the year ended March 31, 1995 and $18.2 million for the year ended March 31, 1994.
RAW MATERIALS AND ENERGY COSTS
Scrap steel, which is the Company's primary raw material and comprises approximately 49% of finished steel products cost, is presently supplied by one company, David Joseph, Inc. ("David Joseph"). David Joseph is a scrap broker and scrap yard operator headquartered in Cincinnati, Ohio, with locations throughout the United States. David Joseph buys substantially all of the scrap required by the Company for which it receives a fixed brokerage fee per ton and operates shredders for the Company at the Jacksonville, Florida and Jackson, Tennessee minimill sites for a fixed gross profit amount per ton. Although the Company obtains its scrap steel from David Joseph, management believes that the Company readily could obtain adequate supplies of scrap, if necessary, from suppliers other than David Joseph at competitive prices. In fiscal 1995, the Company consolidated the scrap purchasing activities under the newly established position of Vice President of Material Procurement. This position will focus on optimizing the purchasing, scheduling, and delivery of scrap and other related items.
The Company's manufacturing processes consume large amounts of energy in the form of electricity and natural gas. The Company purchases its electricity from regulated utilities under interruptible service contracts. Under such contracts, the utility provides service at discount rates in return for the right to interrupt service during peak demand periods. These interruptions are generally limited to several hours and have occurred on no more than five to ten days per year. Since deregulation of the natural gas industry, natural gas requirements generally have been provided through negotiated contract purchases of well-head gas with supplemental transportation through local pipeline distribution networks.
The other important raw or stock materials required for the Company's business, such as refractories, ferro alloys, carbon electrodes, etc., are supplied by various domestic and foreign firms. The Company has historically obtained adequate quantities of scrap steel and other raw materials to permit efficient mill operations.
PRODUCTS AND MARKETS
The following tables set forth the tonnage shipped and average selling price per ton of the Company's five major product groups.
(a) Includes products that are further fabricated by the Company.
(a) Includes products that are further fabricated by the Company.
REBAR PRODUCTS. The Company produces rebar products at its minimills in Knoxville, Jacksonville and Charlotte, and to a lesser degree in Jackson. The Company's rebar either is sold directly to distributors and independent fabricating companies in stock lengths and sizes or is transferred to the Company's 13 fabricating plants where it is cut and bent to meet engineering, architectural or other end product specifications. Rebar is used primarily for strengthening concrete in highway and building construction and other construction applications. Rebar is consumed in a wide variety of private sector applications and public works projects. Private sector applications include construction of commercial and industrial buildings, apartments and hotels, utility construction, agricultural uses and various maintenance and repair applications. Public works projects include construction of highways, streets and bridges, public buildings, water treatment facilities and other projects.
Based on data reported by the Concrete Reinforcing Steel Institute (a rebar fabricators' trade association), rebar consumption in the U.S. is approximately 5 million tons per year. The Company is the second largest rebar producer in the U.S. with approximately 18% market share (included both stock and fabricated rebar).
MERCHANT BARS. The Company produces merchant bars at its minimills in Jackson, Tennessee and Charlotte, North Carolina, and to a lesser degree in Knoxville, Tennessee. Merchant bars consist of rounds, squares, flats, angles and channels. Merchant bars are generally sold to fabricators, steel service centers, and manufacturers who fabricate the steel to meet engineering or end product specifications. Merchant bars are used to manufacture a wide variety of products, including gratings, transmission towers, steel floor and roof joists, safety walkways, ornamental furniture, stair railings, and farm equipment.
Merchant bar products typically require more specialized processing and handling than rebar, including straightening, stacking, and specialized bundling. Because of the greater variety of shapes and sizes, merchant bars typically are produced in shorter production runs, necessitating more frequent changeovers in rolling mill equipment. Merchant products generally command higher prices and produce higher profit margins than rebar.
RODS. The Company produces steel rod at its Jacksonville, Florida minimill. Most of this rod is sold directly to third-party customers, while the remainder, depending on market conditions, is shipped to the Company's New Orleans, Louisiana facility, where the rod is drawn down to wire for use in the manufacture of welded wire fabric and nails.
MARKETING AND CUSTOMERS. The Company conducts its marketing operation through its own sales personnel who specialize in either mill products or fabricated rebar. Sales personnel for mill products including stock rebar and merchant bars are located in close proximity to the Company's major markets and customers. Metallurgical service representatives located at the Company's minimills provide technical and sales support to the mill products sales force and fabricated rebar sales force, where needed. The Company's inside sales force is located at the Tampa headquarters where all order taking and shipping instructions are centrally processed and coordinated. Fabricated rebar sales personnel are located at the Company's 13 fabricating facilities where engineering service representatives provide technical and sale support.
Principal customers of the Company include steel distributors, steel service centers, rebar steel fabricators, other metal fabricators and manufacturers, railroads, building material dealers, and contractors. Its fabricated rebar products are sold to contractors performing work for residential and nonresidential building, road, bridge, public works, utility and other miscellaneous construction.
The Company's business is not dependent upon any particular, single customer. The Company's customer base is fairly stable from year to year, and during fiscal 1996 no one customer accounted for more than 3.1% of sales and the five largest customers accounted for 11.0% of sales. The Company's business is seasonal with orders in the second and third calendar quarters tending to be strongest and those in the rest of the year tending to be the weakest. Stock rebar and merchant bar are generally sold from inventory. Fabricated rebar is generally produced in response to specific customer orders, rather than selling from inventory. The amount of sales order backlog pertaining to fabrication contracts was approximately $85 million at March 31, 1996, as compared to $86 million at March 31, 1995. Almost all of the backlog at March 31, 1996 is expected to be filled during fiscal 1997. None of the business for the 1996 fiscal year is subject to renegotiation or termination of subcontract at the election of the government.
The Company's payment terms to customers are generally determined based on market conditions given the cyclical nature of its sales. However, the Company generally does not offer extended payment terms to customers.
Despite the commodity characteristics of the stock rebar and merchant bar markets, the Company believes that it is able to distinguish itself from its competitors to some extent due to its product quality, its consistent delivery record, its capacity to service large orders and its ability to fill most orders quickly from inventory. Moreover, while construction and infrastructure projects are generally nonrecurring in nature, the steel fabricators, distributors and service centers which supply many of these projects directly tend to be long-time customers of the Company. The Company's reputation for quality and service is among the highest in industry.
LITIGATION
The Company is involved in routine litigation arising in the normal course of business. See "Environmental Matters", under Management's Discussion and Analysis, for a discussion of the Company's cleanup liabilities with state and federal regulators regarding the investigation and/or cleanup of certain Superfund and non-Superfund sites. There are no other legal matters which management believes will have a material impact on its business.
COMPETITION
The Company experiences substantial competition in the sale of each of its products from a large number of domestic companies in its geographic markets.
Rebar and merchant bars are commodity steel products, making price the primary competitive factor. Due to the high cost of freight relative to the value of the Company's steel products, competition from non-regional producers is limited; and rebar deliveries are generally concentrated within a 350 mile radius of a minimill while merchant bar deliveries are generally concentrated within a 500 mile radius of a minimill. Except in unusual circumstances, the customer's delivery expense is limited to freight charges from the nearest competitive minimill and any incremental freight charges must be absorbed by the supplier. The level and degree of foreign competition faced by the Company within the Florida rebar market have varied from time to time depending upon factors including foreign government subsidies and currency exchange rates.
The Company's competitive environment varies by product. The following is a discussion of the Company's competitive environment with respect to its five major product categories: stock rebar, fabricated rebar, merchant bars, rods and billets.
STOCK REBAR. The boundary of the current market area for the Company's rebar products is roughly defined by a line running through New Orleans, Louisiana; Little Rock, Arkansas; Kansas City, Kansas; St. Louis, Missouri; Indianapolis, Indiana; Columbus, Ohio; and Baltimore, Maryland. The Company has found shipping outside of this market area to be only marginally profitable because of freight cost considerations.
MERCHANT BAR. The Company's primary marketing area for merchant bars encompasses the southeastern and midwestern United States. The Company did not enter the merchant bar market in a significant way until 1982 and does not have the same market strength as it does in the rebar market. The Company's presence in the southeastern and midwestern markets has grown steadily, and its merchant bar sales now represent approximately 31% of the Company's total sales.
The market for merchant bars is very competitive, with price being the primary competitive factor. In the last two years, the Company has upgraded its rolling mill facilities at Charlotte, to increase the Company's ability to shift production from rebar to merchant bar depending upon market conditions and demand.
RODS. The Company produces rods at its Jacksonville minimill. The Company's primary marketing area for rods includes Florida, South Carolina, Georgia, Alabama and Louisiana. The Company does not intend to geographically expand its marketing beyond these states due to the relatively low margins and prohibitive freight cost inherent to rod products. While the market for rods can be heavily influenced by foreign imports, rod sales by foreign competitors did not have a material effect on the Company's rod sales in the last three years.
FABRICATED REBAR. With 13 fabricating plants located throughout the southeastern United States, all within good support distance from one of the Company's five minimills, the Company is a major factor in all markets it serves. In the sale of fabricated rebar, the Company competes with other steel fabricators in its marketing area some of whom purchase their stock rebar from the Company.
BILLETS. The Company produces billets (semi-finished steel) for conversion to rebar, merchant bar and rods. When the market for finished product is down, the Company sells the excess billet production.
EMPLOYEES
The Company has approximately 1,840 employees, none of whom is covered by a collective bargaining agreement. The Company believes that its relations with its employees are good and a participatory style of labor-management relations is important to the efficiency of the Company's operations.
On January 1, 1995 an incentive plan based on production tons, was put into effect at the mills. Each mill has a melting and rolling target which provide a 1.5% increase in pay for each 1% increase in production. Effective April 1, 1995, the fabricating group, the mill sales group and the corporate administrative group pay policy included monthly incentives based on certain performance criteria. The executive group (approximately 40 key executives) are covered by an incentive plan that is based on return on capital employed.
ITEM 2.
ITEM 2. PROPERTIES
The Company's buildings are of various ages and forms of construction and are all properly maintained and adequately equipped for the purposes for which they are used. The Company's four minimills are owned in fee simple and serve as the collateral for the First Mortgage Notes together with the other collateral.
The following tables present information with respect to the buildings and facilities:
(a) The First Mortgage Notes are secured by a first priority lien on substantially all the real property, machinery, equipment, and fixtures of each of the Company's four minimills. (b) Includes a fabricating plant, which is not a part of the collateral package.
(c) These properties do not constitute collateral for either the First Mortgage Notes or the New Revolving Credit Agreement.
(d) These properties do not constitute collateral for either the First Mortgage Notes or the Revolving Credit Agreement.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS Not Applicable
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
MARKET PRICE AND CASH DIVIDENDS
No established public trading market exists for the Company's common stock. During the last fiscal year, 48,836 shares were sold to employees through an employee stock purchase plan based on a sales price of 85% of fair market value, as established by an independent third party appraisal. Repurchases at such fair market value of $12.50 per share have been made by the Company upon the termination of employment of any employee owning stock.
No dividends have been declared or paid on the Company's common stock during any of the applicable reporting periods.
As of March 31, 1996, there were approximately 1,300 holders of record of the Company's common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The summary financial information presented below should be read in conjunction with the Financial Statements of AMERISTEEL CORPORATION and the notes thereto ($ in thousands except per share data):
The following table shows the percentage of the Company's revenues derived from each product category in the relevant time period:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS ($ in thousands)
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company's total outstanding borrowings were $267.5 million of which $14.9 million is due within fiscal 1997. Outstanding borrowings under the New Revolving Credit Agreement totaled $72.0 million. Effective June 1995 the Company negotiated a New Revolving Credit Agreement to replace the Revolving Credit Agreement and provide additional liquidity. See Note E - Notes to Financial Statements for additional details concerning the new agreement.
Net cash provided by operating activities of $44.1 million improved substantially in fiscal 1996 as a result of lower working capital requirements. Capital expenditures increased to $36.9 million as compared with $25.8 million in fiscal 1995.
The First Mortgage Notes and the New Revolving Credit Agreement contain certain restrictions to incur additional indebtedness and other covenants deemed appropriate. As of year end, the Company had $29.4 million of available credit under the Revolving Credit Agreement and $6.2 million in cash. The Company believes that the available borrowings and the cash flow generated from operations will be sufficient to fund the current operations and the current capital expenditure program. The Company is currently in compliance with all of the covenants of its loan agreements.
COMPLIANCE WITH ENVIRONMENTAL LAWS AND REGULATIONS
The Company is subject to federal and state requirements governing the remediation of environmental contamination associated with past releases of hazardous substances (collectively, "Environmental Cleanup Laws") and to extensive federal, state, and local laws and regulations governing discharges to the air and water as well as the handling and disposal of solid and hazardous wastes (collectively, "Environmental Regulatory Laws"). Governmental authorities have the power to enforce compliance with these requirements, and violators may be subject to civil or criminal penalties, injunctions or both. Third parties also may have the right to sue to enforce compliance. The Company anticipates that it will incur significant costs under Environmental Cleanup Laws and Environmental Regulatory Laws, as discussed below.
The Company is subject to federal and state hazardous substance cleanup laws that impose liability for the costs of cleaning up contamination resulting from past spills, disposal, or other releases of hazardous substances. In particular, the Company may be subject to liability under the federal Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA" or "Superfund") and similar state laws that impose liability--without a showing of fault, negligence, or regulatory violation--on the generation of hazardous substances that have caused, or may cause, environmental contamination. The current owner and operator of contaminated property also are liable for cleanup of the property even if they have not contributed to the contamination of such property. The Company expects to incur assessment, remediation, and related costs at Company-owned minimills and at certain off-site locations.
Courts have interpreted CERCLA generally to impose joint and several liability for cleanup (and certain other) costs on all potentially responsible parties (PRP). This means that each PRP conceivably could be held liable for the entire amount of necessary cleanup costs.
Based on past use of certain technologies and remediation methods by third parties, evaluation of those technologies and methods by the Company's consultants and quotations and third-party estimates of costs of remediation-related services provided to the Company or of which the Company and its consultants are aware, the Company and its consultants continue to believe that the Company's cost estimates are reasonable. The Company has estimated its potential costs for further remediation under Environmental Cleanup Laws at on-site and off-site locations through 2009 to be approximately $14 million and has included this amount in the Company's recorded liabilities as of March 31, 1996.
The Company anticipates that it will incur potentially significant costs to comply with Environmental Regulatory Laws, including correcting existing noncompliance with such laws and achieving compliance with anticipated future standards for air emissions.
Based on a preliminary EPA determination, the Company no longer expects to incur significant costs to comply with the recent amendments to the federal Clean Air Act under which the EPA was expected to promulgate strict standards that would govern the emission of hazardous air pollutants from electric arc furnaces such as those used by the Company. The EPA regulations are not scheduled to be promulgated until 1997, with compliance expected to be required by 2000, and it is not known when a final determination as to electric arc furnaces will be made by the EPA.
SEASONALITY
The Company's business is seasonal with orders in the second and third calendar quarters tending to be stronger than the rest of the year.
IMPACT OF INFLATION
The Company's primary costs include ferrous scrap, energy and labor which can be affected by inflationary conditions. The Company has been able to pass on cost increases through price adjustments, however the ability to pass on these increases depends on the level of construction activity. Another factor that may limit the Company's ability to increase prices is the over-capacity in the industry.
FISCAL 1996 VERSUS FISCAL 1995
SALES. Net sales for fiscal 1996 were 1.8% lower than fiscal 1995 because of lower volume and lower mill average selling prices. While billet shipments were 24.1% higher than a year ago, finished product shipments were down 3.8%. Average mill selling prices were down $5 per ton, however, fabricated rebar selling prices were up 9.3% or $39 per ton.
COST OF SALES. Cost of sales, excluding depreciation, was 85.0% of net sales as compared with 85.3% for the previous year. Mill conversion costs were the same while scrap cost was $131 per ton or $1 per ton higher than the previous year.
SELLING AND ADMINISTRATION EXPENSES. Selling and administrative expenses were slightly lower in fiscal 1996 versus fiscal 1995 and were 4.7% of net sales for both years.
DEPRECIATION. Depreciation expense for fiscal 1996 was higher than fiscal 1995 because of new capital additions that were placed in service.
OTHER OPERATING EXPENSES. Other operating expenses in fiscal 1996 were primarily the result of the shut-down of the Tampa rolling mill ($15 million) of which $12 million was a non-cash write down of fixed assets to market value and $3 million for employee severance benefits and other closing costs. The Company charged off approximately $752 thousand after vacating the former Washington D.C. fabricating plant. This write-off was the balance of a long-term lease.
INTEREST EXPENSE. Interest expense was lower in fiscal 1996 versus fiscal 1995 primarily because of lower average rates and higher capitalized interest. Average borrowings were higher in the current year versus the prior year. Capitalized interest in fiscal 1996 was $2.1 million versus $654 thousand in fiscal 1995 as a result of higher capital expenditure projects.
AMORTIZATION OF DEFERRED FINANCING COSTS. Amortization of deferred financing costs were lower in fiscal 1996 as compared with fiscal 1995 because of higher financing costs associated with the Revolving Credit Agreement in fiscal 1995.
INCOME TAXES. The effective federal and state income tax rate for fiscal 1996 was 39% compared with 38.8% for the previous year excluding the effect of goodwill amortization which is not deductible for income tax purposes.
FISCAL 1995 VERSUS FISCAL 1994
SALES. Net sales for fiscal 1995 were 17% higher than fiscal 1994 as a result of both higher volume and improved selling prices. Shipments for all finished products were up 12.6% while billet shipments, primarily export shipments at low margins, were lower. All selling prices were higher this year over last year with mill finished products 10.3% higher and fabricated rebar 13.5% higher.
COST OF SALES. Cost of sales excluding depreciation was 85.3% of net sales as compared with 91.2% for the previous year. The substantial improvement was the result of the increased sales volume and prices and a $11 per ton decrease in mill conversion costs. While scrap costs increased $12 per ton the spread between mill finished products average selling prices and scrap increased $20 per ton in fiscal 1995 versus fiscal 1994.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses for fiscal 1995 were higher than fiscal 1994 primarily because of employment costs related to the hiring of the new Chairman of the Board and Chief Executive Officer and higher wages and benefits.
DEPRECIATION. Depreciation expense was lower in fiscal 1995 versus fiscal 1994 because of the shut down of the Tampa melt shop in June 1994.
INTEREST. Interest expense was higher in fiscal 1995 versus fiscal 1994 as a result of higher rates and higher average borrowings. The Company capitalized $654 thousand of interest in the current year versus zero a year ago.
AMORTIZATION OF DEFERRED FINANCING COSTS. Amortization of deferred financing costs were higher in fiscal 1995 versus a year ago primarily because of higher financing costs associated with the Revolving Credit Agreement.
INCOME TAXES. The effective federal and state income tax rate for fiscal 1995 was 38.8% compared with 36.5% for the previous year, excluding the effect of goodwill amortization which is not deductible for income tax purposes. The increased rate reflects the higher federal rate and to a lesser extent higher state rates, based on net income levels.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to index in Item 14 for financial statements and supplementary data filed as a part of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL. The Bylaws of the Company provide that the business shall be managed by a Board of Directors.
The name, age, present principal occupation or employment and five-year employment history of each of the directors and executive officers of the Company are set forth below. All officers serve at the pleasure of the Board. Directors serve no specific term of office. Each director and executive officer listed below is a citizen of the United States, except as noted below. Refer to Item 13 for information on other directorships held by each director.
COMMITTEES OF THE BOARD OF DIRECTORS
AMERISTEEL'S Board of Directors has an Executive Committee consisting of Mr. Casey, Mr. Fujimura, and Mr. Creed. The Company also has an Executive Compensation Committee and an Audit Committee. Committees of the Board of Directors may be appointed by the Board of Directors in accordance with the Bylaws of AMERISTEEL.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The tables and descriptive information set forth below are intended to comply with the amendments adopted by the SEC to the executive compensation requirements applicable to, among other filings, this report. This information is being furnished with respect to those persons who, were the Company's Chief Executive Officer and its four most highly compensated executive officers, other than the Chief Executive Officer, whose salary and bonus exceeded $100,000 for the most recent fiscal year (together, the "named executive officers"). Tables have been omitted where no compensation was awarded to, earned by or paid to any of the named executives required to be reported in any fiscal year covered by that table.
SUMMARY COMPENSATION TABLE
The following table provides information concerning the annual compensation of each of the named executive officers of the Company for services rendered to the Company in each of the Company's last three fiscal years.
(1) These amounts include Company matching contributions made pursuant to the Company's Savings Plan.
(2) 750,000 shares were awarded as of June 1, 1994 and vest at the rate of 20% a year beginning as of June 1, 1995. At the end of fiscal 1996, 600,000 of the shares, valued at $7,500,000 in the aggregate, were still subject to forfeiture and held by Mr. Casey. Dividends, if declared and paid on the Company's common stock generally, are payable on the shares. The 1995 bonus includes a $500,000 signing bonus and a $1,946,000 tax bonus.
(3) The number of shares shown have been adjusted to reflect a 49,999 for 1 stock dividend effected during fiscal 1996.
(4) Includes a $100,000 signing bonus pursuant to Mr. Landa's employment offer.
(5) 12,000 shares were awarded as of November 2, 1995 and vest 1/3 as of April 1, 1997, 1/3 as of April 1, 1998 and 1/3 as of April 1, 1999. At the end of fiscal 1996, all 12,000 shares, valued at $150,000 in the aggregate, were still subject to forfeiture and held by Mr. Landa. Dividends, if declared and paid on the Company's common stock generally, are payable on the shares.
OPTIONS GRANTS TABLE
The following table shows information concerning stock options granted during fiscal 1996 for the individuals shown in the Summary Compensation Table.
(1) The grant options for 12,000 shares to Mr. Landa was made as of November 2, 1995 and vests 1/3 as of April 1, 1997, 1/3 as of April 1, 1998 and 1/3 as of April 1, 1999. The other options were granted under the terms of the Company's 1995 Stock Purchase/Option Plan ("Shares in Success"); they vest 1/3 as of September 29, 1997, 1/3 as of September 29, 1998 and 1/3 as of September 29, 1999.
OPTION EXERCISES AND YEAR-END VALUE TABLE
No stock options were exercised by any of the Company's executive officers during fiscal 1996. The following table shows information concerning stock option values as of the end of fiscal 1996.
(1) The latest appraisal of the Company's common stock, made as of March 31, 1996, sets forth a fair market value per share of $12.50, which is the exercise price of all options, none of which are currently exercisable.
DIRECTORS COMPENSATION
The Company's directors are not compensated for their services as a director but are paid reasonable travel expenses.
EMPLOYMENT ARRANGEMENTS
Effective June 1, 1994, the Company entered into an employment agreement with Mr. Phillip Casey to serve as the Company's Chairman of the Board of Directors and Chief Executive Officer. The Agreement includes a one time signing bonus of $500,000, base annual salary of $300,000, equity interest of 7.5% of the outstanding common stock of the Company ($4.5 million to vest ratably over the next five years), a tax bonus in the amount of $1,946,000 paid to Mr. Casey with respect to his receipt of the 7.5% equity interest, and other benefits commensurate with his position. In addition, Mr. Casey was granted and exercised an option to purchase an additional 2.5% of the outstanding common stock of the Company for $1.5 million. The agreement provides for certain termination benefits and places restrictions on the disposition of the Company's stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As of the end fiscal 1966, the members of the Company's Executive Compensation Committee were Messrs. Koichi Takashima, Hideichiro Takashima, Ryutaro Yoshioka and Takeshi Fujimura. Mr. H. Takashima replaced Mr. Akihiko Takashima on the Committee in November 1995. Mr. Fujimura is Chairman of the Executive Committee and an employee of the Company. None of the other members has at any time been an officer or employee of the Company.
Mr. Fujimura is Advisor to the President of Kyoei Steel, Ltd., and the other members of the Committee are also executive officers and/or directors of Kyoei. Two other members of the Company's Board of Directors are also executive officers and/or directors of Kyoei.
PENSION BENEFIT
The Pension Table sets forth the estimated annual benefits, payable as a single life annuity, at various remuneration levels and for representative years of service at normal retirement date under the Company's tax qualified noncontributory defined benefit pension plan. The years of credited service for the named executives are two years for Phillip E. Casey, one year for Tom J. Landa, 23 years for Thomas G. Creed, 38 years for J. Donald Haney and 30 years for James C. Hogue. The final average compensation for the named executives, for purposes of this plan for 1996 is $150,000.
See notes to financial statements
SUPPLEMENTAL RETIREMENT PLAN
The Company maintains a nonqualified, unfunded supplemental retirement plan, which provides certain officers defined pension benefits in addition to those provided under the Company's other plans. The supplemental plan provides an annual retirement benefit equal to the greater of (i) 50% of final average compensation (as defined above), and (ii) 2.4% of final average compensation multiplied by years of service (up to 25), plus 1% of final average compensation multiplied by years of service in excess of 25 (up to 10), less (in either case) amounts to which the participant is entitled under other retirement plans of the Company and prior employers and under Social Security. In 1988, as a result of the Change in Control of the Company, the accrued benefits under this Plan became immediately due and payable in a lump sum, although all of the active officers in the Company elected to waive receipt of their accrued benefits in exchange for common stock of Holdings. Additional benefits over and above those resulting from the acceleration continue to be earned. Upon retirement at January 26, 1995, R. R. Boswell received a one-time payment of $332,223 for supplemental retirement benefit. As of March 31, 1996 the Company has accrued approximately $470,000 in supplemental retirement benefits for the remaining active employees covered by the Plan.
In connection with the Acquisition, the officers covered by this Plan have all waived their rights to an immediate lump sum payment, provided, that if such officers are terminated without Cause (as defined in the severance agreements entered into with such officers), resign for Good Reason (as defined in the severance agreements) or die, retire or become disabled, then such officers will be entitled to receive the amounts they would have received had such officers not waived the above described rights.
SEVERANCE AGREEMENTS
The Company and certain senior executives have entered into an agreement providing that, if the Company terminates any executive other than for cause, or reassigns such executive to a new position, the Company shall continue to pay the executive his current base pay through August 30, 1996.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information about each person who is known to management to be the beneficial owner, as of June 1, 1996, of more than five percent of the Company's common stock:
Each person named has sole voting power and sole investment power over the shares noted above next to his or its name.
The following table sets forth certain information about the shares of the Company's common stock beneficially owned as of June 1, 1996, by the Company's directors and the five executive officers listed in response to Item 11 individually, and by the directors and all executive officers as a group.
* Less than 1%
Those directors not listed do not beneficially own any shares of the Company's common stock. Each person or group named has sole voting power and sole investment power over the shares noted above next to his name.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 17, 1995, the Company made a loan to Mr. Philip Casey in the amount of $731,511 at 7.15% interest rate to be paid over the next five years. The loan and interest was paid in full in February 1996.
PART IV
ITEM 14,(a),(1),(2),(B)1 FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND REPORTS ON FORM 8-K
(A) (1) The following financial statements of AMERISTEEL CORPORATION as of the dates and for the periods indicated are included herein:
(2) The following financial statement schedules of AMERISTEEL CORPORATION are filed as part of this report:
Schedule II Valuation and qualifying accounts
(3) The following exhibits are filed as part of this report:
Exhibit 3(I) -- Articles of Incorporation, as amended to date
Exhibit 10 -- AmeriSteel Equity Ownership Plan AmeriSteel Strategic Value Added Executive Short-Term Incentive Plan
Exhibit 23 -- Consent of Arthur Andersen LLP
Exhibit 23.1 -- Consent of Deloitte & Touche LLP
Exhibit 27 -- Financial Data Schedule (For SEC Use Only)
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(B) Reports on Form 8-K.
None for the quarter ended March 31, 1996.
Supplemental Information To Be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not registered Securities Pursuant to Section 12 of the Act
The annual report on Form 10K but no proxy statement, form of proxy or other proxy solicitation material, is intended to be furnished to stockholders of the Company with respect to fiscal 1996.
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.
AMERISTEEL CORPORATION
By: /s/ Phillip E, Casey June 25, 1996 --------------------------------------------------------- Phillip E. Casey, Chairman of the Board Date Chief Executive Officer
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.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of AmeriSteel Corporation:
We have audited the accompanying statements of financial position of AmeriSteel Corporation (a Florida corporation) as of March 31, 1996 and 1995, and the related statements of operations, shareholders' equity and cash flows for the years then ended. These financial statements and the schedule referred to below 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.
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 AmeriSteel Corporation as of March 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commissions rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Tampa, Florida April 26, 1996
[LOGO] DELOITTE & TOUCHE LLP Certified Public Accountants Suite 1200 201 East Kennedy Boulevard Tampa, Florida 33602-5821 Telephone: (813) 273-8300
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders AmeriSteel Corporation Tampa, Florida
We have audited the accompanying statements of operations, shareholders' equity, and cash flows of AmeriSteel Corporation [formerly Florida Steel Corporation (the "Company")] for the year ended March 31, 1994. Our audit also included the financial statement schedule listed in the Index at Item 14(a) for the year ended March 31, 1994. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the Company's financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of the Company for the year ended March 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, for the year ended March 31, 1994, when considered in relation to the basic statements taken as a whole, presents fairly in all material respects the information set forth therein for the year ended March 31, 1994.
DELOITTE & TOUCHE LLP
June 6, 1994
- --------------- DELOITTE TOUCHE TOHMATSU INTERNATIONAL - ---------------
AMERISTEEL CORPORATION STATEMENTS OF FINANCIAL POSITION
See notes to financial statements
AMERISTEEL CORPORATION STATEMENTS OF FINANCIAL POSITION -- Continued ($ in thousands except share data)
AMERISTEEL CORPORATION STATEMENTS OF OPERATIONS ($ in thousands except earnings per share)
See notes to financial statements
AMERISTEEL CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY ($ in thousands except share data)
See notes to financial statements
AMERISTEEL CORPORATION STATEMENTS OF CASH FLOWS ($ in thousands)
See notes to financial statements
AMERISTEEL CORPORATION STATEMENTS OF CASH FLOWS - - Continued ($ in thousands)
See notes to financial statements
AMERISTEEL CORPORATION NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
NOTE A-- BASIS OF PRESENTATION
The financial statements include the accounts of AmeriSteel (the "Company"). As of April 1, 1996, the Company changed its name from Florida Steel Corporation (which it had used since 1956) to AmeriSteel Corporation. The predecessor of the Company was formed in 1937.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Credit Risk: The Company extends credit, primarily on a basis of 30-day terms, to various customers in the steel distribution, fabrication and construction industries, primarily located in the southeastern United States. The Company performs periodic credit evaluations of its customers and generally does not require collateral. Credit losses, in the past, have not been significant.
Business Segment: The Company is engaged in steel production and the manufacture, fabrication and marketing of steel products, primarily for use in construction and industrial markets. In the years ended March 31, 1996 and March 31, 1995, export sales were less than 1% of total sales.
Cash Equivalents: The Company considers all highly liquid investments, with a maturity of three months or less when purchased, to be cash equivalents.
Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market.
Assets Held for Sale: Real estate and machinery and equipment held for sale are carried at the lower of cost or estimated fair value. For the years ended March 31, 1996 and March 31, 1995, the Company transferred $4,972,000 and $1,031,000 from property, plant and equipment to assets held for sale.
Property, Plant and Equipment: Major renewals and betterments are capitalized and depreciated over their estimated useful lives. Maintenance and repairs are charged against operations as incurred. Upon retirement or other disposition of property, plant and equipment, the cost and related allowances for depreciation are removed from the accounts and any resulting gain or loss is reflected in operations.
Plant start-up and other preoperating costs of new facilities are charged against operations as incurred. Interest costs for property, plant and equipment construction expenditures of $2,129,000 were capitalized for the year ended March 31, 1996 and $654,000 for the year ended March 31, 1995. For financial reporting purposes, the Company provides for depreciation of property, plant and equipment using the straight-line method over the estimated useful lives of 20 to 30 years for buildings and improvements and 4 to 15 years for all other property, plant and equipment.
Goodwill: Goodwill consists of the excess of purchase price over the fair value of acquired assets and liabilities. Goodwill is stated at cost less accumulated amortization of $13,337,595 and $9,207,375 at March 31, 1996 and 1995, respectively. Goodwill is being amortized over a 25-year period.
Deferred Financing Costs: The deferred financing costs as of March 31, 1996 and 1995, are net of accumulated amortization of $8,023,464 and $6,067,332. These amounts will be amortized over the term of the respective debt instruments, which range from 3 to 8 years.
AMERISTEEL CORPORATION NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Earnings per Common Share Earnings per common share are computed using the weighted average number of outstanding common shares. On May 22, 1995, the Company's Board of Directors authorized a 49,999 for 1 stock dividend. Earnings per common share and weighted average shares outstanding have been retroactively adjusted for the stock dividend for all periods subsequent to March 31, 1993.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Delivery Expenses: The Company's policy is to include all delivery expenses in cost of sales.
Self Insurance: As part of its risk management strategies, the Company is self-insured, up to certain amounts, for risks such as workers' compensation, employee health benefits, and long-term disability. Risk retention is determined based on savings from insurance premium reductions, and, in the opinion of management, does not result in unusual loss exposure relative to other companies in the industry.
Recent Accounting Pronouncement: In March 1995, the Financial Accounting Standards Board issued Statement No. 121 that requires impairment losses to be recorded on long-lived assets used in operations and also addresses the accounting for Long-Lived assets that are expected to be disposed of in future periods. The Company will adopt Statement No. 121 in the first quarter of fiscal 1997 and does not believe the effect of adoption will be material.
Reclassifications: Certain amounts in the fiscal 1995 financial statements have been reclassified to conform to the fiscal 1996 financial statement presentation.
NOTE C-- EXTRAORDINARY ITEM
In March 1994, the Company redeemed $20,000,000 of 14.5% subordinated debentures. The 6% premium, equal to $1,200,000 was charged to expense net of a $452,000 income tax benefit, and was classified as an extraordinary item for financial reporting purposes.
NOTE D--INVENTORIES
Inventories consist of the following: ($ in thousands)
AMERISTEEL CORPORATION NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
NOTE E--BORROWINGS
Long-term borrowings consist of the following: ($ in thousands)
Effective June 9, 1995, the Company entered into a two-year revolving bank agreement (the "New Revolving Credit Agreement"), which replaced the Revolving Credit Agreement and provides up to $140 million borrowings subject to a "borrowing base" amount. The borrowing base amount will not exceed the sum of 85% of eligible accounts receivable plus 65% of eligible inventory. Letters of credit are subject to an aggregate sublimit of $50 million.
The New Revolving Credit Agreement contains certain covenants including financial ratios and limitations on indebtedness, liens, investments and disposition of assets and dividends. It is collateralized by first priority security interests in substantially all accounts receivable and inventory of the Company. The Company is in compliance with these covenants at March 31, 1996.
Revolving Loans under the New Revolving Credit Agreement bear interest at a per annum rate equal to one of several rate options (LIBOR, Fed Funds, or Cost of Funds) at the discretion of the Company plus an applicable margin determined by tests of performance from time to time. Prime interest rate loans, not previously mentioned have no additional margin. In addition to Revolving Loans, the Company has the option of incurring Swingline Loans, subject to an aggregate sub-limit of $10 million, for short-term cash needs at rates near prime. The initial borrowing under the New Revolving Credit Agreement, used to pay off the Revolving Credit Agreement, was LIBOR plus 1.5%. The interest rate at March 31, 1996 was 6.9%.
The First Mortgage Notes are collateralized senior obligations of the Company limited in aggregate principal amount to $100 million and will mature on December 15, 2000. Interest on the First Mortgage Notes accrues at the rate of 11.5% per annum and is payable semiannually on each June 15 and December 15. The Company has assigned and pledged a security interest in substantially all the real and personal property of the four mills.
AMERISTEEL CORPORATION NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
NOTE E--BORROWINGS -- Continued
The First Mortgage Notes will be redeemable, at the option of the Company, in whole or in part from time to time, on or after December 15, 1996 at redemption prices (expressed as percentages of the outstanding principal amount) if redeemed during the twelve-month period commencing on December 15 of the year set forth below, plus, in each case, accrued interest thereon to the date of redemption:
The First Mortgage Notes rank pari passu with respect to the payment in full of the principal and interest on all existing and future senior indebtedness of the Company and rank senior to all subordinated indebtedness of the Company.
The First Mortgage Notes contain covenants that include, without limitation, maintenance of sufficient consolidated net worth and limitations on additional indebtedness, transactions with affiliates, dispositions of assets, liens, dividends and distributions. The Company is in compliance with these covenants at March 31, 1996.
The Company has issued to Holdings a $50 million note (the "Subordinated Intercompany Note") which matures December 21, 2002. The Subordinated Intercompany Note bear interest at variable rates. The weighted average interest rate at March 31, 1996 was 7.2%.
The Company also has outstanding borrowings obtained through industrial revenue bonds ("IRBs") issued to construct facilities in Jackson, Tennessee; Charlotte, North Carolina; Jacksonville, Florida; and Plant City, Florida. The interest rates on these bonds range from 50% to 75% of the prime rate.. The Company increased its outstanding IRB's by $20.0 million in fiscal 1996 for a solid waste disposal project in Jackson, Tennessee. Approximately $13.7 million of these proceeds had not been spent as of March 31, 1996. These unspent proceeds are legally restricted for use on the solid waste disposal project and accordingly, have been classified as construction in progress in the accompanying statements of financial position. The IRBs mature in fiscal 2004 except for the new IRBs which mature in fiscal 2018. The IRBs are backed by irrevocable letters of credit issued pursuant to the New Revolving Credit Agreement. As of March 31, 1996, the Company had approximately $37.1 million of outstanding letters of credit, primarily for IRBs, insurance-related matters and surety bonds
AMERISTEEL CORPORATION NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
NOTE E--BORROWINGS -- Continued
The Note to Parent is an unsecured non-interest bearing note with no stated maturity. Accordingly, amounts due are classified as current as of March 31, 1996, in the accompanying statements of financial position.
The Company has borrowed $4.5 million as of March 31, 1996, under the Trade Loan Agreements. The loan bears interest at 8.5% and matures on April 15, 1996. The proceeds are to be used for the purchase of steel mill equipment which shall collateralize the loans.
As of March 28, 1994, the Company entered into a subordinated note agreement (the "Bank of Tokyo Loan") with the Bank of Tokyo, LTD., New York Agency. The Company pays interest semiannually at the six-month Fed Funds Rate plus 1.5%. (7.2% effective March 31, 1996). This note, which matures January 31, 1997, is subordinated to the Company's senior debt and the Company may not make payments if the senior debt is in default until certain conditions are met.
The maturities of long-term borrowings for the fiscal years subsequent to March 31, 1996 are as follows: ($ in thousands)
AMERISTEEL CORPORATION NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
NOTE F -- INCOME TAXES
The provision (benefit) for income taxes are comprised of the following amounts: ($ in thousands)
For the year ended March 31, 1994, the benefit for income taxes includes $452,000, for an extraordinary item related to the early extinguishment of debt.
A reconciliation of the difference between the effective income tax rate for each year and the statutory federal income tax rate follows: ($ in thousands)
AMERISTEEL CORPORATION NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
NOTE F -- INCOME TAXES -- Continued
The components of the deferred tax assets and liabilities consisted of the following at March 31: ($ in thousands)
The Company has net operating loss carryforwards of approximately $5.9 million and $14.9 million for federal and state income taxes, respectively, expiring through 2009. As a result of a change in tax fiscal year, recognition of federal net operating loss carryforwards are limited to approximately $1.5 million each year. The Company also has alternative minimum tax credit carryforwards of approximately $.5 million which have no expiration.
AMERISTEEL CORPORATION NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
NOTE G -- BENEFIT PLANS
The Company maintains a defined benefit pension plan covering substantially all employees. The benefits are based on years of service and compensation during the period of employment. Annual contributions are made in conformity with minimum funding requirements and maximum deductible limitations.
The plan's funded status and the amounts recognized in the accompanying statements of financial position are as follows: ($ in thousands)
The weighted average discount rate in determining the actuarial present value of the accumulated benefit obligation were 7.5% and 8.0%, for the years ended March 31, 1996 and March 31, 1995, respectively. The rate of increase in future compensation levels was 4.5% for both years. The expected rate of return on plan assets was 9.5% for the years ended March 31, 1996 and 1995.
Pension cost included in the accompanying statements of operations is comprised of the following: ($ in thousands)
AMERISTEEL CORPORATION NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
NOTE G--BENEFIT PLANS -- CONTINUED
The Company also has a voluntary savings plan available to substantially all of its employees. Under this plan, the Company contributes amounts based upon a percentage of the savings paid into the plan by employees. Effective January, 1993, the Company matched 50% of the employees' contributions up to 4% of employees' salaries. Costs under this plan were $1.1 million, $1.2 million, and $1.2 million for the years ended March 31, 1996, 1995 and 1994, respectively.
The Company has an unfunded Supplemental Benefits Plan, which is a nonqualified plan that provides certain officers defined pension benefits in excess of limits imposed by federal tax laws. The charges to earnings under the Supplemental Benefits Plan for the years ended March 31, 1996, 1995 and 1994 were $0, $159 thousand and $765 thousand, respectively.
Post Retirement Benefits: The Company currently provides specified health care benefits to retired employees. Employees who retire after a certain age with specified years of service become eligible for benefits under this unfunded plan. The Company has the right to modify or terminate these benefits. The following table summarizes the accumulated post retirement benefit obligations included in the Company's statements of financial position:
The following table summarizes the net post retirement benefit costs: ($ in thousands)
AMERISTEEL CORPORATION NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
NOTE G--BENEFIT PLANS -- Continued
The weighted average discount rate used in determining the accrued post retirement benefit obligation was 7.50%. The gross medical trend rate was assumed to be 10.65% in 1995 and dropping .346% per year to 6.0% in 2008 and beyond for pre-65 retirees that retired before January 1, 1994 and 9.5% decreasing by .5% per year to 5.5% in 2003 and beyond for post 65-retirees that retired before January 1, 1994. For retirees on or after January 1, 1994, the trend rate is the same until the Company's expected costs are double the 1992 costs. At that point, future increases in the medical trend will be paid by the retirees. The health care cost trend rate assumption has a significant effect on the amount of the obligation reported.
The incremental effect of a 1% increase in the medical trend rate would result in an increase of approximately $242,000 and $17,000 to the accrued post retirement benefit obligation and net post retirement benefit cost, respectively, as of and for the year ended March 31, 1996.
NOTE H - COMMON STOCK
In fiscal 1996, the Board of Directors approved a one time stock purchase plan available to essentially all employees. Employees who purchased stock were also eligible for stock options equal to six times the amount of shares purchased. A total of 37,689 shares were sold under the plan at a purchase price of $10.63 per share. The option price is $12.50 per share with a four year vesting period. A total of 226,134 options were granted under the plan, 5,040 were canceled and 221,094 remained outstanding as of March 31, 1996. No options remain available for future grant. On September 29, 1997, one-third of the options become vested, another one-third will become vested on September 29, 1998, and the balance will become vested on September 29, 1999. The final date to exercise the options is September 30, 2005.
During fiscal 1996, the Board of Directors also approved the AmeriSteel Corporation Equity Ownership Plan (the Equity Ownership Plan) which provides for grants of common stock, options to purchase common stock and stock appreciation rights. A total of 12,000 restricted shares and options for 12,000 additional shares were granted under the Equity Ownership Plan during 1996, leaving 414,852 shares available for future grant as of March 31, 1996. As of March 31, 1996, options for 12,000 shares remained outstanding with an exercise price of $12.50, none of which are exercisable as of that date. Subsequent to year-end the Board of Directors granted options for an additional 68,850 shares with an exercise price of $12.50.
NOTE I--INCENTIVE COMPENSATION PLAN
During 1989, the Board of Directors of Holdings approved a short-term incentive plan to reward key employees who are significant to the Company's long-term success. The awards are based on the Company's actual operating results, as compared to targeted results. The plan provides for annual distributions to participants based on that relationship. The plan is amended annually by the Board of Directors to reflect changes in expected operating results, and to adjust target results accordingly. The fiscal 1996 plan was based on actual return on capital employed as compared to target return on capital employed. The prior fiscal years plans were based on operating earnings as compared to target operating earnings. The award was $1.2 million and $1.9 million for fiscal 1996, and 1995, respectively which is included in salaries, wages and employee benefits. No amounts were awarded under the plan for the year ended March 31, 1994.
AMERISTEEL CORPORATION NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
NOTE J--ENVIRONMENTAL MATTERS
Environmental legislation and regulation at both the federal and state level is subject to change, which may change the cost of compliance. Various possible methods of remediation are presently being studied for approval; however, it is expected that the investigation and remediation process will take a number of years. Although the ultimate costs associated with the remediation are not presently known, the Company has estimated the cost to be approximately $15.4 million. Approximately $13.7 million of these costs is recorded in accrued liabilities as of March 31, 1996. The remaining amounts consist of site restoration and environmental exit costs to ready idle facilities for sale, and have been considered in determining whether the carrying amounts of the properties exceed their net realizable values. The Company paid approximately $11 million in remediation costs in fiscal 1996. Of the amount accrued at March 31, 1996, the Company expects to pay approximately $6.0 million in fiscal 1997. The timing of future payments are uncertain due to the various remediation alternatives being considered. The Company's estimate of the remediation costs is based on its review of each site and the nature of such problems. The Company then determines for each site the expected remediation methods, and the estimated cost for each step of remediation. In all such determinations, the Company employs outside consultants, and providers of such remedial services where necessary, to assist in making such determinations.
During the years ended March 31, 1996, March 31, 1995 and March 31, 1994, the Company expensed approximately $2 million, $6 million, and $10 million, respectively, for environmental remediation costs.
Based on past use of certain technologies and remediation methods by third parties, evaluation of those technologies and methods by the Company's consultants and quotations and third-party estimates of costs of remediation-related services provided to the Company or of which the Company and its consultants are aware, the Company and its consultants believe that the Company's cost estimates are reasonable. In light of the uncertainties inherent in determining the costs associated with the clean-up of such contamination, including the time periods over which such costs must be paid, the extent of contribution by parties which are joint and severally liable, and the nature and timing of payments to be made under cost sharing arrangements; there can be no assurance the ultimate costs of remediation may not be greater or less than the estimated remediation costs.
NOTE K -- COMMITMENTS
Operating Leases The Company leases certain equipment and real property under noncancelable operating leases. Aggregate future minimum payments under these leases are as follows:
($ in thousands)
AMERISTEEL CORPORATION NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
NOTE K -- COMMITMENTS -- Continued
Total rent expense was approximately $4.2 million, $5.0 million, and $4.8 million, for the years ended March 31, 1996, 1995 and 1994, respectively.
On April 1, 1995, the Company entered into two noncancelable operating lease agreements with an initial lease term of five years to lease land and land improvements to a third party. Aggregate future minimum gross rentals under these leases is $100,000 per year. Cost of the land and land improvements was $1.6 million.
Service Commitments The Company entered into two noncancelable agreements to purchase transportation services. The rates charged are based on a fixed dollar amount and number of miles. These rates are subject to change each year based on inflation. The term for each agreement is 5 years, beginning April 1, 1995, renewable for successive one-year periods.
Employment Agreement On June 1, 1994, the Company entered into a five-year employment agreement (the "Employment Agreement") with a senior member of management. The Employment Agreement provides for, among other benefits, a one-time bonus of $2,446,000, base annual salary of $300,000, and equity interest of 7.5% of the outstanding common stock of the Company to vest ratably over the next five years. Deferred compensation of $4,500,000 was recorded related to the common stock granted, and is being amortized on a straight-line basis over the term of the Employment Agreement. The Employment Agreement also provides for certain additional benefits in the event of termination.
Interest Rate Swap The Company maintains an interest rate swap (the "Swap") agreement as a hedge against fluctuations in interest rates on certain debt. The Swap has a notional amount of $20 million and a three-year term expiring February 24, 1997. Under the terms of the Swap the Company has agreed to pay fixed interest at 9% and receive variable interest at the LIBOR Rate (5.21% at March 31, 1996) + 3.0%, computed based on the notional amount. The Company is amortizing the premium paid to acquire the Swap over its term as an adjustment to interest expense.
Litigation The Company is defending various claims and legal actions which are common to its operations. While it is not feasible to predict or determine the ultimate outcome of these matters, none of them, in the opinion of management, will have a material effect on the Company's financial position or results of operations.
NOTE L--OTHER OPERATING EXPENSES
In March 1994, the Company announced the closing of the Tampa Mill melt shop resulting in a $10.3 million charge of which $9.1 million was to reduce fixed assets to realizable value and the balance was primarily benefit costs for affected employees. The Company also announced the closing of the Ft. Myers, Florida and Woodbridge, Virginia fabricating shops at a cost of $600,000.
In June 1995, the Company announced the closing of the Tampa rolling mill resulting in a $15.0 million charge. $12.0 million was to reduce fixed assets to realizable value and the balance was primarily benefit costs for affected employees. The Company also wrote off $752 thousand in fiscal 1996, for the remaining cost of the Woodbridge, Virginia lease.
AMERISTEEL CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(1) Represents accounts considered to be uncollectible and charged off, less recoveries on accounts previously charged off.