10-K405 1 0001.txt FORM 10-K ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- 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 December 31, 2000 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ----------- Commission File Number: 333-79587 ---------------- CALIFORNIA STEEL INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 33-0051150 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 14000 San Bernardino Avenue Fontana, California 92335 (Address of principal executive offices) (Zip code)
(909) 350-6200 (Registrant's telephone number, including area code) ---------------- Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange Title of Each Class: on Which Registered: -------------------- --------------------- None None
Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in 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 March 26, 2001, there were 1,000 shares of the registrant's common stock, no par value, outstanding. ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- CALIFORNIA STEEL INDUSTRIES, INC. INDEX TO ANNUAL REPORT ON FORM 10-K For The Fiscal Year Ended December 31, 2000
Page ---- PART I.................................................................. 1 Item 1. Business...................................................... 1 Item 2. Properties.................................................... 10 Item 3. Legal Proceedings............................................. 10 Item 4. Submission of Matters to a Vote of Security Holders........... 10 PART II................................................................. 11 Market for Registrant's Common Equity and Related Stockholder Item 5. Matters...................................................... 11 Item 6. Selected Financial Data....................................... 11 Management's Discussion and Analysis of Financial Condition Item 7. and Results of Operations.................................... 12 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... 17 Item 8. Consolidated Financial Statements and Supplementary Data...... 18 Changes in and Disagreements with Accountants on Accounting Item 9. and Financial Disclosure..................................... 18 PART III................................................................ 19 Item 10. Directors and Executive Officers of the Registrant............ 19 Item 11. Executive Compensation........................................ 21 Security Ownership of Certain Beneficial Owners and Item 12. Management................................................... 24 Item 13. Certain Relationships and Related Transactions................ 24 PART IV................................................................. 26 Exhibits, Financial Statement Schedule, and Reports on Form 8- Item 14. K............................................................ 26
PART I Item 1. Business Statements of our belief in this section are based on our own internal studies or research, estimates of members of our senior sales management team, our knowledge of the industry or other information we have internally compiled. Introduction We believe we are the leading producer of flat rolled steel in the western United States based on tonnage billed. We produce the widest range of flat rolled steel products in the region, including hot rolled, cold rolled and galvanized coil and sheet. We also produce electric resistance weld pipe. Unlike integrated steel mills and mini-mills, we do not manufacture steel. Rather, we process steel slab manufactured by third parties. Our principal market consists of the 11 states located west of the Rocky Mountains. We have four main competitors located in the western United States. Steel products are also supplied to the western United States via imports from foreign companies and from domestic suppliers. We believe our slab-based business model, breadth of products, non-union work environment, southern California location and long-standing customer relationships provide us with significant advantages over our competition. Industry Overview The steel industry is highly cyclical in nature. It is influenced by a combination of factors including periods of economic growth or recession, strength or weakness of the U.S. dollar, worldwide production capacity, levels of steel imports and tariffs. Other factors including the failure to adapt to technological change, plant inefficiencies, high labor costs and fluctuating energy costs have affected the industry. Steel, regardless of product type, responds to forces of supply and demand, and prices have been volatile and have fluctuated in reaction to general and industry-specific economic conditions. There are generally two types of steel producers: "integrated mills" and "mini-mills." Steel manufacturing by an integrated producer includes ironmaking from raw materials, like iron ore and coal in a blast furnace, followed by steelmaking, slab making, reheating and further rolling into coil or other shapes. A mini-mill is generally a smaller volume steel producer that uses an electric arc furnace rather than a blast furnace to create steel from ferrous scrap metal. Mini-mills typically service regional markets. Unlike integrated steel mills and mini-mills, we do not manufacture steel. Rather, we process steel slab manufactured by third parties. As a result, we do not have the fixed costs associated with the manufacturing of steel. Historically, raw material costs comprise approximately 70% of our cost of goods sold. We believe we are the largest importer and the second largest purchaser of steel slab in the world. Our purchasing power provides us with the ability to negotiate favorable terms and conditions for steel slab from low cost and high quality producers throughout the world. Prices of our flat rolled steel products have historically experienced a close correlation to the prices of steel slab. Although we remain subject to the cyclicality inherent in the steel industry, we believe this correlation, combined with our slab- based business model, provides us with operating margins that are more consistent than those of a typical flat rolled steel producer. Recent Industry Conditions In 2000, the United States steel industry entered into its second downward cycle in the last three years, characterized by excess supply and depressed prices. In 1998, the difficulties suffered by the industry were generally the result of increased quantities of lower-priced imports into the United States, triggered in large part by the Asian financial crisis. This past year, high import levels have continued. In addition, high inventory levels and a slowdown in domestic demand have resulted in lower steel sales and depressed average selling prices. 1 During 1999, the International Trade Commission of the U.S. Department of Commerce and the U.S. International Trade Commission imposed anti-dumping duties ranging from 17% to 67% on certain foreign steel producers. Additionally, agreements were concluded between the U.S. government and the governments of Brazil and Russia to limit hot rolled shipments into the United States for a period of five years. We believe that this measure of relief against the significant supply of hot rolled products entering the U.S. market, through clearly defined limits on imports or additional tariffs, served as a stabilizing force to domestic steel prices in 1999. In 1999, several U.S. steel producers also filed petitions seeking relief from foreign dumping of several other types of steel products including, but not limited to, cold rolled steel and electric resistance welded or ERW pipe. The International Trade Commission in mid-2000 ultimately rejected the trade case filed against imported cold rolled products. In response to a petition from the domestic ERW pipe industry, the President of the United States determined that the domestic ERW pipe industry was severely injured due to a surge in volume of imported ERW pipe. As a result, the President has imposed significant limits on the volume of imported ERW pipe for the next several years. In response to continued high volumes of imported steel imports in 2000, a second round of hot rolled trade cases were filed in late 2000 by a consortium of domestic steel producers, complementing the successful cases filed in 1999 against Japan, Brazil and Russia. The International Trade Commission has not yet reached a final determination on this second round of hot rolled trade cases. Other than the 1999 hot rolled trade cases, we have not participated in the steel industry trade actions. Despite aggressive trade actions, several steel companies in the United States have initiated bankruptcy proceedings over the last year. Liquidity concerns plague the industry in general and steel company valuations have been significantly depressed. Products and Customers Our principal product lines are hot rolled coil and sheet, cold rolled coil and sheet, galvanized coil and sheet and electric resistance weld (ERW) pipe. The following table sets forth our sales by product category as a percentage of total shipments for the periods indicated:
Year Ended December 31, --------------------------------- 2000 1999 1998 1997 1996 ----- ----- ----- ----- ----- Hot rolled coil and sheet............... 40.7% 47.3% 52.1% 58.0% 58.8% Cold rolled coil and sheet.............. 16.1% 15.9% 15.1% 12.0% 12.2% Galvanized coil and sheet............... 35.6% 29.7% 24.4% 21.8% 22.2% ERW pipe................................ 7.6% 7.1% 8.4% 8.2% 6.8% ----- ----- ----- ----- ----- Total ................................ 100% 100% 100% 100% 100% ----- ----- ----- ----- ----- Total tons billed, excluding scrap (in thousands)............................. 1,753 1,803 1,614 1,625 1,563 ===== ===== ===== ===== =====
The western U.S. steel market is comprised of many consumers typically requiring small order sizes with a wide variety of metallurgical qualities and specifications. In contrast, the majority of other U.S. steel markets primarily depend on heavy-tonnage steel consumers like the automotive and durable goods manufacturing industries. We believe that the western United States' smaller and more diverse customer base helps balance pricing power between the consumer and the supplier. Instead of competing solely on price, we believe we benefit from having customers that place greater value on our competitive strengths, including integrated service, timeliness of delivery and ability to meet unique customer needs. We believe that we benefit from our strategic location in Fontana, California. We have approximately 300 active customers, with no single customer accounting for more than 6% of our 2000 sales. Our customers include service and processing centers, construction and building material companies, roofing and decking manufacturers, structural tubing concerns, oil and gas producers and distributors, wheel and rim manufacturers, packaging and container companies as well as various customers in other industries. 2 We do not actively pursue sales in foreign markets and we make foreign sales only when they are economically advantageous to us. In 2000, we sold approximately 8,900 tons of steel product to customers in Mexico and Canada, which represented approximately 0.51% of our total 2000 tons billed. Hot rolled coil and sheet is our largest product category as measured by tons sold per year. Our customers use hot rolled steel for a variety of manufacturing applications, including the production of spiral weld pipe, shipping containers, automobile wheels and rims, strapping, tubing and a variety of construction related products. In 2000, we directed approximately 40.2% of our hot rolled production to outside sales and we further processed approximately 59.8% internally for our own higher-margin, value added product needs. Cold rolled coil and sheet are used in exposed steel applications where high surface quality is important. Typically, cold rolled material is coated or painted. Applications for our cold rolled products include electronic cabinetry, lighting fixtures, metal office furniture, water heaters, container manufacturers, tubing, appliances, galvanized containers and a variety of construction related products. In 2000, we directed approximately 35.0% of our cold rolled production to outside sales and we further processed approximately 65.0% internally for our own higher-margin, value added product needs. Galvanized coil and sheet is produced by adding a coating of zinc to cold rolled steel, and in some instances, to hot rolled steel, for additional corrosion resistance. We believe we offer the broadest range of thicknesses, widths and coatings of galvanized products in the western U.S. market. Applications for our galvanized coil product include tubing, drums, tanks, culvert and a variety of construction related products. We supply ERW pipe with diameters ranging from 4.5" to 16.0" in the western U.S. markets. The principal end-users of our ERW pipe production are oil and gas transmission companies. We also sell standard pipe to industrial accounts for load bearing and low-pressure applications. Operations Modernization Program In 1999 we completed a six-year modernization program encompassing capital expenditures of approximately $250.0 million. We believe that these investments have strengthened our competitive position by reducing operating costs, broadening our product line, improving product quality and significantly increasing our throughput capacity of flat rolled steel products. We continued to make additional capital investments in 2000 that were designed to improve the efficiency of our cold rolled annealing processes and ensure continued reliability of our hot strip mill. 3 The following table describes the primary investments made under our modernization program:
Major Investment Amount Completion Benefit ---------------- ------------- ---------- ------- (in millions) Continuous pickling line.................. $68 1994 . Replaced two pickling lines and increased annual continuous pickling capacity from 780,000 to 1.2 million tons . Increased overall efficiency, productivity and product quality Five-stand cold rolling mill modernization.... $64 1997 . Revamped five-stand cold rolling mill and increased throughput capacity and improved overall product quality . Increased maximum width of coils produced from 42 inches to 62 inches, allowing for a commensurate increase in coil weight from 18 to 35 tons (increased width matches width capacity on new continuous pickling line) Reheat furnace......... $28 1997 . Walking beam furnace substantially replaced 3 pusher furnaces . Reduced emissions from reheating process and decreased energy costs Second continuous galvanizing line...... $73 1998 . Increased annual capacity from 375,000 to 550,000 tons . Provided ability to produce a broader product range (we believe the widest range in the western United States) . Improved efficiency by allowing each galvanizing line to focus on either high or low gauge product . Investment includes a capital expenditure of $38.5 million and an operating lease of $34.5 million Coil handling system... $14 1999 . Reduced hot coil cooling times from 3 days to 6-8 hours . Improved product quality and efficiency by eliminating manual coil handling process
The benefits of our modernization program were evident in 2000. For the first time in our history, higher-margin, valued added products exceeded 51% of our total products sold. Production efficiencies continue to be gained through improved operating and maintenance practices, targeted capital investments and enhanced production planning and quality control procedures. We believe the success of our modernization program contributes to our being a low cost producer of flat rolled steel products. Hot Strip Rolling and Finishing Mills We produce hot rolled coil and sheet from slab in our hot strip mill. A walking beam furnace reheats slab, directs it to a multi-stand rolling mill to reduce thickness and rolls it into coil. Equipped with an automatic gauge control system and technologically advanced computer controls, the hot strip mill currently possesses a throughput capacity of over 1.7 million tons annually and can produce hot rolled coil in gauges from 0.053 inches to 0.750 inches. 4 The hot strip mill facility is primarily composed of the following: . a walking beam furnace with a capacity of 5,820 tons of slab per day supported by one pusher type reheat furnace that can be used to provide incremental production needs and increase capacity by 310 tons per day; and . the 86 inches mill which consists of five roughing stands, a scale breaker, six finishing stands and two downcoilers. In addition, the hot strip finishing lines are composed of the following: . an 80 inches coil slitter line that can trim product up to 0.375 inches in thickness and can be easily adjusted to meet a variety of customer- specified widths; . one shear line using a synchronized flying shear; . a skin pass line that uses one 2-hi mill with 32 inches diameter x 86 inches rolls which is used for surface improvements; and . a build-up line that is used to increase coil sizes to customers specifications. Continuous Pickle Line We can further process hot rolled coil on the 62 inches continuous pickle line for direct sales to our customers or for our own cold rolling and galvanizing production. The continuous pickle line is a conventional horizontal design with a coil entry section, welder, hot water preheat tanks, acid tanks, water rinse, dryer, looper, side trimmer, coiler, oiling equipment and scale. The line, which was installed in 1994, can currently yield up to approximately 1.2 million tons per year. Cold Rolled Mill Cold rolled sheet is hot rolled steel that has been further processed through the continuous pickle line and then successively passed through a rolling mill without reheating until the desired gauge and other physical properties have been achieved. Cold rolling reduces gauge and hardens the steel and, when further processed through an annealing furnace and temper mill, improves uniformity, ductility and formability. Cold rolling can also impart various surface finishes and textures. Cold rolled steel is used in applications that demand higher quality or finish. The thinner coil is usually annealed to increase ductility, while some coil is cut into sheet. The cold rolled facility, with a current annual finished capacity of approximately 1.1 million tons, includes the following: . a five-stand reduction mill; . an electrolytic cleaning line; and . nine single stack annealing furnaces. The five-stand reduction mill reduces pickled steel strip from a gauge range of 0.075 inches to 0.225 inches to a range of 0.010 inches to 0.172 inches in thickness, with a maximum width of 60 inches. The five-stand reduction mill was completely revamped in 1997. After cold reduction, coil is cleaned in a 200 feet to 1,000 feet per minute electrolytic cleaning line, producing smut-free steel which is then batch annealed before final production in the 609 temper mill, where the steel is tempered to specified finish and gauge. In year 2000, we initiated a capital improvement project to replace our existing Hydrogen/Nitrogen gas annealing units with new, state of the art, Hydrogen Annealing units. Phase I of this Batch Anneal-Hydrogen Annealing project was completed in August 2000, and included 8 bases. This process heats steel coils to annealing temperatures in a pure Hydrogen atmosphere, in comparison to the previous batch annealing process 5 which used a Hydrogen/Nitrogen mixed gas (HNx) atmosphere. Phase II, with an additional 12 bases, is under construction now, and is scheduled to be completed in the third quarter of 2001. Hydrogen annealing provides higher productivity, improved product quality, and a reduction in utilities consumption compared to HNx annealing. When complete, the two phases combined will have an annual capacity of 360,000 tons of cold rolled annealed product per year. Galvanizing Mills Galvanized coil and sheet represent our highest margin, value added products, requiring the greatest degree of processing and quality controls. We produce galvanized sheet by taking cold rolled coils, and in some instances, hot rolled coils, heating it in an annealing furnace and dipping the coil, while still hot, into a pot of molten zinc. As the coil leaves the pot, coating controls insure product specifications match customer requirements. The steel's corrosion resistance makes it ideal for applications like air conditioning units, air ducts, metal ties, studs, siding, decking, roofing and culverts. With the addition of our second continuous galvanizing line that was placed in production in August 1998, we believe that our galvanizing facilities can produce the full range of coated steel. The combined theoretical capacity of our galvanizing lines is approximately 550,000 tons per year. However, in 2000 we achieved higher levels of productivity resulting in approximately 634,000 tons of galvanized steel production. The first continuous galvanizing line is horizontally configured and produces gauges from 0.012 inches to 0.174 inches. The second continuous galvanizing line is vertically configured and produces gauges from 0.010 inches to 0.060 inches. Electric Resistance Weld (ERW) Pipe Mill We produce ERW pipe by rollforming hot rolled skelp into a pipe shape, welding the edges together with a high frequency welder, annealing the weld and cutting the finished product to length on a continuous line. The ERW pipe may then undergo additional testing and/or finishing operations like hydrotesting and end beveling. The pipe mill produces pipe with outside diameters ranging from 4.5 inches to 16 inches and wall thickness ranging from 0.156 inches to 0.375 inches, with lengths available up to 63 feet without mid-weld. Process coating is available through local coating applicators, one of whom lease space on our property. The ERW pipe mill has a current capacity of approximately 150,000 tons per year. Semi-Finished Steel Slab and Suppliers Steel slab is a semi-finished steel product in rectangular form and is generally the first form taken by molten steel after it solidifies. The principal users of steel slab are steel producers or processors that roll slab into finished products like plate or coil. Historically, our raw material consumption costs have comprised approximately 70% of our cost of goods sold. We are the largest importer and the second largest purchaser of slab in the world. We purchase slab from a diverse group of foreign suppliers and one U.S. supplier to obtain high quality steel at low cost through reliable sources. Our foreign vendors are located in Mexico, Brazil, Australia, Japan, Slovakia, Russia, South Africa, China, and Venezuela. We typically make our slab purchases on a quarterly basis. As of December 31, 2000 we were committed, in the form of open purchase orders, to purchase approximately $35 million in steel slabs. In 1999, approximately 90% of our slab procurement needs were met with slab purchased under annual contracts, which was a departure from our traditional method of quarterly slab purchasing. This change resulted from an opportunity to assure slab suppliers with guaranteed volume in exchange for more attractive pricing. Opportunities to continue annual contract purchases diminished in the second half of 1999 and in 2000, no slab purchases were made under annual contracts. We do not anticipate similar opportunities to appear in 2001. We expect to continue to negotiate slab prices and volume with our traditional suppliers on a quarterly basis for our slab purchases in 2001. 6 Although we are not reliant on any one single vendor, in 2000, we purchased approximately 27% of our slab from Ispat Mexicana de C. V. -Imexsa of Mexico and approximately 21% of our slab from Companhia Siderurgica de Tubarao of Brazil. Ispat Mexicana and Companhia Siderurgica de Tubarao are the only two steel facilities in the world dedicated solely to the production of steel slab. Each company currently does not possess production equipment beyond slab casting. We own 4% of the common stock of Companhia Siderurgica de Tubarao, which represents 1.5% of the total equity interest in Companhia Siderurgica de Tubarao. Companhia Siderurgica de Tubarao is a subsidiary of both Companhia Vale do Rio Doce and Kawasaki Steel Corporation, our stockholders' parent companies. All slab purchases with our parent or affiliated companies are negotiated on an "arm's length" basis and in accordance with market conditions. We negotiate directly with a variety of shipping companies to deliver our slab directly to the Port of Los Angeles. We also charter vessels from Seamar Shipping Corporation, a subsidiary of Companhia Vale do Rio Doce. The vessels are loaded following a specific stowage plan that we develop. The plan ensures high productivity rates at both the loading and unloading sites. Our agents are on site for the loading of each shipment. After unloading, the slab is transported to our facility by rail using the services of Burlington Northern Santa Fe Railroad. In January 2001, we extended our long-term contract with Burlington Northern Santa Fe Railroad through December 2013. This agreement provides us with transportation services at fixed rates and ensures us a dedicated level of rail availability through the term of the agreement. Additionally, Burlington Northern Santa Fe Railroad will utilize new rail cars designed specifically to transport steel slab. We believe this will greatly improve the efficiency and safety of steel slab transportation through our community. Under an agreement that we have entered into with our two shareholders, we have agreed to continuously purchase slabs from Companhia Siderurgica de Tubarao as raw material for our operations according to basic terms and conditions we agree upon from time to time. In addition, our stockholders have agreed to maintain the existing contracts between us and Companhia Siderurgica de Tubarao and Seamar Shipping Corporation in accordance with their respective terms and conditions. We believe that our integrated slab procurement system allows us to manage our slab inventory levels, ensuring optimal tonnage levels as well as the slab quality necessary to meet our customers' order specifications. As of December 2000, we had what we believed to be firm backlog orders of approximately 120,000 tons. Based on our average sales price at that time, the backlog value was approximately $48,000,000. As of December 1999, we had what we believed to be firm backlog orders of approximately 248,000 tons. Based on our average sales price at that time, the backlog value was approximately $95,000,000. Marketing and Customer Service We believe that we provide the highest level of customer service and product support in the western U.S. market. Our emphasis on customer service and product quality has enabled us to establish long-standing relationships with our customers. Our relationships with 90% of our top 30 customers extend beyond 10 years. We attribute this customer loyalty, in large part, to the successful execution of our marketing strategies to provide a broad range of products; to provide consistent service and reliable product availability; and to provide ancillary, value added services. We are the only producer of flat rolled steel products located in the western United States which can supply hot rolled, cold rolled and galvanized coil and sheet. We also produce ERW pipe in diameters ranging from 4.5 inches to 16.0 inches. We believe that we are well equipped to provide "one-stop shopping" for our customers and we believe that this maximizes sales opportunities and increases the convenience and value of the service we provide to customers. We will continue to invest in the quality of our products across all product lines, allowing us to market ourselves as a full-service provider of flat rolled steel in the region. Our location in southern California not only gives us a significant freight cost advantage over our competitors, but also allows us to provide a more service-oriented approach to our customers. Our operating 7 structure allows us to respond quickly to changes in the timing of customer requirements, adjust schedules, source stock inventory and meet specialized shipping needs. Our ability to deliver made-to-order products in a timely manner allows our customers to maximize their inventory turns and meet production targets. By maintaining a regional focus, we believe that we can most effectively service our customers and achieve our goal of increasing market share in higher margin value added products. As part of our strategy to provide superior customer service, we offer our customers ancillary services such as engineering and metallurgical advice. A substantial portion of our customers are small to medium-sized businesses. As a result, many do not have the resources to employ a sophisticated metallurgical engineering staff. Our metallurgical engineers work with our customers on a daily basis, often on site, providing advisory services focused on reducing procurement costs and improving overall production efficiency. In addition to ancillary services, we also provide "service center" like operations including slitting, shearing, coating and single-billing for third party processing. We believe that these value added services help to further differentiate us from our competitors. Competition The steel industry is cyclical in nature and highly competitive. We compete with domestic and foreign steel producers on the basis of customer service, product quality and price. The domestic steel industry has been adversely affected in recent years by high levels of steel imports, worldwide production overcapacity, increased domestic and international competition, rising energy costs and other factors. We believe that the competitive landscape within the steel industry will continue to evolve, especially as new technologies and production methods are introduced. We believe that because of our slab-based business model, breadth of products, non-union work environment, southern California location and long-standing customer relationships, we are well positioned to meet competitive threats. However, some of our competitors are larger and may have substantially greater capital resources, more modern technology and lower labor and raw material costs than us, as well as excess production capacity in some products and could exert downward pressure on prices for some of our products in the future. We are also subject to general economic trends and conditions, such as the presence or absence of sustained economic growth and currency exchange rates. We are particularly sensitive to trends in the construction, agriculture, oil and gas and gas transmission industries, because these industries are significant markets for our steel products. If there were a downturn in one or more of these industries, our sales volume and prices could be adversely affected. U.S. Competition We compete with western U.S. based producers of steel sheet products, including steel processors, one integrated producer and, to a lesser extent, service centers. Historically, high transportation costs have deterred midwestern steel manufacturers from accessing the western U.S. market. Many of our competitors have invested in new plants and equipment, that have improved their product quality and increased their production efficiencies. In the hot rolled segment, our principal domestic competitor is Geneva Steel, located in Provo, Utah. UPI, located in Pittsburg, California, is our principal competitor in galvanized and cold rolled products. We also compete in the galvanized market with Steelscape Inc. (formerly known as BHP Coated Steel Corporation) with two facilities, one located in Kalama, Washington, and the other in Rancho Cucamonga, California and MSC Pinole-Point Steel, located in Richmond, California. We also compete with steel service and processing centers. Service and processing centers serve as both our customers as well as competitors. Service centers serve as wholesale distributors for a broad line of sheet products and also provide value added services including slitting, shearing and coating. Over the past 10 years, mini-mills have been transforming the competitive environment of the U.S. steel industry. Mini-mills are generally smaller volume steel producers that use ferrous scrap metal as their basic raw 8 material and serve regional markets. While no mini-mills in our market currently produce significant amounts of flat rolled products, at least one mini-mill has expressed an intention to construct facilities in the western U.S. to produce hot rolled coil and sheet that might compete with products we manufacture. Manufacturing techniques have allowed mini-mills to produce types of sheet products that have traditionally been supplied by us or integrated producers. We also face increasing competition from producers of materials such as aluminum, composites, plastics and concrete that compete with steel in many markets. Foreign Competition Foreign steel producers consistently compete in the western United States steel market in all of our product categories. Since the fourth quarter of 1997, we have experienced increased competition from importers primarily within the hot rolled product sector. Foreign competition within the cold rolled product sector increased during 2000 following the failure of trade suits initiated by certain U.S. steel companies earlier in the year. Although imported steel has relatively long lead times to reach the western U.S. market, economic and currency dislocations in foreign markets encourage many importers to target the United States with excess capacity at aggressive prices. Some foreign producers benefit from low labor costs, weak local currencies and government subsidies. Existing trade laws and regulations may not be adequate to prevent unfair trade practices concerning steel imports that could pose increasing problems for us and the domestic steel industry in general. Employee Relations At December 31, 2000, we had 973 full-time employees. We have the largest non-union workforce located at any one steel facility in the United States. We provide our employees with supplemental work training and education programs. Our officers also routinely discuss our business plan with them. We believe that we have a good relationship with our employees. Forward-Looking Statements Certain statements contained in this Form 10-K regard matters that are not historical facts and are forward-looking statements (as such term is defined in the rules promulgated pursuant to the Securities Act of 1933, as amended). Such forward-looking statements include any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words "anticipate," "believe," "estimate," "expect," "project," "imply," "intend," "foresee," "will be," "will continue," "will likely result," and similar words and expressions. Such forward-looking statements reflect our current views about future events, but are not guarantees of future performance and are subject to risk, uncertainties and assumptions. Such risks, uncertainties and assumptions include those specifically identified in this Form 10-K and the following: . our substantial indebtedness, interest expense and principal repayment obligations under our bank facility and 8 1/2% senior notes, which could limit our ability to use operating cash flow in our business other than for debt-servicing obligations, obtain additional financing and react to changing market and general economic conditions, and which increase our vulnerability to interest rate increases, . because our board of directors is elected by our two stockholders, each of whom holds 50% of our stock, there is a possibility of deadlocks among our board of directors that could result in costly delays in making important business decisions and put us at a competitive disadvantage, . competitive factors and pricing pressures, . our ability to control costs and maintain quality, . future expenditures for capital projects, . volatility of energy costs as well as the viability of the electrical power distribution system within the state of California, and . industry-wide market factors and general economic and business conditions. 9 Our actual results could differ materially from those projected in these forward-looking statements as a result of these risks, uncertainties and assumptions, many of which are beyond our control. Item 2. Properties We are located on approximately 450 acres in Fontana, California. Our facilities are situated on approximately 115 acres of this space. The property includes a 22 mile railroad system serviced by Burlington Northern Santa Fe and Southern Pacific rail lines. Item 3. Legal Proceedings We are from time to time in the ordinary course of business, subject to various pending or threatened legal actions. We believe that any ultimate liability arising from pending or threatened legal actions should not have a material adverse effect on our financial position, results of operations or liquidity. Environmental Matters Compliance with environmental laws and regulations is a significant factor in our business. We are subject to various federal, state, and local environmental laws and regulations concerning, among other things, air emissions, waste water discharges and solid and hazardous waste disposal. We own property and conduct or have conducted operations at properties that are contaminated with hazardous materials and will require investigation and remediation according to federal, state or local environmental laws and regulations. Expenditures on environmental matters, including expenditures on pollution control equipment and remediation activities, totaled approximately $3.2 million in 1997, $2.3 million in 1998, $1.1 million in 1999 and $0.9 million in 2000. We plan to spend approximately $2.2 million in 2001, with the largest component representing investigation activities at our Fontana site. In 1996, we entered into an Expedited Remedial Action Voluntary Enforceable Agreement with the California Environmental Protection Agency, Department of Toxic Substances Control. This agreement superseded a Voluntary and Enforceable Agreement and Imminent and/or Substantial Endangerment Order issued by the Department in 1992 and amended in 1994. According to the agreement, we are conducting an investigation of potential soil contamination at approximately 28 areas of concern at our facility in Fontana, California. We are unable to reasonably estimate the range of liability until completion of a remedial feasibility study. The site investigation and remedial feasibility study is expected to be completed in 2001. There can be no guarantee that these expenditures will not have a material adverse effect on our financial condition or results of operations. At December 31, 2000, we accrued $700,000 for the remedial action feasibility study, which is expected to be completed during 2001. In October 1998, we received a Notice of Violation of Waste Discharge Requirements from the California Regional Water Quality Control Board, Santa Ana Region, relating to stormwater discharges at our Fontana facility. Based on the facts and circumstances of this case, we believe that the outcome of this matter will not materially affect our financial position, results of operations or liquidity. Item 4. Submission of Matters to a Vote of Security Holders None. 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Not applicable. Item 6. Selected Financial Data The selected consolidated financial information presented below as of and for the fiscal years ended December 31, 2000, 1999, 1998, 1997, and 1996 has been derived from our audited consolidated financial statements. Except for the fiscal years ended December 31, 1996 and 1997 these consolidated financial statements are contained elsewhere in this Form 10-K. The following selected consolidated financial information is qualified by reference to, and should be read in conjunction with the historical consolidated financial statements, including notes accompanying them and "Management's Discussion and Analysis of Financial Condition and Results of Operations" found elsewhere in this Form 10-K.
Year Ended December 31, ------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (dollars in thousands) Income Statement Data(1): Net sales................... $720,900 $687,050 $673,439 $722,458 $694,444 Cost of sales............... 616,638 564,889 603,613 638,159 591,672 Gross profit................ 104,262 122,161 69,826 84,299 102,772 Selling, general and administrative expenses.... 32,185 29,946 28,626 27,088 26,215 Income from operations...... 72,077 92,215 41,200 57,211 76,557 Interest expense, net....... (18,756) (16,345) (16,954) (13,977) (10,145) Income before income taxes.. 56,138 77,027 26,816 44,316 67,725 Net income.................. 34,845 46,847 19,800 28,792 39,403 EBITDA, as adjusted Data(2): Income before income taxes.. $ 56,138 $ 77,027 $ 26,816 $ 44,316 $ 67,725 Interest expense ........... 18,756 16,345 16,954 13,977 10,145 Excluding (gain) loss of fixed assets............... (28) (13) 308 1,054 2,518 Depreciation and amortization............... 28,852 26,331 26,659 24,374 18,844 -------- -------- -------- -------- -------- EBITDA, as adjusted......... $103,718 $119,690 $ 70,737 $ 83,721 $ 99,232 -------- -------- -------- -------- -------- EBITDA, as adjusted margin.. 14.4% 17.4% 10.5% 11.6% 14.3% Other Data: Operating margin............ 10.0% 13.4% 6.1% 7.9% 11.0% Cash flows provided by operating activities....... 34,594 72,287 63,456 57,211 66,503 Cash flows used in investing activities................. (33,936) (37,321) (49,335) (57,954) (82,300) Cash flows (used in) provided by financing Activities................. (6,015) (39,029) (12,502) 1,067 15,623 Capital expenditures........ $ 33,995 $ 37,397 $ 49,354 $ 58,296 $ 50,421 Total tons billed, excluding scrap (in thousands)....... 1,753 1,803 1,614 1,625 1,563 Number of employees at end of period.................. 973 952 976 945 923 Man hours per ton produced.. 1.18 1.18 1.29 1.3 1.3 Selected Ratios: Ratio of earnings to fixed charges(3)................. 3.8x 5.3x 2.3x 3.6x 6.3x Ratio of EBITDA, as adjusted to interest expense, net .. 5.5x 7.3x 4.2x 6.0x 9.8x
11
As of December 31, --------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- (in thousands) Balance Sheet Data: Cash and cash equivalents............. $ 2,542 $ 7,899 $11,962 $10,343 $10,019 Property, plant and equipment, net.... 268,429 262,696 251,163 228,795 194,615 Total assets.......................... 602,158 552,805 533,606 500,151 491,931 Total long-term debt including current portion and notes payable to banks... 239,000 230,000 243,700 241,900 213,500 Total stockholders' equity(1)......... 236,909 217,079 190,272 184,774 183,315
-------- (1) During the fourth quarter of 1999, we changed our inventory costing method from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. We believe that the accounting change is preferable primarily because under the then-existing economic environment of low inflation, the change to FIFO would result in a better measurement of operating results. All previously reported results have been restated to reflect the retroactive application of this accounting change as required by accounting principles generally accepted in the United States of America. The accounting change decreased net income for 1996 by $1,263,000, decreased net income for 1997 by $1,979,000, decreased net income for 1998 by $9,295,000 and decreased net income for 1999 by $6,276,000, net of applicable income taxes, due principally to the effect of LIFO allowance liquidations. (2) EBITDA, as adjusted represents income before income taxes, gain/loss on sale of fixed assets, plus net interest expense, depreciation and amortization. EBITDA, as adjusted is not intended to represent cash flows from operations, cash flows from investing or cash flows from financing activities as defined by accounting principles generally accepted in the United States of America and should not be considered as an alternative to cash flow or a measure of liquidity or as an alternative to net earnings as indicative of operating performance. EBITDA, as adjusted is included because we believe that investors find it a useful tool for measuring our ability to service our debt. EBITDA, as adjusted is not necessarily comparable to similarly titled measures reported by other companies. (3) For the purpose of determining the ratio of earnings to fixed charges, earnings represent income before income taxes plus fixed charges and amortization of capitalized interest, minus capitalized interest. Fixed charges consist of interest expensed and capitalized, an estimate of the interest within rental expense. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction From our site in Fontana, California, we produce flat rolled steel products: hot rolled, cold rolled, galvanized as well as ERW pipe, with a current annual finished shipment capability of approximately 1.8 million tons. We service a broad range of customers with applications that include pipe and tubing, heating, ventilating and air conditioning, strapping, drums, steel wheels, culverts and a variety of construction related products. In 1993, we began a modernization program of approximately $250.0 million to be spent over a six year period. In 1999, we completed these capital expenditures originally contemplated under our modernization program. In 2000, we spent approximately $34.0 million on our new capital projects. We believe these investments have strengthened our competitive position by reducing operating costs, broadening our product line, improving product quality and significantly increasing throughput capacity. Our tons billed in 2000 were 1,753,000 compared to 953,000 tons billed in 1992. Hot rolled tons billed increased 221,000 tons and accounted for 27.6% of the volume gains during this period. Cold rolled tons billed increased 143,000 tons, or 17.9%, galvanized tons billed increased 371,000, or 46.4% and ERW pipe tons billed increased 65,000 tons or 8.1%. We ship our products by truck and rail to manufacturers, contractors and distributors primarily in the 11 states west of the Rocky Mountains. We generally sell our products free on board (FOB), shipping point, and title is passed when products are loaded for shipment. We recognize revenue from product sales when products 12 are shipped or delivered to the customer, depending on the terms of the sale. For products shipped FOB, shipping point, revenue is recognized at the time of shipment. For products shipped FOB destination, revenue is recognized at the time of delivery. Our revenue is dependent on the volume, product mix and sales prices of our products. General economic conditions as well as the supply and demand of steel products within our market influence sales prices. We generally set our sales prices quarterly and we maintain no long-term sales agreements. Cost of goods sold consists primarily of raw materials, labor, natural gas, electricity, depreciation and zinc costs. Raw material costs have historically comprised approximately 70% of our cost of goods sold. Our slab unit cost in 2000 was higher compared to 1999 but still lower than in years prior to 1999. Our slab unit cost was significantly lower in 1999 compared to previous years. We generally purchase steel slab in boatload quantities. Imported slab arrives on chartered vessels in the Port of Los Angeles and is transported by rail to our Fontana facility. We generally purchase steel slab on open negotiated payment terms. Steel slab consumption costs include the FOB value of steel slab, quality extras, ocean transportation, rail freight, duties, unloading, insurance and handling costs. Historically, we negotiate slab FOB prices quarterly and other rates through contracts of varying lengths. In 1999, however, approximately 90% of our slab procurement needs were met with slab purchased under one year purchase contracts. We changed from our traditional method of slab purchasing when an opportunity was recognized to assure slab suppliers with guaranteed volume in exchange for attractive pricing. Opportunities to continue annual contract purchases diminished in the second half of 1999 and we returned to our practice of negotiating slab prices on a quarterly basis for year 2000. Our purchasing power and extensive knowledge of the worldwide slab market continues to provide us with the opportunity to negotiate with slab suppliers on terms that we believe are favorable to us. We will continue to actively manage slab procurement to minimize costs and may opportunistically purchase slab in the future. We use zinc in the production of our galvanized products. We currently purchase zinc from several suppliers. Zinc is purchased on a monthly basis and is priced using a formula tied to the London Metals Exchange zinc index. In the past, we have managed our purchase price of zinc by entering into contracts to lock in favorable prices and may continue to do so in the future. We purchase natural gas and electricity from local vendors active in the California market. The unit price we pay for natural gas is based on a formula tied to published indices and the unit price we pay for electricity is based on market prices. In 1998, the State of California partially deregulated the electricity market. During 2000, the availability of electricity was significantly impaired as a consequence of high spot prices for electricity, increasing debt burdens of electric utility companies, and lack of available electricity to meet demand. However, unit prices for electricity passed through to end-users have not been materially affected because the laws enacting deregulation fixed the price utility companies could charge consumers. As an "interruptible" purchaser of electricity, the crisis in California forced us to interrupt production 14 times during 2000. We were also subject to electricity surcharges of approximately $600,000 for consuming more electricity during the interruption periods than our contract allowed. Subsequent to December 31, 2000 the state of California's Public Utilities Commission effectively cancelled the interruptible rate program. Additionally, the state of California has taken significant steps to ensure reliable electricity availability in the future. As a consequence of the electricity crisis we expect our unit price of electricity to increase at least $0.01 per kilowatt in 2001. Based on our average electricity consumption of approximately 26.2 million kilowatts per month in 2000, we may expect to incur an increased cost for electricity of approximately $3.1 million in 2001. We currently do not have backup generators or alternate sources of power in the event of a blackout, and our current insurance does not provide coverage for any damages we or our customers may suffer as a result of any interruption in our power supply. Any such interruption in our ability to continue operations at our facilities could harm our ability to retain existing customers and to obtain new customers, and could result in lost revenue, any of which could substantially harm our business and results of operations. 13 We have experienced increasing natural gas costs for most of 2000. At December 31, 2000, natural gas prices were approximately triple those of a year earlier. Our average cost of natural gas in 1999 was approximately $3.00 per Million British Thermal Unit or MMBTU. Our natural gas costs escalated throughout 2000, peaking in December at approximately $11.60 per MMBTU. Additionally, we believe the transportation cost of natural gas from wellhead to the state of California have been influenced by the state's electricity crisis, further increasing the overall cost of natural gas. As opportunities arise we will seek to mitigate the volatility of commodity natural gas prices at reasonable costs. During 2000, rising natural gas prices negatively affected our profitability. Subsequent to December 31, 2000, natural gas prices continued to rise, further threatening our profitability. In March 2001 we elected to enter into a natural gas swap transaction with a third party whereby we would pay a fixed rate per MMBTU of natural gas and the third party would pay us an index based rate per MMBTU of natural gas. The contract period is effective March 2001 and continues through August 2002 and represents a substantial portion of our natural gas volume requirements. Selling, general and administrative expenses consist primarily of sales and labor, various administrative expenses, and shipping costs. Labor costs comprise approximately 45% of selling, general and administrative expenses. Results of Operations
Tons Billed ----------------------------- Year Ended December 31, ----------------------------- 2000 1999 1998 --------- --------- --------- Hot Rolled..................................... 712,717 853,539 841,275 Cold Rolled.................................... 282,418 287,371 242,908 Galvanized..................................... 623,782 534,861 394,100 ERW pipe....................................... 134,177 127,599 135,753 --------- --------- --------- Total (excluding scrap)...................... 1,753,094 1,803,370 1,614,036 ========= ========= =========
During the fourth quarter of 1999, we changed our inventory costing method from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. We believe that the accounting change is preferable primarily because under the then-existing economic environment of low inflation, the change to FIFO would result in a better measurement of operating results. All previously reported results have been restated to reflect the retroactive application of this accounting change as required by accounting principles generally accepted in the United States of America. The accounting change decreased net income for 1998 by $9,295,000 and decreased net income for 1999 by $6,276,000, net of applicable income taxes, due principally to the effect of LIFO allowance liquidations. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Net sales. For the year ended December 31, 2000 net sales were $720,900,000. This was a $33,850,000, or 4.9% increase from the $687,050,000 net sales generated for the year ended December 31, 1999. The year over year increase is attributable to an increase in sales unit price and a better product mix partially offset by lower volume. In 2000, we sold 1,753,094 net tons compared to 1,803,370 net tons of steel in 1999, excluding steel scrap, a decrease of 50,276 net tons. This 2.8% decrease in tonnage sold resulted in a decrease of approximately $18,974,000 in net sales. In 2000, we sold more cold rolled and galvanized steel as a percentage of total products than in 1999. This improved product mix contributed an additional $19,138,000 to net sales. Unit prices, after adjusting for product mix, increased year over year impacting net sales by approximately $35,967,000. 14 Gross profit. Gross profit decreased $17,899,000, or 14.7%, from $122,161,000 for the year ended December 31, 1999 to $104,262,000 for the year ended December 31, 2000. Gross profit as a percentage of net sales decreased from 17.8% in 1999 to 14.5% in 2000. Our gross profit decreased as a result of (1) steel slab cost increases, (2) increases in utility (natural gas) costs, and (3) lower sales volumes. Selling, general and administrative (SG&A) expenses. Selling, general and administrative expenses increased $2,239,000, or 7.5%, from $29,946,000 for the year ended December 31, 1999 to $32,185,000 for the year ended December 31, 2000. SG&A expenses as a percentage of net sales remained comparable at 4.5% and 4.4% for the years ended December 31, 2000 and 1999, respectively. Management performance compensation was the largest single contributing factor to this increase. Equity in income of affiliate. We maintain a 1.5% ownership interest in Companhia Siderurgica de Tubarao, which is based on our ownership of 4.0% of its common stock. Our investment in Companhia Siderurgica de Tubarao is accounted for under the equity method of accounting. For the year ended December 31, 2000, we recognized income of $909,000 from our investment in Companhia Siderurgica de Tubarao, which consists of our pro-rata share of Companhia Siderurgica de Tubarao's income, and $1,320,000 of amortized negative goodwill. Companhia Siderurgica de Tubarao is a publicly traded Brazilian company engaged in the production of steel slab. Approximately 90% of Companhia Siderurgica de Tubarao's products are exported outside of Brazil and sold predominantly in U.S. dollars. This high percentage of U.S. dollar denominated cash flow tends to lessen the impact of market risks related to fluctuations in currency exchange rates. For the year ended December 31, 1999, we recognized income of $75,000, including amortization of negative goodwill, from our investment in Companhia Siderurgica de Tubarao. Net Interest expense. Net interest expense increased $2,411,000, or 14.8%, from $16,345,000 for the year ended December 31, 1999 to $18,756,000 for the year ended December 31, 2000. The increase in interest expense in 2000 is attributable to higher average loan balances and higher interest rates in 2000 compared to 1999. Interest expense figures are net of interest income and capitalized interest of $1,046,000 in 1999 and $621,000 in 2000. Income taxes. Income taxes decreased $8,887,000 from $30,180,000 for the year ended December 31, 1999 to $21,293,000 for the year ended December 31, 2000. The effective tax rate for 1999 was 39.2% compared to an effective tax rate of 37.9% in 2000. Income tax expense is net of state manufacturing investment credit of $1,050,000 in 1999 and $1,886,000 in 2000. Net income. Net income for the year ended December 31, 2000 was $34,845,000. This was $12,002,000, or 25.6%, lower than the net income of $46,847,000 for the year ended December 31, 1999. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Net sales. For the year ended December 31, 1999 net sales were $687,050,000. This was a $13,611,000, or 2.0%, increase from the $673,439,000 net sales generated for the year ended December 31, 1998. The year over year increase is attributable to an increase in sales volume and a better product mix partially offset by a lower unit price. In 1999 we sold 1,803,370 net tons of steel, excluding steel scrap. This exceeded 1998 tonnage sold of 1,614,036 by 189,334 net tons. The 11.7% increase in tonnage sold contributed approximately $78,414,000 in additional net sales. In 1999 we sold more cold rolled and galvanized steel as a percentage of total products then in 1998. This improved product mix contributed an additional $21,400,000 in additional net sales. Unit prices, after adjusting for product mix, decreased year over year impacting net sales by approximately $87,700,000. Gross profit. Gross profit increased $52,335,000, or 75.0%, from $69,826,000 for the year ended December 31, 1998 to $122,161,000 for the year ended December 31, 1999. Gross profit as a percentage of net sales increased from 10.4% in 1998 to 17.8% in 1999. Our gross profit increased as a result of (1) our slab costs decreasing at a faster rate than our sales prices, (2) higher sales volumes, and (3) a product mix that included more of the higher value added galvanized products. 15 Selling, general and administrative expenses. Selling, general and administrative expenses increased $1,320,000, or 4.6%, from $28,626,000 for the year ended December 31, 1998 to $29,946,000 for the year ended December 31, 1999. Selling, general and administrative expenses as a percentage of net sales remained comparable at 4.4% and 4.3% for the years ended December 31, 1999 and 1998, respectively. We experienced an increase in selling, general and administrative expenses predominately as a result of profit sharing increases. Equity in income (loss) of affiliate. We maintain a 1.5% ownership interest in Companhia Siderurgica de Tubarao, which is based on our ownership of 4.0% of its common stock. Our investment in Companhia Siderurgica de Tubarao is accounted for under the equity method of accounting. For the year ended December 31, 1999, we recognized a $1,125,000 loss from our investment in Companhia Siderurgica de Tubarao, which consists of our pro-rata share of Companhia Siderurgica de Tubarao's loss, offset by $1,200,000 of amortized negative goodwill. Companhia Siderurgica de Tubarao is a publicly-traded Brazilian company engaged in the production of steel slab. Approximately 90% of Companhia Siderurgica de Tubarao's products are exported outside of Brazil and sold predominantly in U.S. dollars. This high percentage of U.S. dollar denominated cash flow tends to lessen the impact of market risks related to fluctuations in currency exchange rates. For the year ended December 31, 1998, we recognized income of $1,932,000, including amortization of negative goodwill, from our investment in Companhia Siderurgica de Tubarao. Net Interest expense. Net interest expense decreased $609,000, or 3.6%, from $16,954,000 for the year ended December 31, 1998 to $16,345,000 for the year ended December 31, 1999. Interest expense figures are net of interest income and capitalized interest of $2,522,000 in 1998 and $1,046,000 in 1999. Income taxes. Income taxes increased $23,164,000 from $7,016,000 for the year ended December 31, 1998 to $30,180,000 for the year ended December 31, 1999. The effective tax rate for 1998 was 26.2% compared to an effective tax rate of 39.2% in 1999. Income tax expense is net of state manufacturing investment credit of $3,869,000 in 1998 and $1,050,000 in 1999. Net income. Net income for the year ended December 31, 1999 was $46,847,000. This was $27,047,000, or 136.6%, higher than the net income of $19,800,000 for the year ended December 31, 1998. Liquidity and Capital Resources On March 10, 1999, we entered into a $130,000,000 five-year bank facility of which $89,000,000 was outstanding as of December 31, 2000. The bank facility is collateralized by cash, accounts receivable, inventory and other assets. Subject to the satisfaction of customary conditions and a borrowing base, advances under the bank facility may be made at any time prior to the bank facility termination date. The termination date is the earlier to occur of March 10, 2004 or the date that is 60 days prior to the maturity of our 8.5% senior notes. Advances may be used for working capital, capital expenditures and other lawful corporate purposes, including the refinancing of existing debt. On April 6, 1999, we issued an aggregate of $150,000,000 of ten-year, 8.5% senior unsecured notes. Interest is payable on the notes on April 1 and October 1 of each year. The notes are senior in right of payment to all of our subordinated indebtedness and equal in right of payment to all of our existing and future indebtedness that is not by its terms subordinated to the notes. We may redeem the notes at any time after April 1, 2004. The indenture governing the notes contains covenants that limit our ability to incur additional indebtedness, pay dividends on, redeem or repurchase capital stock and make investments, create liens, sell assets, sell capital stock of certain of our subsidiaries, engage in transactions with affiliates and consolidate, merge or transfer all or substantially all of our assets and the assets of certain of our subsidiaries on a consolidated basis. In 1999, the proceeds from the notes were used to permanently repay outstanding bank debt under a $10,000,000 term loan provided by The Dai-Ichi Kangyo Bank, Netherlands, and a $50,000,000 revolving credit facility and an $80,000,000 term loan, both provided by a syndicate of institutions led by the Industrial Bank of Japan, Ltd., Los Angeles Agency. 16 At December 31, 2000, we had $2,542,000 in cash and cash equivalents and $21,648,000 available under our bank facility. During the year ended December 31, 2000, cash flows from operations generated $34,594,000, which consisted of $34,845,000 in net income, $28,852,000 in depreciation and amortization expense and a net cash flow decrease of $27,725,000 due to changes in assets and liabilities. The majority of changes in assets and liabilities were due to a $52,009,000 increase in inventories, a $8,868,000 decrease in accounts receivable, a $10,801,000 increase in accounts payable and a $8,805,000 increase in deferred income taxes. Cash flows from investing activities during the year ended December 31, 2000 consisted predominately of $33,995,000 of capital expenditures. Cash flows from financing activities during the year ended December 31, 2000 consisted primarily of additional borrowings under our bank facility in the amount of $9,000,000 and a dividend payment of $15,015,000. We currently have approximately $16,881,000 in material commitments for capital investments expected to be completed during fiscal 2001. At December 31, 2000 there were approximately 52 open capital projects designed to maintain or enhance operational performance. We anticipate that our primary liquidity requirements will be for working capital, capital expenditures, debt service and the payment of dividends. We believe that cash generated from operations and available borrowings under our bank facility will be sufficient to enable us to meet our liquidity requirements for fiscal 2001. Item 7A. Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risks related to fluctuations in interest rates on our senior notes and on our $130 million floating rate bank facility. During fiscal year 2000, we did not use interest rate swaps or other types of derivative financial instruments. For fixed rate debt like the senior notes, changes in interest rates generally affect the fair value of the debt instrument. For variable rate debt like our bank facility, changes in interest rates generally do not affect the fair value of the debt, but do affect earnings and cash flow. We do not have an obligation to repay our senior notes prior to maturity in 2009 and, as a result, interest rate risk and changes in fair value should not have a significant impact on us. We believe that the interest rate on the 8 1/2% senior notes approximates the current rates available for similar types of financing and as a result the carrying amount of the 8 1/2% senior notes approximates fair value. The carrying value of the floating rate bank facility approximates fair value as the interest rate is variable and resets frequently. The bank facility bears interest at the Eurodollar rate, which was 6.56% at December 31, 2000. We estimate that the average amount of debt outstanding under the facility for fiscal year 2001 will be $80.0 million. Therefore, a one percentage point increase in interest rates would result in an increase in interest expense of $800,000 for the year. We do not believe that the future market rate risk related to the senior notes and the floating rate bank facility will have a material impact on our financial position, results of operations or liquidity. Historically, we have been exposed to market risks related to the volatility of natural gas prices. We generally purchase natural gas on an annual contract basis from a physical supplier active in the California market. The price we pay for natural gas is tied to an index typically used in the industry for natural gas purchases. During 2000 rising natural gas prices negatively affected our profitability. Subsequent to December 31, 2000, natural gas prices continued to rise, further threatening our profitability. In March 2001 we elected to enter into a natural gas swap transaction with a third party whereby we would pay a fixed rate per MMBTU of natural gas and the third party would pay us an index based rate per MMBTU of natural gas. The contract period is effective March 2001 and continues through August 2002 and represents a substantial portion of our natural gas volume requirements. 17 Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and hedging activities. SFAS 133, as amended by SFAS 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Application of this accounting standard has not had a material impact on our financial position, results of operations or liquidity. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial Statements." This Staff Accounting Bulletin ("SAB"), as amended by SAB 101A and SAB 101B, summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements and is effective for registrants with fiscal years that begin after March 15, 2000. We do not expect the adoption of SAB 101, as amended, to have a material impact on our consolidated results of operations. Item 8. Consolidated Financial Statements and Supplementary Data The Consolidated Financial Statements required in response to this Item are included under Item 14(a) of Part IV of this Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 18 PART III Item 10. Directors and Executive Officers of the Registrant The following table sets forth our Directors and executive officers as of December 31, 2000. All Directors hold their positions until their terms expire and until their respective successors are elected and qualified. Executive officers are elected by and serve at the discretion of the Board of Directors until their terms expire and their successors are duly chosen and qualified.
Name Age Position ---- --- -------- Tatsuhiko Hamamoto............. 60 Chairman of the Board of Directors Francisco Povoa................ 51 Director Toshihiro Kabasawa............. 46 Director Armando de Oliveira Santos 50 Director Neto.......................... C. Lourenco Goncalves.......... 42 President and Chief Executive Officer Junsuke Takasaki............... 51 Executive Vice President, Operations Vicente Wright................. 48 Executive Vice President, Finance James Wilson................... 52 Vice President, Sales Brett Guge..................... 46 Vice President, Administration and Corporate Secretary
Tatsuhiko Hamamoto has served as Chairman of the Board of Directors since July 1998. From 1995 to 1998, Mr. Hamamoto was Corporate Auditor on the Board of Kawasaki Steel Corporation. From 1993 to 1995, Mr. Hamamoto was Executive Vice President of KLI, a leasing company. From 1990 to 1992, Mr. Hamamoto served as Vice President, Technology and Finance at Armco Steel. From 1987 to 1989, Mr. Hamamoto was General Manager of the Overseas Steel Business Department at Kawasaki Steel Corporation and our Executive Vice President. He graduated from Kobe University with a Bachelor of Arts Degree in Economics. Francisco Povoa has served as a Director since March 1998. He has worked at Companhia Vale do Rio Doce since February 1972 and has held positions as Superintendent of Technology, Mining Superintendent and General Manager of the South System, Industrial Engineering General Manager. From 1991 to 1993, Mr. Povoa served as the Executive Director of Rio Doce International in Brussels. Since 1997, he has served as both the Chairman of the board of directors and the President of Companhia Vale do Rio Doce's Employees Investment Club, a shareholder of Companhia Vale do Rio Doce. He served as President of SIBRA- Eletrosiderurgica Brasileira S.A. and Companhia Paulista de Ferro-Ligas, a Brazilian manganese producer, from 1997 to 1998. He has served as a member of the board of directors of Companhia Vale do Rio Doce since 1997, Societe Europeenne D'Alliages Pour La Siderurgie (SEAS), a French ferro-alloy producer since 1998, Nova Era Silicon, a Brazilian ferro-silicon company, since 1998, and Companhia Vale do Rio Doce's pension fund since 1993. Mr. Povoa graduated from Universidade Federal de Minas Gerais with a Mining Engineering Degree. Toshihiro Kabasawa has served as a Director since July 2000. He has been employed by Kawasaki Steel Corporation since 1977 where he has held positions as Human Development Manager, Organization & Systems Manager, Steel Business Planning Manager, and Manager of Overseas Business in Corporate Planning Department. He graduated from Tokyo University with a Bachelor's Degree in Law. Armando de Oliveira Santos Neto has been a member of the Board since July 2000. He has been employed by Companhia Vale do Rio Doce (CVRD) since 1970. He currently is the President of Rio Doce America Inc. (USA), a subsidiary of CVRD. Previously he has held the positions of Commercial Director of the CVRD Group, Executive Director--Iron Ore Division of CVRD and General Sales Manager. He graduated from the Engineering School of the Federal University of Espirito Santo in Civil Engineering. C. Lourenco Goncalves has served as President and Chief Executive Officer since March 1998. From 1981 to 1998, he was employed by Companhia Siderurgica Nacional, the largest steel company in Brazil, where he held positions as a Managing Director, General Superintendent of Volta Redonda Works, Hot Rolling General 19 Manager, Cold Rolling and Coated Products General Manager, Hot Strip Mill Superintendent, Continuous Casting Superintendent and Quality Control Manager. Mr. Goncalves graduated from the Federal University of Minas Gerais State with a Master's Degree in Metallurgy. Junsuke Takasaki has served as Executive Vice President, Operations since June 1998. Prior to joining us, he was employed by Kawasaki Steel Corporation from 1973 to 1998 where he held positions as Cold Rolling Department General Manager and Quality Department Manager at Chiba Works and Kawasaki Steel Corporation's New York and Detroit offices. Mr. Takasaki graduated from Kyushu University with a Master's Degree in Metallurgy. Vicente Wright has served as Executive Vice President, Finance since February 1998. Mr. Wright was the Steel Division General Manager, from 1992 to 1998, and Iron Ore Sales General Manager from 1991 to 1992 of Companhia Vale do Rio Doce. From 1987 to 1988, he served as Iron Ore Sales General Manager for Rio Doce Asia Ltd., a subsidiary of Companhia Vale do Rio Doce. In 1986 and 1987, he was the assistant to the President of California Steel Industries in charge of slab procurement and all of its related logistics. From 1978 to 1986, Mr. Wright served as Purchasing Executive and Slab Marketing Manager at Companhia Siderurgica de Tubarao. Mr. Wright was a member of the Board of Directors of Companhia Siderurgica Nacional, the largest steel company in Brazil, from 1993 to 1997, Acominas, a Brazilian steel mill, from 1994 to 1998, Siderar, an Argentine steel mill, from 1994 to 1997, Chairman of Nova Era Silicon, a Brazilian ferro-silicon company mill, from 1994 to 1997 and SEAS from 1994 to 1998. He graduated from Marquette University, Milwaukee, Wisconsin with a Bachelor's Degree in Business Administration. James Wilson has served as Vice President, Sales since November 2000. He has been employed by California Steel Industries since 1984 holding the positions of Manager, Galvanized Products and Manager, Cold Rolled Products. Prior to joining California Steel Industries, he worked in various segments of the metals industry, including J.T. Ryerson & Sons, a service center, and in manufacturing. He graduated from the University of California, Berkeley, with a Bachelor of Science degree in Industrial Engineering. Brett Guge has served as Vice President, Administration and Corporate Secretary since May 1997. From 1994 to 1997, he served as the Manager of Administration of Gallatin Steel. From 1983 to 1994, he was employed by Alcoa where he held positions as the Superintendent of Industrial Relations and Employment, Supervisor of Employee Relations and Superintendent of Industrial Relations and Training. Mr. Guge graduated from the University of Tennessee with a Bachelor's Degree in Communications, and from Xavier University with a Master's Degree in Business Administration. Board Committees Our Board of Directors has a Compensation Committee and an Operations and Finance Committee. The Compensation Committee is comprised of four members: Director Tatsuhiko Hamamoto, Director Francisco Povoa, Mr. Yasutaka Kumeda of Kawasaki Steel Corporation and Ms. Carla Grasso of Companhia Vale do Rio Doce. The Compensation Committee met twice during 2000. The Compensation Committee reviews compensation packages for our officers and prepares the executive compensation proposal to the Board. The Operations and Finance Committee is comprised of four members including Directors Armando de Oliveira Santos Neto and Toshihiro Kabasawa, Ms. Gloria Serra of Companhia Vale do Rio Doce and Mr. Yunosuke Maki of Kawasaki Steel Corporation. This committee met twice during 2000. The Operations and Finance Committee mainly reviews our investment plans, business plan, annual operating plan and budget. The Operations and Finance Committee is also responsible for reviewing our operating results and performance. 20 Director Compensation For their service as our Directors for fiscal year 2000, all Directors, except the Chairman, received $3,000 per month and committee members received $1,000 per month, each payable on a monthly basis. Mr. Hamamoto, Chairman of the Board of Directors, is paid a salary of $324,000 as our employee. In addition to his salary, he received $286,000 in bonus and $10,500 in matching contributions to his account in our 401(k) Plan. Item 11. Executive Compensation The following summary compensation table sets forth information regarding compensation earned in the fiscal years ended December 31, 2000 and 1999 by our Chief Executive Officer and each of our other four most highly compensated executive officers whose salary and bonus exceeded $100,000 in the 2000 fiscal year. Summary Compensation Table
Long-Term Annual Compensation Compensation ----------------------------------- ------------ Name and Principal Other Annual All Other Position Year Salary Bonus Compensation LTIP Payouts Compensation ------------------ ---- -------- -------- ------------ ------------ ------------ C. Lourenco Goncalves... 2000 $324,000 $286,000 $183,997(1) -- $10,381(2) President and Chief 1999 $310,000 $127,284 $ 49,521(3) -- $ 7,470(2) Executive Officer James E. Declusin(4).... 2000 $270,000 $236,000 -- (5) -- $10,283(2) Senior Executive Vice 1999 $282,000 $109,315 -- (5) -- $ 7,884(2) President, Commercial Vicente Wright.......... 2000 $209,000 $149,000 $135,387(6) -- $ 8,812(2) Executive Vice 1999 $190,000 $ 87,404 $ 62,509(7) -- $ 8,237(2) President, Finance Junsuke Takasaki........ 2000 $209,000 $163,000 -- (5) -- $ 8,812(2) Executive Vice 1999 $190,000 $ 59,771 -- (5) -- $ 8,237(2) President, Operations Brett Guge.............. 2000 $167,000 $127,000 -- (5) -- $ 8,360(2) Vice President 1999 $160,000 $ 85,115 -- (5) -- $ 7,785(2) Administration & Corporate Secretary
-------- (1) Represents $10,734 in car allowance and $173,263 in personal and family medical expenses and home leave reimbursements. Home leave reimbursement is paid to our executives who are foreign nationals in connection with trips by them and their family members to their country of origin. (2) Represents matching contributions made to the executive's account in our 401(k) plan. (3) Represents $9,250 in car allowance and $40,271 in personal and family medical expenses and home leave reimbursements. Home leave reimbursement is paid to our executives who are foreign nationals in connection with trips by them and their family members to their country of origin. (4) Mr. Declusin retired on October 31, 2000. (5) Executive received perquisites that are not disclosed here in accordance with SEC regulations because the value of such perquisites is less than the lesser of $50,000 or 10% of the executive's total salary and bonus. (6) Represents $10,729 in car allowance and $124,658 in medical expenses and home leave reimbursements. Home leave reimbursement is paid to our executives who are foreign nationals in connection with trips by them and their family members to their country of origin. (7) Represents $9,250 in car allowance and $53,259 medical expenses and home leave reimbursements. Home leave reimbursement is paid to our executives who are foreign nationals in connection with trips by them and their family members to their country of origin. 21 Supplemental Executive Retirement Plans and Separation Agreement On August 7, 1998, we entered into a Supplemental Executive Retirement Plan with James E. Declusin, ex-Senior Executive Vice President, Commercial. The plan reduced Mr. Declusin's annual base salary effective July 1, 1998 from $360,000 to $282,000, based on reassignment from his position of Chief Operating Officer, and granted him retirement payments in order to induce him to remain in our employ. In addition, upon Mr. Declusin's retirement on October 31, 2000, Mr. Declusin will be paid a monthly benefit for 180 months calculated as follows: one-twelfth of the product of 2.5% multiplied by the number of years he is employed with us, limited to 16 years, multiplied by his average annual compensation, multiplied by a vested percent and which increases to 100% if Mr. Declusin continuously remains employed by us on October 30, 2000. Mr. Declusin retired on October 31, 2000. Upon his retirement he elected to receive the net present value of his total retirement package and on November 6, 2000, he was paid $2,059,270 as his full retirement package under this agreement. On September 19, 2000, we entered into a Supplemental Executive Retirement Plan with Brett J. Guge, Vice President, Administration and Secretary, intended to induce Mr. Guge to remain in our employ. Upon his retirement, we are obligated to pay Mr. Guge a monthly benefit for 180 months calculated as follows: one-twelfth of the product of 2.5% multiplied by the number of years he is employed with us limited to 18 years, multiplied by his average annual compensation. This benefit vests at the rate of 4% per year, continuing yearly except for the year Mr. Guge turns 65, when the vesting will be 24%. The payment of the vested portion of this benefit will start at the first day of the month following the month in which Mr. Guge reaches age 65. At December 31, 2000, he was vested 4% under this agreement. Shareholders' Agreement We are owned 50% by Kawasaki Steel Holdings (USA), Inc., a Delaware corporation and a subsidiary of Kawasaki Steel Corporation, a Japanese corporation, and 50% by Rio Doce Limited, a New York corporation and a subsidiary of Companhia Vale do Rio Doce, a Brazilian corporation. Our two stockholders entered into a Shareholders' Agreement dated June 27, 1995, replacing a Shareholders' Agreement dated June 1, 1987. According to the Shareholders' Agreement, the stockholders agreed to subscribe for additional shares of our stock in proportion to their respective ownership if any new stock is issued, and increases in our capital stock from time to time shall be allocated between our common stock and preferred stock as agreed upon by the stockholders. Each of the stockholders has the right and obligation to subscribe and pay fully for the new shares in proportion to its respective ownership of our common stock. In addition, either stockholder may let its Affiliated Corporations, as defined the Shareholders' Agreement, subscribe, in whole or in part, to the new shares to be issued to it under the terms described below. The Shareholders' Agreement provides that the Board of Directors shall be constituted of five directors, one of whom shall be chairman, as elected by and among the directors. Each stockholder shall have the right to appoint two Directors and the fifth Director shall be elected by unanimous affirmative vote of the shareholders. In addition, the stockholders shall jointly appoint a president, who shall appoint other officers designated by the Board of Directors. The Shareholders' Agreement also provides for a Consultative Council consisting of two members, one appointed by each of the stockholders. It is unclear whether the Consultative Council provisions are valid under Delaware corporation law. The Consultative Council decides on all relevant matters submitted to it by both or either of the stockholders and specifically resolves any deadlock among the Directors. Because no stockholder holds a majority of our stock and the Directors and members of the Consultative Council are elected by the stockholders in proportion to each of the stockholders' holdings, there is a possibility that a deadlock may occur on any issue voted on by the stockholders, Board of Directors and Consultative Council. If a deadlock were to occur and the Consultative Council could not resolve the issue, the last recourse is arbitration according to the Shareholders' Agreement. Furthermore, according to the Shareholders' Agreement, we have agreed to purchase slab from Companhia Siderurgica de Tubarao and use Seamar Shipping Corporation for ocean transportation of slab at negotiated prices. 22 The Shareholders' Agreement provides that, subject to any limitation on the payment of dividends contained in any agreement we are a party to, the stockholders shall cause us to distribute from our profits as many dividends as possible that may be distributed under the applicable laws and regulations, provided that the profits shall first be applied to the payment of dividends on the preferred stock. We have historically paid dividends of 50% of our net income per year. If either one of the stockholders wishes to transfer or assign their shares of our stock to a third party, other than to one of its affiliated corporations, the stockholder must first offer to sell those shares to the other stockholder upon the same terms and conditions that the third party has offered to purchase the shares. Any stockholder who sells, transfers, assigns, or creates a pledge or other encumbrance on its shares in favor a third party, other than its affiliated corporations, is obligated to obtain an undertaking letter from the third party according to which the third party undertakes unconditionally and irrevocably the obligations of the transferring stockholder under the Shareholders' Agreement in proportion to the number of shares transferred. Either stockholder may sell, transfer or assign to its affiliated corporations all or any part of its shares or preemptive rights to subscribe for new shares of our stock by giving written notice to the other stockholder, provided that the affiliated corporation has agreed to become a party to the Shareholders' Agreement. In this case, both the transferor and the affiliated corporation shall jointly assume all of the obligations of the transferor under the Shareholders' Agreement. 401(k) Plan We maintain the California Steel Industries, Inc. 401(k) Savings Plan, a tax qualified cash or deferred tax arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended. The 401(k) Plan provides the participants with benefits upon retirement, death, disability or termination of employment with us. Employees are eligible to participate in the salary reduction portion of the plan on the first day of the calendar month following their date of hire. Participants may authorize us to contribute to the 401(k) Plan on their behalf a percentage of their compensation, not to exceed legally permissible limits, including an overall dollar limit of $10,500 for 2000. The 401(k) Plan provides for our discretionary matching and profit sharing contributions. We currently match 100% of the first 4% of the participant's deferral under the 401(k) Plan each year and 50% of the next 2% of the participant's deferral under the 401(k) Plan each year. Each plan year we may also elect to make an additional contribution to the 401(k) Plan. This discretionary employer contribution, if we make it, is allocated to each participant's account based on the participant's compensation for the year relative to the compensation of all participants for that year. In order to share in the allocation of the discretionary employer contribution, if any, a participant must complete 1,000 hours of service in the plan year. Profit-Sharing Plan We maintain a profit sharing plan under which bonuses are awarded based on a pool amount, equal to 8% of our income before taxes excluding gain or loss on disposition of fixed assets and the results of Companhia Siderurgica de Tubarao. The basis for determining the profit sharing pool is subject to review and approval of our Board of Directors. The employee's share in the pool amount is based on his or her length of service with us during the profit sharing period. Employees who voluntarily terminate their employment for reasons others than retirement before the end of the profit sharing period and employees whose employment is involuntarily terminated are not eligible to receive any profit sharing award. Compensation Committee Interlocks and Inside Participation Francisco Povoa, Yatsutaka Kumeda, Carla Grasso and Tatsuhiko Hamamoto served as members of our Compensation Committee in 2000. Except for Mr. Hamamoto, none of the members of the Compensation Committee was, during 2000, an officer, employee or formerly an officer or employee of ours or our subsidiary. 23 Mr. Kumeda served as Staff Manager, Corporate Planning Department of Kawasaki Steel Corporation during 2000. Kawasaki Steel Corporation's subsidiary, Kawasaki Steel Holdings (USA), Inc. is one of our stockholders. During 2000, we paid $36,394,000 pursuant to related party transactions with Kawasaki Steel Corporation. In 2000, Mr. Povoa served as a board member of CVRD, as well as the President of the CVRD Employees Investment Club, a shareholder of Companhia Vale do Rio Doce. In 2000, Ms. Grasso served as Director of Human Resources and Corporate Administration of Companhia Vale do Rio Doce, the parent of one of our stockholders, Rio Doce Limited. Board Compensation Committee Report on Executive Compensation Executive compensation at California Steel Industries, including plan design and scope, covers five corporate executive officer positions and the Chairman of the Board. Executive compensation is the responsibility of the Board of Directors. Periodically the Board, through its Compensation Committee, authorizes benchmarking surveys of executive compensation for similarly sized manufacturing companies, including private companies and those publicly traded. The surveys are conducted by recognized consulting firms, analyzing executive compensation within the steel industry and other manufacturing sectors. California Steel Industries' executive compensation program currently includes as its major elements a base annual salary, and a management incentive program based on (i) annual performance of California Steel Industries, and (ii) individual performance measured against annual objectives. Submitted by the Compensation Committee of the Board of Directors: Francisco Povoa Yatsutaka Kumeda Carla Grasso Tatsuhiko Hamamoto Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of December 31, 2000, information regarding the shares of our common stock and Class C preferred stock beneficially owned by each stockholder that beneficially owns in excess of 5% of the outstanding shares of our common stock and Class C preferred stock. No director or named executive officer beneficially owns any shares of our common stock or Class C preferred stock.
Class C Common Preferred ------------ ------------ % of % of Name of Beneficial Owner Number Class Number Class ------------------------ ------ ----- ------ ----- Rio Doce Limited..................................... 500 50% 1,500 50% 546 5th Avenue, 12th Floor New York, New York 10036 Kawasaki Steel Holdings (USA), Inc................... 500 50% 1,500 50% c/o Corporation Trust Center 1209 Orange Street Wilmington, Delaware 19801
Rio Doce Limited is a subsidiary of Companhia Vale do Rio Doce, a Brazilian corporation, and Kawasaki Steel Holdings (USA), Inc. is a subsidiary of Kawasaki Steel Corporation, a Japanese corporation. Item 13. Certain Relationships and Related Transactions Our stockholders, Kawasaki Steel Holdings (USA), Inc., a subsidiary of Kawasaki Steel Corporation, and Rio Doce Limited, a subsidiary of Companhia Vale do Rio Doce, are parties to a Shareholders' Agreement. 24 According to the Shareholders' Agreement, the stockholders control the election of the Board of Directors. The stockholders also indirectly control the appointment of officers through their right to jointly elect the president, who is entitled to appoint our other officers. The Shareholders' Agreement also provides for a Consultative Council, comprised of two members. Each stockholder is entitled to elect one member. The Consultative Council decides on all matters submitted to it by either or both of the stockholders and resolves deadlocks among the Board of Directors. We have transactions in the normal course of business with affiliated companies. For example, we purchase slab from Companhia Siderurgica de Tubarao, a subsidiary of both Companhia Vale do Rio Doce and Kawasaki Steel Corporation. During 2000, we purchased $78,188,000 of slab from Companhia Siderurgica de Tubarao and $36,394,000 of slab from Kawasaki Steel Corporation. We expect to purchase approximately 30% of our estimated 2001 supply of steel slab from Companhia Siderurgica de Tubarao. We also hold a 4% interest in the common stock of Companhia Siderurgica de Tubarao. We conducted arms-length negotiations with Companhia Siderurgica de Tubarao in 2000. The Shareholders' Agreement provides that we shall continuously purchase slabs from Companhia Siderurgica de Tubarao under terms and conditions as agreed upon by Companhia Siderurgica de Tubarao and us. The executive officer negotiating the market price for the steel slab was our Executive Vice President--Finance. We charter vessels from Seamar Shipping Corporation (Seamar), a subsidiary of Companhia Vale do Rio Doce, for the ocean transfer of slab to the Port of Los Angeles. During 2000, we incurred $7,691,000 in charter fees from Seamar for its services. The Shareholders' Agreement provides that we shall charter vessels from Seamar. We entered into a 15-year contract with Seamar for shipping services that expired on May 29, 2000, which was extended to December 31, 2000. We expect to continue utilizing Seamar's shipping services in 2001 on a ship by ship basis. The executive officer responsible for negotiating the price for shipping services was our Executive Vice President--Finance. We contract with Rio Doce Pasha Terminal, a joint venture of Companhia Vale do Rio Doce, to unload our ocean cargo from ships at the Port of Los Angeles. During 2000, we incurred $21,580,000 for Rio Doce Pasha Terminal's services. The Shareholders' Agreement provides that we shall contract with Rio Doce Pasha Terminal for their unloading services. We have a five-year contract with Rio Doce for terminal unloading services that expired on December 31, 2000. We are currently negotiating a renewal of this contract with Rio Doce Pasha Terminal and expect to enter into a definitive agreement shortly. We expect to continue utilizing Rio Doce Pasha's unloading services in 2001. We negotiate rates annually on an arms-length basis. The contract specifies that we will process a minimum of 1.0 million tons of steel slab through Rio Doce Pasha Terminal per year. The price per ton may be renegotiated July 1 of each year to reflect a change in union labor contracts. If we ship more than 1.0 million tons per year, we will receive a discount per ton for the unloading of any slabs after 1.0 million tons of slabs have been unloaded. One hundred percent of our unloading services of foreign slabs are provided by Rio Doce Pasha Terminal. The executive officer negotiating the price for unloading services was our Executive Vice President--Finance. 25 PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (a)(1) and (2) Financial Statements: The following consolidated financial statements and schedule of the Registrant are included in response to Item 8 of this Report: 1. Consolidated Financial Statements:
Page ---- Index to Consolidated Financial Statements............................ F-1 Independent Auditors' Report.......................................... F-2 Consolidated Balance Sheets as of December 31, 2000 and 1999.......... F-3 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998.................................................. F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998..................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.................................................. F-6 Notes to Consolidated Financial Statements............................ F-7 2. Consolidated Financial Statement Schedule: Schedule II--Valuation and Qualifying Accounts........................ S-1
All other schedules have been omitted since they are either not required, not applicable or the information is otherwise included. (b) Reports on Form 8-K, filed during the last quarter of 2000: None. (c) Exhibits:
Exhibit No. Description ------- ----------- 3.1 Certificate of Incorporation of the Registrant as amended by Amendment to the Certificate of Incorporation filed June 6, 1984, with Delaware Secretary of State, as amended by the Certificate of Amendment to the Certificate of Incorporation filed August 2, 1984, with the Delaware Secretary of State, as amended by the Certificate of Amendment to the Certificate of Incorporation, filed January 12, 1988, with the Delaware Secretary of State, and, as amended by the Certificate of Ownership merging California Steel Industries Tubular Products, Inc. into the Registrant, filed with the Delaware Secretary of State on December 20, 1993.(1) 3.2 Bylaws of the Registrant.(1) 4.1 Indenture dated as of April 6, 1999 between the Registrant and State Street Bank Trust Company of California, N.A., Trustee, relating to the Registrant's 8% Senior Notes due April 6, 2009.(1) 4.2 Specimen Series B note.(1) 4.3 Shareholders' Agreement, dated June 27, 1995, by and among Rio Doce Limited, Companhia Vale do Rio Doce, Kawasaki Steel Holdings (USA), Inc. and Kawasaki Steel Corporation.(1) 10.1 Revolving Credit Agreement, dated as of March 10, 1999, among the Registrant, the Lending Institutions from time to time party thereto as lenders, BancBoston, N.A., in its capacity as Loan and Collateral Agent, and Bank of America National Trust and Savings Association, in its capacity as Letter of Credit and Documentation Agent and BancBoston Robertson Stephens Inc. and NationsBanc Montgomery Securities LLC, as the Arrangers.(1)
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Exhibit No. Description ------- ----------- 10.2 Agreement for the Purchase of Carbon Steel Slabs, dated as of December 5, 1984, by and between the Registrant and Companhia Siderurgica de Tubarao, as amended by Memorandum of Agreement, dated as of June 7, 1985, Memorandum of Agreement No. MA-02, dated as of December 9, 1986, Memorandum of Agreement No. MA-03, dated as of December 11, 1986, Memorandum of Agreement No. MA-04, dated as of December 11, 1986, Memorandum of Agreement No. MA-05, dated as of May 22, 1987 and Memorandum of Agreement No. MA-06, dated as of December 11, 1996.(1) 10.3 Facsimile transmission, dated October 27, 1998 from the Registrant to Companhia Siderurgica de Tubarao, confirming the parties mutual understanding that the Registrant will acquire 700,000 metric tons of steel slab from Companhia Siderurgica de Tubarao for 1999 delivery.(1) 10.4 E-mails from Broken Hill Proprietary Company Ltd. to the Registrant, dated October 13, 1998 and October 15, 1998, respectively, confirming the Registrant's and Broker Hill Proprietary Company Ltd.'s mutual agreement of October 9, 1998 and October 14, 1998, to purchase and supply 70,000 metric tons and 280,000 metric tons of steel slab during 1999.(1) 10.5 Letter, dated October 6, 1998, from the Registrant to Companhia Siderurgica Nacional, confirming Companhia Siderurgica Nacional's agreement to supply the Registrant with 100,000 metric tons of steel in 1999.(1) 10.6 Contract, dated August 20, 1990, by and between the Registrant and Seamar Shipping Corporation of Monrovia, Liberia.(1) 10.7 The Burlington Northern and Santa Fe Railway Company BNSFC 302606 Regulated Transportation Contract, dated as of November 19, 1998, by and between the Registrant and Burlington Northern Railroad Company.(1) 10.8 Stevedore and Terminal Services Agreement, dated as of January 1, 1996, between Rio Doce Pasha Terminal L.P. and the Registrant, as amended.(1) 10.9 Equipment Lease Agreement, dated as of September 30, 1998, by and between the Registrant and State Street Bank and Trust Company of California, National Association.(1) 10.10 Settlement Agreement, dated as of June 1, 1995, by and among the Registrant, Kaiser Ventures, Inc., KSC Recovery, Inc. and Kaiser Steel Land Development, Inc.(1) 10.11 Groundwater Indemnity Agreement, dated as of June 1, 1995, between the Registrant and Kaiser Ventures, Inc.(1) 10.12 A 1996 Expedited Remedial Action Voluntary Enforceable Agreement, by and among the Registrant and the California Environmental Protection Agency, Department of Toxic Substances Control.(1) 10.13 Purchase Agreement dated March 30, 1999 by and among the Registrant, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, BancBoston Robertson Stephens Inc. and NationsBanc Montgomery Securities LLC.(1) 10.14 Registration Rights Agreement dated as of April 6, 1999 by and among the Registrant, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, BancBoston Robertson Stephens Inc. and NationsBanc Montgomery Securities LLC.(1) 10.15 Addendum No. 39, dated May 31, 2000, to Contract, dated August 20, 1990, by and between the Registrant and Seamar Shipping Corporation of Monrovia, Liberia.(2) 10.16 First Amendment, dated as of April 28, 2000, to Revolving Credit Agreement, dated as of March 10, 1999, among the Registrant, the Banks named therein, Fleet National Bank (f/k/a BankBoston, N.A.), as loan and collateral agent for the Banks, and Bank of America National Trust and Savings Association, as documentation and letter of credit agent for the Banks.(2) 10.17 Amendment to Supplemental Executive Retirement Plan, dated October 10, 2000, between the Registrant and James E. Declusin.(3)
27
Exhibit No. Description ------- ----------- 10.18 Supplemental Executive Retirement Plan, dated as of September 19, 2000, between the Registrant and Brett J. Guge.(3) 10.19 The Burlington Northern and Santa Fe Railway Company BNSFC 302606-- Amendment 1 Regulated Transportation Contract, dated as of January 15, 2001, by and between the Registrant and The Burlington Northern and Santa Fe Railway Company. 12.1 Statement of Computation of Ratio of Earnings to Fixed Charges. 12.2 Statement of Computation of Ratio of EBITDA to Interest Expense. 21.1 Subsidiaries of the Registrant.(1) 23.1 Independent Auditors' Report on Schedule.
-------- (1) Incorporated by reference to the Registrant's Registration Statement on Form S-4, File No. 333-79587, as filed with the Securities and Exchange Commission on May 28, 1999, as amended. (2) Incorporated by reference to the Registrant's Quarterly Report on Form 10- Q, for the period ended June 30, 2000, as filed with the Securities and Exchange Commission on August 4, 2000. (3) Incorporated by reference to the Registrant's Quarterly Report on Form 10- Q, for the period ended September 30, 2000, as filed with the Securities and Exchange Commission on October 27, 2000. 28 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report............................................. F-2 Consolidated Balance Sheets as of December 31, 2000 and 1999............. F-3 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998........................................................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998........................................ F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998..................................................... F-6 Notes to Consolidated Financial Statements............................... F-7
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors California Steel Industries, Inc.: We have audited the accompanying consolidated balance sheets of California Steel Industries, Inc. and subsidiary as of December 31, 2000 and 1999 and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of California Steel Industries, Inc. and subsidiary as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Orange County, California January 19, 2001 F-2 CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999
2000 1999 -------- -------- (Dollars in thousands) ASSETS Current assets: Cash and cash equivalents (note 7).......................... $ 2,542 $ 7,899 Trade accounts receivable, less allowance for doubtful receivables of $600,000 in 2000 and $300,000 in 1999 (note 7)......................................................... 59,998 68,866 Inventories (notes 3 and 7)................................. 218,579 166,570 Deferred income taxes (note 11)............................. 3,242 2,382 Other receivables and prepaid expenses...................... 9,079 4,832 -------- -------- Total current assets....................................... 293,440 250,549 Investment in affiliated company (notes 6 and 9)............. 36,151 34,801 Other assets (note 7)........................................ 4,138 4,759 Property, plant and equipment, net (notes 4, 7 and 13)....... 268,429 262,696 -------- -------- $602,158 $552,805 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable (note 9)................................... $ 65,508 $ 54,707 Accrued interest expense (note 7)........................... 4,325 4,064 Accrued utilities........................................... 7,233 3,303 Other accrued expenses (notes 10 and 12).................... 6,320 10,454 -------- -------- Total current liabilities.................................. 83,386 72,528 -------- -------- Long-term debt (note 7)...................................... 239,000 230,000 Deferred income taxes (note 11).............................. 42,863 33,198 Stockholders' equity (note 8): Class A preferred stock, $10,000 par value per share. Authorized 1,000 shares; none issued....................... -- -- Class B preferred stock, $10,000 par value per share. Authorized 2,000 shares; none issued....................... -- -- Class C preferred stock, $10,000 par value per share. Authorized 3,000 shares; issued and outstanding 3,000 shares..................................................... 30,000 30,000 Common stock, no par value. Authorized 2,000 shares; issued and outstanding 1,000 shares............................... 10,000 10,000 Retained earnings........................................... 196,909 177,079 -------- -------- Total Stockholders' equity................................. 236,909 217,079 -------- -------- Commitments and contingencies (notes 5, 7, 9, 10, 11 and 12)......................................................... $602,158 $552,805 ======== ========
See accompanying notes to consolidated financial statements. F-3 CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 2000, 1999 and 1998
2000 1999 1998 -------- -------- -------- (Dollars in thousands) Net sales....................................... $720,900 $687,050 $673,439 Cost of sales (notes 2, 9 and 13)............... 616,638 564,889 603,613 -------- -------- -------- Gross profit.................................. 104,262 122,161 69,826 Selling, general and administrative expenses (note 12)...................................... 32,185 29,946 28,626 -------- -------- -------- Income from operations........................ 72,077 92,215 41,200 Other income (expense): Equity in income of affiliate (note 6).......... 2,229 75 1,932 Interest expense, net (note 7).................. (18,756) (16,345) (16,954) Other, net...................................... 588 1,082 638 -------- -------- -------- Income before income taxes.................... 56,138 77,027 26,816 Income taxes (note 11).......................... 21,293 30,180 7,016 -------- -------- -------- Net income.................................... $ 34,845 $ 46,847 $ 19,800 ======== ======== ========
See accompanying notes to consolidated financial statements. F-4 CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 2000, 1999 and 1998 (Dollars in thousands, except per share amounts)
Class C Total preferred Common Retained stockholders' stock stock earnings equity --------- ------- -------- ------------- Balance at December 31, 1997......... $30,000 $10,000 $144,774 $184,774 Net income for the year ended December 31, 1998................... -- -- 19,800 19,800 Cash dividends (note 8): Class C Preferred Stock, $3,826 on 3,000 shares...................... -- -- (11,478) (11,478) Common Stock, $2,824 on 1,000 shares............................ -- -- (2,824) (2,824) ------- ------- -------- -------- Balance at December 31, 1998......... 30,000 10,000 150,272 190,272 Net income for the year ended December 31, 1999................... -- -- 46,847 46,847 Cash dividends (note 8): Class C Preferred Stock, $5,260 on 3,000 shares...................... -- -- (15,780) (15,780) Common Stock, $4,260 on 1,000 shares............................ -- -- (4,260) (4,260) ------- ------- -------- -------- Balance at December 31, 1999......... 30,000 10,000 177,079 217,079 Net income for the year ended December 31, 2000................... -- -- 34,845 34,845 Cash dividends (note 8): Class C Preferred Stock, $4,129 on 3,000 shares...................... -- -- (12,386) (12,386) Common Stock, $2,629 on 1,000 shares............................ -- -- (2,629) (2,629) ------- ------- -------- -------- Balance at December 31, 2000......... $30,000 $10,000 $196,909 $236,909 ======= ======= ======== ========
See accompanying notes to consolidated financial statements. F-5 CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2000, 1999 and 1998
2000 1999 1998 -------- --------- -------- (dollars in thousands) Cash flows from operating activities: Net income..................................... $ 34,845 $ 46,847 $ 19,800 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................. 28,852 26,331 26,659 (Gain) loss on disposition of property, plant and equipment................................ (28) (13) 308 Undistributed earnings of affiliate........... (2,229) (75) (1,932) Dividends received from affiliate............. 879 -- 789 Changes in assets and liabilities: Trade accounts receivable, net............... 8,868 (15,236) 4,650 Inventories.................................. (52,009) 5,085 (10,142) Other receivables and prepaid expenses....... (4,247) 330 (2,576) Accounts payable............................. 10,801 4,157 19,166 Accrued interest expense..................... 261 2,566 (683) Other accrued expenses....................... (204) (7,089) 6,996 Deferred income taxes........................ 8,805 9,384 421 -------- --------- -------- Net cash provided by operating activities.. 34,594 72,287 63,456 -------- --------- -------- Cash flows from investing activities: Additions to property, plant and equipment..... (33,995) (37,397) (49,354) Proceeds from sale of property, plant and equipment..................................... 59 76 19 -------- --------- -------- Net cash used in investing activities...... (33,936) (37,321) (49,335) -------- --------- -------- Cash flows from financing activities: Net advances (repayments) under line of credit agreement with banks.......................... -- (103,700) 6,800 Proceeds from issuance of long-term debt....... -- 150,000 10,000 Borrowings on credit facility.................. 9,000 80,000 -- Repayment of long-term debt.................... -- (140,000) (15,000) Deferred financing costs....................... -- (5,289) -- Dividends paid................................. (15,015) (20,040) (14,302) -------- --------- -------- Net cash used in financing activities...... (6,015) (39,029) (12,502) -------- --------- -------- Net increase (decrease) in cash and cash equivalents............................... (5,357) (4,063) 1,619 Cash and cash equivalents at beginning of year.. 7,899 11,962 10,343 -------- --------- -------- Cash and cash equivalents at end of year........ $ 2,542 $ 7,899 $ 11,962 ======== ========= ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amount capitalized).......... $ 18,864 $ 13,974 $ 18,254 Income taxes.................................. 15,211 21,035 7,050 ======== ========= ========
See accompanying notes to consolidated financial statements. F-6 CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 (1) Organization and Nature of Operations California Steel Industries, Inc. (the Company) was incorporated in the state of Delaware on November 3, 1983. Its stockholders consist of two U.S. companies, Kawasaki Steel Holdings (USA), Inc., a Delaware corporation, and Rio Doce Limited, a New York corporation, which each own 50% of the stock of the Company. From its site in Fontana, California, the Company manufactures a wide range of flat rolled steel products, including hot rolled, cold rolled and galvanized coil and sheet. The Company also produces electric resistant weld pipe. (2) Summary of Significant Accounting Policies (a) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. (b) Cash and Cash Equivalents For purposes of the statements of cash flows, all highly liquid debt instruments purchased with an original maturity of three months or less are considered to be cash equivalents. The statement of cash flows is prepared using the indirect method. (c) Inventories During the fourth quarter of 1999, the Company changed its inventory costing method from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. Management believed that the accounting change was preferable primarily because under the then existing economic environment of low inflation, the change to FIFO would result in a better measurement of operating results. All previously reported results have been restated to reflect the retroactive application of this accounting change as required by accounting principles generally accepted in the United States of America. The accounting change decreased net income for 1999 by $6,276,000 and net income for 1998 by $9,295,000, net of applicable income taxes, due principally to the effect of LIFO allowance liquidation. The balances of retained earnings for 1997 and 1998 have been adjusted for the effect (net of applicable income taxes) of applying retroactively the new method of accounting. (d) Investment in Affiliated Company Investment in affiliated company consists of 4% of the common stock of Companhia Siderurgica de Tubarao (CST), a Brazilian steel slab manufacturer. The investment is accounted for by the equity method, since combined investments in CST by the Company and certain other related companies allow for significant influence over the financing and operating activities of CST. The Company's share of earnings or losses from this investment is reflected in other income (expense) in the accompanying consolidated statements of income. Dividends are credited against the investment when received. The excess of the Company's share of the net assets of CST over the cost of the common stock is being amortized straight-line over a five-year period. F-7 CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (e) Property, Plant and Equipment Property, plant and equipment is stated at cost and depreciation is computed on the straight-line method over the estimated useful lives (see note 13) of the respective assets as follows: Plant and equipment.......................................... 3 to 25 years Plant refurbishment costs.................................... 10 years
Assets under construction are not depreciated until placed into service. (f) Deferred Financing Costs Costs related to the issuance of debt are deferred and amortized on a straight-line basis over the terms of the respective debt issues. (g) Impairment of Long-Lived Assets The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (h) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (i) Environmental Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures are capitalized if they meet one of the following criteria: (1) extend the useful life, increase the capacity or improve the safety or efficiency of property, (2) mitigate or prevent environmental contamination that has yet to occur and that otherwise may result from future operations or activities, (3) incurred in preparing property currently held for sale. The Company accrues for costs associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change (see note 10). F-8 CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (j) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. (k) Reclassifications Certain reclassifications have been made to the 1999 and 1998 consolidated financial statements to conform with the 2000 presentation. (l) Fair Value of Financial Instruments The carrying value of cash, trade accounts receivable, other accounts receivable, accounts payable and other accrued expenses are measured at cost which approximates their fair value because of the short maturity of those instruments. The fair values of long-term indebtedness are estimated based on the quoted market prices for the same or similar issues, or the current rates offered to the Company for debt of similar maturities. The carrying amounts and fair values of financial instruments at December 31, 2000 and 1999 are listed as follows:
2000 1999 ---------------- ---------------- Carrying Fair Carrying Fair amount value amount value -------- ------- -------- ------- Senior notes............................... $150,000 124,500 150,000 145,500 Notes payable.............................. 89,000 89,000 80,000 80,000 ======== ======= ======= =======
(m) Revenue Recognition The Company recognizes revenue when products are shipped or delivered to the customer, depending on the terms of the sale. For products shipped FOB shipping point, revenue is recognized at the time of shipment. For products shipped FOB destination, revenue is recognized at the time of delivery. (3) Inventories Inventories at December 31, 2000 and 1999 consist of the following:
2000 1999 -------- ------- (Dollars in thousands) Finished goods.............................................. $ 44,289 39,526 Work in process............................................. 37,310 18,723 Raw materials............................................... 131,939 103,399 Supplies.................................................... 5,041 4,922 -------- ------- Total inventories......................................... $218,579 166,570 ======== =======
F-9 CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (4) Property, Plant and Equipment The following is a summary of property, plant and equipment at December 31, 2000 and 1999:
2000 1999 --------- -------- Land.................................................... $ 17,422 17,422 Plant and equipment..................................... 454,810 416,458 Plant refurbishment costs............................... 22,219 22,219 Construction in progress................................ 11,734 16,830 --------- -------- 506,185 472,929 Less accumulated depreciation........................... (237,756) (210,233) --------- -------- Total property, plant and equipment................... $ 268,429 262,696 ========= ========
Capitalized interest was $300,000, $587,000 and $1,940,000 for 2000, 1999 and 1998, respectively. (5) Leases The Company is obligated under various leases for equipment that expire at various dates during the next eight years. At December 31, 2000, the future minimum lease payments under noncancelable operating leases with commitments of at least one year are as follows (dollars in thousands): Year ending December 31: 2001............................................................ $ 4,213 2002............................................................ 5,489 2003............................................................ 3,495 2004............................................................ 7,038 2005............................................................ 2,798 Thereafter...................................................... 15,450 -------- $ 38,483 ========
Lease expense totaled approximately $6,209,000, $6,346,000 and $2,300,000 for the years ended December 31, 2000, 1999 and 1998, respectively. (6) Investment in Affiliated Company The investment in the net assets of CST accounted for under the equity method amounted to $36,151,000 and $34,801,000 at December 31, 2000 and 1999, respectively. The unamortized portion of the excess of the Company's share of net assets over the cost of the common stock is $780,000 at December 31, 2000 and $2,100,000 at December 31, 1999. The Company and its parents purchased their investment in CST at a premium over the market price of the shares which was paid in order to obtain significant influence over CST. F-10 CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (7) Notes Payable and Long-Term Debt In March 1999, the Company entered into a five-year revolving credit facility (the Facility) with a syndicate of three financial institutions. The Facility provides for an aggregate principal amount of up to $130,000,000, including a $25,000,000 sublimit for letters of credit, subject in all respects to a borrowing base coverage requirement. The Company drew a substantial portion of the advances available under the Facility on the closing date to repay advances under its previously existing credit agreement. Under the Facility, a commitment fee is applied on the average daily undrawn portion of the commitments at a rate equal to the applicable margin. The applicable margin in effect from time to time will range from 0.150% to 0.200%, based upon the leverage ratio, provided that the applicable margin with respect to the commitment fee will increase to 0.500% if borrowings fall below a certain level. The Facility is secured by a first priority security interest in cash, accounts receivable, inventory and other assets. At the Company's election, the amounts advanced under the Facility bear interest at the base rate or the Eurodollar rate, plus the applicable margin. Interest is generally payable monthly and any accrued interest and principal is due and payable in full in March 2004. As of December 31, 2000 and 1999, outstanding borrowings of $88,000,000 and $80,000,000 consisted of advances payable at the Eurodollar rate, which was 6.56% and 5.87%, respectively. Also at December 31, 2000 outstanding borrowings of $1,000,000 consisted of advances payable at the base rate, which was 9.50%. The Company had $21,648,000 of borrowings available under the Facility as of December 31, 2000. The unamortized amount of the related financing costs was approximately $589,000 at December 31, 2000. The Facility requires that the Company maintain certain financial ratios and other financial covenants. The Company was in compliance with all such covenants at December 31, 2000. In April 1999, the Company issued an aggregate principal amount of $150,000,000 unsecured senior notes (the Senior Notes). The Senior Notes are due in April 2009, carry an 8.5% coupon rate and are redeemable by the Company beginning on April 1, 2004. Interest is payable semi-annually on each April 1 and October 1, commencing October 1, 1999. The notes are senior in right of payment to all of the Company's subordinated indebtedness and equal in right of payment to all of the Company's existing and future indebtedness that is not by its terms subordinate to the Senior Notes. The indenture governing the Senior Notes contains covenants that limit the Company's ability to incur additional indebtedness, pay dividends, redeem or repurchase capital stock and make investments, create liens, sell assets, sell capital stock of its subsidiary, engage in transactions with affiliates and consolidate, merge or transfer all or substantially all of the Company's assets and the assets of its subsidiary on a consolidated basis. The Company was in compliance with all such covenants at December 31, 2000. Proceeds from the Senior Notes were used to repay in full the then existing long-term debt. The unamortized portion of the related financing costs was approximately $3,549,000 at December 31, 2000. Long-term debt at December 31, 2000 and 1999 consisted of the following (dollars in thousands):
2000 1999 -------- -------- Senior Notes bearing interest at 8.5%, payable semi- annually, due April 2009................................... $150,000 $150,000 Notes payable to banks consist of advanced under a $130,000,000 revolving credit facility, bearing interest at either the Eurodollar rate or the base rate, plus the applicable margin. Interest is generally payable monthly and any accrued interest and principal are due and payable in full in March 2004...................................... 89,000 80,000 -------- -------- Long-term debt............................................ $239,000 $230,000 ======== ========
F-11 CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (8) Stockholders' Equity The Class C preferred stock is redeemable by the Company at its option, in whole or in part, at par value. Class C preferred stock has priority over the common stock in the distribution of dividends and is entitled to a dividend equivalent to 10% of the par value per annum on a cumulative basis and is thereafter entitled to participate in the distribution of dividends at the same rate and upon the same conditions as the common stock. Each holder of common stock is entitled to one vote for each share held of record on each matter submitted to a vote of the stockholders. Holders of the common stock have no cumulative voting, conversion or redemption rights, but are entitled to preemptive rights to subscribe for additional shares of common stock in any additional issuance of common stock or any security convertible into common stock. Subject to any preferences that may be granted to the holders of preferred stock, each holder of common stock is entitled to receive ratably dividends as may be declared by the Board of Directors, and in the event of liquidation, dissolution or winding up, is entitled to share ratably in all Company assets remaining after payment of liabilities. During the years ended December 31, 2000, 1999 and 1998, $15,015,000, $20,040,000 and $14,302,000, respectively, in dividends were declared and paid. (9) Related Party Transactions The Company has transactions in the normal course of business with affiliated companies. The Company is 50% owned by Kawasaki Steel Holdings (USA), Inc., a subsidiary of Kawasaki Steel Corporation, a Japanese corporation, and 50% owned by Rio Doce Limited, a subsidiary of Companhia Vale do Rio Doce (CVRD), a Brazilian corporation. The Company purchases steel slab from CST, an investee, from Kawasaki Steel Corporation, and from Companhia Siderurgica National (CSN). CSN maintained an ownership interest in CVRD through December 31, 2000. The Company charters vessels from Seamar Shipping Corporation, a subsidiary of CVRD, for the ocean transfer of slab from Brazil to the Port of Los Angeles. The Company also contracts with Rio Doce Pasha Terminal, a joint venture of CVRD, to unload ocean cargo from ships in the Port of Los Angeles. The following represents amounts paid to the various affiliated companies for the years ended December 31:
2000 1999 1998 ------- ------- ------- (Dollars in thousands) CST.................................................. $78,188 105,248 112,695 Kawasaki Steel Corporation........................... 36,394 51,089 60,258 Rio Doce Pasha Terminal.............................. 21,580 16,076 16,732 CSN.................................................. -- 14,499 -- Seamar Shipping Corporation.......................... 7,691 8,003 11,825
At December 31, 2000 and 1999, the Company owed affiliated companies $23,584,000 and $19,264,000, respectively, for goods and services. (10) Commitments and Contingencies At December 31, 2000, the Company is committed, in the form of open purchase orders, to purchase approximately $34,762,000 in steel slabs, of which $9,736,000 is from related parties. The Company has been contacted by various governmental agencies regarding specific environmental matters, at its operating facility. During September 1990, the Company reached a preliminary agreement with F-12 CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the California Regional Department of Health Services, which allows the Company to draft its own remediation agreement and move forward with its own plan of action at its operating facility. In November 1992, the Company entered into a Voluntary and Enforceable Agreement (the Agreement) with the California Department of Toxic Substances Control which sets forth certain terms and conditions related to the remediation of hazardous substances at the Company's operating facility. The Agreement also preserves the Company's right as to future assignment and apportionment of costs to other parties. The Company is addressing environmental concerns caused by the former occupant at the Company's Fontana site and is currently in the remedial investigation stage. The Company is unable to reasonably estimate the range of liability until completion of a remedial feasibility study. The site investigation is expected to be completed in 2001. At December 31, 2000, the Company has accrued $700,000, which represents management's best estimate of the costs to complete the remedial feasibility study. Although the level of future expenditures for environmental remediation matters cannot be reasonably estimated, based on the facts presently known to management, it does not believe that the costs will have a material effect on the Company's financial position, results of operations, or liquidity. The Company is involved in legal actions and claims arising in the ordinary course of business. It is the opinion of management, based on advice of legal counsel, that this litigation will be resolved without material effect on the Company's financial position, results of operations, or liquidity. (11) Income Taxes Income tax expense (benefit) for the years ended December 31, 2000, 1999 and 1998 consists of the following:
2000 1999 1998 ------- ------ ------ (Dollars in thousands) Current: Federal............................................ $11,206 20,504 3,546 State.............................................. 1,282 291 3,000 ------- ------ ------ 12,488 20,795 6,546 ------- ------ ------ Deferred: Federal............................................ 9,133 4,718 6,005 State.............................................. (328) 4,667 (5,535) ------- ------ ------ 8,805 9,385 470 ------- ------ ------ $21,293 30,180 7,016 ======= ====== ======
Actual tax expense differs from the "expected" tax expense (computed by applying the U.S. federal corporate tax rate of 35% to income before income taxes) as follows:
2000 1999 1998 ------- ------ ------ (Dollars in thousands) Computed "expected" tax expense................... $19,648 26,959 9,385 State income taxes, net of federal benefit........ 2,416 3,935 537 State manufacturing investment credit, net of federal benefit.................................. (1,795) (712) (2,515) Other............................................. 1,024 (2) (391) ------- ------ ------ $21,293 30,180 7,016 ======= ====== ======
F-13 CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 are as follows:
2000 1999 -------- ------- (Dollars in thousands) Deferred tax assets: Inventory............................................... $ 2,649 2,583 State taxes............................................. 832 894 Reserves................................................ 263 217 Accrued expenses........................................ 2,096 1,835 Other................................................... 25 11 -------- ------- Total gross deferred tax assets....................... 5,865 5,540 Less valuation allowance................................ -- -- Net deferred tax assets............................... 5,865 5,540 -------- ------- Deferred tax liabilities: Property, plant and equipment........................... (40,731) (31,929) Change in inventory valuation........................... (1,536) (3,072) Undistributed earnings of affiliate..................... (1,865) (1,273) Other................................................... (1,354) (82) -------- ------- Total gross deferred tax liabilities.................. (45,486) (36,356) -------- ------- Net deferred tax liability............................ $(39,621) (30,816) ======== =======
Based on the Company's historical pretax earnings, adjusted for significant items such as nonrecurring charges, management believes it is more likely than not that the Company will realize the benefit of the deferred tax assets existing at December 31, 2000. Management believes the existing deductible temporary differences will reverse during periods in which the Company generates net taxable income. Nevertheless, certain tax planning or other strategies will be implemented, if necessary, to supplement income from operations to fully realize the recorded tax benefits. The Company's U.S. federal income tax returns for the years ended 1994, 1995, 1996 and 1997 are currently under examination by the Internal Revenue Service. Management of the Company believes that the ultimate outcome of this matter will not have a material adverse effect on the Company's consolidated financial statements. (12) Employee Benefit and Retirement Plans (a) 401(k) Plan The Company sponsors a 401(k) plan covering substantially all employees of the Company who are full-time employees. Participants may make contributions to the plan on a pretax basis from 1% to 16% of their annual salary. Company contributions, when made, will match 100% of employee contributions up to 4% of employees' salaries and 50% of employee contributions for the next 2% of employees' salaries. Participants are immediately 100% vested in both their contributions and Company contributions plus actual earnings thereon. Company contributions are accrued as participant contributions are withheld, and are paid in full to the Trustee of the plan on a pay period basis. F-14 CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Plan expense for the years ended December 31, 2000, 1999 and 1998 was approximately $2,300,000, $2,189,000 and $2,084,000, respectively. (b) Profit Sharing The Company has a profit sharing plan under which bonuses are awarded based on a pool amount, equal to 8% of the Company's income before taxes and gain or loss on disposition of fixed assets. The basis for determining the profit sharing pool is subject to review and approval of the Company's Board of Directors. The employee's share in the pool amount is based on his or her length of service with the Company during the profit sharing period. Employees who voluntarily terminate their employment for reasons other than retirement before the end of the profit sharing period and employees whose employment is involuntarily terminated are not eligible to receive any profit sharing award. Profit sharing expense for the years ended December 31, 2000, 1999 and 1998 was $6,108,000, $6,394,000 and $2,248,000, respectively. (13) Changes in Accounting Estimates In fiscal 1998, the Company made changes in the estimated useful lives of the hot strip mill reheat furnace, five stand cold reduction mill, continuous pickling line, and the second galvanizing line from 10 to 15 years. This change increased 1998 net income by $1,500,000. Also, effective in fiscal 1998, the Company changed the estimated useful life of its rolls from 1 year to 3 years for work rolls and 10 years for backup rolls. This change increased 1998 net income by $2,000,000. These changes were made to better reflect how these assets are expected to be used over time, to provide a better matching of revenues and expenses, and to be consistent with industry practice. (14) Selected Quarterly Financial Data (Unaudited) Summarized quarterly financial data for 2000 and 1999 is as follows (dollars in thousands):
Quarter ---------------------------------------- 1st 2nd 3rd 4th Total -------- ------- ------- ------- ------- 2000 Net sales............................. $187,709 196,483 186,796 149,912 720,900 Income from operations................ 29,909 30,262 9,162 2,744 72,077 Net income............................ 15,438 15,716 3,416 275 34,845 1999 Net sales............................. $160,994 170,264 183,566 172,226 687,050 Income from operations................ 12,092 23,232 30,055 26,836 92,215 Net income*........................... 5,096 11,956 16,168 13,627 46,847
-------- * In the fourth quarter of 1999, the Company changed its inventory costing method from the LIFO method to the FIFO method. All previously reported results have been restated to reflect the retroactive application of this accounting change (see note 2). F-15 CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Beginning Ending Balance Additions Deductions Balance --------- --------- ---------- ------- Year ended December 31, 2000 A/R Allowance.......................... 300,000 300,000 -- 600,000 Year ended December 31, 1999 A/R Allowance.......................... 720,000 296,747 (716,747) 300,000 Year ended December 31, 1998 A/R Allowance.......................... 720,000 618,157 (618,157) 720,000
S-1 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. CALIFORNIA STEEL INDUSTRIES, INC. /s/ C. Lourenco Goncalves By: _________________________________ C. Lourenco Goncalves, Chief Executive Officer and President March 28, 2001 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.
Signature Title Date --------- ----- ---- /s/ C. Lourenco Goncalves Chief Executive Officer and March 28, 2001 ________________________________________ President (Principal C. Lourenco Goncalves Executive Officer) /s/ Vicente B. Wright Executive Vice President-- March 28, 2001 ________________________________________ Finance (Principal Vicente B. Wright Financial and Accounting Officer) /s/ Tatsuhiko Hamamoto Director March 23, 2001 ________________________________________ Tatsuhiko Hamamoto /s/ Armando de Oliveira Santos Neto Director March 28, 2001 ________________________________________ Armando de Oliveira Santos Neto /s/ Francisco Povoa Director March 26, 2001 ________________________________________ Francisco Povoa /s/ Toshihiro Kabasawa Director March 22, 2001 ________________________________________ Toshihiro Kabasawa
II-1 EXHIBIT INDEX
Exhibit No. Description ------- ----------- 3.1 Certificate of Incorporation of the Registrant as amended by Amendment to the Certificate of Incorporation filed June 6, 1984, with Delaware Secretary of State, as amended by the Certificate of Amendment to the Certificate of Incorporation filed August 2, 1984, with the Delaware Secretary of State, as amended by the Certificate of Amendment to the Certificate of Incorporation, filed January 12, 1988, with the Delaware Secretary of State, and, as amended by the Certificate of Ownership merging California Steel Industries Tubular Products, Inc. into the Registrant, filed with the Delaware Secretary of State on December 20, 1993.(1) 3.2 Bylaws of the Registrant.(1) 4.1 Indenture dated as of April 6, 1999 between the Registrant and State Street Bank Trust Company of California, N.A., Trustee, relating to the Registrant's 8% Senior Notes due April 6, 2009.(1) 4.2 Specimen Series B note.(1) 4.3 Shareholders' Agreement, dated June 27, 1995, by and among Rio Doce Limited, Companhia Vale do Rio Doce, Kawasaki Steel Holdings (USA), Inc. and Kawasaki Steel Corporation.(1) 10.1 Revolving Credit Agreement, dated as of March 10, 1999, among the Registrant, the Lending Institutions from time to time party thereto as lenders, BancBoston, N.A., in its capacity as Loan and Collateral Agent, and Bank of America National Trust and Savings Association, in its capacity as Letter of Credit and Documentation Agent and BancBoston Robertson Stephens Inc. and NationsBanc Montgomery Securities LLC, as the Arrangers.(1) 10.2 Agreement for the Purchase of Carbon Steel Slabs, dated as of December 5, 1984, by and between the Registrant and Companhia Siderurgica de Tubarao, as amended by Memorandum of Agreement, dated as of June 7, 1985, Memorandum of Agreement No. MA-02, dated as of December 9, 1986, Memorandum of Agreement No. MA-03, dated as of December 11, 1986, Memorandum of Agreement No. MA-04, dated as of December 11, 1986, Memorandum of Agreement No. MA-05, dated as of May 22, 1987 and Memorandum of Agreement No. MA-06, dated as of December 11, 1996.(1) 10.3 Facsimile transmission, dated October 27, 1998 from the Registrant to Companhia Siderurgica de Tubarao, confirming the parties mutual understanding that the Registrant will acquire 700,000 metric tons of steel slab from Companhia Siderurgica de Tubarao for 1999 delivery.(1) 10.4 E-mails from Broken Hill Proprietary Company Ltd. to the Registrant, dated October 13, 1998 and October 15, 1998, respectively, confirming the Registrant's and Broker Hill Proprietary Company Ltd.'s mutual agreement of October 9, 1998 and October 14, 1998, to purchase and supply 70,000 metric tons and 280,000 metric tons of steel slab during 1999.(1) 10.5 Letter, dated October 6, 1998, from the Registrant to Companhia Siderurgica Nacional, confirming Companhia Siderurgica Nacional's agreement to supply the Registrant with 100,000 metric tons of steel in 1999.(1) 10.6 Contract, dated August 20, 1990, by and between the Registrant and Seamar Shipping Corporation of Monrovia, Liberia.(1) 10.7 The Burlington Northern and Santa Fe Railway Company BNSFC 302606 Regulated Transportation Contract, dated as of November 19, 1998, by and between the Registrant and Burlington Northern Railroad Company.(1) 10.8 Stevedore and Terminal Services Agreement, dated as of January 1, 1996, between Rio Doce Pasha Terminal L.P. and the Registrant, as amended.(1)
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Exhibit No. Description ------- ----------- 10.9 Equipment Lease Agreement, dated as of September 30, 1998, by and between the Registrant and State Street Bank and Trust Company of California, National Association.(1) 10.10 Settlement Agreement, dated as of June 1, 1995, by and among the Registrant, Kaiser Ventures, Inc., KSC Recovery, Inc. and Kaiser Steel Land Development, Inc.(1) 10.11 Groundwater Indemnity Agreement, dated as of June 1, 1995, between the Registrant and Kaiser Ventures, Inc.(1) 10.12 A 1996 Expedited Remedial Action Voluntary Enforceable Agreement, by and among the Registrant and the California Environmental Protection Agency, Department of Toxic Substances Control.(1) 10.13 Purchase Agreement dated March 30, 1999 by and among the Registrant, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, BancBoston Robertson Stephens Inc. and NationsBanc Montgomery Securities LLC.(1) 10.14 Registration Rights Agreement dated as of April 6, 1999 by and among the Registrant, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, BancBoston Robertson Stephens Inc. and NationsBanc Montgomery Securities LLC.(1) 10.15 Addendum No. 39, dated May 31, 2000, to Contract, dated August 20, 1990, by and between the Registrant and Seamar Shipping Corporation of Monrovia, Liberia.(2) 10.16 First Amendment, dated as of April 28, 2000, to Revolving Credit Agreement, dated as of March 10, 1999, among the Registrant, the Banks named therein, Fleet National Bank (f/k/a BankBoston, N.A.), as loan and collateral agent for the Banks, and Bank of America National Trust and Savings Association, as documentation and letter of credit agent for the Banks.(2) 10.17 Amendment to Supplemental Executive Retirement Plan, dated October 10, 2000, between the Registrant and James E. Declusin.(3) 10.18 Supplemental Executive Retirement Plan, dated as of September 19, 2000, between the Registrant and Brett J. Guge.(3) 10.19 The Burlington Northern and Santa Fe Railway Company BNSFC 302606-- Amendment 1 Regulated Transportation Contract, dated as of January 15, 2001, by and between the Registrant and The Burlington Northern and Santa Fe Railway Company. 12.1 Statement of Computation of Ratio of Earnings to Fixed Charges. 12.2 Statement of Computation of Ratio of EBITDA to Interest Expense. 21.1 Subsidiaries of the Registrant.(1) 23.1 Independent Auditors' Report on Schedule.
-------- (1) Incorporated by reference to the Registrant's Registration Statement on Form S-4, File No. 333-79587, as filed with the Securities and Exchange Commission on May 28, 1999, as amended. (2) Incorporated by reference to the Registrant's Quarterly Report on Form 10- Q, for the period ended June 30, 2000, as filed with the Securities and Exchange Commission on August 4, 2000. (3) Incorporated by reference to the Registrant's Quarterly Report on Form 10- Q, for the period ended September 30, 2000, as filed with the Securities and Exchange Commission on October 27, 2000. II-3