Explanatory
Note:
Schnitzer
Steel Industries, Inc. (the “Company”) filed a Current Report on Form 8-K on
June 23, 2006 (the “Original 8-K”) to furnish information under Item 4.02(a)
with respect to, among other things, the decision to restate the unaudited
condensed consolidated statements of operations for the three months
ended
November 30, 2005 included in the Company’s Quarterly Report on Form 10-Q (the
“First Quarter 10-Q”) for the fiscal 2006 first quarter ended November 30, 2005
(the “First Quarter 2006”) and the unaudited condensed consolidated statements
of operations for the six months ended February 28, 2006 included in
the
Company’s Quarterly Report on Form 10-Q (the “Second Quarter 10-Q”) for the
fiscal 2006 second quarter ended February 28, 2006 (the “Second Quarter
2006”).
The
purpose of this Amendment on Form 8-K/A is to supplement the disclosure
in the
Original 8-K with the following: (i) the Audit Committee of the Company’s Board
of Directors has concluded that the following previously reported consolidated
financial statements should no longer be relied on because of the need
to
restate certain items set forth therein: the consolidated statements
of cash
flows for the fiscal years ended August 31, 2003, August 31, 2004 and
August 31,
2005 included in the Company’s Annual Report on Form 10-K (the “2005 10-K”) for
the fiscal year ended August 31, 2005 (the “Fiscal Year 2005”), the unaudited
condensed consolidated statements of cash flows for the three months
ended
November 30, 2004 and November
30, 2005 included in the Company’s First Quarter 10-Q for the First Quarter
2006, the unaudited condensed consolidated statements of cash flows for
the six
months ended February 28, 2005 and February 28, 2006 included in the
Company’s
Second Quarter 10-Q for the Second Quarter 2006 and the unaudited condensed
consolidated statements of cash flows for the nine months ended May 31,
2005;
(ii) the Company has identified two errors relating to the Company’s previously
reported statements of cash flows and will restate its consolidated financial
statements for the aforementioned periods. The Company is in the process
of
quantifying the effect of these errors and will file its restated financial
statements as soon as practicable; (iii) management of the Company has
determined that at the end of the Fiscal Year 2005, First Quarter 2006,
Second
Quarter 2006 and the fiscal 2006 third quarter ended May 31, 2006 (the
“Third
Quarter 2006”) a material weakness existed in the Company’s internal control
over financial reporting related to the cash flow presentation of cash
received
from interests in joint ventures and that an additional material weakness
existed at the end of the First Quarter 2006, Second Quarter 2006 and
Third
Quarter 2006 related to the application and review of the completeness
and
accuracy of purchase accounting. The Company is continuing its assessment
as to
whether other deficiencies exist in its internal control over financial
reporting; (iv) management of the Company has determined that as of the
end of
the Fiscal Year 2005 the Company’s internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange
Act of
1934, as amended, (the “Exchange Act”)) was not effective; and (v) the Company’s
Chief Executive Officer and Chief Financial Officer have concluded that,
as of
the end of the Fiscal Year 2005, First Quarter 2006, Second Quarter 2006
and
Third Quarter 2006, the Company’s disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were not effective.
| ITEM
4.02 |
NON-RELIANCE
ON PREVIOUSLY ISSUED FINANCIAL STATEMENTS OR A RELATED AUDIT
REPORT OR
COMPLETED INTERIM REVIEW.
|
(a)
On
July
14, 2006, after being advised by Company management that management had
identified errors in classification in the Company’s previously reported
statements of cash flows with respect to (i) cash flows received from
interests
in certain joint ventures and (ii) treatment of cash acquired as part
of the net
assets in a purchase business combination, the Audit Committee of the
Company’s
Board of Directors concluded that the consolidated financial statements
for the
fiscal years ended August 31, 2003, August 31, 2004 and August 31, 2005,
included in the Company’s Annual Report on Form 10-K for the year ended August
31, 2005, and the unaudited condensed consolidated financial statements
for the
three months ended November 30, 2004 and November 30, 2005, the six months
ended
February 28, 2005 and February 28, 2006 and the nine months ended May
31, 2005,
included in the Company’s Quarterly Reports on Form 10-Q for the quarters ended
May 31, 2005, November 30, 2005 and February 28, 2006, should no longer
be
relied on because of the need to restate certain items set forth
therein.
The
Company’s consolidated statements of cash flows for the fiscal years ended
August 31, 2003, August 31, 2004 and August 31, 2005, and the unaudited
condensed consolidated statements of cash flows for the three months
ended
November 30, 2004 and November 30, 2005, the six months ended February
28, 2005
and February 28, 2006 and the nine months ended May 31, 2005 will be
restated.
The Company will restate its unaudited condensed consolidated statement
of cash
flows for the nine months ended May 31, 2005 in its Quarterly Report
on Form
10-Q for the quarter ended May 31, 2006. The Company had previously considered
certain cash flows received from its joint ventures as returns of its
investment
and had therefore classified these cash flows as investing activities.
However,
the Company has now determined that certain of the cash flows from its
joint
ventures should have been considered a return on its investment and classified
as an operating activity as distributions of (undistributed) equity in
income of
joint ventures.
The
Company’s unaudited condensed consolidated statements of cash flows for the
three months ended November 30, 2005 and the six months ended February
28, 2006
also will be restated because cash acquired as a part of the net assets
in a
purchase business combination was incorrectly classified as net cash
provided by
operations. The Company has now determined that these cash flows should
be
classified in net cash (used) provided by investing activities. Neither
the
accounting error that affected the condensed consolidated statements
of
operations,
which
was previously reported in the Original 8-K, nor
the
accounting errors in the Company’s consolidated statements of cash flows and
unaudited condensed consolidated statements of cash flows, which are
reported in
this Amendment on Form 8-K/A, had any impact on the Company’s net income or net
income per share in the previously reported consolidated statements of
operations for the fiscal years ended August 31, 2003, August 31, 2004
and
August 31, 2005 or in the previously reported unaudited condensed consolidated
statements of operations for the three months ended November 30, 2004
and
November 30, 2005, the three and six months ended February 28, 2005 and
February
28, 2006, and the three and nine months ended May 31, 2005, nor was there
any
effect on the previously reported consolidated balance sheets as of August
31,
2004 and August 31, 2005, the previously reported unaudited condensed
consolidated balance sheets as of May 31, 2005, November 30, 2005 and
as of
February 28, 2006, or the previously reported consolidated statements
of
shareholders’ equity for the years ended August 31, 2003, August 31, 2004 and
August 31, 2005 or the previously reported unaudited
condensed
consolidated statements of shareholders’ equity for the nine months ended May
31, 2005, three months ended November 30, 2005, and six months ended
February
28, 2006.
A
material weakness is a control deficiency or combination of control deficiencies
that results in more than a remote likelihood that a material misstatement
of
the annual or interim financial statements will not be prevented or detected.
The
Company did not maintain effective controls over its reporting of cash
flows
related to its interests in joint ventures. Specifically, the Company
did not
maintain effective controls to ensure that certain cash flows received
from its
joint ventures as returns on investment were appropriately classified
as net
cash provided by operations as opposed to net cash provided by investing
activities. This control deficiency resulted in the restatement of the
Company’s
consolidated financial statements for the fiscal years ended August 31,
2003,
August 31, 2004, and August 31, 2005, and the unaudited condensed consolidated
financial statements for the three months ended November 30, 2004 and
November
30, 2005, the six months ended February 28, 2005 and February 28, 2006,
and the
nine months ended May 31, 2005 described herein. Additionally, this control
deficiency could result in a misstatement of net cash provided by operations
and
net cash provided by investing activities that would result in a misstatement
to
the annual or interim consolidated financial statements that would not
be
prevented or detected. Accordingly, management has concluded that this
control
deficiency constitutes a material weakness.
Furthermore,
the Company did not maintain effective controls over its application
and review
of the completeness and accuracy of purchase accounting. Specifically,
the
Company did not maintain effective controls to ensure that purchased
business
combinations were accurately recorded as of the acquisition date, in
accordance
with generally accepted accounting principles. The control deficiency
resulted
in the restatement of revenue, cost of goods sold, selling, general &
administrative expense, interest expense, other income, net, income tax
provision, and pre-acquisition interests, net of tax, in the condensed
consolidated statements of operations. In addition to this error, which
was
identified in the original 8-K related to application and review of purchase
accounting, management identified that cash acquired as part of the net
assets
in a purchase business combination was incorrectly classified as net
cash
provided by operations and should have been classified as investing activities
in accordance with generally accepted accounting principles. These errors
will
result in the restatement of the audited condensed consolidated financial
statements for the three months ended November 30, 2005 and six months
ended
February 28, 2006 described herein. Additionally, this control deficiency
could
result in a misstatement of the aforementioned accounts and disclosures
in the
statement of operations and cash flows that would result in a material
misstatement of the annual or interim consolidated financial statements
that
would not be prevented or detected. Accordingly, management has concluded
that
this control deficiency constitutes a material weakness.
Due
to
the material weakness in internal control over financial reporting that
existed
as of the end of the Fiscal Year 2005, management of the Company has
determined
that as of the end of the Fiscal Year 2005 the Company’s internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under
the
Exchange Act) was not effective. In the Company’s 2005 Form 10-K that was filed
on November 14, 2005, Management’s Report on Internal Control Over Financial
Reporting (“Management’s 2005 Report”), previously concluded that the Company
maintained effective internal control over financial reporting
as
of
August 31, 2005. In connection with this restatement, the Company’s management
has re-evaluated the effectiveness of its internal control over financial
reporting as of August 31, 2005 and determined that the Company did not
maintain
effective internal control over financial reporting as of August 31,
2005 due to
the material weaknesses described above and that Management’s 2005 Report should
no longer be relied upon. Due to the material weaknesses in internal
control
over financial reporting that existed as of the end of the Fiscal Year
2005,
First Quarter 2006, Second Quarter 2006 and Third Quarter 2006 and due
to
the
Company’s determination that it did not timely file with the SEC financial
statements of the businesses it acquired through the termination and
separation
of its joint ventures with HNC on September 30, 2005, as required under
Rule
3-05 and Article 11 of Regulation S-X,
the
Company’s Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of the Fiscal Year 2005, First Quarter 2006, Second
Quarter
2006 and Third Quarter 2006 the Company’s disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were not
effective.
The
Company’s management, including the Company’s Chief Financial Officer and its
Corporate Controller, who serves as the principal accounting officer,
and its
Audit Committee, have discussed the matters described above in this Item
4.02(a)
with PricewaterhouseCoopers LLP, the Company’s independent registered public
accounting firm. The Company intends to file an amended 2005 10-K, an
amended
fiscal 2006 First Quarter 10-Q, an amended fiscal 2006 Second Quarter
10-Q and
the Company’s Quarterly Report on Form 10-Q for Third Quarter 2006, which
filings will include restatements of the aforementioned statements of
cash
flows, prior to the Company’s Annual Report on Form 10-K for the fiscal year
ended August 31, 2006. The Company is continuing its assessment as to
whether
other deficiencies exist in its internal control over financial
reporting.
Forward-looking
statements
Certain
statements in this Amendment on Form 8-K/A are “forward-looking statements”
within the meaning of U.S. federal securities laws. The Company intends
that
these statements be covered by the safe harbors created under these laws.
These
forward-looking statements are subject to risks, uncertainties, and other
factors that could cause actual results to differ materially from future
results
expressed or implied by the forward-looking statements. These forward-looking
statements include, but are not limited to, statements about the Company’s plans
to restate certain previously reported results and to file an amended
annual
report on Form 10-K and amended quarterly reports on form 10-Q, as well
as the
expected timing thereof. Certain factors could cause actual results to
differ
materially from the information set forth in these forward-looking statements,
some of which are discussed in the Company’s most recent annual report on Form
10-K and its most recent quarterly report on Form 10-Q. Many of these
factors
and events are beyond the Company’s ability to control or predict. Given these
uncertainties, readers are cautioned not to place undue reliance on the
forward-looking statements, which only speak as of the date of this Amendment
on
Form 8-K/A. The Company does not undertake any obligation to release
publicly
any revisions to these forward-looking statements to reflect events or
circumstances after the date of this Amendment on Form 8-K/A or to reflect
the
occurrence of unanticipated events, except as may be required under applicable
securities laws.