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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 1998
REGISTRATION NO. 333-48245
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
RENCO STEEL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
OHIO 3312 34-1854775
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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1040 PINE AVENUE, S.E.
WARREN, OHIO 44483
(330) 399-6884
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------------
ROGER L. FAY
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
RENCO STEEL HOLDINGS, INC.
C/O THE RENCO GROUP, INC.
30 ROCKEFELLER PLAZA, SUITE 4225
NEW YORK, NEW YORK 10112
(212) 541-6000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
MICHAEL C. RYAN, ESQ.
CADWALADER, WICKERSHAM & TAFT
100 MAIDEN LANE
NEW YORK, NEW YORK 10038
(212) 504-6177
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION, DATED MAY 18, 1998
RENCO STEEL HOLDINGS, INC.
OFFER TO EXCHANGE ITS 10 7/8% SENIOR SECURED NOTES DUE 2005, SERIES B,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, FOR ANY AND ALL OF ITS OUTSTANDING
10 7/8% SENIOR SECURED NOTES DUE 2005, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED.
Renco Steel Holdings, Inc., an Ohio corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal" and together with this Prospectus, the "Exchange Offer"), to
exchange its 10 7/8% Senior Secured Notes due 2005, Series B (the "Exchange
Notes"), which have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a Registration Statement (as defined) of
which this Prospectus is a part, for an equal principal amount of its
outstanding 10 7/8% Senior Secured Notes due 2005, Series A (the "Old Notes"),
of which $120.0 million principal amount is outstanding. The Exchange Notes and
the Old Notes are collectively referred to herein as the "Notes." The Company
does not have, and upon consummation of the Exchange Offer will not have, any
indebtedness junior in right of payment to the Notes.
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on
, 1998, unless the Exchange Offer is extended (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date. The Exchange Notes will be issued and
delivered promptly after the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. See "The Exchange Offer." Old Notes may be tendered only in integral
multiples of $1,000. The Company has agreed to pay the expenses of the Exchange
Offer.
The Exchange Notes will be obligations of the Company evidencing the same
debt as the Old Notes and will be entitled to the benefits of the same
indenture, dated as of February 3, 1998 (the "Indenture"), between the Company
and State Street Bank and Trust Company, as trustee (the "Trustee"). The form
and terms of the Exchange Notes are substantially the same as the form and terms
of the Old Notes except that the Exchange Notes have been registered under the
Securities Act. See "The Exchange Offer."
The Exchange Notes will bear interest from February 3, 1998. Holders of Old
Notes whose Old Notes are accepted for exchange will be deemed to have waived
the right to receive any payment in respect of interest on the Old Notes accrued
up until the date of the issuance of the Exchange Notes. Such waiver will not
result in the loss of interest income to such holders, since the Exchange Notes
will bear interest from the issue date of the Old Notes.
Interest on the Exchange Notes will be payable semi-annually on February 1
and August 1 of each year, commencing on August 1, 1998. The Exchange Notes will
mature on February 1, 2005. Except as set forth below, the Exchange Notes will
not be redeemable prior to February 1, 2002. Thereafter, the Exchange Notes will
be redeemable at the option of the Company, in whole or in part, at the
redemption prices set forth herein, together with accrued and unpaid interest,
if any, to the date of redemption. In addition, at any time on or prior to
February 1, 2001, the Company may, subject to certain requirements, redeem up to
33 1/3% of the original aggregate principal amount of the Exchange Notes with
the net cash proceeds of one or more Equity Offerings (as defined), at 111% of
the principal amount thereof, together with accrued and unpaid interest, if any,
to the date of redemption; PROVIDED that at least $80 million of Notes remain
outstanding immediately after any such redemption. Upon the occurrence of a
Change of Control (as defined), each holder of the Exchange Notes may require
the Company to repurchase such holder's Exchange Notes at 101% of the principal
amount thereof plus accrued interest to the date of repurchase. The Company is
obligated in certain instances to make offers to repurchase Exchange Notes with
the net cash proceeds of certain sales and other dispositions of assets. See
"Description of the Notes."
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making or other trading activities, must acknowledge that
it will deliver a Prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that, by so acknowledging and by
delivering a Prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Old Notes where such Old Notes were acquired by such broker-dealer as a
result of market-making or other trading activities. The Company has agreed that
for a period of 180 days after consummation of the Exchange Offer, it will make
this Prospectus, as it may be amended or supplemented from time to time,
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
There has been no public market for the Old Notes. If a market for the
Exchange Notes should develop, the Exchange Notes could trade at a discount from
their principal amount. The Company does not intend to list the Exchange Notes
on a national securities exchange or quotation system. There can be no assurance
that an active public market for the Exchange Notes will develop.
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE EXCHANGE
NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") under the Securities Act with respect to the Exchange Notes offered
hereby. This Prospectus, which forms a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement, certain
parts of which have been omitted in accordance with the rules and regulations of
the Commission. For further information with respect to the Company, and the
Exchange Notes offered hereby, reference is made to the Registration Statement.
Statements contained in this Prospectus as to the contents of certain documents
filed as exhibits to the Registration Statement are not necessarily complete
and, in each case, are qualified by reference to the copy of the document so
filed. The Registration Statement can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material may
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Such material also
can be reviewed through the Commission's Electronic Data Gathering, Analysis,
and Retrieval System, which is publicly available through the Commission's web
site (http://www.sec.gov).
The Company intends to furnish to each holder of the Exchange Notes annual
reports containing audited financial statements and quarterly reports containing
unaudited financial information for the first three quarters of each fiscal
year. The Company also will furnish to each holder of the Exchange Notes such
other reports as may be required by applicable law.
The principal executive offices of the Company are located at 1040 Pine
Avenue, S.E., Warren, Ohio 44483, telephone number: (330) 841-8312.
FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and "Business" and elsewhere constitute
"forward-looking statements." Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions;
increasing industry capacity and levels of imports of steel or steel products;
industry trends, including product pricing; competition; currency fluctuations;
the loss of any significant customers; availability of qualified personnel;
major equipment failures; changes in, or the failure or inability to comply
with, government regulation, including, without limitation, environmental
regulations; the outcome of pending environmental and other legal proceedings;
and other factors referenced in this Prospectus. See "Risk Factors." These
forward-looking statements speak only as of the date of this Prospectus. The
Company expressly disclaims any obligation or undertaking to disseminate any
updates or revisions to any forward-looking statement contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
2
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PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS ARE URGED TO READ THIS
PROSPECTUS IN ITS ENTIRETY BEFORE INVESTING IN THE EXCHANGE NOTES. THE COMPANY'S
AND WCI'S (AS DEFINED) FISCAL YEAR ENDS OCTOBER 31, AND THUS, FOR EXAMPLE,
"FISCAL 1997" REFERS TO THE FISCAL YEAR ENDED OCTOBER 31, 1997.
THE COMPANY
GENERAL
The Company is a holding company formed by The Renco Group, Inc. ("Renco")
under the laws of Ohio in January 1998, which owns all the outstanding shares of
capital stock (the "WCI Pledged Stock") of WCI Steel, Inc. ("WCI"). On February
3, 1998, the Company sold and issued the Old Notes (the "Old Notes Offering").
The Company used the net proceeds of the Old Notes Offering to pay a dividend to
Renco, provide cash to the Company and pay related fees and expenses. Currently,
the assets of the Company consist of (i) the WCI Pledged Stock and (ii) as of
May 15, 1998, cash and investments of approximately $17.5 million, net of
accrued and unpaid transaction fees and expenses related to the Old Notes
Offering.
The Company intends to meet its debt service obligations from its cash and
investment balances and earnings thereon and through distributions from WCI,
including payments pursuant to a tax sharing agreement and dividends as
permitted under WCI's outstanding indebtedness. In addition, Renco may make
contributions or advances to the Company to meet its debt service obligations.
Renco, however, has no obligation to do so.
WCI
WCI is a niche oriented integrated producer of value-added custom steel,
producing approximately 170 grades of custom and commodity steel products. WCI
produces a wide range of custom flat rolled products, including high carbon,
alloy, high strength, silicon electrical, terne coated and galvanized steel.
These custom grades typically sell at higher prices than commodity products,
resulting in higher operating margins. Since fiscal 1991, the price of WCI's
custom products has averaged $543 per ton, while commodity products have
averaged $387 per ton. Since fiscal 1991, custom products have increased from
47.2% of total shipments to 67.6% in fiscal 1997 and comprised 62.2% of total
shipments for the three months ended January 31, 1998.
WCI shipped approximately 1,329,000 tons and 348,000 tons of steel products
in fiscal 1997 and the three months ended January 31, 1998, respectively. Such
shipments resulted in net sales of $668.5 million and $166.6 million and EBITDA
of $91.7 million and $20.8 million in fiscal 1997 and the three months ended
January 31, 1998, respectively, for the Company.
WCI believes that it operates at a distinct competitive advantage to other
integrated steel manufacturers due to its niche oriented custom product mix, its
experience and technical expertise in producing these products and its
experienced management team. WCI also maintains a low overhead structure and the
Company believes that WCI has one of the lowest selling, general and
administrative expense structures in the industry. The Company believes that the
combination of these factors has permitted WCI to generate one of the highest
operating margins per net ton in the domestic steel industry.
WCI's business strategy consists of three principal elements: (a) continue
to increase sales of custom products, thereby further improving operating
margins; (b) continue to build and maintain strong relationships with strategic
customers, targeting customers for which it can supply at least 25% of such
customers'
3
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custom steel needs; and (c) continue to improve operating efficiency and product
quality through strategic cost reduction initiatives, as well as a significant
capital investment program.
INDUSTRY DEVELOPMENTS
In late 1997, the flat rolled steel industry experienced a decline in spot
selling prices due to, among other things, increasing domestic capacity and a
high level of imports. As a result of the foregoing conditions, sales prices
have been lower in 1998 to date as compared to 1997, resulting in reduced
profitability and cash flows for the industry, including WCI. If the downward
pricing trends were to continue and result in a prolonged period of reduced
prices, WCI may not be able to pay dividends to the Company in amounts that
would permit the Company to meet fully its debt service requirements under the
Exchange Notes. See "Risk Factors--Relating to the Industry--Cyclicality."
CONTROL OF THE COMPANY
All of the Company's issued and outstanding common stock is owned by Renco,
which is 97.9% owned by Mr. Ira Leon Rennert, the Chairman of the Company and
Chairman and Chief Executive Officer of Renco, and by trusts established by him
for himself and members of his family (but of which he is not a trustee). As a
result of such ownership, Mr. Rennert controls the Company and its subsidiaries.
Mr. Rennert is the sole Director of the Company.
CORPORATE STRUCTURE
The following sets forth certain aspects of the corporate structure of
Renco, the Company and WCI.
[LOGO]
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THE EXCHANGE OFFER
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THE EXCHANGE OFFER..................... $1,000 principal amount of Exchange Notes will be
issued in exchange for each $1,000 principal amount
of Old Notes validly tendered pursuant to the
Exchange Offer. As of the date hereof, $120.0
million in aggregate principal amount of Old Notes
are outstanding. The Company will issue the
Exchange Notes to tendering holders of Old Notes
promptly after the Expiration Date.
RESALES................................ Based on an interpretation by the staff of the
Commission set forth in Morgan Stanley & Co.
Incorporated, SEC No-Action Letter (available June
5, 1991) (the "Morgan Stanley Letter"), Exxon
Capital Holdings Corporation, SEC No-Action Letter
(available May 13, 1988) (the "Exxon Capital
Letter") and similar letters, the Company believes
that Exchange Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by any
person receiving such Exchange Notes, whether or
not such person is the holder (other than any such
holder or other person which is (i) a broker-dealer
that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of
market-making or other trading activities, or (ii)
an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act (collectively,
"Restricted Holders")) without compliance with the
registration and prospectus delivery provisions of
the Securities Act, PROVIDED that (a) such Exchange
Notes are acquired in the ordinary course of
business of such holder or other person (b) neither
such holder nor such other person is engaged in or
intends to engage in a distribution of such
Exchange Notes and (c) neither such holder nor
other person has any arrangement or understanding
with any person to participate in the distribution
of such Exchange Notes. If any person were to be
participating in the Exchange Offer for the
purposes of participating in a distribution of the
Exchange Notes in a manner not permitted by the
Commission's interpretation, such person (a) could
not rely upon the Morgan Stanley Letter, the Exxon
Capital Letter or similar letters and (b) must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with a secondary resale transaction.
Each broker or dealer that receives Exchange Notes
for its own account in exchange for Old Notes,
where such Old Notes were acquired by such broker
or dealer as a result of market-making or other
activities, must acknowledge that it will deliver a
Prospectus in
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connection with any sale of such Exchange Notes.
See "Plan of Distribution."
EXPIRATION DATE........................ 5:00 p.m., New York City time, on ,
1998, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is
extended.
ACCRUED INTEREST ON THE EXCHANGE NOTES
AND OLD NOTES........................ The Exchange Notes will bear interest from February
3, 1998. Holders of Old Notes whose Old Notes are
accepted for exchange will be deemed to have waived
the right to receive any payment in respect of
interest on such Old Notes accrued to the date of
issuance of the Exchange Notes.
CONDITIONS TO THE EXCHANGE OFFER....... The Exchange Offer is subject to certain customary
conditions. The conditions are limited and relate
in general to proceedings which have been
instituted or laws which have been adopted that
might impair the ability of the Company to proceed
with the Exchange Offer. As of the date of this
Prospectus, none of these events had occurred, and
the Company believes their occurrence to be
unlikely. If any such conditions exist prior to the
Expiration Date, the Company may (a) refuse to
accept any Old Notes and return all previously
tendered Old Notes, (b) extend the Exchange Offer
or (c) waive such conditions. See "The Exchange
Offer--Conditions."
PROCEDURES FOR TENDERING OLD NOTES..... Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with the Old Notes to be exchanged and any other
required documentation to the Exchange Agent (as
defined) at the address set forth herein and
therein. Tendered Old Notes, the Letter of
Transmittal and accompanying documents must be
received by the Exchange Agent by 5:00 p.m. New
York City time, on the Expiration Date. See "The
Exchange Offer--Procedures for Tendering." By
executing the Letter of Transmittal, each holder
will represent to the Company that, among other
things, the Exchange Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary
course of business of the person receiving such
Exchange Notes, whether or not such person is the
holder, that neither the holder nor any such other
person is engaged in or intends to engage in a
distribution of the Exchange Notes or has an
arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes, and that neither the holder nor any such
other person is an
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"affiliate," as defined under Rule 405 of the
Securities Act, of the Company.
SPECIAL PROCEDURES FOR BENEFICIAL
HOLDERS.............................. Any beneficial holder whose Old Notes are
registered in the name of his broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender in the Exchange Offer should
contact such registered holder promptly and
instruct such registered holder to tender on his
behalf. If such beneficial holder wishes to tender
on his own behalf, such beneficial holder must,
prior to completing and executing the Letter of
Transmittal and delivering his Old Notes, either
make appropriate arrangements to register ownership
of the Old Notes in such holder's name or obtain a
properly completed bond power from the registered
holder. The transfer of record ownership may take
considerable time. See "The Exchange
Offer--Procedures for Tendering."
GUARANTEED DELIVERY PROCEDURES......... Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes and
a properly completed Letter of Transmittal or any
other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date may tender their Old Notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer--Guaranteed Delivery
Procedures."
WITHDRAWAL RIGHTS...................... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
ACCEPTANCE OF OLD NOTES AND DELIVERY OF
EXCHANGE NOTES....................... Subject to certain conditions, the Company will
accept for exchange any and all Old Notes which are
properly tendered in the Exchange Offer prior to
5:00 p.m., New York City time, on the Expiration
Date. The Exchange Notes issued pursuant to the
Exchange Offer will be delivered promptly after the
Expiration Date. See "The Exchange Offer--Terms of
the Exchange Offer."
CERTAIN U.S. FEDERAL INCOME TAX
CONSIDERATIONS....................... The exchange of Old Notes for Exchange Notes
pursuant to the Exchange Offer will not be a
taxable event for federal income tax purposes. A
holder's holding period for Exchange Notes will
include the holding period for Old Notes. For a
discussion summarizing certain U.S. federal income
tax consequences to holders of the Exchange Notes,
see "Certain U.S. Federal Income Tax
Considerations."
EXCHANGE AGENT......................... State Street Bank and Trust Company is serving as
exchange agent (the "Exchange Agent") in connection
with the Exchange Offer. The mailing address of the
Exchange Agent is State Street Bank and Trust
Company, Two International Place, 4th Floor,
Boston, Massachusetts
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02110, Attention: Claire Young--Corporate Trust
Department. Deliveries by hand or overnight courier
should be addressed to State Street Bank and Trust
Company, 61 Broadway, 15th Floor, New York, New
York 10016, Attention: Corporate Trust Department.
For information with respect to the Exchange Offer,
call the Exchange Agent at telephone number: (860)
244-1846 or facsimile number: (860) 244-1881.
USE OF PROCEEDS........................ The Company will not receive any proceeds from the
Exchange Offer. See "Use of Proceeds." The Company
has agreed to bear the expenses of the Exchange
Offer pursuant to the Registration Rights Agreement
(as defined). No underwriter is being used in
connection with the Exchange Offer.
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SUMMARY OF TERMS OF EXCHANGE NOTES
The Exchange Offer constitutes an offer to exchange up to $120.0 million
aggregate principal amount of the Exchange Notes for up to an equal aggregate
principal amount of Old Notes. The Exchange Notes will be obligations of the
Company evidencing the same indebtedness as the Old Notes, and will be entitled
to the benefit of the same Indenture. The form and terms of the Exchange Notes
are substantially the same as the form and terms of the Old Notes except that
the Exchange Notes have been registered under the Securities Act. See
"Description of the Notes."
COMPARISON WITH OLD NOTES
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FREELY TRANSFERABLE.................... The Exchange Notes will be freely transferable
under the Securities Act by holders who are not
Restricted Holders. Restricted Holders are
restricted from transferring the Exchange Notes
without compliance with the registration and
prospectus delivery requirements of the Securities
Act. The Exchange Notes will be identical in all
material respects (including interest rate,
maturity and restrictive covenants) to the Old
Notes, with the exception that the Exchange Notes
will be registered under the Securities Act. See
"The Exchange Offer--Terms of the Exchange Offer."
REGISTRATION RIGHTS.................... The holders of Old Notes currently are entitled to
certain registration rights pursuant to the
Registration Rights Agreement, dated as of February
3, 1998 (the "Registration Rights Agreement"), by
and between the Company and Donaldson, Lufkin &
Jenrette Securities Corporation, the initial
purchaser of the Old Notes ("DLJ"), including the
right to cause the Company to register the Old
Notes under the Securities Act if the Exchange
Offer is not consummated prior to the Exchange
Offer Termination Date (as defined). See "The
Exchange Offer--Conditions." However, pursuant to
the Registration Rights Agreement, such
registration rights will expire upon consummation
of the Exchange Offer.
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Accordingly, holders of Old Notes who do not
exchange their Old Notes for Exchange Notes in the
Exchange Offer will not be able to reoffer, resell
or otherwise dispose of their Old Notes unless such
Old Notes are subsequently registered under the
Securities Act or unless an exemption from the
registration requirements of the Securities Act is
available.
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TERMS OF THE EXCHANGE NOTES
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<S> <C>
MATURITY DATE.......................... February 1, 2005.
INTEREST PAYMENT DATES................. February 1 and August 1, commencing August 1, 1998.
OPTIONAL REDEMPTION.................... The Exchange Notes will be redeemable at the
Company's option, in whole or in part, at any time
on or after February 1, 2002, at the redemption
prices set forth herein, together with accrued and
unpaid interest, if any, to the date of redemption.
In addition, on or prior to February 1, 2001, in
the event of one or more Equity Offerings, the
Company may, at its option, redeem up to 33 1/3% of
the principal amount of Exchange Notes originally
issued from the net proceeds thereof at a
redemption price equal to 111% of the principal
amount thereof, together with accrued and unpaid
interest, if any, to the date of redemption;
provided that at least $80 million of Notes remain
outstanding immediately after such redemption and
any such redemption occurs not more than 120 days
after the consummation of any such Equity Offering.
CHANGE OF CONTROL...................... Upon a Change of Control, each holder of the
Exchange Notes will have the right to require the
Company to repurchase all or a portion of such
holder's Exchange Notes at a price of 101% of the
principal amount thereof plus accrued interest to
the repurchase date. A Change of Control would
likely also constitute a change of control for
purposes of WCI's indebtedness, including the WCI
Notes (as defined) and under the WCI Revolving
Credit Facility (as defined), which, among other
things, could require WCI to repurchase all or a
portion of the WCI Notes and repay all amounts
outstanding under the WCI Revolving Credit
Facility. Under such circumstances, WCI may not
have sufficient funds to pay dividends or make
loans or advances to the Company, and thus, the
Company could be unable to fulfill its repurchase
obligation in the event of a Change of Control.
There can be no assurance that the Company will
have sufficient funds available at the time of any
Change of Control to make any required repurchases
of the Exchange Notes. See "Description of the
Notes-- Certain Covenants--Change of Control."
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
ASSET SALE PROCEEDS.................... The Company is obligated in certain instances to
make offers to purchase the Exchange Notes at a
redemption price of 100% of the principal amount
thereof (plus, in the case of the WCI Pledged
Stock, the Applicable Premium (as defined)) plus
accrued interest to the repurchase date with the
net cash proceeds of certain sales or other
dispositions of assets. See "Description of the
Notes-- Certain Covenants--Limitation on Sale of
Assets."
SECURITY............................... The Exchange Notes will be secured by a pledge of
all the WCI Pledged Stock; however, WCI will not be
an obligor of the Exchange Notes. The Exchange
Notes will be structurally subordinated to all
existing and future liabilities of WCI and any
future subsidiaries of the Company, and holders of
the Exchange Notes will have no direct recourse to
the assets of WCI upon an Event of Default under
the Indenture. WCI will not be obligated to make
distributions to the Company sufficient to pay
interest or principal on the Exchange Notes. As of
January 31, 1998, WCI had outstanding indebtedness
of approximately $302.0 million and other
significant outstanding liabilities. See
"Description of the Notes-- Security."
RANKING................................ The Exchange Notes will be senior secured
obligations of the Company and will rank senior in
right of payment to all future senior subordinated
and subordinated indebtedness of the Company and
PARI PASSU with all other existing and future
senior indebtedness of the Company. As of January
31, 1998, on a consolidated basis, the Company
could incur additional senior indebtedness of up to
approximately $217.2 million, of which $15.0
million is permitted under the Indenture, $102.2
million is permitted under the WCI Senior Secured
Notes Indenture (as defined) and $100.0 million
(exclusive of outstanding letters of credit) is
available under the WCI Revolving Credit Facility.
CERTAIN COVENANTS...................... The Indenture contains certain covenants,
including, without limitation, covenants with
respect to the following matters: (a) limitation on
indebtedness; (b) limitation on liens; (c)
limitation on restricted payments; (d) limitation
on transactions with affiliates; (e) impairment of
security interest; (f) consolidations, mergers and
transfers of all or substantially all of the assets
of the Company; (g) limitation on business
activities; and (h) limitation on the sale of the
WCI Pledged Stock. See "Description of the
Notes--Certain Covenants."
</TABLE>
RISK FACTORS
Prospective purchasers of the Exchange Notes should carefully consider all
of the information set forth in this Prospectus and, in particular, should
evaluate the specific factors set forth under "Risk Factors" for risks involved
with an investment in the Exchange Notes.
10
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for the Company for each of
the years in the five fiscal year period ended October 31, 1997 have been
derived from the consolidated financial statements of the Company, which
financial statements have been audited by KPMG Peat Marwick LLP. The
consolidated statement of operations data for the three months ended January 31,
1997 and 1998, and the balance sheet data as of January 31, 1998, have been
derived from the Company's unaudited condensed consolidated financial
statements. The financial data set forth below should be read in conjunction
with the Company's audited consolidated financial statements and the related
notes thereto for the fiscal years ended October 31, 1995, 1996 and 1997 and the
unaudited condensed consolidated financial statements and the related notes
thereto for the three months ended January 31, 1997 and 1998 appearing elsewhere
herein and with "Management's Discussion and Analysis of Results of Operations
and Financial Condition."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED OCTOBER 31, JANUARY 31,
------------------------------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994(1) 1995(2) 1996(3) 1997(4) 1997(4) 1998
<CAPTION>
(DOLLARS AND TONS IN THOUSANDS, EXCEPT PER TON
DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................................... $578,639 $709,363 $630,990 $660,801 $668,470 $ 160,907 $166,592
Gross margin...................................... 86,639 134,753 86,201 110,192 120,925 29,298 24,744
Operating income.................................. 46,517 79,996 45,348 65,578 64,793 8,837 13,336
Interest expense.................................. 23,182 28,709 25,787 24,968 31,690 7,525 8,014
Interest and other income, net.................... 301 1,505 6,212 6,545 1,239 651 299
Income before income taxes, extraordinary losses
on early retirement of debt and cumulative
effect of change in accounting principle........ 23,636 51,029 23,308 44,211 33,919 1,540 5,621
Income before extraordinary losses on early
retirement of debt and cumulative effect of
change in accounting principle.................. 14,151 29,090 12,995 25,103 20,668 697 3,580
OTHER DATA:
EBITDA(5)......................................... $ 67,796 $ 99,992 $ 67,297 $ 88,473 $ 91,691 $ 15,290 $ 20,802
Net cash provided (used) by operating
activities...................................... 60,567 76,922 60,731 78,001 39,574 (5,272) 3,024
Net cash provided (used) by investing
activities...................................... (14,639) (14,371) (35,637) (71,751) (47,555) (20,336) (4,082)
Net cash used by financing activities............. (37,281) (491) (2,254) (10,115) (63,431) (51,613) (6,264)
Cash interest expense(6).......................... 18,108 26,437 23,607 22,788 30,255(7) 7,121 7,677(7)
Capital expenditures.............................. 14,639 14,371 26,173 35,384 39,902 12,548 4,192
Depreciation and amortization..................... 20,978 19,868 21,178 22,547 26,777 6,445 7,359
OTHER OPERATING DATA:
Net tons shipped.................................. 1,302 1,468 1,222 1,397 1,329 324 348
Percent custom products........................... 53.9% 56.9% 59.4% 57.9% 67.6% 65.9% 62.2%
Average selling price per net ton shipped......... $ 445 $ 483 $ 516 $ 473 $ 503 $ 496 $ 479
Average cost per net ton shipped.................. 378 391 446 394 412 406 408
Average gross margin per net ton shipped.......... 67 92 71 79 91 90 71
Average operating income per net ton shipped...... 36 54 37 47 49 27 38
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1998
----------------------------
<S> <C> <C>
HISTORICAL AS ADJUSTED(8)
----------- ---------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................................................................... $ 11,667 $ 27,233
Working capital (excluding cash and cash equivalents)............................................. 78,267 78,267
Property, plant and equipment, net................................................................ 275,105 275,105
Total assets...................................................................................... 520,507 540,073
Total debt (including current portion)............................................................ 301,972 421,538
Shareholder's deficit............................................................................. (50,848) (150,848)
</TABLE>
- ------------------------
(1) Fiscal 1994 Statement of Operations reflects $11.1 million of compensation
expenses related to WCI's initial public offering and the offering of the
WCI Senior Notes (as defined).
(2) Fiscal 1995 results were adversely impacted by a 54-day labor contract
dispute and resulting work stoppage at WCI commencing September 1, 1995 and
a 36-day blast furnace reline commencing on April 1, 1995.
(3) WCI's custom product mix and the results for fiscal 1996 were adversely
impacted by a 54-day labor contract dispute and resulting work stoppage
which was concluded on October 24, 1995.
(4) Fiscal 1997 Statement of Operations reflects $8.6 million of compensation
expenses related to the November 1996 Transactions (as defined).
(5) EBITDA represents earnings before interest, income taxes, minority interest
and depreciation and amortization. EBITDA includes other income of $301,000,
$128,000, $771,000, $355,000, $121,000, $8,000 and $107,000 for the fiscal
years ended October 31, 1993, 1994, 1995, 1996 and 1997 and the three months
ended January 31, 1997 and 1998, respectively. The trends of EBITDA
generally follow the trends of operating income. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition"
for a discussion of the recent trends of operating income. Information
regarding EBITDA is presented because management believes that certain
investors use EBITDA as a measure of an issuer's historical ability to
service its debt. EBITDA should not be considered alternatives to, or more
meaningful than, operating income or cash flow as indicators of an issuer's
operating performance. Furthermore, caution should be used in comparing
EBITDA to similarly titled measures of other companies, as the definitions
of these measures may vary.
(6) Excludes non-cash amortization of financing costs.
(7) Does not include the cash interest expense that would have been payable by
the Company on the Old Notes of approximately $13.1 million and $3.3 million
for the fiscal year ended October 31, 1997 and the three months ended
January 31, 1998, respectively, had the Old Notes been outstanding for those
periods.
(8) Represents the balance sheet data of the Company as adjusted to give effect
to the Old Notes Offering and the application of the proceeds therefrom as
if they had occurred on January 31, 1998.
12
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE RISK FACTORS SET FORTH
BELOW AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS.
RELATING TO THE COMPANY
HOLDING COMPANY STRUCTURE; REFINANCING RISK; STRUCTURAL SUBORDINATION
The Company is a holding company that has no significant assets other than
the WCI Pledged Stock. The Company was formed solely for the purpose of serving
as the issuer of the Notes and, as of May 15, 1998, other than cash and
investments of approximately $17.5 million, net of accrued and unpaid
transaction fees and expenses related to the Old Notes Offering, has no
operations or assets from which it will be able to repay the Exchange Notes.
Accordingly, the Company's cash flow and, consequently, its ability to repay the
Exchange Notes at maturity or otherwise, will be primarily dependent upon the
net income of WCI and its subsidiaries and the payment of funds by WCI in the
form of loans, dividends or otherwise. WCI has, and any future subsidiaries of
the Company will have, no obligation, contingent or otherwise, to pay amounts
due pursuant to the Exchange Notes or to make funds available therefor, whether
in the form of loans, dividends or otherwise. WCI is, and any future
subsidiaries of the Company may be, parties to agreements which contain
limitations on the ability of such subsidiaries to pay dividends or make loans
or advances to the Company, and the Indenture does not prohibit such agreements.
The indenture (the "WCI Senior Secured Notes Indenture") related to WCI's $300.0
million principal amount of 10% Senior Secured Notes due 2004 (the "WCI Senior
Secured Notes") contains provisions which, among other things, limit the amount
of distributions to the Company to amounts received from capital stock issuances
or capital contributions and 50% of consolidated net income of WCI. On January
28, 1998, WCI paid a dividend to Renco in the aggregate amount of $5.3 million,
which represented substantially all of the amount permitted under the WCI Senior
Secured Notes Indenture at that date. At January 31, 1998, WCI was permitted to
make dividend payments of approximately $1.1 million under the WCI Senior
Secured Notes Indenture. In addition, WCI's $100.0 million revolving credit
facility (the "WCI Revolving Credit Facility") imposes restrictions on WCI's
ability to make dividends or other distributions. Accordingly, the Company's
ability to repay the Exchange Notes at maturity or otherwise may be dependent
upon the Company's ability to refinance the Exchange Notes which will depend, in
large part, upon factors beyond the control of the Company. See "--Substantial
Indebtedness."
Because the Company is a holding company and conducts its business through
WCI, any right of the Company and its creditors, including holders of the
Exchange Notes, to participate in the assets of WCI upon any liquidation or
reorganization of WCI will be subject to the prior claims of WCI's creditors,
including holders of the WCI Senior Secured Notes and WCI's $0.3 million
principal amount of 10 1/2% Senior Notes Due 2002 (the "WCI Senior Notes" and
together with the WCI Senior Secured Notes, the "WCI Notes"), the lenders under
the WCI Revolving Credit Facility and a Voluntary Employee Beneficiaries
Association trust fund, a trust fund established to hold WCI contributions to
fund postretirement health care and life insurance obligations for the benefit
of hourly employees (the "VEBA Trust").
See "--Relating to WCI--Substantial Employee Postretirement Obligations." As of
January 31, 1998, holders of the Notes would have been effectively subordinated
to $302.0 million of indebtedness (excluding $100.0 million of undrawn
availability under the WCI Revolving Credit Facility) and other liabilities of
WCI (which as of January 31, 1998 were reported on WCI's balance sheet in
accordance with generally accepted accounting principles at $248.3 million). The
WCI Senior Secured Notes Indenture and the WCI Revolving Credit Facility limit,
but do not prohibit, the incurrence of additional indebtedness by WCI.
SUBSTANTIAL INDEBTEDNESS
The Company has substantial indebtedness and debt service requirements.
After giving effect to the Old Notes Offering and the application of the
proceeds therefrom, as of January 31, 1998, the Company
13
<PAGE>
would have had outstanding consolidated total senior debt of approximately
$421.5 million (excluding $100.0 million of undrawn availability under the WCI
Revolving Credit Facility), representing an annual debt service requirement of
approximately $43.1 million, and a shareholder's deficit of approximately $150.8
million. The Company's ability to meet its debt service obligations and to
reduce its total debt will be primarily dependent upon WCI's future performance,
which will be subject to economic, financial, political, competitive and other
factors, including market prices of flat rolled steel, many of which are beyond
the Company's and WCI's control.
CERTAIN CREDITORS' RIGHTS
The Old Notes Offering and the application of the proceeds therefrom may be
subject to review under relevant federal and state fraudulent conveyance laws if
a bankruptcy, reorganization or rehabilitation case or a lawsuit (including in
circumstances where bankruptcy is not involved) were commenced by or on behalf
of unpaid creditors of the Company at some future date. These laws vary among
the various jurisdictions. In general, under these laws, if a court were to find
that, at the time an obligation (such as the Old Notes) was incurred, either (a)
such obligation was incurred with the intent of hindering, delaying or
defrauding creditors or (b) the entity incurring the obligation received less
than reasonably equivalent or fair value consideration in exchange for the
incurrence of such obligation and (i) was insolvent or was rendered insolvent by
reason thereof, (ii) was engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital, (iii) intended to
incur, or believed, or reasonably should have believed, that it would incur,
debts beyond its ability to pay such debts as they matured (as all of the
foregoing terms are defined in or interpreted under the fraudulent conveyance
statutes) or (iv) such entity was a defendant in an action for money damages, or
had a judgment for money damages docketed against it (if, in either case, after
final judgment, the judgment is unsatisfied) (each of clauses (i)-(iv) above, a
"Fraudulent Conveyance"), such court could impose legal and equitable remedies,
including (x) subordination of the obligation to presently existing and future
indebtedness of the entity, (y) avoidance of the issuance of the obligation and
the liens, and direction of the repayment of any amounts paid from the proceeds
thereof to a fund for the benefit of the entity's creditors or (z) taking of
other action detrimental to the holders of the Notes.
The measures of insolvency for purposes of determining whether a Fraudulent
Conveyance occurred would vary depending upon the laws of the relevant
jurisdiction and upon the valuation assumptions and methodology applied by the
court. Generally, however, a company would be considered insolvent for purposes
of the foregoing if the sum of the company's debts, including contingent
unliquidated and unmatured liabilities, is greater than all of such company's
property at a fair valuation, or if the present fair saleable value of the
company's assets is less than the amount that will be required to pay the
probable liability on its existing debts as they become absolute and matured.
The Company believes that at the time of, or as a result of, the issuance of
the Old Notes and the use of proceeds therefrom, the Company (a) was not
insolvent or rendered insolvent under the foregoing standards, (b) was not
engaged in a business or transactions for which its remaining assets constitute
unreasonably small capital, (c) did not intend to incur, and does not believe
that it did incur, debts beyond its ability to pay such debts as they mature and
(d) had sufficient assets to satisfy any probable money judgment against it in
any pending actions. Consequently, the Company believes that even if one or more
elements of the Old Notes Offering were deemed to involve the incurrence of an
obligation for less than reasonably equivalent or fair value, a Fraudulent
Conveyance did not occur. The beliefs with regard to the solvency of the Company
are based in part on management's analysis of internal cash flow projections and
estimated values of assets and liabilities of the Company at the time of the Old
Notes Offering. There can be no assurance, however, that a court passing on
these issues would adopt the same methodology or assumptions, or arrive at the
same conclusions.
14
<PAGE>
RIGHTS OF THE COMPANY IN AND TO COLLATERAL; ABILITY OF HOLDERS TO REALIZE
UPON COLLATERAL
To secure the Notes, the Company has granted a first priority security
interest in (i) all of the WCI Pledged Stock and (ii) subject to the third
paragraph of this Risk Factor, all dividends, interest, cash, instruments and
other property and proceeds from time to time received, receivable or otherwise
distributed in respect of or in exchange for any of the foregoing and any
account, instrument or security in which any of the foregoing is deposited or
invested, including any earnings thereon (collectively, the "Collateral"). Under
certain circumstances described under "Description of the Notes--Certain
Covenants--Limitations on Sale of Assets," all of the capital stock of WCI may
be sold to third parties free of the security interest in favor of holders of
Notes, and the Company will be required to make an offer to purchase the Notes
at a premium with the net cash proceeds of such sale.
Absent any Event of Default and until written notice is given to the Company
by the Trustee under the Indenture, the Company will be able to exercise all
voting and other corporate rights pertaining to the WCI Pledged Stock. Once the
Trustee gives such written notice, all voting and other corporate rights
pertaining to the WCI Pledged Stock will become vested in the Trustee until such
Event of Default is cured or waived. If an Event of Default occurs under the
Indenture, the Trustee, on behalf of the holders of the Notes, in addition to
any rights or remedies available to it or the holder, may take such action as it
deems advisable to protect and enforce its rights in the Collateral, including
the institution of foreclosure proceedings. If voting rights in the WCI Pledged
Stock were to become vested in the Trustee, or if the Trustee were to foreclose
upon the Collateral, such vesting or foreclosure, as the case may be, may
constitute a "change of control" under instruments governing certain
indebtedness of WCI, including the WCI Senior Secured Notes Indenture. Such
occurrence could enable the holders of such indebtedness to require WCI to
repurchase or repay indebtedness and could adversely affect holders of the
Notes.
Unless an Event of Default has occurred and is continuing and until notice
is received from the Trustee, the Company is entitled to receive dividends and
other distributions (other than certain extraordinary distributions) on the WCI
Pledged Stock. The Pledge Agreement (as defined) provides that, upon receipt by
the Company or any of its subsidiaries of such an extraordinary distribution on
any WCI Pledged Stock, the Company shall deliver, or cause to be delivered, to
the Trustee (i) for deposit as Collateral into a cash collateral account all
cash or cash equivalents included in such extraordinary distribution and (ii)
for pledge to secure the Notes any of the extraordinary distribution which is in
a form other than cash or cash equivalents.
Upon the occurrence and during the continuance of an Event of Default, all
rights to receive and retain dividends and other distributions made on the WCI
Pledged Stock during such continuance will become vested in the Trustee and all
amounts received in respect of the WCI Pledged Stock (other than extraordinary
distributions, which shall be held as referred to above) shall be delivered to
the Trustee as Collateral and segregated from all other Collateral. Upon the
cure or waiver of any such Event of Default, so long as no other Event of
Default has occurred and is continuing, all rights which the Company has to
receive and retain dividends and distributions on the WCI Pledged Stock (other
than certain extraordinary distributions) will revert to the Company and all
such segregated collateral shall, at the written direction of the Company, be
delivered to the Company or applied to the payment of principal on the Notes.
There can be no assurance that the proceeds of any sale of the Collateral
pursuant to the Indenture following an Event of Default would be sufficient to
satisfy payments due on the Notes. In addition, the ability of the holders of
Notes to realize upon the Collateral may be subject to certain bankruptcy law
limitations in the event of a bankruptcy involving the Company. See "Description
of the Notes--Certain Bankruptcy Limitations."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The terms and conditions of the Indenture impose restrictions that will
affect, among other things, the ability of the Company to incur debt, pay
dividends, create liens and use the proceeds of certain asset sales.
15
<PAGE>
The ability of the Company to comply with the foregoing provisions can be
affected by events beyond the Company's control. The breach of any of these
covenants could result in a default under the Company's indebtedness, including
the Indenture. In the event of any such default, the Company may be unable to
make any payments of principal or interest on the Exchange Notes for a period of
time. See "Description of the Notes."
CONTROL BY RENCO
The Company is a wholly-owned subsidiary of Renco, of which Mr. Ira Leon
Rennert is the controlling stockholder. As a result of his indirect ownership of
all the capital stock of the Company, Mr. Rennert is, and will continue to be,
able to direct and control the policies of the Company and its subsidiaries,
including mergers, sales of assets and similar transactions and the election of
directors.
ABSENCE OF A PUBLIC MARKET
The Exchange Notes will be new securities for which there is currently no
public market. The Company does not intend to list the Exchange Notes on any
national securities exchange or quotation system. DLJ has advised the Company
that it currently intends to make a market in the Exchange Notes, but it is not
obligated to do so and, if commenced, may discontinue such market making at any
time. Accordingly, there can be no assurance as to the development of any market
or liquidity of any market that may develop for the Exchange Notes. To the
extent that Old Notes are tendered and accepted in the Exchange Offer, the
aggregate principal amount of Old Notes outstanding will decrease, with a
resulting decrease in the liquidity of the market therefor.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of the Old Notes set forth in the legend thereon as a consequence of
the issuance of the Old Notes pursuant to an exemption from, or in a transaction
not subject to, the registration requirements of the Securities Act. In general,
Old Notes may not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. The Company currently
does not anticipate that it will register the Old Notes under the Securities
Act.
RELATING TO WCI
SUBSTANTIAL INDEBTEDNESS
WCI has substantial indebtedness and debt service requirements. As of
January 31, 1998, WCI had outstanding consolidated total debt of approximately
$302.0 million (excluding $100.0 million of undrawn availability under the WCI
Revolving Credit Facility) and a shareholder's deficit of approximately $92.0
million.
WCI's level of indebtedness will have several important effects on its
future operations, including the following: (a) a significant portion of WCI's
cash flow from operations will be dedicated to the payment of interest on its
indebtedness and will not be available for other purposes; (b) the financial
covenants and other restrictions contained in the WCI Revolving Credit Facility
require WCI to meet certain financial tests and limit its ability to borrow
additional funds or to dispose of assets; and (c) WCI's ability to obtain
additional financing in the future for working capital, postretirement health
care and pension funding, capital expenditures, acquisitions, general corporate
purposes or other purposes may be impaired. Additionally, WCI's ability to meet
its debt service obligations and to reduce its total debt will be dependent upon
WCI's future performance, which will be subject to economic, financial,
political, competitive and other factors, including market prices of flat rolled
steel, many of which are beyond its control. Moreover, an inability of WCI to
meet the financial covenants contained in the WCI Revolving Credit Facility or
16
<PAGE>
other indebtedness could result in an acceleration of amounts due thereunder
which could have a material adverse effect on the financial condition and
results of operations of WCI.
RESTRICTIONS IMPOSED BY TERMS OF WCI'S INDEBTEDNESS
The terms and conditions of the WCI Senior Secured Notes Indenture and the
WCI Revolving Credit Facility impose on WCI restrictions that will affect, among
other things, the ability of WCI to incur debt, pay dividends, make
acquisitions, create liens, make capital expenditures and make certain
investments and advances.
The ability of WCI to comply with the foregoing provisions can be affected
by events beyond WCI's control. The breach of any of these covenants could
result in a default under WCI's indebtedness, including the WCI Senior Secured
Notes Indenture and the WCI Revolving Credit Facility. In the event of any such
default, depending on the actions taken by the holders of the WCI Notes and the
lenders under the WCI Revolving Credit Facility, WCI may be unable to make any
distributions to the Company for payments of principal or interest on the
Exchange Notes for a period of time. See "--Relating to the Company--Holding
Company Structure; Refinancing Risk; Structural Subordination." In addition, the
holders of the WCI Notes and the lenders under the WCI Revolving Credit Facility
could elect to declare all amounts borrowed, together with accrued and unpaid
interest, to be due and payable. If WCI were unable to repay such amounts, the
holders of the WCI Notes and the lenders under the WCI Revolving Credit Facility
could proceed against certain collateral securing indebtedness under the WCI
Notes and the WCI Revolving Credit Facility. If such indebtedness were to be
accelerated, there can be no assurance that the assets of WCI would be
sufficient to repay in full such indebtedness and the other indebtedness of WCI.
LABOR RELATIONS
The United Steelworkers of America (the "USWA") represents approximately 75%
of WCI's employees. WCI experienced a 54-day labor contract dispute and
resulting work stoppage in connection with the negotiation of the current
collective bargaining agreement. In October 1995, WCI negotiated a new
collective bargaining agreement with the USWA, which expires on September 1,
1999. There can be no assurance as to the results of negotiations of future
collective bargaining agreements, whether future collective bargaining
agreements will be negotiated without production interruptions or the possible
impact of future collective bargaining agreements, or the negotiation thereof,
on WCI's financial condition and results of operations.
SUBSTANTIAL EMPLOYEE POSTRETIREMENT OBLIGATIONS
WCI has substantial financial obligations related to its employee
postretirement plans for medical and life insurance and pensions. Statement of
Financial Accounting Standards No. 106, "Accounting for Postretirement Benefits
Other than Pensions" ("SFAS 106") requires accrual of retiree medical and life
insurance benefits rather than recognition of costs as claims are paid. In
accordance with SFAS 106, a liability has been established for the present value
of the estimated future unfunded medical and life insurance benefit obligations.
In addition, in accordance with the Statement of Financial Accounting Standards
No. 87, "Pensions," WCI has recognized a minimum liability equal to its unfunded
accumulated pension benefit obligations. As of October 31, 1997, WCI had an
accumulated postretirement health care and life insurance benefit obligation in
excess of plan assets of approximately $100.5 million, and WCI had a projected
pension benefit obligation in excess of plan assets of approximately $33.1
million. The cash payments for actual postretirement health care and life
insurance claims were approximately $2.4 million and $.7 million during fiscal
1997 and the three months ended January 31, 1998, respectively. WCI also has a
contractual agreement to contribute $.50 per hour worked by certain hourly
employees to the VEBA Trust, or a minimum of approximately $1.5 million per
year, and has certain minimum pension funding requirements under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). See
17
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"Business--WCI--Benefit Plans," "Management's Discussion and Analysis of Results
of Operations and Financial Condition--Liquidity and Capital
Resources--WCI--Postretirement Benefit Plans" and Notes 7 and 8 to WCI's audited
consolidated financial statements.
ENVIRONMENTAL MATTERS
In common with much of the steel industry, WCI's facilities are located on
sites that have been used for heavy industrial purposes for decades. WCI is and
will continue to be subject to numerous federal, state and local environmental
laws and regulations governing, among other things, air emissions, waste water
discharge and solid and hazardous waste disposal. WCI believes it has made, and
intends to continue to make, the necessary expenditures for environmental
remediation and compliance with environmental laws and regulations.
Environmental laws and regulations have changed rapidly in recent years, and WCI
may be subject to more stringent environmental laws and regulations in the
future. During 1997, the EPA proposed new standards regulating particulate
matter and ozone emissions. Data relating to these standards is to be collected
and analyzed with implementation as early as 2004. These standards have been the
subject of significant discussion throughout federal and state governments, and
changes to the standards or the implementation date may be made prior to final
approval. Like much of the steel, utilities and other industries, WCI's current
operations are not expected to comply with these proposed standards. WCI cannot
currently assess the impact of these proposed standards on its results of
operations or financial condition. Compliance with more stringent environmental
laws and regulations could have a material adverse effect on WCI's and the
Company's financial condition and results of operations.
On June 29, 1995, the Department of Justice, (the "DOJ") on behalf of the
Environmental Protection Agency (the "EPA"), instituted a civil action against
WCI under the Clean Water Act in the United States District Court for the
Northern District of Ohio (the "CWA Litigation"). The action alleges numerous
violations of WCI's National Pollution Discharge Elimination System ("NPDES")
permit alleged to have occurred during the years 1989 through 1996, inclusive.
On March 29, 1996, the Department of Justice on behalf of the EPA, instituted
another civil action against WCI in the same court under the Clean Air Act (the
"CAA Litigation") alleging violations by WCI of the work practice, inspection
and notice requirements for demolition and renovation of the National Emission
Standard for Hazardous Air Pollutants for Asbestos and also violations of the
particulate standard and the opacity limits applicable to WCI's facilities in
Warren, Ohio. Each action seeks a civil penalty not to exceed the statutory
maximum of $25,000 per day per violation and also seeks an injunction against
continuing violations. WCI believes that imposition of the statutory maximum
penalty for the alleged violations is unlikely based upon past judicial
penalties imposed under the Clean Water Act and the Clean Air Act, and that it
has defenses to liability. However, no assurance can be given that WCI will not
be found to have liability and, if it has liability, that the statutory maximum
penalty will not be imposed. By letter dated November 1, 1996, EPA's Region V
Water Division Director requested information pursuant to the Clean Water Act
from WCI relating to the Warren facility, including information as to the effect
of a prohibition against federal procurement of WCI's products on WCI's
business. WCI responded to the EPA's request on December 2, 1996. WCI has not
been notified that the EPA will seek a federal procurement prohibition based on
alleged permit violations. However, there can be no assurance that a federal
procurement prohibition will not be imposed. WCI is negotiating a consent decree
with the EPA to settle the CWA Litigation and is also negotiating with the EPA
toward settlement of the CAA Litigation. If WCI is unable to reach a negotiated
settlement and if a substantial penalty similar to the statutory maximum penalty
or federal procurement prohibition were imposed, it could have a material
adverse effect on the financial condition or results of operations of WCI and
the Company, the extent of which WCI is unable to estimate at this time.
Discovery has been completed in both of these actions, and a trial date has been
scheduled for August 1998 for the CAA Litigation.
18
<PAGE>
On December 17, 1997, WCI received a compliance order from the EPA alleging
certain violations of WCI's NPDES permit, including exceedances of permit limits
for pH and oil and grease and failure to identify and sample for residual
chlorine. WCI is investigating the alleged exceedances.
On May 11, 1998, the DOJ, on behalf of the EPA, instituted a civil action
against WCI under the Resource Conservation and Recovery Act of 1976, as amended
("RCRA"), in the United States District Court for the Northern District of Ohio.
The action seeks injunctive relief and civil penalties against WCI for alleged
violations of RCRA, the Ohio Administrative Code ("OAC") and WCI's hazardous
waste management permit issued pursuant to RCRA and OAC related to WCI's
management of hazardous waste in surface impoundments at WCI's Warren, Ohio
facility. The action alleges that from September 1988 to the present, WCI
operated hazardous waste management units at the Warren facility without the
proper permits pursuant to RCRA and seeks civil penalties not to exceed the
statutory maximum of $25,000 per day per violation for each day of violation
prior to January 30, 1997 and $27,500 per day per violation for each day of
violation on or after January 30, 1997. WCI intends to assert several defenses,
including that these claims are subject to a five-year statute of limitations.
WCI believes that imposition of the statutory maximum penalty is unlikely based
on past judicial penalties imposed under RCRA. However, there can be no
assurance that WCI will not be found to have liability and, if it has liability,
that the statutory maximum penalty will not be imposed. If the statutory maximum
penalty or other substantial penalty were imposed, it could have a material
adverse effect on the financial condition or results of operations of WCI and
the Company.
WCI has obtained a storage permit under RCRA for waste pickle liquor at its
Warren facility acid regeneration plant. As a provision of the permit, WCI will
be required to undertake a corrective action program with respect to historical
material handling practices at the Warren facility. In April 1997, WCI received
notice from the EPA that it had approved a workplan for the first investigation
step of the corrective action program, the RCRA Facility Investigation ("RFI"),
which is expected to be completed in 1999. The workplan identifies thirteen
historical solid waste management units which are subject to the RFI, including
areas of the facility which are the subject of the RCRA civil action filed on
May 11, 1998 described above. The final scope of the corrective action required
to remediate or reclaim any contamination that may be present at or emanating
from the Warren facility is dependent upon the findings of the RFI and the
development and approval of the corrective action program. Accordingly, WCI is
unable at this time to estimate the final cost of the corrective action program
or the period over which such costs may be incurred, and there can be no
assurance that it would not have a material adverse effect on the financial
condition of WCI and the Company.
The costs for environmental compliance may place domestic steel producers,
including WCI, at a competitive disadvantage with respect to certain foreign
steel producers and manufacturers of steel substitutes that are subject to less
stringent environmental requirements. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition--Liquidity and Capital
Resources--WCI-- Environmental Matters" and "Business--WCI--Environmental
Matters."
RELIANCE ON KEY MANUFACTURING EQUIPMENT
WCI's manufacturing processes are dependent upon certain critical pieces of
equipment, such as its blast furnace, basic oxygen furnace (the "BOF"), twin
strand continuous slab caster (the "Continuous Caster") and hot strip mill,
which on occasion may be out of service as the result of unexpected equipment
failure. This interruption in WCI's production capabilities could result in
fluctuations in WCI's sales and income. WCI believes that it maintains adequate
property damage insurance and business interruption insurance to cover losses
resulting from any production shutdown caused by an unexpected equipment
failure. Although WCI to date has experienced no such equipment failure that has
resulted in a complete shutdown of its steelmaking production for a significant
period of time, no assurance can be given that a material shutdown will not
occur in the future or that such a shutdown would not have a material adverse
effect on WCI. The most significant scheduled maintenance outage involves the
relining of WCI's blast
19
<PAGE>
furnace, which is scheduled approximately every six to eight years and typically
takes four to six weeks. WCI completed its most recent blast furnace reline in
May 1995. See "Business--WCI--Facilities."
RELATING TO THE INDUSTRY
CYCLICALITY
The steel industry is highly cyclical in nature and is affected
significantly by economic conditions. Factors that negatively impact steel
producers generally include high levels of steel imports, worldwide production
overcapacity, expansion of U.S. steel producing capacity, a strong U.S. dollar
and increased domestic and international competition. Recently, the steel
industry has experienced lower prices as a result of certain of these factors.
Moreover, there can no assurance that the U.S. steel industry will not be
negatively impacted by increased imports of steel from certain Asian countries
whose currencies have recently depreciated relative to the U.S. dollar.
Additionally, no assurance can be given that these and other factors will not
continue to have an adverse effect on the steel industry or WCI. See "Management
Discussion and Analysis of Financial Condition and Results of
Operations--Industry Developments."
COMPETITION
The domestic steel industry is highly competitive. Despite significant
reductions in raw steel production capacity by major domestic producers in the
1980s, the domestic industry continues to be adversely affected by excess world
capacity.
In the United States, WCI competes with many other domestic steel companies.
WCI also faces increasing competitive pressures from minimills. Minimills are
generally smaller volume steel producers that use ferrous scrap metals as their
basic raw material. Compared to integrated producers, minimills, which rely on
less capital intensive hot metal sources, have certain advantages. Since
minimills typically are not unionized, they have more flexible work rules that
have resulted in lower employment costs per net ton shipped. Since 1989,
significant flat rolled minimill capacity has been constructed and these
minimills now compete with integrated producers in product areas that
traditionally have not faced significant competition from minimills. In
addition, there is significant additional flat rolled minimill capacity under
construction or announced with various planned commissioning dates through 1999.
These minimills are expected to compete with WCI in the commodity flat rolled
steel market and in certain custom steel markets. In addition, the increased
competition in commodity product markets has resulted in certain integrated
producers increasing product offerings to compete with WCI's custom products.
During 1996 and 1997, the domestic steel market experienced significant
increases in imports of foreign produced flat rolled products. The relative
strength of the U.S. dollar and economy versus the strength of foreign
currencies and economies can significantly affect the import/export trade
balance for flat rolled steel products. The status of the trade balance may
significantly affect the ability of new minimill capacity to come on-line
without disrupting the domestic flat rolled steel market.
Materials such as aluminum, cement, composites, glass and plastics compete
as substitutes for steel in many markets. In addition, certain lower cost steel
products, through technological developments, have and may continue to become
commercially viable substitutes for WCI's higher cost custom products.
AVAILABILITY AND FLUCTUATION IN COSTS OF RAW MATERIALS AND ENERGY
WCI's operations are heavily dependent on the supply of various raw
materials including iron ore pellets, coke and energy. WCI purchases all of its
iron ore pellets and coke requirements through contracts based in part on market
pricing. Supply interruptions or cost increases, to the extent that WCI could
not pass on these costs to its customers, could adversely affect WCI's future
results of operations. The domestic supply of coke has decreased significantly
over the last decade and is expected to decrease further in the future due to
the requirements of the Clean Air Act. As WCI does not own a coke battery, it is
dependent upon commercially available domestic or imported coke to sustain its
operations. WCI has contracts for the purchase of its estimated coke
requirements through 1999 and believes that there will be
20
<PAGE>
adequate supplies of coke available domestically or from foreign sources
thereafter for its purposes. However, there can be no assurance that adequate
supplies of coke will be available to WCI in the future. See "Business--WCI--Raw
Materials."
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. In
consideration for issuing the Exchange Notes as contemplated in this Prospectus,
the Company will receive in exchange Old Notes of like principal amount, the
terms of which are identical in all material respects to the Exchange Notes. The
Old Notes surrendered in exchange for Exchange Notes will be retired and
canceled and cannot be reissued. Accordingly, issuance of the Exchange Notes
will not result in any increase in the indebtedness of the Company. The Company
has agreed to bear the expenses of the Exchange Offer pursuant to the
Registration Rights Agreement. No underwriter is being used in connection with
the Exchange Offer.
The net proceeds of the Old Notes Offering were approximately $116.6
million. Such net proceeds were used to pay a $100.0 million dividend to Renco,
provide approximately $15.6 million of cash to the Company and pay related fees
and expenses.
21
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated cash and cash equivalents
and capitalization of the Company as of January 31, 1998 and as adjusted to give
effect to the Old Notes Offering and the application of the proceeds therefrom.
The table below should be read in conjunction with "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and the Company's
condensed consolidated financial statements and the related notes thereto
appearing elsewhere herein.
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1998
-----------------------
<S> <C> <C>
HISTORICAL AS ADJUSTED
---------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................ $ 11,667 $ 27,233
---------- -----------
---------- -----------
Long-term debt, including current portion:
WCI Revolving Credit Facility(1)................................... $ 0 $ 0
WCI Senior Secured Notes........................................... 300,000 300,000
WCI Senior Notes................................................... 280 280
Old Notes.......................................................... -- 119,566(2)
Other WCI indebtedness............................................. 1,692 1,692
---------- -----------
Total long-term debt, including current portion.................. 301,972 421,538
Total shareholder's equity (deficit)................................. (50,848) (150,848)
---------- -----------
Total capitalization................................................. $ 251,124 $ 270,690
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Represents WCI's $100.0 million revolving credit facility, which is undrawn,
exclusive of $5.5 million in outstanding letters of credit, and expires on
December 29, 1999.
(2) Represents the $120.0 million aggregate principal amount of Old Notes less
the debt discount of approximately $434,400.
22
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated financial data have
been prepared to give effect to the Old Notes Offering and the application of
the proceeds therefrom (the "Old Notes Transaction"). The Unaudited Pro Forma
Condensed Consolidated Balance Sheet as of January 31, 1998, gives effect to the
Old Notes Transaction as if it had occurred on such date. The Unaudited Pro
Forma Condensed Consolidated Statements of Operations for the three months ended
January 31, 1998 and for the twelve months ended October 31, 1997 give effect to
the Old Notes Transaction as if it had occurred on November 1, 1997 and 1996,
respectively. The pro forma adjustments are based upon available information and
certain assumptions that the Company believes are reasonable under the
circumstances.
The unaudited pro forma condensed consolidated financial information should
be read in conjunction with "Management's Discussion and Analysis of Results of
Operations and Financial Condition," the audited consolidated financial
statements of the Company, and the notes thereto, and the other financial
information included elsewhere herein. The unaudited pro forma condensed
consolidated financial data do not purport to be indicative of the results which
would have actually been attained had the Old Notes Transaction been consummated
on the dates indicated or of the results which may be expected to occur in the
future.
23
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JANUARY 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR THE OLD
NOTES
HISTORICAL TRANSACTION PRO FORMA
---------- ---------------- -----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................................... $ 11,667 $ 15,566(1) $ 27,233
Accounts receivable, less allowances for doubtful accounts... 70,337 70,337
Inventories.................................................. 104,867 104,867
Recoverable income taxes..................................... 791 791
Deferred income taxes........................................ 8,470 8,470
Prepaid expenses............................................. 2,066 2,066
---------- ---------------- -----------
Total current assets..................................... 198,198 15,566 213,764
Property, plant and equipment, net............................. 275,105 275,105
Intangible pension asset....................................... 15,510 15,510
Other assets, net.............................................. 31,694 4,000(2) 35,694
---------- ---------------- -----------
Total assets............................................. $ 520,507 $ 19,566 $ 540,073
---------- ---------------- -----------
---------- ---------------- -----------
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities
Current portion of long-term debt............................ $ 382 $ 382
Accounts payable............................................. 61,726 61,726
Accrued liabilities.......................................... 46,156 46,156
---------- -----------
---------- -----------
Total current liabilities................................ 108,264 108,264
Long-term debt, excluding current portion...................... 301,590 119,566(1) 421,156
Deferred income taxes.......................................... 28,238 28,238
Postretirement health care benefits............................ 87,987 87,987
Pension benefits............................................... 30,242 30,242
Other liabilities.............................................. 15,034 15,034
---------- ---------------- -----------
Total liabilities........................................ 571,355 119,566 690,921
Shareholder's deficit
Common stock, no par value, $.01 stated value, 850 shares
authorized, 100 shares issued and outstanding.............. -- --
Additional paid-in capital................................... 1 1
Accumulated deficit.......................................... (50,849) (100,000)(3) (150,849)
---------- ---------------- -----------
Total shareholder's deficit.............................. (50,848) (100,000) (150,848)
---------- ---------------- -----------
Total liabilities and shareholder's deficit.............. $ 520,507 $ 19,566 $ 540,073
---------- ---------------- -----------
---------- ---------------- -----------
</TABLE>
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(1) The Unaudited Pro Forma Condensed Consolidated Balance Sheet gives effect to
the following unaudited pro forma adjustments and reflects the issuance of
the $120.0 million Old Notes less debt discount, distribution to Renco, and
payments of fees and expenses.
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
Face value of Old Notes................................................. $ 120,000
Price................................................................... 99.638%
--------
Proceeds.............................................................. $ 119,566
Distribution to Renco................................................... (100,000)
Estimated transaction costs............................................. (4,000)
--------
Cash retained by the Company.......................................... $ 15,566
--------
</TABLE>
(2) Reflects $4.0 million deferred transaction costs.
(3) Reflects payment of $100.0 million dividend to Renco.
25
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR THE OLD
NOTES
HISTORICAL TRANSACTION PRO FORMA
----------- ---------------- -----------
<S> <C> <C> <C>
Net sales....................................................... $ 166,592 $ 166,592
Operating costs and expenses
Cost of products sold......................................... 141,848 141,848
Depreciation and amortization................................. 7,359 7,359
Selling, general and administrative expenses.................. 4,049 4,049
----------- -----------
153,256 153,256
----------- -----------
Operating income............................................ 13,336 13,336
Other income (expense)
Interest expense.............................................. (8,014) (3,422)(1) (11,436)
Interest and other income, net................................ 299 299
----------- -------- -----------
(7,715) (3,422) (11,137)
----------- -------- -----------
Income before income taxes.................................. 5,621 (3,422) 2,199
Income tax expense.............................................. 2,041 (1,300)(2) 741
----------- -------- -----------
Net income.................................................. $ 3,580 $ (2,122) $ 1,458
----------- -------- -----------
----------- -------- -----------
</TABLE>
TWELVE MONTHS ENDED OCTOBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
FOR THE OLD
NOTES
HISTORICAL(1) TRANSACTION PRO FORMA
------------ ---------------- -----------
<S> <C> <C> <C>
Net sales..................................................... $ 668,470 $ 668,470
Operating costs and expenses
Cost of products sold....................................... 547,545 547,545
Depreciation and amortization............................... 26,777 26,777
Selling, general and administrative expenses................ 29,355 29,355
------------ -----------
603,677 603,677
------------ -----------
Operating income.......................................... 64,793 64,793
Other income (expense)
Interest expense............................................ (31,690) (13,683)(1) (45,373)
Interest and other income, net.............................. 1,239 1,239
Minority interest........................................... (423) -- (423)
------------ -------- -----------
(30,874) (13,683) (44,557)
------------ -------- -----------
Income before income taxes and extraordinary loss......... 33,919 (13,683) 20,236
Income tax expense............................................ 13,251 (5,200)(2) 8,051
------------ -------- -----------
Income before extraordinary loss.......................... $ 20,668 $ (8,483) $ 12,185
------------ -------- -----------
------------ -------- -----------
</TABLE>
26
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(1) The Unaudited Pro Forma Condensed Consolidated Statements of Operations give
effect to the following pro forma adjustments and reflects the coupon
interest on the $120.0 million Old Notes and amortization of financing costs
and debt discount.
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1998 1997
--------------- ---------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Coupon interest on Old Notes............................... $ 3,263 $ 13,050
Amortization of transaction costs.......................... 143 571
Amortization of debt discount.............................. 16 62
------- -------
$ 3,422 $ 13,683
------- -------
</TABLE>
(2) Reflects income tax benefit based on composite tax rate of 38%.
27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for the Company for each of
the years in the five fiscal year period ended October 31, 1997 have been
derived from the consolidated financial statements of the Company, which
financial statements have been audited by KPMG Peat Marwick LLP. The
consolidated statement of operations data for the three months ended January 31,
1997 and 1998, and the balance sheet data as of January 31, 1998, have been
derived from the Company's unaudited condensed consolidated financial
statements. The financial data set forth below should be read in conjunction
with the Company's audited consolidated financial statements and the related
notes thereto for the fiscal years ended October 31, 1995, 1996 and 1997 and the
unaudited condensed consolidated financial statements and the related notes
thereto for the three months ended January 31, 1997 and 1998 appearing elsewhere
herein and with "Management's Discussion and Analysis of Results of Operations
and Financial Condition."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED OCTOBER 31, JANUARY 31,
------------------------------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994(1) 1995(2) 1996(3) 1997(4) 1997(4) 1998
<CAPTION>
(DOLLARS AND TONS IN THOUSANDS, EXCEPT PER TON DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................................... $578,639 $709,363 $630,990 $660,801 $668,470 $ 160,907 $166,592
Cost of products sold............................. 492,000 574,610 544,789 550,609 547,545 131,609 141,848
-------- -------- -------- -------- -------- ------------ --------
Gross margin...................................... 86,639 134,753 86,201 110,192 120,925 29,298 24,744
Depreciation and amortization..................... 20,978 19,868 21,178 22,547 26,777 6,445 7,359
Selling, general and administrative expenses...... 19,144 34,889 19,675 22,067 29,355 14,016 4,049
-------- -------- -------- -------- -------- ------------ --------
Operating income.................................. 46,517 79,996 45,348 65,578 64,793 8,837 13,336
Interest expense.................................. 23,182 28,709 25,787 24,968 31,690 7,525 8,014
Interest and other income, net.................... 301 1,505 6,212 6,545 1,239 651 299
Minority interest................................. -- 1,763 2,465 2,944 423 423 --
Income before income taxes, extraordinary losses
on early retirement of debt and cumulative
effect of change in accounting principle........ 23,636 51,029 23,308 44,211 33,919 1,540 5,621
Income taxes...................................... 9,485 21,939 10,313 19,108 13,251 843 2,041
Income before extraordinary losses on early
retirement of debt and cumulative effect of
change in accounting principle.................. 14,151 29,090 12,995 25,103 20,668 697 3,580
FINANCIAL RATIOS AND OTHER DATA:
EBITDA(5)......................................... $ 67,796 $ 99,992 $ 67,297 $ 88,473 $ 91,691 $ 15,290 $ 20,802
Net cash provided (used) by operating
activities...................................... 60,567 76,922 60,731 78,001 39,574 (5,272) 3,024
Net cash provided (used) by investing
activities...................................... (14,639) (14,371) (35,637) (71,751) (47,555) (20,336) (4,082)
Net cash used by financing activities............. (37,281) (491) (2,254) (10,115) (63,431) (51,613) (6,264)
Cash interest expense(6).......................... 18,108 26,437 23,607 22,788 30,255(7) 7,121 7,677(7)
Capital expenditures.............................. 14,639 14,371 26,173 35,384 39,902 12,548 4,192
Depreciation and amortization..................... 20,978 19,868 21,178 22,547 26,777 6,445 7,359
Ratio of earnings to fixed charges(8)............. 2.0x 2.8x 2.0x 2.9x 2.1x x1.3 1.7x
OTHER OPERATING DATA:
Net tons shipped.................................. 1,302 1,468 1,222 1,397 1,329 324 348
Percent custom products........................... 53.9% 56.9% 59.4% 57.9% 67.6% 65.9% 62.2%
Average selling price per net ton shipped......... $ 445 $ 483 $ 516 $ 473 $ 503 $ 496 $ 479
Average cost per net ton shipped.................. 378 391 446 394 412 406 408
Average gross margin per net ton shipped.......... 67 92 71 79 91 90 71
Average operating income per net ton shipped...... 36 54 37 47 49 27 38
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, AS OF
----------------------------------------------------- JANUARY 31,
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments............ $ 9,366 $ 71,426 $ 106,548 $ 139,547 $ 18,989 $ 11,667
Working capital (excluding cash, cash equivalents and
short-term investments).................................... 49,510 69,193 61,881 42,093 68,034 78,267
Property, plant and equipment, net........................... 206,951 196,212 189,733 205,121 277,473 275,105
Total assets................................................. 396,342 481,596 519,159 567,459 533,875 520,507
Total debt (including current portion)....................... 136,858 216,108 213,854 211,506 302,937 301,972
Shareholder's equity (deficit)............................... 69,168 36,877 50,030 67,478 (49,129) (50,848)
</TABLE>
- ------------------------------
(1) Fiscal 1994 Statement of Operations reflects $11.1 million of compensation
expenses related to WCI's initial public offering and the offering of the
WCI Senior Notes.
(2) Fiscal 1995 results were adversely impacted by a 54-day labor contract
dispute and resulting work stoppage at WCI commencing September 1, 1995 and
a 36-day blast furnace reline commencing on April 1, 1995.
(3) WCI's custom product mix and the results for fiscal 1996 were adversely
impacted by a 54-day labor contract dispute and resulting work stoppage
which was concluded on October 24, 1995.
(4) Fiscal 1997 Statement of Operations reflects $8.6 million of compensation
expense related to the November 1996 Transactions.
(5) EBITDA represents earnings before interest, income taxes, minority interest
and depreciation and amortization. EBITDA includes other income of $301,000,
$128,000, $771,000, $355,000, $121,000, $8,000 and $107,000 for the fiscal
years ended October 31, 1993, 1994, 1995, 1996 and 1997 and the three months
ended January 31, 1997 and 1998, respectively. The trends of EBITDA
generally follow the trends of operating income. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition"
for a discussion of the recent trends of operating income. Information
regarding EBITDA is presented because management believes that certain
investors use EBITDA as a measure of an issuer's historical ability to
service its debt. EBITDA should not be considered an alternative to, or more
meaningful than, operating income or cash flow as an indicator of an
issuer's operating performance. Furthermore, caution should be used in
comparing EBITDA to similarly titled measures of other companies as the
definitions of these measures may vary.
(6) Excludes non-cash amortization of financing costs.
(7) Does not include the cash interest expense that would have been payable by
the Company on the Old Notes of approximately $13.1 million and $3.3 million
for the fiscal year ended October 31, 1997 and the three months ended
January 31, 1998, respectively, had the Old Notes been outstanding for those
periods.
(8) Fixed charges consist of interest expense, capitalized interest,
amortization of deferred financing costs and the portion of rental expense
that is representative of interest expense. Earnings consist of income
before taxes plus fixed charges and minority interest less capitalized
interest. On a pro forma basis, as if the Company had been in existence and
the Old Notes Offering had been consummated on November 1, 1996, the
Company's ratio of earnings to fixed charges would have been 1.4 to 1 for
fiscal 1997. On a pro forma basis, as if the Offering had been consummated
on November 1, 1997, the Company's ratio of earnings to fixed charges would
have been 1.2 to 1 for the three months ended January 31, 1998.
29
<PAGE>
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
GENERAL
In connection with the sale of Old Notes to the initial purchaser pursuant
to the Purchase Agreement, dated January 29, 1998, between the Company and DLJ,
the holders of the Old Notes became entitled to the benefits of the Registration
Rights Agreement.
Under the Registration Rights Agreement, the Company became obligated to (a)
file a registration statement in connection with a registered exchange offer
within 45 days after February 3, 1998, the date the Old Notes were issued (the
"Issue Date"), and (b) cause the registration statement relating to such
registered exchange offer to become effective within 120 days after the Issue
Date. The Exchange Offer being made hereby, if consummated within the required
time periods, will satisfy the Company's obligations under the Registration
Rights Agreement. The Company understands that there are approximately
beneficial owners of such Old Notes. This Prospectus, together with the
Letter of Transmittal, is being sent to all such beneficial holders known to the
Company.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept all Old
Notes properly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount of
Exchange Notes in exchange for each $1,000 principal amount of outstanding Old
Notes accepted in the Exchange Offer. Holders may tender some or all of their
Old Notes pursuant to the Exchange Offer.
Based on an interpretation by the staff of the Commission set forth in the
Morgan Stanley Letter, the Exxon Capital Letter and similar letters, the Company
believes that Exchange Notes issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by any
person who received such Exchange Notes, whether or not such person is the
holder (other than Restricted Holders) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's or other
person's business, neither such holder nor such other person is engaged in or
intends to engage in any distribution of the Exchange Notes and such holders or
other persons have no arrangement or understanding with any person to
participate in the distribution of such Exchange Notes.
If any person were to be participating in the Exchange Offer for the
purposes of participating in a distribution of the Exchange Notes in a manner
not permitted by the Commission's interpretation, such person (a) could not rely
upon the Morgan Stanley Letter, the Exxon Capital Letter or similar letters and
(b) must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Old Notes where such Old Notes were acquired by such broker-dealer as result
of market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after consummation of the Exchange Offer, it will
make this Prospectus, as it may be amended or supplemented from time to time,
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. See "Use
of Proceeds." The Company has agreed to bear the expenses of the Exchange Offer
pursuant to the Registration Rights Agreement. No underwriter is being used in
connection with the Exchange Offer.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes for the purposes of receiving the Exchange Notes from the Company
and delivering Exchange Notes to such holders.
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<PAGE>
If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain conditions set forth herein under
"--Conditions" without waiver by the Company, certificates for any such
unaccepted Old Notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes,
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes in connection with the Exchange Offer. See
"--Fees and Expenses."
In the event the Exchange Offer is consummated, the Company will not be
required to register the Old Notes. In such event, holders of Old Notes seeking
liquidity in their investment would have to rely on exemptions to registration
requirements under the securities laws, including the Securities Act. See "Risk
Factors--Relating to the Company--Consequences of Failure to Exchange."
EXPIRATION DATE; EXTENSIONS; AMENDMENT
The term "Expiration Date" shall mean the expiration date set forth on the
cover page of this Prospectus, unless the Company, in its sole discretion,
extends the Exchange Offer, in which case the term "Expiration Date" shall mean
the latest date to which the Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the Exchange
Agent of any extension by oral or written notice and will issue a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Such announcement
may state that the Company is extending the Exchange Offer for a specified
period of time.
The Company reserves the right (a) to delay accepting any Old Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept Old
Notes not previously accepted if any of the conditions set forth herein under
"--Conditions" shall have occurred and shall not have been waived by the Company
(if permitted to be waived by the Company), by giving oral or written notice of
such delay, extension or termination to the Exchange Agent, or (b) to amend the
terms of the Exchange Offer in any manner deemed by it to be advantageous to the
holders of the Old Notes. Any such delay in acceptance, extension, termination
or amendment will be followed as promptly as practicable by oral or written
notice thereof. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of the Old
Notes of such amendment and the Company may extend the Exchange Offer for a
period of up to ten business days, depending upon the significance of the
amendment and the manner of disclosure to holders of the Old Notes, if the
Exchange Offer would otherwise expire during such extension period.
Without limiting the manner in which the Company may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from February 3, 1998, payable
semiannually on February 1 and August 1 of each year, commencing August 1, 1998,
at the rate of 10 7/8% per annum. Holders of Old Notes whose Old Notes are
accepted for exchange will be deemed to have waived the right to receive any
payment in respect of interest on the Old Notes accrued up until the date of the
issuance of the Exchange Notes.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by instruction 3 of the Letter of Transmittal, and mail
or otherwise deliver such Letter of Transmittal or such facsimile, together with
the Old Notes and any other required documents. To be validly tendered, such
documents must reach the Exchange Agent on or before 5:00 p.m., New York City
time, on the Expiration Date.
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<PAGE>
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect such tender for such
holders.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery to the Exchange Agent on or before 5:00 p.m.
New York City time, on the Expiration Date. No Letter of Transmittal or Old
Notes should be sent to the Company.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder.
Any beneficial holder whose Old Notes are registered in the name of his
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial holder wishes to
tender on his own behalf, such registered holder must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such holder's
name or obtain a properly completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or correspondent in the United
States (an "Eligible Institution") unless the Old Notes tendered pursuant
thereto are tendered (a) by a registered holder who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" on
the Letter of Transmittal or (b) for the account of an Eligible Institution. In
the event that signatures on a Letter of Transmittal or a notice of withdrawal,
as the case may be, are required to be guaranteed, such guarantee must be by an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by appropriate bond powers and a proxy which authorizes such person
to tender the Old Notes on behalf of the registered holder, in each case signed
as the name of the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority so to act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), and withdrawal of the tendered Old Notes will be determined by the
Company in its sole discretion, which determination will be final and binding.
The Company reserves the absolute right to reject any and all Old Notes not
properly tendered or any Old Notes the Company's acceptance of which would, in
the opinion of counsel for the Company, be unlawful. The Company also reserves
the right to waive any irregularities or conditions of tender as to particular
Old Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Old Notes must be cured within such time as the
Company shall determine. None of the Company, the Exchange Agent or any other
person shall be under any duty to give notification of defects or irregularities
with respect to tenders of Old Notes, nor shall any of them incur any liability
for failure to give such notification. Tenders of Old Notes will not be deemed
to have been made until such irregularities have been cured or waived. Any Old
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned without cost to such holder by the Exchange Agent to the
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<PAGE>
tendering holders of Old Notes, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right to (a) purchase or make offers
for any Old Notes that remain outstanding subsequent to the Expiration Date or,
as set forth under "--Conditions," to terminate the Exchange Offer in accordance
with the terms of the Registration Rights Agreement and (b) to the extent
permitted by applicable law, purchase Old Notes in the open market, in privately
negotiated transactions or otherwise. The terms of any such purchases or offers
will differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (a) the Exchange Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of such holder or other person, (b)
neither such holder nor such other person is engaged in or intends to engage in
a distribution of the Exchange Notes (c) neither such holder or other person has
any arrangement or understanding with any person to participate in the
distribution of such Exchange Notes, and (d) such holder or other person is not
an "affiliate," as defined under Rule 405 of the Securities Act, of the Company
or, if such holder or other person is such an affiliate, will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in exchange
for Old Notes where such Old Notes were acquired by such broker-dealer as result
of market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after consummation of the Exchange Offer, it will
make this Prospectus, as it may be amended or supplemented from time to time,
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. See "Use
of Proceeds." The Company has agreed to bear the expenses of the Exchange Offer
pursuant to the Registration Rights Agreement. No underwriter is being used in
connection with the Exchange Offer.
The Old Notes were issued on February 3, 1998 and there is no public market
for them at present. To the extent Old Notes are tendered and accepted in the
Exchange Offer, the principal amount of outstanding Old Notes will decrease with
a resulting decrease in the liquidity in the market therefor. Following the
consummation of the Exchange Offer, holders of Old Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for the Old Notes could be adversely affected.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (a) whose Old Notes are not
immediately available or (b) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, may effect a tender if: (i) the tender is make through an
Eligible Institution; (ii) prior to the Expiration Date, the Exchange Agent
receives from such Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount of Old
Notes tendered, stating that the tender is being made thereby, and guaranteeing
that, within three business days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) together with the certificate(s) representing
the Old Notes to be tendered in proper form for transfer and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent; and (iii) such properly completed and
executed Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing all tendered Old Notes in proper form for transfer
and all other documents required by the Letter of Transmittal are received by
the Exchange Agent within three business days after the Expiration Date.
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<PAGE>
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date,
unless previously accepted for exchange.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (a) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"), (b)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes), (c) be signed by the Depositor
in the same manner as the original signature on the Letter of Transmittal by
which such Old Notes were tendered (including any required signature guarantees)
or be accompanied by documents of transfer sufficient to have the Trustee with
respect to the Old Notes register the transfer of such Old Notes into the name
of the Depositor withdrawing the tender and (d) specify the name in which any
such Old Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange Exchange Notes for, any Old
Notes not theretofore accepted for exchange, and may terminate or amend the
Exchange Offer as provided herein before the acceptance of such Old Notes, if
the Company or the holders of at least a majority in principal amount of Old
Notes reasonably determine in good faith that any of the following conditions
exist: (a) the Exchange Notes to be received by such holders of Old Notes in the
Exchange Offer, upon receipt, will not be tradable by each such holder (other
than a holder which is an affiliate of the Company at any time on or prior to
the consummation of the Exchange Offer) without restriction under the Securities
Act and the Exchange Act and without material restrictions under the blue sky or
securities laws of substantially all of the states of the United States, (b) the
interests of the holders of the Old Notes, taken as a whole, would be materially
adversely affected by the consummation of the Exchange Offer or (c) after
conferring with counsel, the Commission is unlikely to permit the making of the
Exchange Offer prior to June 3, 1998.
Pursuant to the Registration Rights Agreement, if an Exchange Offer shall
not be consummated prior to the Exchange Offer Termination Date, the Company
will be obligated to cause to be filed with the Commission a shelf registration
statement with respect to the Old Notes (the "Shelf Registration Statement") as
promptly as practicable after the Exchange Offer Termination Date and thereafter
use its best efforts to have the Shelf Registration Statement declared
effective.
"Exchange Offer Termination Date" means the date on which the earliest of
any of the following events occurs: (a) applicable interpretations of the staff
of the Commission do not permit the Company to effect the Exchange Offer, (b)
any holder of Notes notifies the Company that either (i) such holder is not
eligible to participate in the Exchange Offer or (ii) such holder participates
in the Exchange Offer and does not receive freely transferable Exchange Notes in
exchange for tendered Old Notes or (c) the Exchange Offer is not consummated
within 120 days after the Issue Date.
If any of the conditions described above exist, the Company will refuse to
accept any Old Notes and will return all tendered Old Notes to exchanging
holders of the Old Notes.
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter
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<PAGE>
of Transmittal and deliveries of completed Letters of Transmittal with tendered
Old Notes should be directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
BY MAIL BY HAND/OVERNIGHT DELIVERY
State Street Bank and Trust Company State Street Bank and Trust Company
Two International Place, 4th Floor 61 Broadway, 15th Floor
Boston, Massachusetts 02110 New York, New York 10006
Attention: Claire Young--Corporate Trust Attention: Corporate Trust Department
Department
</TABLE>
The Company will indemnify the Exchange Agent and its agents for any loss,
liability or expense incurred by them, including reasonable costs and expenses
of their defense, except for any such loss, liability or expense caused by
negligence or bad faith.
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Company and its affiliates in person, by
telephone or facsimile.
The Company will not make any payments to brokers, dealers, or other persons
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this Prospectus, Letters of Transmittal and related
documents to the beneficial owners of the Old Notes, and in handling or
forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer, including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees and expenses, will be paid by the Company, and are estimated in the
aggregate to be approximately $250,000.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes (or Old Notes for principal amounts not tendered or
accepted for exchange) are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The Company will not recognize any gain or loss for accounting purposes upon
the consummation of the Exchange Offer. The expense of the Exchange Offer will
be amortized by the Company over the term of the Exchange Notes under GAAP.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company is a holding company formed by Renco under the laws of Ohio in
January 1998, which owns the WCI Pledged Stock. On February 3, 1998, the Company
sold and issued the Old Notes. The Company used the net proceeds of the Old
Notes Offering to pay a dividend to Renco, provide cash to the Company and pay
related fees and expenses. Currently, the assets of the Company consist of (i)
the WCI Pledged Stock and (ii) as of May 15, 1998, cash and investments of
approximately $17.5 million, net of accrued and unpaid transaction fees and
expenses related to the Old Notes Offering.
INDUSTRY DEVELOPMENTS
In late 1997, the flat rolled steel industry experienced a decline in spot
selling prices due to, among other things, increasing domestic capacity and a
high level of imports. As a result of the foregoing conditions, sales prices
have been lower in 1998 to date as compared to 1997, resulting in reduced
profitability and cash flows for the industry, including WCI. If the downward
pricing trends were to continue and result in a prolonged period of reduced
prices, WCI may not be able to pay dividends to the Company in amounts that
would permit the Company to meet fully its debt service requirements under the
Exchange Notes. See "Risk Factors--Relating to the Industry--Cyclicality."
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1998 COMPARED TO THREE MONTHS ENDED JANUARY
31, 1997
Net sales for the three months ended January 31, 1998 were $166.6 million on
347,931 tons shipped, representing a 3.5% increase in net sales and a 7.4%
increase in tons shipped compared to the three months ended January 31, 1997.
Net sales per ton shipped decreased 3.6% to $479 compared to $496 for the 1997
quarter. This decrease is primarily the result of changes in product mix with
shipments of custom carbon, alloy and electrical steels accounting for 62.2% of
total shipments in the 1998 quarter compared to 65.9% in the 1997 quarter and a
decline in market selling prices in late 1997. In addition, shipments in the
1998 quarter included 9,394 tons of lower value added semi-finished steel.
Throughout the 1998 quarter, WCI experienced a high order entry rate, and as a
result, WCI's order backlog increased to 306,000 tons at January 31, 1998 from
232,000 tons at October 31, 1997. Because of the recent strength in the order
entry rate and backlog for the industry, management believes that market prices,
although below 1997 levels, should be more stable through the first half of
1998.
Gross margin (net sales less cost of products sold) was $24.7 million for
the three months ended January 31, 1998 compared to $29.3 million for the three
months ended January 31, 1997. The decrease in gross margin reflects the changes
in product mix and decreases in selling prices discussed above offset somewhat
by increased volume.
Operating income was $13.3 million for the three months ended January 31,
1998 compared to $8.8 million for the three months ended January 31, 1997. The
operating results for the 1997 quarter include $8.6 million of compensation
expenses related to the November 1996 Transactions. Excluding the expenses
incurred as a result of the November 1996 Transactions, operating income was
$17.4 million during the 1997 quarter or $54 per ton shipped compared to $38 per
ton shipped in the 1998 quarter. The decrease in operating income in the 1998
quarter (excluding the previously mentioned compensation charges in the 1997
quarter) reflects the lower gross margin discussed above and higher depreciation
expense as a result of the hot strip mill upgrade substantially completed in
late 1997 offset by a decrease in selling, general and administrative expenses
in the 1998 quarter as a result of lower variable compensation and legal
expenses.
Interest expense increased to $8.0 million in the 1998 quarter compared to
$7.5 million in the 1997 quarter as a result of the issuance of the $300 million
WCI Senior Secured Notes and the retirement of $206.1 million principal amount
of the WCI Senior Notes on November 27, 1996.
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<PAGE>
As a result of the items discussed above, income before extraordinary items
was $3.6 million in the 1998 quarter compared to $0.7 million in the 1997
quarter. During the 1997 quarter, WCI recognized an extraordinary loss of $19.6
million, net of income taxes, on the early retirement of $206.1 million
principal amount of the WCI Senior Notes. As a result, the Company had a net
loss of $18.9 million for the three months ended January 31, 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales in fiscal 1997 were $668.5 million on 1,328,931 tons shipped,
representing a 1.2% increase in net sales and a 4.9% decrease in tons shipped
compared to fiscal 1996. The upgrade of the hot strip mill, substantially
completed during fiscal 1997, required several equipment outages and resulted in
lower shipping volume during the second and third quarters. Net sales per ton
shipped increased 6.3% to $503 compared to $473 for fiscal 1996. This increase
is primarily the result of changes in product mix with shipments of custom
carbon, alloy and electrical steels accounting for 67.6% in fiscal 1997 and
57.9% in fiscal 1996 and, to a lesser extent, increases in product selling
prices. WCI's custom product mix in fiscal 1996 was adversely effected by a
54-day labor contract dispute and resulting work stoppage which was concluded on
October 24, 1995. Selling prices were generally strong through the third quarter
of fiscal 1997 but began to decline late in the fourth quarter of fiscal 1997
due to minimill capacity additions, a high level of imports, and the reentry
into the market of a major integrated mill. As a result of the foregoing
conditions, sales prices are expected to remain lower in early 1998. In
addition, shipments during fiscal 1997 and 1996 included 22,642 tons and 45,904
tons, respectively, of lower value added semi-finished steel. WCI expects to
continue to ship semi-finished products during the first two quarters of 1998
while the upgrade to the hot strip mill is fully implemented.
Gross margin (net sales less cost of goods sold) was $120.9 million in
fiscal 1997 compared to $110.2 million in fiscal 1996. The increase in gross
margin reflects the increase in selling prices and improvement in product mix
offset somewhat by higher LIFO inventory charges and lower shipping volume in
fiscal 1997. Charges under the LIFO inventory valuation method amounted to $3.3
million in fiscal 1997, including $2.1 million in the fourth quarter, compared
to essentially no LIFO charge in fiscal 1996.
Operating income was $64.8 million, $49 per ton shipped, for fiscal 1997
compared to $65.6 million, $47 per ton shipped, for fiscal 1996. The operating
results for fiscal 1997 reflect the increase in gross margin discussed above
offset by $8.6 million of compensation expenses related to the November 1996
Transactions. In addition, the operating results for fiscal 1997 reflect $3.6
million of additional depreciation and amortization resulting from purchase
accounting adjustments aggregating $44.1 million relating to the November 1996
Transactions. Excluding the non-recurring expenses incurred as a result of the
November 1996 Transactions, operating income was $73.4 million during fiscal
1997 or $55 per ton shipped.
Interest expense increased to $31.7 million in fiscal 1997 compared to $25.0
million in fiscal 1996 as a result of the issuance of $300 million WCI Senior
Secured Notes and the retirement of $206.1 million principal amount of WCI
Senior Notes on November 27, 1996. Interest income decreased to $1.1 million in
fiscal 1997 compared to $6.2 million in fiscal 1996 as a result of lower cash,
cash equivalent and short-term investments in fiscal 1997 due to the November
1996 Transactions. Minority interest expense decreased by $2.5 million due to
the purchase of the minority interest as part of the November 1996 Transactions.
As a result of the items discussed above, income before the extraordinary
loss was $20.7 million in fiscal 1997 compared to $25.1 million in fiscal 1996.
During fiscal 1997, the Company recognized an extraordinary loss of $19.6
million, net of income taxes, on the early retirement of $206.1 million
principal amount of WCI Senior Notes. As a result, the Company had net income of
$1.1 million in fiscal 1997.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales in fiscal 1996 were $660.8 million on 1,396,732 tons shipped,
representing a 4.7% increase in net sales and a 14.3% increase in tons shipped
compared to fiscal 1995. Net sales per ton shipped declined
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<PAGE>
8.3% to $473 compared to $516 for fiscal 1995 due to lower prices realized in
the spot market as well as a change in product mix. The fiscal 1996 period
included the sale of approximately 46,000 tons of lower value added
semi-finished steel and a lower mix of custom carbon, alloy and electrical steel
products, which accounted for 57.9% of total shipments in fiscal 1996 compared
to 59.4% in fiscal 1995. The sales mix and volume were adversely affected during
the first two quarters of fiscal 1996 by a labor contract dispute and resulting
work stoppage which was concluded October 24, 1995. During the third and fourth
quarters of fiscal 1996, WCI's product mix returned to a more traditional mix,
with sales of custom products accounting for 64.8% of shipments compared to
62.4% during the comparable period in fiscal 1995. Shipments for the three
months ended October 31, 1996 were 342,147 tons compared to 208,522 during the
same period in fiscal 1995 which was adversely affected by the work stoppage.
Gross margin was $110.2 million in fiscal 1996 compared to $86.2 million in
fiscal 1995. The increase in gross margin reflects higher volume and improved
per ton operating costs, offset somewhat by the lower sales prices in fiscal
1996 and the changes in product mix mentioned above, and a loss of $13.6 million
of gross margin during the fourth quarter of fiscal 1995 as a result of work
stoppage.
Operating income was $65.6 million, or $47 per ton shipped, for fiscal 1996
compared to $45.3 million, or $37 per ton shipped, for fiscal 1995. The results
for fiscal 1996 and 1995 reflect the gross margin discussed above, higher
depreciation and amortization expense associated with the completion of a blast
furnace reline in May 1995 and higher selling, general and administrative
expenses in the fourth quarter of fiscal 1996 compared to the same period in
fiscal 1995. Selling, general and administrative expenses for the fourth quarter
of fiscal 1996 were $3.3 million higher than during the same period in fiscal
1995 due primarily to reductions in expense in the fourth quarter of fiscal 1995
under WCI's variable compensation programs as a result of the loss incurred
during that period.
As a result of the items discussed above, net income increased to $25.1
million for fiscal 1996 compared to net income of $13.0 million for fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
In February 1998, the Company issued $120.0 million principal amount of Old
Notes. Interest on the Old Notes is, and the Exchange Notes will be, payable
semiannually in arrears on February 1 and August 1 of each year commencing
August 1, 1998. The Company intends to meet its debt service obligations from
its cash and investment balances and earnings thereon and through distributions
from WCI, including payments pursuant to a tax sharing agreement and dividends
as permitted under WCI's outstanding indebtedness. However, the amount of
distributions that WCI may make to the Company are limited by the terms of its
indebtedness. On January 28, 1998, WCI paid a dividend to Renco in the aggregate
amount of $5.3 million, which represented substantially all of the amount
permitted under the WCI Senior Secured Notes Indenture at that date. At January
31, 1998, WCI was permitted to make dividend payments of approximately $1.1
million under the WCI Senior Secured Notes Indenture. In addition, Renco may
make contributions or advances to the Company. Renco, however, has no obligation
to do so. See "Risk Factors--Relating to the Company--Holding Company Structure;
Refinancing Risk; Structural Subordination."
The Indenture contains numerous covenants and prohibitions that limit the
financial activities of the Company, including, among others, limitations on the
incurrence of additional indebtedness and additional liens. The ability of the
Company to meet its debt service requirements and to comply with such covenants
will be dependent upon WCI's future performance, which will be subject to
financial, economic, political, competitive and other factors, including market
prices of flat rolled steel, many of which are beyond the Company's and WCI's
control. See "Risk Factors--Relating to the Company--Substantial Indebtedness."
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<PAGE>
WCI
WCI's liquidity requirements result from capital expenditures, working
capital requirements, postretirement health care and pension funding, interest
expense and, to a lesser extent, principal payments on its indebtedness. WCI has
met these requirements in each fiscal year since 1992 from cash balances and
cash provided by operating activities. WCI's primary sources of liquidity as of
January 31, 1998 consisted of cash and cash equivalents of $11.7 million and
available borrowing under the WCI Revolving Credit Facility.
The WCI Revolving Credit Facility has a maximum borrowing limit of $100.0
million, is secured by eligible inventories and receivables of WCI, as defined
therein, and expires on December 29, 1999. As of January 31, 1998, WCI had no
borrowings outstanding under the WCI Revolving Credit Facility, with a borrowing
limit of $94.5 million net of $5.5 million in outstanding letters of credit.
During the first quarter of fiscal 1998, WCI declared and paid a dividend to
Renco of $5.3 million.
CASH FROM OPERATIONS
Cash provided by WCI's operating activities was $3.0 million for the three
months ended January 31, 1998 compared to cash used by operating activities of
$5.3 million for the three months ended January 31, 1997. Cash provided by
operating activities was $39.6 million, $78.0 million and $60.7 million for
fiscal 1997, 1996 and 1995, respectively. The increase in operating cash flow
for the three months ended January 31, 1998 compared to the three months ended
January 31, 1997 resulted from an increase in income before extraordinary loss
and changes in working capital elements in the 1998 quarter offset by an
increase in payments relating to interest as a result of the November 1996
Transactions. The decrease in operating cash flow in fiscal 1997 compared to
fiscal 1996 resulted from significantly higher in-process steel inventory in
fiscal 1997 as a result, in part, of the hot strip mill upgrade and a working
capital benefit experienced in fiscal 1996 following the resolution of a work
stoppage in late 1995.
As of January 31, 1998, at pricing then in effect, WCI had commitments under
raw material supply contracts of approximately $29.6 million and $33.8 million
for fiscal 1998 and 1999, respectively.
CAPITAL EXPENDITURES
Capital expenditures at WCI were $4.2 million, $39.9 million, $35.4 million
and $26.2 million during the three months ended January 31, 1998 and fiscal
1997, 1996 and 1995, respectively. Capital expenditures are estimated to be $25
million to $30 million in fiscal 1998. The higher level of capital investment in
fiscal 1997 and 1996 reflect expenditures on the hot strip mill upgrade and
hydrogen anneal facility, and expenditures in fiscal 1995 reflect the blast
furnace reline. Management has funded WCI's capital expenditures in fiscal 1998,
1997, 1996 and 1995 through cash balances and cash provided by operating
activities. At January 31, 1998, WCI had commitments for capital expenditures of
approximately $7.4 million.
THE NOVEMBER 1996 TRANSACTIONS
On November 27, 1996, WCI Steel Holdings, Inc. ("WCI Holdings"), a
wholly-owned subsidiary of Renco, completed a tender offer in which it purchased
substantially all the outstanding shares of common stock of WCI not held by
Renco (the "Equity Tender Offer"). Following the completion of the Equity Tender
Offer, WCI Holdings was merged with and into WCI (the "Merger") with WCI
surviving as a wholly-owned subsidiary of Renco. The total consideration paid
for the common stock tendered and to non-tendering shareholders pursuant to the
Merger was approximately $56.9 million, including related expenses.
On the same date, WCI completed the sale of $300.0 million of the WCI Senior
Secured Notes. The proceeds from the WCI Senior Secured Notes, with existing
cash balances of WCI, were used to complete
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<PAGE>
the Equity Tender Offer, complete a tender offer in which WCI acquired $206.1
million of the $206.4 million aggregate principal amount of the then outstanding
WCI Senior Notes at a rate of $1,125.00 per $1,000 principal amount outstanding
plus accrued interest, pay a $108.0 million dividend to Renco, make contractual
compensation payments to certain executives of WCI and pay related transaction
costs (collectively, the "November 1996 Transactions"). As a result of these
November 1996 Transactions, WCI recognized an extraordinary loss of $19.6
million, net of taxes, and compensation expenses of $8.6 million in the first
quarter of fiscal 1997. WCI's liquidity was significantly reduced and its debt
service requirements significantly increased as a result of the November 1996
Transactions. Management anticipates that cash flow from operations and
availability under the WCI Revolving Credit Facility will be sufficient to
finance WCI's liquidity needs for the foreseeable future.
The WCI Revolving Credit Facility and the WCI Senior Secured Notes Indenture
contain numerous covenants and prohibitions that limit the financial activities
of WCI, including requirements that WCI satisfy certain financial ratios and
limitations on the incurrence of additional indebtedness. The ability of WCI to
meet its debt service requirements and to comply with such covenants will be
dependent upon future operating performance and financial results of WCI, which
will be subject to financial, economic, political, competitive and other factors
affecting WCI, many of which are beyond its control.
POSTRETIREMENT BENEFIT PLANS
WCI provides postretirement health care and life insurance benefits to
substantially all employees who retire from WCI upon meeting certain age and
length of service eligibility requirements. Under terms of WCI's labor contract,
WCI is required to pay current claims and to contribute $.50 per hour worked by
certain hourly employees, or a minimum of $1.5 million annually to the VEBA
Trust established to fund future benefits. Claims paid by WCI totaled $2.4
million, $1.7 million and $0.5 million during fiscal 1997, 1996 and 1995,
respectively.
WCI has a defined benefit pension plan which covers substantially all
bargained for employees and provides a minimum level of pension benefits based
on age and years of service when combined with benefits provided under WCI's
defined contribution plan and a predecessor company's defined benefit plan.
Under the minimum funding requirements of ERISA, WCI is required to contribute
approximately $0.4 million in fiscal 1998 and $7.8 million in fiscal 1999 to
this plan. WCI has made no contributions to this plan during fiscal 1998 to date
and made minimal contributions during fiscal 1997.
ENVIRONMENTAL MATTERS
WCI has incurred and, in the future, will continue to incur capital
expenditures for matters relating to environmental control and monitoring.
Capital expenditures for environmental control and monitoring at WCI were $0.8
million, $0.8 million and $2.3 million in fiscal 1997, 1996 and 1995,
respectively.
Future environmental capital expenditures may be dependent in part upon the
outcome of certain pending environmental matters. Operating costs for control
and monitoring equipment, excluding depreciation and amortization expense, were
$10.8 million, $9.6 million and $8.9 million for fiscal 1997, 1996 and 1995,
respectively. Operating costs for fiscal 1998 for control and monitoring
equipment are not expected to increase significantly from the fiscal 1997 level.
Environmental laws and regulations have changed rapidly in recent years, and
WCI may be subject to more stringent environmental laws and regulations in the
future. Compliance with more stringent environmental laws and regulations could
have a material adverse effect on WCI's consolidated financial position and
future results of operations. During fiscal 1997, the EPA proposed new standards
regulating particulate matter and ozone emissions. Data relating to these
standards is to be collected and analyzed with implementation as early as 2004.
These standards have been the subject of significant discussion throughout
federal and state governments, and changes to the standards or the
implementation date may be made prior to final approval. Like much of the steel,
utilities and other industries, WCI's current
40
<PAGE>
operations are not expected to comply with these proposed standards. WCI cannot
currently assess the impact of these proposed standards on its results of
operations or financial condition. In addition, the EPA has asserted certain
alleged environmental violations against WCI which are described in Notes 12 and
14 to the Consolidated Financial Statements.
YEAR 2000 BUSINESS MATTERS
Many information and process control systems used in the current business
environment were designed to use only two digits in the date field and thus may
not function properly in the year 2000. Over the past several years, WCI has
been assessing and modifying its business systems to be year 2000 compliant. WCI
has a plan to achieve year 2000 compliance with respect to its business systems,
including systems and user testing. WCI does not currently expect year 2000
issues related to its business systems to have any material effect on WCI's
costs or to cause any significant disruption in operations. WCI has initiated a
program to assess its process control environment for year 2000 compliance,
which is expected to be completed by mid-1998, and intends to make the necessary
modifications to prevent disruption to its operations. WCI is unable at this
time to estimate the cost or potential effect on its operations of achieving
year 2000 compliance in its process control environment.
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<PAGE>
BUSINESS
THE COMPANY
The Company is a holding company formed by Renco under the laws of Ohio in
January 1998, which owns the WCI Pledged Stock. On February 3, 1998, the Company
sold and issued the Old Notes. The Company used the net proceeds of the Old
Notes Offering to pay a dividend to Renco, provide cash to the Company and pay
related fees and expenses. Currently, the assets of the Company consist of (i)
the WCI Pledged Stock and (ii) as of May 15, 1998, cash and investments of
approximately $17.5 million, net of accrued and unpaid transaction fees and
expenses related to the Old Notes Offering.
The Company intends to meet its debt service obligations from its cash and
investment balances and earnings thereon and through distributions from WCI,
including payments pursuant to a tax sharing agreement and dividends as
permitted under WCI's outstanding indebtedness. Notwithstanding the foregoing,
Renco may make contributions or advances to the Company. Renco, however, has no
obligation to do so.
WCI
WCI is a niche oriented integrated producer of value-added, custom steel
products. WCI was incorporated in Ohio in 1988 and commenced operations on
September 1, 1988. WCI's primary facility covers approximately 1,100 acres in
Warren, Ohio, with additional facilities located in Niles and Youngstown, Ohio,
all of which are situated between Cleveland and Pittsburgh. WCI currently
produces approximately 170 grades of flat rolled custom and commodity steel
products. Custom flat rolled products, which include high carbon, alloy and high
strength, silicon electrical, terne coated and galvanized steel, constituted
approximately 67.6% of the 1.3 million net tons shipped during fiscal 1997.
Major users of WCI products are steel converters, steel service centers,
construction product companies, electrical equipment manufacturers and, to a
lesser extent, automobile and automotive parts manufacturers.
BUSINESS STRATEGY
WCI's business strategy consists of three principal elements: (a) continue
to increase sales of custom products, thereby further improving operating
margins; (b) continue to build and maintain strong relationships with strategic
customers, targeting customers for which it can supply at least 25% of such
customers' custom steel needs; and (c) continue to improve operating efficiency
and product quality through strategic cost reduction initiatives, as well as a
significant capital investment program.
INCREASE SALES OF CUSTOM PRODUCTS
In response to intense competition in commodity steels from other integrated
mills (both domestic and international) and domestic minimills, WCI's strategy
is to increase sales of custom products. Custom products comprised 67.6% of net
tons shipped in fiscal 1997 and 62.2% for the three months ended January 31,
1998. With less competition in custom products, WCI believes it can sustain
higher prices and operating margins in these products compared to commodity
steel products. There can be no assurance, however, that WCI will be able to
sustain such prices or margins.
The Continuous Caster installed during fiscal 1992 enabled WCI to improve
the quality and mix of its products and to enter new markets. WCI offers
approximately 170 grades of custom and commodity steel with cast quality. With
the Continuous Caster, WCI has achieved substantial cost savings, as well as
gained the ability to offer products with higher quality standards to a broader
group of customers. In addition, in fiscal 1997, WCI substantially completed an
upgrade of its hot strip mill which is expected to improve WCI's product quality
and expand WCI's product range.
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<PAGE>
BUILD AND MAINTAIN STRONG RELATIONSHIPS WITH STRATEGIC CUSTOMERS
The second component of WCI's strategy is to become a major supplier to its
strategic customer base. WCI targets accounts where it can supply 25% or more of
the customer's steel requirements. Specifically, WCI looks for custom steel
customers with needs that currently are incompatible with the market direction
or production capabilities of major integrated producers and minimills. Examples
of such needs are as follows: small order quantities; narrow widths; and
specialized chemistries and/or metallurgical properties. WCI invests significant
resources in these customers, building processing and product knowledge over
time. WCI believes that as a significant supplier, it will have a certain degree
of protection against competition due to WCI's investment in processing
knowledge, its high level of service to these customers and the difficulty
competitors have with the smaller order quantities, typical of WCI's custom
steel products.
IMPROVE OPERATING EFFICIENCIES AND PRODUCT QUALITY
WCI is committed to improving its operating efficiencies through focused
capital investment and the implementation of non-capital cost reduction programs
throughout its operations. Since its inception in 1988, WCI has completed over
$318 million of capital investments designed, in part, to decrease production
costs, increase product range and improve product quality, as well as increase
productivity. The cornerstone of this program was the installation of the
Continuous Caster and the ladle metallurgy facility (the "LMF") completed in
December 1991 at a combined cost of $135 million. Since May 1992, the Continuous
Caster has enabled WCI to offer a 100% continuously cast product line which has
substantially reduced WCI's operating costs, dramatically improved the quality
of its products, and enabled WCI to participate in new markets where the
superiority of continuously cast steel is a competitive strength. Another
capital investment was the reactivation of the Youngstown sinter plant, which
reduced WCI's dependence on iron ore pellets, as well as reduced manufacturing
costs by recycling waste streams from the steel making process. In May 1995, WCI
completed the reline of its blast furnace, a procedure which is performed on a
routine basis every six to eight years, thereby essentially completing the
upgrade of WCI's primary steelmaking capabilities.
Currently, WCI's capital investment program is focused on its finishing
facilities or the customer end of the mill. In fiscal 1997, WCI substantially
completed an upgrade of its hot strip mill, the scope of which included
enhancing virtually every element of the mill operation including the heating,
roughing, finishing, cooling and coiling processes. When fully operational, the
hot strip mill upgrade is expected to significantly improve product quality and
expand WCI's product range, in addition to reducing operating costs. Also, in
1997, WCI installed a high-temperature hydrogen anneal facility to upgrade its
product mix and to meet the rising demand for silicon electrical steels.
In addition to the ongoing capital investment program, WCI expended on
average approximately $68 per net ton shipped on maintenance expenditures during
the period fiscal 1992 through fiscal 1997 or an average of approximately $92
million annually. As a result of these expenditures, in addition to the ongoing
capital investment program, WCI believes that it operates and will continue to
maintain a modern and efficient integrated steel mill offering a diverse product
mix.
Consistent with WCI's commitment to improve product quality and operating
efficiencies, WCI obtained ISO 9002 certification in 1995 and QS 9000
certification (a quality standard used extensively in the auto industry) in
1997. WCI undergoes periodic audits to verify its continued compliance with the
standards.
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<PAGE>
PRODUCTS
OVERVIEW
WCI produces a wide range of custom flat rolled steel products, including
high carbon, alloy and high strength, silicon electrical, terne coated and
galvanized steel. In these markets, WCI competes principally on the basis of (a)
customer and product requirements, including small order quantities, specialized
chemistries, narrow widths and delivery performance, (b) quality and (c) price.
WCI's commodity steel product sales consist principally of hot and cold rolled
low carbon sheet steel. In these markets, WCI competes principally on the basis
of price and delivery performance. Export sales were approximately 2.0% of net
sales during the last three fiscal years.
<TABLE>
<CAPTION>
NET TONS SHIPPED PERCENT OF TOTAL
---------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED OCTOBER 31, FISCAL YEAR ENDED OCTOBER 31,
---------------------------------- -------------------------------
<CAPTION>
1995 1996 1997 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Custom Products:
Hot and Cold Rolled........................ 358,556 426,945 481,740 29.3% 30.5% 36.2%
Coated..................................... 367,444 382,352 416,854 30.1 27.4 31.4
---------- ---------- ---------- --------- --------- ---------
Total Custom Products........................ 726,000 809,297 898,594 59.4 57.9 67.6
Total Commodity.............................. 495,940 587,435 430,337 40.6 42.1 32.4
---------- ---------- ---------- --------- --------- ---------
Total Steel Products......................... 1,221,940 1,396,732 1,328,931 100.0% 100.0% 100.0%
---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- --------- --------- ---------
</TABLE>
HOT AND COLD ROLLED CUSTOM PRODUCTS
HIGH CARBON, ALLOY, HIGH STRENGTH. WCI has developed niche markets for high
carbon, alloy and high strength steel products that are sold to strip
converters, steel service centers, and automobile and automotive parts
manufacturers. Products required by the strip converter customers are
characterized by low order quantities, relatively narrow width and specific
metallurgical properties. WCI presently produces over 100 specialized
chemistries for these niche markets.
WCI's customers in this sector, in turn, supply end-users which have highly
specific and defined product needs requiring the strip converter to order steel
with close gauge tolerances, minimal crown profiles, critical surface qualities
and, in certain cases, narrow widths.
In the high carbon and alloy market, WCI competes with several other
domestic integrated producers, as well as various steel producers in Canada,
Europe and Japan. In the high strength market, WCI competes with various major
integrated mills.
COATED CUSTOM PRODUCTS
SILICON. Silicon electrical steel is sheet steel that exhibits certain
electrical or magnetic properties. The magnetic properties of this product
permit electric motors to run at high speeds for extended periods of time with
greater efficiency while minimizing heat loss.
The market for electrical sheet steel can be divided into two main segments:
grain oriented silicon sheet and non-grain oriented silicon sheet. The
distinction between grain and non-grain oriented silicon sheet pertains to the
electrical properties of the steel. WCI's silicon annealing line is designed for
production of non-grain oriented silicon sheet, and all of WCI's silicon
shipments are in this segment. Presently, there is one domestic competitor in
this category and other foreign competitors. In addition, WCI's product also
competes with cold rolled motor laminations produced by several other integrated
steel makers which have been developed as a substitute product for silicon
steels in certain applications.
GALVANIZED. Galvanized steel is zinc-coated sheet steel produced on WCI's
hot dipped galvanizing line. The market for galvanized sheet steel is divided
into two broad categories: heavy and light gauge steel.
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Heavy gauge galvanized steel is used in the manufacture of electrical boxes,
automotive bumpers, culvert coil and grain bins, as well as many other end uses.
WCI's galvanized finishing line is suited to produce heavy gauge steel, and
as a result, a majority of WCI's galvanized shipments are in this sector. WCI
competes with several other integrated producers and minimills, as well as
independent producers in the heavy gauge galvanized steel market.
TERNE. Terne steel is sheet steel coated with a mixture of lead and tin and
is principally used in the manufacture of gasoline tanks. As a result, the
demand for terne steel closely tracks trends in the automotive sector. Terne
steel also is being used in areas where the ability to weld, solder, paint and
resist corrosion is required to promote longer life and attractiveness of the
end product. Given the current regulatory concerns involving products containing
lead, demand for terne steel is expected to decrease. Terne steel accounted for
less than 1% of WCI's net sales in fiscal 1997. In the terne market, WCI
competes with two major integrated mills.
COMMODITY PRODUCTS
In fiscal 1997, WCI shipped 430,337 tons in the aggregate of hot and cold
rolled low carbon sheet and strip and low carbon semi-finished steel, which
represented approximately 32.4% of WCI's net tons shipped. Hot rolled low carbon
sheet is more price sensitive than custom hot rolled steels and is sold to steel
service centers or manufacturers producing a broad array of products, including
tubing, stampings and roll formed parts. Cold rolled sheet and strip is
purchased by service centers, container manufacturers, and the automotive and
appliance industries. In these commodity steel markets, WCI competes with all
major integrated producers and several minimills.
MARKETING AND CUSTOMER SERVICE
WCI's marketing, sales and customer service functions are coordinated
through three wholly-owned subsidiaries, WCI Steel Sales LP ("WCI Sales"), WCI
Steel Metallurgical Services Inc. ("WCI Metallurgical Services") and WCI Steel
Production Control Services Inc. ("WCI Production Services").
WCI Sales is responsible for developing and implementing a sales and
marketing strategy aimed at increasing the sales of custom steel products and
building the strategic customer base. At January 31, 1998, WCI Sales employed a
direct sales force of ten field representatives covering approximately 300
active accounts and other potential steel accounts within WCI's geographic
market. Over 50% of WCI Sales' shipments are to customers within 200 miles of
the Warren facility, and as a result of this concentration of active and
potential customers in its geographic area, WCI Sales believes that it has a
competitive advantage over competitors located farther away.
Sales outside WCI's geographic market are made through three independent
sales representatives on a commission basis. Although transportation costs can
be prohibitive at extreme distances from the Warren facility, select custom
products are competitively priced outside WCI Sales normal target markets. WCI
Sales believes that independent sales representatives provide the most cost
effective method to access these customers. Approximately 5% of WCI Sales volume
in fiscal 1997 was sold through the independent sales representatives.
Marketing and pricing are centralized at the Warren facility, where the
marketing strategy and pricing levels are established for all WCI products. WCI
Sales has two general managers of sales and a three-person marketing staff that
works closely with the sales and technical service representatives to coordinate
the implementation of the sales and marketing strategy.
WCI Metallurgical Services is responsible for developing the specialized
chemistries that support WCI's custom product mix. In addition, WCI
Metallurgical Services has a staff of eight technical service representatives
with strong metallurgical and technical backgrounds who assist the sales force
in the field.
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<PAGE>
Together, WCI believes the sales force and the technical staff comprise a
knowledgeable team qualified to identify and meet customer needs.
WCI Production Services provides order entry, production scheduling and
order status services to assist WCI Sales in meeting customer needs. As of
January 31, 1998, WCI Production Services employed 41 persons at the Warren
facility who provide customer service and utilize a fully-automated computerized
sales network that provides the sales force and customers with product
specifications and timely order status information.
CUSTOMERS
WCI Sales' customer strategy is to market to prospective accounts that have
special needs such as small order quantities, narrow widths, specialized
chemistries and other metallurgical properties not readily met by WCI's
competitors. WCI Sales targets customers for which it can supply at least 25% of
such customer's steel requirements. Nevertheless, WCI Sales attempts to minimize
its customer concentration by generally not having sales to a single customer
greater than 5% of net sales. Consistent with this strategy, WCI Sales' customer
base is dominated by steel converters and steel service centers, which in fiscal
1997 represented 65.8% of shipments. The remaining shipments were direct to end
users.
The following table sets forth the percentage of WCI's net tons shipped to
various markets for the past three fiscal years.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31,
-------------------------------
<S> <C> <C> <C>
CUSTOMER CATEGORY 1995 1996 1997
Conversion/further processing................................. 39.3% 44.6% 42.5%
Steel service centers......................................... 23.0 24.0 23.3
Construction.................................................. 13.1 11.5 15.8
Electrical equipment.......................................... 8.4 7.1 7.3
Direct automotive............................................. 11.1 8.1 6.3
Other......................................................... 5.1 4.7 4.8
--------- --------- ---------
Total....................................................... 100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
In fiscal 1997, 1996 and 1995, WCI's twenty largest customers represented
approximately 57%, 56% and 56%, respectively, of net sales. No customer
accounted for more than 10% of the net sales in fiscal 1997.
BACKLOG
On January 31, 1998, WCI's order backlog was approximately 306,000 net tons
with an approximate value of $146 million compared to approximately 246,000 net
tons with an approximate value of $126 million at January 31, 1997, based in
each case on the then current prices. Under the applicable orders, WCI is
scheduled to ship substantially all of the orders in the January 31, 1998
backlog by June 30, 1998.
MANUFACTURING PROCESS
In WCI's primary steelmaking process, iron ore pellets, coke, limestone,
sinter and other raw materials are consumed in the blast furnace to produce "hot
metal." Hot metal is further converted into liquid steel through its BOF process
where impurities are removed, recycled scrap is added and metallurgical
properties for end use are determined on a batch-by-batch basis. WCI's BOF has
two vessels, each with a steelmaking capacity of 182 tons per heat. From the
BOF, the heats of steel are sent to the LMF, where the temperature and chemistry
of the steel are adjusted to precise tolerances. In addition, the steel may be
vacuum degassed to further improve its cleanliness. Liquid steel from the LMF
then is formed into slabs through the process of continuous casting. The
Continuous Caster allows WCI to cast all of its steel
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<PAGE>
products. After continuous casting, slabs then are reheated, reduced and
finished by extensive rolling, shaping, tempering and, in certain cases, by the
application of coatings at WCI's downstream operations. Finished products are
normally shipped to customers in the form of coils. WCI has linked its
steelmaking and rolling equipment with a computer based integrated manufacturing
control system to coordinate production and sales activities.
RAW MATERIALS
WCI's steelmaking operations are dependent on reliable supplies of various
raw materials, principally iron ore pellets, coke and energy. WCI believes that
it has adequate sources of its principal raw materials to meet its present
needs.
IRON ORE PELLETS
WCI has a contract with a major supplier of iron ore pellets for all of its
requirements through fiscal 1998 and no less than half of its requirements in
fiscal 1999. Iron ore pellets satisfied approximately 71% of WCI's iron ore
requirements in fiscal 1997, while WCI's sinter plant provided the balance. The
iron ore pellet contract requires WCI to purchase all of its iron ore pellet
requirements from the contracting vendor. WCI carries an increased level of iron
ore pellet inventory immediately preceding the winter months, due to the
curtailment of vendor shipments during the winter as a result of the freezing of
the Great Lakes.
COKE
Coke is the principal fuel used to produce liquid iron and is an essential
ingredient in steelmaking. WCI has contracts with two integrated steel producers
for its estimated coke requirements through fiscal 1999. WCI's coke requirements
are approximately 600,000 tons per year. The domestic supply of coke has
decreased significantly over the last decade and is expected to decrease further
in the future due to the requirements of the Clean Air Act. As WCI does not own
a coke battery, it is dependent upon commercially available domestic or imported
coke to sustain its operations. WCI believes that there will be adequate
supplies of domestic or imported coke available for its purposes after the
expiration of its contracts in 1999. However, there can be no assurance that
adequate supplies of coke will be available to WCI in the future. See "Risk
Factors--Relating to the Industry--Availability and Fluctuation in Costs of Raw
Materials and Energy."
ENERGY AND GASES
WCI's steel operation consumes large amounts of electricity, natural gas,
oxygen and other industrial gases. WCI purchases its electrical power
requirements from a local utility under a contract that extends to 2002. WCI can
generate approximately 20% of its own electrical needs. Natural gas is also
purchased pursuant to a supply contract that extends to 2000. Oxygen is
delivered from supplier-owned plants located at the Warren facility. Pursuant to
a contract entered into in 1988, WCI is required to purchase all coke oven gas
produced at an adjoining coke plant, which is usable by WCI, at a price based
upon, but at a discount to, natural gas prices.
CAPITAL INVESTMENTS
WCI believes that it must continuously strive to improve product quality and
control manufacturing costs in order to remain competitive. Accordingly, WCI is
committed to continuing to make extensive capital investments with the objective
of reducing manufacturing costs per ton, improving the quality of steel produced
and broadening the array of products offered to WCI's served markets. Since its
inception, WCI has made approximately $318 million in capital investments, of
which approximately $212 million has
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<PAGE>
been for capital improvements and approximately $106 million has been for
maintenance capital. Significant capital improvements made include the
installation of the Continuous Caster and the LMF in fiscal 1992, the restart of
the Youngstown sinter plant in fiscal 1992 and the substantial completion of the
hot strip mill upgrade in fiscal 1997.
In addition, since the installation of the Continuous Caster in fiscal 1992,
WCI has expensed (in addition to its maintenance capital expenditures) an
average of approximately $68 per net ton shipped on maintenance expenditures,
averaging approximately $92 million annually.
FACILITIES
WCI's Warren, Ohio facility, situated on approximately 1,100 acres, includes
a blast furnace, a two vessel BOF shop, an LMF and a vacuum degasser, the
Continuous Caster, a 56-inch hot strip mill, 54-inch tandem and temper mills,
annealing facilities, a silicon continuous anneal line, hot-dip galvanizing and
terne coating lines and other finishing facilities.
The blast furnace was relined in April and May 1995 as part of its planned
maintenance, a procedure which is performed on a routine basis every six to
eight years, which required WCI to shut down the blast furnace for 36 days. In
connection with the reline, WCI purchased and/or produced in advance sufficient
cast slabs such that there were no material interruptions in shipments to its
customers during the blast furnace reline.
Youngstown Sinter Company, a subsidiary of WCI, owns and operates a sinter
plant located in Youngstown, Ohio on 51 acres. The sinter plant converts plant
waste dusts and iron ore into resources usable in the blast furnace, reducing
iron ore pellet feed requirements by approximately 29% in fiscal 1997.
WCI's Niles Industrial Park is located approximately five miles from the
Warren facility, and has approximately 600,000 square feet of usable building
space. Presently, four steel users are tenants at the Niles facility, using 52%
of the space. WCI is continuing to seek other appropriate tenants.
WCI believes that its facilities are well maintained and they are considered
satisfactory for their purposes.
ENVIRONMENTAL MATTERS
In common with much of the steel industry, WCI's facilities are located on
sites that have been used for heavy industrial purposes for decades. WCI is
subject to numerous federal, state and local environmental laws and regulations
governing, among other things, air emissions, waste water discharge and solid
and hazardous waste disposal. WCI believes that it has made, and intends to
continue to make, the necessary expenditures for environmental remediation and
compliance with environmental laws and regulations. Environmental laws and
regulations have changed rapidly in recent years, and WCI may be subject to more
stringent environmental laws and regulations in the future. Compliance with more
stringent environmental laws and regulations could have a material adverse
effect on WCI's and the Company's financial condition and results of operations.
On June 29, 1995, the DOJ, on behalf of the EPA, instituted the CWA
Litigation. The action alleges numerous violations of WCI's NPDES permit alleged
to have occurred during the years 1989 through 1996, inclusive. On March 29,
1996, the Department of Justice on behalf of the EPA, instituted the CAA
Litigation alleging violations by WCI of the work practice, inspection and
notice requirements for demolition and renovation of the National Emission
Standard for Hazardous Air Pollutants for Asbestos and also violations of the
particulate standard and the opacity limits applicable to WCI's facilities in
Warren, Ohio. Each action seeks a civil penalty not to exceed the statutory
maximum of $25,000 per day per violation and also seeks an injunction against
continuing violations. WCI believes that imposition of the statutory maximum
penalty for the alleged violations is unlikely based upon past judicial
penalties imposed under the Clean Water Act and the Clean Air Act, and that it
has defenses to liability. By letter
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dated November 1, 1996, EPA's Region V Water Division Director requested
information pursuant to the Clean Water Act from WCI relating to the Warren
facility, including information as to the effect of a prohibition against
federal procurement of WCI's products on WCI's business. WCI responded to the
EPA's request on December 2, 1996. WCI has not been notified that the EPA will
seek a federal procurement prohibition based on alleged permit violations.
However, there can be no assurance that a federal procurement prohibition will
not be imposed. WCI is negotiating a consent decree with the EPA to settle the
CWA Litigation and is also negotiating with the EPA toward settlement of the CAA
Litigation. If WCI is unable to reach a negotiated settlement and if a
substantial penalty similar to the statutory maximum penalty or federal
procurement prohibition were imposed, it could have a material adverse effect on
the financial condition or results of operations of WCI and the Company, the
extent of which WCI is unable to estimate at this time. Discovery has been
completed in both of these actions, and a trial date has been scheduled for
August 1998 for the CAA Litigation.
On December 17, 1997, WCI received a compliance order from the EPA alleging
certain violations of WCI's NPDES permit, including exceedances of permit limits
for pH and oil and grease and failure to identify and sample for residual
chlorine. WCI is investigating the alleged exceedances.
On May 11, 1998, the DOJ, on behalf of the EPA, instituted a civil action
against WCI under RCRA in the United States District Court for the Northern
District of Ohio. The action seeks injunctive relief and civil penalties against
WCI for alleged violations of RCRA, the OAC and WCI's hazardous waste management
permit issued pursuant to RCRA and OAC related to WCI's management of hazardous
waste in surface impoundments at WCI's Warren, Ohio facility. The action alleges
that from September 1988 to the present, WCI operated hazardous waste management
units at the Warren facility without the proper permits pursuant to RCRA and
seeks civil penalties not to exceed the statutory maximum of $25,000 per day per
violation for each day of violation prior to January 30, 1997 and $27,500 per
day per violation for each day of violation on or after January 30, 1997. WCI
intends to assert several defenses, including that these claims are subject to a
five-year statute of limitations. WCI believes that imposition of the statutory
maximum penalty is unlikely based on past judicial penalties imposed under RCRA.
However, there can be no assurance that WCI will not be found to have liability
and, if it has liability, that the statutory maximum penalty will not be
imposed. If the statutory maximum penalty or other substantial penalty were
imposed, it could have a material adverse effect on the financial condition or
results of operations of WCI and the Company.
WCI has obtained a storage permit under the RCRA, for waste pickle liquor at
its Warren facility acid regeneration plant. As a provision of the permit, WCI
will be required to undertake a corrective action program with respect to
historical material handling practices at the Warren facility. In April 1997,
WCI received notice from the EPA that it had approved a workplan for the first
investigation step of the corrective action program, the RFI, which is expected
to be completed in 1999. The workplan identifies thirteen historical solid waste
management units which are subject to the RFI, including areas of the facility
which are the subject of the RCRA civil action filed on May 11, 1998 described
above. The final scope of the corrective action required to remediate or reclaim
any contamination that may be present at or emanating from the Warren facility
is dependent upon the findings of the RFI and the development and approval of
the corrective action program. Accordingly, WCI is unable at this time to
estimate the final cost of the corrective action program or the period over
which such costs may be incurred, and there can be no assurance that it would
not have a material adverse effect on the financial condition of WCI and the
Company.
WCI received from the EPA a formal request dated April 1, 1994 for
information pursuant to Section 3007 of the RCRA and Section 104(e) of the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"). The request required WCI to submit information relating to
the generation, storage, treatment and disposal of solid or hazardous wastes or
hazardous substances at the Warren facility. The request also required WCI to
submit certain financial information and other information needed to evaluate
the facility's compliance with the RCRA and CERCLA requirements. WCI
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<PAGE>
made the requested information available to the EPA during 1994, and the EPA
examined the information in March 1997. The request did not identify violations,
seek to impose penalties or monetary sanctions or require the performance of
remedial activities or other capital expenditures. Among other items, the
request sought information about a specific area at which waste management
occurred at the Warren facility under a prior owner. This area was remediated by
the prior owner before the facility was sold to WCI, and the area is also
scheduled to be investigated under the corrective action RFI. Under EPA
guidance, the area will not be addressed under CERCLA when it is included in the
corrective action process. Because of the past remediation of the area by a
prior owner and the inclusion of the area in the corrective action process, WCI
believes that the area would not be regarded as a priority risk under CERCLA.
WCI operates a landfill at its Warren facility which receives waste
materials from the iron and steel-making operations. WCI has submitted a plan to
state environmental authorities to replace this landfill with a new lined
landfill. The plan involves closure by removal of the present landfill by
selling approximately one-third of its contents to established markets for
construction materials and recycling most of the remaining contents over an
extended period at the sinter plant in Youngstown, Ohio operated by WCI's
subsidiary, Youngstown Sinter Company, and disposing of any non-salable or
non-recyclable material in the new lined landfill. Youngstown Sinter Company is
presently exploring modifications to sulfur dioxide emission regulations
applicable to the Youngstown sinter plant to enable it to comply with applicable
sulfur dioxide emission levels, as well as allow faster recycling of the present
landfill contents. The Company does not believe that the sinter plant's
noncompliance will result in any material expenditures. The new lined landfill
construction and existing landfill closure, if pursued, are expected to be
completed in seven consecutive phases. The estimated cost through Phase I is
approximately $2.9 million to $4.1 million expended over three years. The
estimated cost for Phase II is approximately $1.6 million expended over six
years, and the estimated cost for Phase III is approximately $1.7 million
expended over ten years. Construction is expected to begin during fiscal 1998 or
1999.
During 1997, the EPA proposed new standards regulating particulate matter
and ozone emissions. Data relating to these standards is to be collected and
analyzed with implementation as early as 2004. These standards have been the
subject of significant discussion throughout federal and state governments, and
changes to the standards or the implementation date may be made prior to final
approval. Like much of the steel, utilities and other industries, WCI's current
operations are not expected to comply with these proposed standards. WCI cannot
currently assess the impact of these proposed standards on its results of
operations or financial condition.
EMPLOYEES
As of January 31, 1998, WCI had 553 salaried employees and 1,677 hourly
employees. Most of the employees are located at the Warren facility and most of
the hourly employees are represented by the USWA with which WCI reached a
four-year collective bargaining agreement which expires September 1, 1999.
BENEFIT PLANS
HOURLY PROFIT SHARING PLAN
Certain hourly employees represented by the USWA participate in a profit
sharing plan under which WCI pays 12% of pretax income as defined in the profit
sharing agreement. WCI advances one-half of the amounts due under this plan on a
quarterly basis, within 45 days following the end of each fiscal quarter, and
pays the remaining amounts by February 15 of the subsequent year.
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SALARIED VARIABLE COMPENSATION PLAN
WCI has a variable compensation plan for salaried employees known as the
Company Performance Compensation Program ("CPC"). Under the CPC, salaried
employees receive variable compensation based on WCI's pretax income as defined
in the plan. CPC payments are measured as a percentage of the employees base
salary and paid quarterly.
PENSION
WCI has defined contribution retirement plans that cover substantially all
employees. WCI funds these contributions as earned. WCI's contributions to the
plans are based on employee age, length of service and compensation.
WCI has a defined benefit floor offset pension plan which covers
substantially all hourly employees at the Warren facility. The plan, when
combined with benefits from WCI's defined contribution plan and benefits from a
predecessor company defined benefit pension plan, will provide a minimum level
of pension benefits for eligible employees. Benefits are based on age and years
of service, but not compensation. Under this plan, employees will receive upon
retirement a monthly benefit equal to $35 times the number of years of service
with WCI or its predecessors. If the employee has at least 30 years of service
at retirement, the monthly benefit is subject to certain minimums based on age
at retirement. Monthly benefits under the plan are reduced by any benefit from
WCI's defined contribution plan (as an annuity equivalent) and benefits payable
from a defined benefit pension plan of a predecessor company. No named executive
officer is eligible to participate in this plan.
POSTRETIREMENT HEALTH CARE
WCI provides postretirement health care benefits to employees who retire
while meeting certain age and service eligibility requirements. WCI has
established a VEBA Trust to hold WCI's contributions to fund future
postretirement health care and life insurance obligations. The VEBA Trust holds
liens on the Collateral and certain assets of WCI and one of its subsidiaries to
secure WCI's obligation for postretirement health care benefits. WCI
contributions are $.50 per hour or a minimum of approximately $1.5 million per
year. See "Risk Factors--Relating to WCI--Substantial Employee Postretirement
Obligations."
PENDING LITIGATION
On January 23, 1996, two retired employees instituted an action against WCI
and the USWA in the United States District Court for the Northern District of
Ohio alleging in substance that certain distributions made by WCI to employees
and benefit plans violated certain agreements, ERISA, the National Labor
Relations Act and common law. On July 31, 1997, the court granted WCI's motion
to dismiss this action and entered judgment in favor of WCI and the USWA. The
plaintiffs have filed an appeal regarding the court's decision to dismiss.
On April 5, 1996, an employee instituted an action for damages against WCI
in the Court of Common Pleas, Trumbull County, Ohio alleging that, under Ohio
common law, her privacy rights were violated and that she has been subjected to
sexual harassment. On April 28, 1997, the plaintiff filed for summary judgment,
which the court denied. WCI denies plaintiff's allegations of liability. The
court has set a trial date for August 1998.
For a description of pending litigation related to environmental matters,
see "--Environmental Matters."
In addition, WCI is involved in various claims and lawsuits incidental to
the ordinary course of its business, which WCI believes will not have a material
adverse effect on the consolidated financial condition of WCI.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Ira Leon Rennert................. 63 Chairman of the Board and Director
James N. Chapman................. 35 President
Roger L. Fay..................... 52 Vice President and Chief Financial Officer
</TABLE>
IRA LEON RENNERT has been Chairman, Chief Executive Officer and principal
shareholder of the Company's parent company, Renco (including predecessors),
since Renco's first acquisition in 1975 and Chairman of the Company since its
inception and of WCI since its formation in 1988. Renco holds controlling
interests in a number of manufacturing and distribution concerns operating in
businesses not competing with WCI, including Renco Metals, Inc. and AM General
Corporation, for both of which he serves as a Director.
JAMES N. CHAPMAN has been President of the Company since its inception and
Vice President-- Investment Banking of Renco since December 1996. Prior to
joining Renco, Mr. Chapman was a Principal with the investment banking firm of
Fieldstone FPCG Services, L.P. from August 1990 through May 1996. Mr. Chapman is
a director of Coinmach Laundry Corporation.
ROGER L. FAY has been Vice President and Chief Financial Officer of the
Company since its inception and Vice President--Finance of Renco since 1983. Mr.
Fay is a certified public accountant.
The sole director of the Company serves at the pleasure of the Company's
sole shareholder, Renco, for an unspecified term. The executive officers of the
Company serve at the pleasure of the Company's sole director for an unspecified
term.
The executive officers of the Company do not receive any compensation from
the Company or its subsidiaries. Renco receives a management consultant fee from
WCI. See "Stock Ownership and Certain Relationships and Transactions."
EXECUTIVE OFFICERS OF WCI
The following sets forth the executive officers of WCI, who are not officers
of the Company and who are not involved in the management or day-to-day
operations of the Company:
EDWARD R. CAINE has been President and Chief Executive Officer of WCI since
April 1996. Mr. Caine was a Director of WCI from April 1996 through December
1996. Prior to joining WCI, Mr. Caine had 37 years of experience in the steel
industry with U.S. Steel, most recently as General Manager of U.S. Steel's
Fairfield, Alabama integrated steel operations from April 1991 to March 1996.
PATRICK T. KENNEY has been Vice President, Operations of WCI since June
1994. Prior to becoming Vice President of WCI, Mr. Kenney served as General
Superintendent of Finishing Operations of WCI since 1988.
PATRICK G. TATOM has been Vice President, Commercial of WCI since November
1995. He served as Vice President, Sales of WCI from February 1994 through
October 1995 and as General Manager of Sales of WCI from September 1988 to
February 1994.
BRET W. WISE has been Vice President, Finance and Chief Financial Officer of
WCI since September 1994. Prior to joining WCI, Mr. Wise was a partner with the
accounting and consulting firm of KPMG Peat Marwick LLP and had been with that
firm in various capacities from June 1982 through August 1994.
The executive officers of WCI do not receive any compensation from the
Company.
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STOCK OWNERSHIP AND CERTAIN RELATIONSHIPS AND TRANSACTIONS
The following table sets forth certain information as of the date hereof
regarding the beneficial ownership of common stock of the Company by each
beneficial owner of 5% or more of the common stock of the Company, each director
and each named executive officer of the Company during the last fiscal year, and
by all directors and executive officers of the Company as a group. Except as
otherwise noted, the persons named in the table below have sole voting and
investment power with respect to all shares shown as beneficially owned by them.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
------------------------------
<S> <C> <C>
SHARES OF
NAME OF BENEFICIAL OWNERS AND ADDRESS OF 5% BENEFICIAL OWNERS COMMON STOCK PERCENT
The Renco Group, Inc. ............................................... 100 100.0%
30 Rockefeller Plaza, 42nd Floor
New York, NY 10112
Ira Leon Rennert(1).................................................. 100 100.0%
c/o The Renco Group, Inc.
30 Rockefeller Plaza, 42nd Floor
New York, NY 10112
James N. Chapman..................................................... -- --
Roger L. Fay......................................................... -- --
All directors and executive officers as a group (3 persons).......... 100 100.0%
</TABLE>
- ------------------------
(1) Mr. Rennert is deemed to beneficially own the Common Stock of the Company
owned by Renco due to the ownership by himself and trusts established by him
(but of which he is not a trustee) for himself and members of his family of
a total of 97.9% of the outstanding Common Stock of Renco.
By virtue of Renco's ownership of all the outstanding shares of Common
Stock, and Mr. Rennert's ownership of a majority of the stock of Renco, Mr.
Rennert is in position to control actions that require the consent of a majority
of the holders of the Company's outstanding shares of Common Stock, including
the election of the Board of Directors.
Under a Management Consultant Agreement, effective October 1, 1992, as
amended, between Renco and WCI, WCI pays a monthly fee of $100,000 to Renco. The
Management Consultant Agreement provides that WCI shall not make any payment
thereunder which would violate any of its agreements with respect to any of its
outstanding indebtedness. The Management Consultant Agreement extends to October
31, 2001 and thereafter shall continue for additional terms of three years each
unless sooner terminated by either party by giving six months prior written
notice. In the year ended October 31, 1997, WCI paid management fees to Renco in
the amount of $1,200,000. WCI believes that the cost of obtaining the type and
quality of services rendered by Renco under the Management Consultant Agreement
was, and continues to be, no less favorable than that at which WCI could obtain
such services from unaffiliated entities.
The Company and WCI are included in the consolidated federal income tax
return of Renco. Under the terms of the Company's tax sharing agreement with
Renco, income taxes are allocated by Renco to the Company on a separate return
basis, consolidated with WCI and its subsidiaries, except that transactions
between the Company and its subsidiaries and Renco and its other subsidiaries
are accounted for on a cash basis and not on an accrual basis. Similarly, under
the terms of WCI's tax sharing agreements with the Company and Renco, income
taxes are allocated by the Company to WCI on a separate return basis, except
that transactions between WCI and the Company are accounted for on a cash basis
and not on an accrual basis. Neither the Company nor WCI is entitled to the
benefit of net tax loss carryforwards, unless such tax losses were a result of
timing differences between their respective accounting for tax and financial
reporting purposes. As of October 31, 1997, WCI had no net operating tax loss
carryforwards. Renco has
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agreed to indemnify WCI for any tax imposed on or paid by it in excess of the
amount payable under its tax sharing agreement. As of January 31, 1998, WCI had
recoverable income taxes of $.8 million under its tax sharing agreement.
To obtain the advantages of volume, Renco purchases certain insurance
coverages for its subsidiaries, including WCI, and the actual cost of such
insurance, without markup, is reimbursed by the covered subsidiaries. The major
areas of WCI's insurance coverage obtained under the Renco programs are
property, business interruption, general, product and auto liability and
workers' compensation (other than Ohio for which WCI is self insured). The
premiums for director and officer, fidelity, fiduciary, property, business
interruption, auto liability and casualty umbrella are allocated by Renco
substantially as indicated in the underlying policies. General and product
liability and workers' compensation coverages (excluding the Ohio self insured
program) are loss sensitive programs with both fixed and variable premium
components. The fixed premium component for this coverage is allocated to each
insured Renco subsidiary based on factors that include historical guaranteed
cost premium, the overall growth of each subsidiary and an assessment of risk
based on loss experience. The fixed component is subject to revision resulting
from the insurance carrier's audit of actual premium factors. As claims (the
variable component) are paid, each insured within the loss sensitive program is
charged for its claims up to a maximum amount and subject to an overall maximum
for all insured subsidiaries. Each insured Renco subsidiary has been assigned an
individual maximum cost based on historical guaranteed cost premiums. The
overall and individual subsidiary maximums are subject to revision based on
audit of actual premium factors. If an insured Renco subsidiary reaches its
individual maximum cost, the other insured subsidiaries are required to share
proportionately in the excess cost of the subsidiary which has reached its
individual maximum. In fiscal 1997, WCI incurred costs of approximately $1.7
million under the Renco insurance program. WCI believes that its insurance costs
under this program were less than it would have incurred if it had obtained its
insurance directly. In addition, the Company expects to participate in Renco's
insurance program to the extent of its insurance requirements.
In fiscal 1998, WCI has purchased, and may from time to time in the future
purchase, zinc and other materials from The Doe Run Resources Corporation, an
indirect subsidiary of Renco. WCI believes that such purchase in the amount of
$.8 million was on an arm's length basis at a price no less favorable than that
at which WCI could obtain from unaffiliated entities. No such purchases were
made in fiscal 1997.
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DESCRIPTION OF THE NOTES
The Old Notes were and the Exchange Notes will be issued under the
Indenture, authorizing the issuance of up to $120.0 million in aggregate
principal amount of Notes. The following summary sets forth all material
elements of the Indenture; nevertheless, this summary does not purport to be
complete and is subject to, and qualified in its entirety by, reference to the
provisions of the Indenture, including the definitions of certain terms
contained therein and those terms made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (the "TIA"), as in effect on the date of
the Indenture. A copy of the Indenture is filed as an exhibit to the
Registration Statement. The definitions of certain capitalized terms used in the
following summary are set forth below under "--Certain Definitions." References
in this section to "the Company" refer only to Renco Steel Holdings, Inc. and
not to its Subsidiaries.
GENERAL
The Notes will mature on February 1, 2005. Each Note bears interest at the
rate of 10 7/8% per annum from the date of issuance or from the most recent
interest payment date to which interest has been paid, payable semiannually in
arrears on February 1 and August 1 of each year, commencing August 1, 1998, to
the person in whose name the Note (or any predecessor Note) is registered at the
close of business on the January 15 or July 15 next preceding such interest
payment date.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes will be exchangeable and transferable, at the office or agency of
the Company in The City of New York maintained for such purposes (which
initially will be the Trustee or its agent); provided that payment of interest
may be made at the option of the Company by check mailed to the registered
holders of the Notes ("Holders") at their registered addresses. The Notes will
be issued only in fully registered form without coupons, in denominations of
$1,000 and any integral multiple thereof. No service charge will be made for any
registration of transfer, exchange or redemption of Notes, except in certain
circumstances for any tax or other governmental charge that may be imposed in
connection therewith. Interest will be computed on the basis of a 360 day year
comprised of twelve 30 day months.
OPTIONAL REDEMPTION
The Notes will be subject to redemption, in whole or in part, at the option
of the Company, at any time on or after February 1, 2002, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued interest to the redemption date, if redeemed during the twelve month
period beginning on February 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2002.......................................................... 105.438%
2003.......................................................... 102.719%
2004 and thereafter........................................... 100.000%
</TABLE>
OPTIONAL REDEMPTION UPON EQUITY OFFERINGS
In addition, at any time prior to February 1, 2001, the Company may redeem
up to 33 1/3% of the aggregate principal amount of the Notes originally issued
with the proceeds of one or more Equity Offerings at a redemption price
(expressed as a percentage of principal amount) of 111% plus accrued interest to
the redemption date; PROVIDED that at least $80 million aggregate principal
amount of Notes remains outstanding immediately after any such redemption. In
order to effect the foregoing redemption with the proceeds of any Equity
Offering, the Company shall make such redemption not more than 120 days after
the consummation of any such Equity Offering. "Equity Offering" means an
offering of Qualified Capital Stock of the Company (other than to any Subsidiary
of the Company).
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<PAGE>
SINKING FUND
There will be no mandatory sinking fund payments for the Notes.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time,
selection of such Notes for redemption will be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which such Notes are listed or, if such Notes are not then listed on a national
securities exchange, on a pro rata basis, by lot or by such method as the
Trustee shall deem fair and appropriate; PROVIDED, HOWEVER, that (i) no Notes of
a principal amount of $1,000 or less shall be redeemed in part and (ii) a
redemption with the net cash proceeds of an Equity Offering shall be made on a
pro rata basis unless such method is otherwise prohibited. Notice of redemption
shall be mailed by first-class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in a principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
will cease to accrue on Notes or portions thereof called for redemption.
RANKING; HOLDING COMPANY STRUCTURE
The indebtedness of the Company evidenced by the Notes ranks senior in right
of payment to all senior subordinated and subordinated indebtedness of the
Company, and PARI PASSU with all other existing and future senior indebtedness
of the Company.
The Company is a holding company with no material operations of its own and
only limited assets. Accordingly, the Company is dependent upon the distribution
of the earnings of WCI and any future Subsidiaries of the Company, whether in
the form of dividends, advances or payments on account of intercompany
obligations, to service its debt obligations, and on the earnings of the
Investments made with a portion of the proceeds of the Old Notes Offering. In
addition, the claims of the Holders of Notes are subject to the prior payment of
all liabilities (whether or not for borrowed money) and to any preferred stock
interest of WCI and any such Subsidiaries. There can be no assurance that, after
providing for all prior claims, there would be sufficient assets available from
the Company and its Subsidiaries to satisfy the claims of the Holders of Notes.
See "Risk Factors--Relating to the Company--Holding Company Structure;
Refinancing Risk; Structural Subordination."
SECURITY
The Old Notes are and the Exchange Notes will be secured by a first priority
security interest in (i) all of the Capital Stock of WCI now owned or from time
to time acquired by the Company (the "WCI Pledged Stock") and (ii) all
dividends, distributions, interests, cash, instruments and other property and
proceeds from time to time received, receivable or otherwise distributed in
respect of or in exchange for the WCI Pledged Stock and any account, instrument
or security in which the WCI Pledged Stock is deposited or invested, including
any earnings thereon (together with the WCI Pledged Stock, the "Collateral").
The Company has entered into a pledge agreement (the "Pledge Agreement")
providing for the first priority pledge by the Company to State Street Bank and
Trust Company, as collateral agent (the "Collateral Agent"), of all of the WCI
Pledged Stock. Such pledge secures the payment and performance when due of all
of the obligations of the Company under the Indenture and the Notes as provided
in the Pledge Agreement.
So long as no Event of Default shall have occurred and be continuing, and
subject to certain terms and conditions in the Indenture and the Pledge
Agreement, the Company will be entitled to receive all cash dividends and other
distributions (other than Extraordinary Distributions) made upon or with respect
to the WCI Pledged Stock and to exercise any voting and other consensual rights
pertaining to the WCI
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Pledged Stock. The Pledge Agreement provides that, upon receipt by the Company
of an Extraordinary Distribution on the WCI Pledged Stock, the Company shall
deliver such Extraordinary Distribution to the Trustee to be held as Collateral
(with any necessary endorsement and accompanied by any documentation necessary
to ensure that, and evidence that, a first priority perfected security interest
is being created therein). Upon the occurrence and during the continuance of an
Event of Default, (i) all rights of the Company to exercise such voting or other
consensual rights shall cease, and all such rights shall become vested in the
Collateral Agent, which, to the extent permitted by law, shall have the sole
right to exercise such voting and other consensual rights, (ii) all rights of
the Company to receive all cash dividends and other distributions made upon or
with respect to the WCI Pledged Stock will cease and such cash dividends and
other distributions (including Extraordinary Distributions) will be paid to the
Collateral Agent and (iii) the Collateral Agent may sell the WCI Pledged Stock
or any part thereof in accordance with the terms of the Pledge Agreement. All
funds distributed under the Pledge Agreement and received by the Collateral
Agent for the benefit of the Holders of the Notes will be distributed by the
Collateral Agent pro rata to the Holders of Notes in accordance with the
provisions of the Indenture and the Pledge Agreement.
Under the terms of the Pledge Agreement, the Collateral Agent will determine
the circumstances and manner in which the WCI Pledged Stock shall be disposed
of, including, but not limited to, the determination of whether to release all
or any portion of the WCI Pledged Stock from the Liens created by the Pledge
Agreement and whether to foreclose on the WCI Pledged Stock following an Event
of Default. Moreover, upon the full and final payment and performance of all
obligations of the Company under the Indenture and the Notes, the Pledge
Agreement shall terminate and the Lien on the WCI Pledged Stock shall be
released.
Upon satisfaction by the Company of the conditions to its legal defeasance
or covenant defeasance or the discharge of the Indenture in accordance with its
terms, the Lien of the Indenture on all of the Collateral will terminate and all
the Collateral will be released without any further action on the part of the
Collateral Agent or any other person. In addition, the Indenture and the Pledge
Agreement provide that the WCI Pledged Stock will be released from the Lien of
the Indenture and the Pledge Agreement in the event that all of the Capital
Stock of WCI owned by the Company is sold by the Company to a person who is not
an Affiliate of the Company and the sale complies with the provisions set forth
below under
"--Certain Covenants--Limitation on Sale of Assets."
CERTAIN BANKRUPTCY LIMITATIONS
The right of the Trustee to repossess and dispose of the Collateral upon the
occurrence of an Event of Default is likely to be significantly impaired by
applicable bankruptcy law if a bankruptcy proceeding were to be commenced by or
against the Company prior to the trustee having repossessed and disposed of the
Collateral. Under the United States Bankruptcy Code, a secured creditor such as
the Trustee is prohibited from repossessing its security from a debtor in a
bankruptcy case, or from disposing of security repossessed from such debtor,
without bankruptcy court approval. Moreover, the United States Bankruptcy Code
permits the debtor to continue to retain and to use collateral even though the
debtor is in default under the applicable debt instruments, provided that the
secured creditor is given "adequate protection." The meaning of the term
"adequate protection" may vary according to circumstances, but it is intended in
general to protect the value of the secured creditor's interest in the
collateral and may include cash payments or the granting of additional security,
if and at such times as the court in its discretion determines, for any
diminution in the value of the Collateral as a result of the stay of
repossession or disposition or any use of the collateral by the debtor during
the pendency of the bankruptcy case. In view of the lack of a precise definition
of the term "adequate protection" and the broad discretionary powers of a
bankruptcy court, it is impossible to predict how long payments under the Notes
could be delayed following commencement of a bankruptcy case, whether or when
the Trustee could repossess or dispose of the Collateral or whether or to what
extent holders of the Notes would be compensated for any delay in payment or
loss of value of the Collateral through the requirement of "adequate
protection."
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CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INDEBTEDNESS AND DISQUALIFIED CAPITAL STOCK
(a) The Company will not (i) create, incur, assume, guarantee, become
liable, contingently or otherwise, with respect to, or otherwise become
responsible for the payment of (collectively "incur") any Indebtedness
(including Acquired Indebtedness) other than Permitted Indebtedness or (ii)
issue any Disqualified Capital Stock.
(b) The Company shall not in any event incur any Indebtedness which by its
terms (or by the terms of any agreement governing such Indebtedness) is
subordinated to any other Indebtedness of the Company unless such Indebtedness
is also by its terms (or by the terms of any agreement governing such
Indebtedness) made expressly subordinated to the Notes to the same extent and in
the same manner as such Indebtedness is subordinated to such other Indebtedness
of the Company.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not after the Issue Date (a) declare or pay any dividend or
make any distribution on the Company's Capital Stock or make any payment to
holders of such Capital Stock (other than dividends or distributions payable in
Qualified Capital Stock of the Company, repayment of Indebtedness permitted to
be incurred under the Indenture or the reimbursement of expenses paid on behalf
of the Company) or (b) purchase, redeem or otherwise acquire or retire for value
any Capital Stock of the Company or any warrants, rights or options to purchase
or acquire shares of any class of such Capital Stock (each of the foregoing
actions set forth in clauses (a) and (b) being referred to as a "Restricted
Payment"), if at the time of such Restricted Payment or immediately after giving
effect thereto, (i) a Default or an Event of Default shall have occurred and be
continuing or (ii) Restricted Payments made subsequent to the Issue Date (the
amount expended for such purposes, if other than in cash, shall be the Fair
Market Value of such property proposed to be transferred by the Company pursuant
to such Restricted Payment) shall exceed the sum of:
(x) 50% of the cumulative Net Cash Income (or if cumulative Net Cash
Income shall be a loss, minus 100% of such loss) of the Company earned
subsequent to January 31, 1998 and prior to the date the Restricted Payment
occurs (treating such period as a single accounting period); and
(y) 100% of the aggregate net proceeds, including the Fair Market Value
of property other than cash, received by the Company from any person (other
than a Subsidiary of the Company) from the issuance and sale subsequent to
the Issue Date of Qualified Capital Stock of the Company (excluding (A)
Qualified Capital Stock paid as a dividend on any Capital Stock or as
interest on any Indebtedness, (B) any net proceeds from issuances and sales
financed directly or indirectly using funds borrowed from the Company or any
Subsidiary of the Company, until and to the extent such borrowing is repaid
and (C) any net proceeds from any Equity Offering which are used to redeem
Notes pursuant to, and in accordance with, the provisions described under
the caption "--Optional Redemption--Optional Redemption Upon Equity
Offerings" above);
The foregoing provisions shall not prohibit:
(1) the payment of any dividend within 60 days after the date of its
declaration if the dividend would have been permitted on the date of
declaration;
(2) the acquisition of Capital Stock of the Company either (i) solely in
exchange for shares of Qualified Capital Stock or (ii) through the
application of net proceeds of a substantially concurrent sale for cash
(other than to a Subsidiary of the Company) of shares of Qualified Capital
Stock;
(3) the making of payments by the Company to Renco (A) no earlier than
ten days prior to the date on which Renco is required to make its payments
to the Internal Revenue Service or the
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applicable state taxing authority, as the case may be, pursuant to a tax
sharing agreement between the Company and Renco (which tax sharing agreement
provides that the payments thereunder shall not exceed the amount the
Company would have been required to pay for taxes on a stand-alone basis,
except that the Company will not have the benefit of any of its tax loss
carryforwards unless such tax losses were a result of timing differences
between the Company's accounting for tax and financial reporting purposes,
and which tax sharing agreement also provides that transactions between the
Company and Renco and Renco's other Subsidiaries are accounted for on a cash
basis and not on an accrual basis) and (B) to reimburse Renco for out of
pocket insurance payments made by Renco on behalf of the Company; and
(4) the payment by the Company of a dividend to Renco on the Issue Date
in an amount not to exceed $100.0 million;
PROVIDED that in the case of clause (2) no Default or Event of Default shall
have occurred and be continuing at the time of such payment or as a result
thereof.
In determining the aggregate amount of Restricted Payments permissible under
clause (ii) of the first paragraph of this section, amounts expended, incurred
or outstanding pursuant to clauses (1) and (2) (but not pursuant to clauses (3)
and (4)), of the second paragraph of this section shall be included as
Restricted Payments; PROVIDED that any proceeds received from the issuance of
Qualified Capital Stock pursuant to clause (2) of the second paragraph of this
section shall be included in calculating the amount referred to in clause (y) of
the first paragraph of this section.
LIMITATION ON SALE OF ASSETS
(a) The Company will not consummate any Asset Sale unless (i) such Asset
Sale is for at least Fair Market Value, (ii) at least 80% of the consideration
therefrom received by the Company is in the form of cash or Cash Equivalents,
(iii) if such Asset Sale involves the sale of Capital Stock of WCI it shall be
in compliance with the provisions of clause (b) below," and (iv) the Company
shall apply the Net Cash Proceeds of such Asset Sale (the "Available Amount")
within 180 days of receipt thereof to make an offer to purchase (the "Asset Sale
Offer") from all Holders of Notes, up to a maximum principal amount (expressed
as a multiple of $1,000) of Notes equal to the Available Amount, at a purchase
price equal to 100% of the principal amount thereof plus accrued and unpaid
interest thereon, if any, to the date of purchase; PROVIDED, HOWEVER, that the
Company will not be required to apply, pursuant to this paragraph (a), Net Cash
Proceeds received from any Asset Sale if, and only to the extent that, such Net
Cash Proceeds are applied in compliance with the "Limitation on Business
Activities" covenant within 180 days of such Asset Sale; PROVIDED, FURTHER, that
if at any time any non-cash consideration received by the Company in connection
with any Asset Sale is converted into or sold or otherwise disposed of for cash,
then such conversion or disposition shall be deemed to constitute an Asset Sale
under the Indenture and the Net Cash Proceeds thereof shall be applied in
accordance with this "Limitation on Sale of Assets" covenant; PROVIDED, FURTHER,
that the Company may defer the Asset Sale Offer until there is an aggregate
unutilized Available Amount equal to or in excess of $5.0 million resulting from
one or more Asset Sales (at which time, the entire unutilized Available Amount,
and not just the amount in excess of $5.0 million, shall be applied as required
pursuant to this paragraph).
(b) Notwithstanding anything to the contrary contained in clause (a) above
or in the Indenture, the Company may not sell any of the Capital Stock of WCI
unless such Asset Sale involves the sale of all of the Capital Stock of WCI and
the Company uses the Net Cash Proceeds of such Asset Sale within 60 days of
receipt thereof to make an offer to purchase from all Holders of Notes, up to a
maximum principal amount (expressed as a multiple of $1,000) of Notes equal to
the Net Cash Proceeds of such Asset Sale, at a purchase price equal to the sum
of the principal amount of the Notes plus the Applicable Premium plus accrued
and unpaid interest thereon, if any, to the date of purchase. Any such offer to
purchase Notes with the Net Cash Proceeds of an Asset Sale involving the sale of
all of the Capital Stock of WCI shall comply
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with all the procedural and other requirements set forth herein and in the
Indenture for an Asset Sale Offer.
(c) In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Subsidiaries as an entirety to a
person in a transaction permitted under "--Merger, Consolidation, Etc." below,
the successor corporation shall be deemed to have sold the properties and assets
of the Company and its Subsidiaries not so transferred for purposes of this
covenant, and shall comply with the provisions of this covenant with respect to
such deemed sale as if it were an Asset Sale. In addition, the Fair Market Value
of such properties and assets of the Company or its Subsidiaries deemed to be
sold shall be deemed to be Net Cash Proceeds for purposes of this covenant.
(d) Notice of an Asset Sale Offer will be mailed to the record Holders as
shown on the register of Holders not less than 30 days nor more than 60 days
before the payment date for the Asset Sale Offer, with a copy to the Trustee,
and shall comply with the procedures set forth in the Indenture. Upon receiving
notice of the Asset Sale Offer, Holders may elect to tender their Notes in whole
or in part in integral multiples of $1,000 principal amount at maturity in
exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Available Amount, Notes of tendering Holders will be repurchased
on a pro rata basis (based on amounts tendered). An Asset Sale Offer shall
remain open for a period of 20 business days or such longer period as may be
required by law.
(e) If an offer is made to repurchase the Notes pursuant to an Asset Sale
Offer, the Company will comply with all tender offer rules under state and
Federal securities laws, including, but not limited to, Section 14(e) under the
Exchange Act and Rule 14e-1 thereunder, to the extent applicable to such offer.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company shall be obligated
to make an offer to purchase (a "Change of Control Offer"), and shall, subject
to the provisions described below, purchase, on a business day (the "Change of
Control Purchase Date") not more than 60 nor less than 45 days following the
occurrence of the Change of Control, all of the then outstanding Notes at a
purchase price (the "Change of Control Purchase Price") equal to 101% of the
principal amount of the Notes plus accrued and unpaid interest thereon to the
date of purchase. The Company shall, subject to the provisions described below,
be required to purchase all Notes validly tendered into the Change of Control
Offer and not withdrawn. The Change of Control Offer is required to remain open
for at least 20 business days and until the close of business on the Change of
Control Purchase Date.
In order to effect such Change of Control Offer, the Company shall, not
later than the 30th day after the Change of Control, mail to each Holder of
Notes notice of the Change of Control Offer, which notice shall govern the terms
of the Change of Control Offer and shall state, among other things, the
procedures that Holders of Notes must follow to accept the Change of Control
Offer.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by Holders of Notes
seeking to accept the Change of Control Offer. The Company shall not be required
to make a Change of Control Offer upon a Change of Control if a third party
makes the Change of Control Offer in the manner, at the times and otherwise in
compliance with the requirements applicable to a Change of Control Offer made by
the Company and purchases all Notes validly tendered and not withdrawn under
such Change of Control Offer.
Except as described in this section, the Indenture does not contain
provisions that permit the holders of Notes to require the Company to purchase
or redeem the Notes in the event of a takeover, recapitalization or similar
transaction. The Company could enter into certain transactions, including
acquisitions, refinancings or other recapitalizations, that could affect the
Company's capital structure or the value of the Notes, but that would not
constitute a Change of Control. The Company's ability to
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repurchase Senior Notes following a Change of Control may also be limited by the
Company's then existing financial resources.
The Company will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that a Change of Control occurs and the
Company is required to purchase Notes as described above.
LIMITATION ON LIENS
The Company will not create, incur, assume or suffer to exist any Liens (i)
upon any item of Collateral other than the Liens created by the Notes, the
Indenture and the Pledge Agreement and (ii) upon any other properties or assets
of the Company whether owned on the Issue Date or acquired after the Issue Date,
or on any income or profits therefrom, or assign or otherwise convey any right
to receive income or profits thereon other than (A) in the case of clause (ii)
only, Liens securing Indebtedness permitted to be incurred pursuant to clause
(i) of the definition of Permitted Indebtedness and (B) in the case of clauses
(i) and (ii), Permitted Liens.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
(a) The Company will not enter into or permit to exist any transaction
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with or for the benefit of, an
Affiliate of the Company (an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under (b) below and (y) Affiliate Transactions (including
lease transactions) on terms that are no less favorable to the Company in the
aggregate than those that might reasonably have been obtained in a comparable
transaction by the Company on an arm's-length basis (as determined in good faith
by the Board of Directors of the Company, as evidenced by a Board Resolution)
from a person that is not an Affiliate; PROVIDED that except as otherwise
provided by (b) below, the Company shall not enter into an Affiliate Transaction
or series of related Affiliate Transactions involving or having a value of more
than $5.0 million unless the Company received an opinion from an Independent
Financial Advisor, with a copy thereof to the Trustee, to the effect that the
financial terms of such Affiliate Transaction are fair and reasonable to the
Company, and such terms are no less favorable to the Company than those that
could be obtained in a comparable transaction on an arm's-length basis with a
person that is not an Affiliate.
(b) The foregoing provisions shall not apply to (i) any Restricted Payment
that is made in compliance with the provisions under "--Limitation on Restricted
Payments" and (ii) reasonable and customary regular fees to directors of the
Company who are not employees of the Company.
(c) Notwithstanding anything to the contrary contained in clauses (a) or (b)
above or in the Indenture, the Company shall not make any Investment after the
Issue Date in any person in which Renco or any of its Affiliates (other than the
Company and its Subsidiaries) owns any Capital Stock.
OWNERSHIP OF WCI STOCK
Other than the sale of all of the Capital Stock of WCI in compliance with
clause (b) of the "Limitation on Sale of Assets" covenant above, the Company
will at all times be the legal and beneficial owner of all of the outstanding
Capital Stock of WCI.
LIMITATION ON BUSINESS ACTIVITIES
The Company will not engage in any business other than (i) the ownership of
the Capital Stock of WCI and (ii) the investing and reinvesting of the assets of
the Company other than the Capital Stock of WCI, and the application of any
proceeds therefrom, at the discretion of the Company.
IMPAIRMENT OF SECURITY INTEREST
The Company will not, and will not permit any of its Subsidiaries to, take
or omit to take any action which action or omission might or would have the
result of affecting or impairing the security interest in
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favor of the Trustee, on behalf of itself and the Holders of the Notes, with
respect to the Collateral, and the Company shall not grant to any person (other
than the Trustee on behalf of itself and the Holders of the Notes) any interest
whatsoever in the Collateral other than Liens permitted by the Indenture and the
Pledge Agreement.
AMENDMENT TO PLEDGE AGREEMENT
The Company will not, and will not permit any of its Subsidiaries to, amend,
modify or supplement or permit or consent to any amendment, modification or
supplement of, the Pledge Agreement in any way which would be adverse to the
Holders of the Notes or which would constitute a Default under the Indenture or
the Pledge Agreement.
LIMITATION ON STATUS AS INVESTMENT COMPANY
The Company will not, and will not permit any of its Subsidiaries or
controlled Affiliates to, conduct its business in a fashion that would cause the
Company to be required to register as an "investment company" (as that term is
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act")), or otherwise become subject to regulation under the Investment
Company Act.
REPORTS
So long as any Note is outstanding, the Company will file with the
Commission and, within fifteen days after it files them with the Commission,
file with the Trustee and mail or cause the Trustee to mail to the Holders at
their addresses as set forth in the register of the Notes copies of the annual
reports on Form 10-K and of the information, documents and other reports which
the Company is required to file with the Commission pursuant to Section 13 or
15(d) of the Exchange Act or which the Company would be required to file with
the Commission if the Company then had a class of securities registered under
the Exchange Act. Such financial information shall include annual reports
containing consolidated financial statements and notes thereto, together with an
opinion thereon expressed by an independent public accounting firm, management's
discussion and analysis of financial condition and results of operations as well
as quarterly reports containing unaudited condensed consolidated financial
statements for the first three quarters of every fiscal year.
MERGER, CONSOLIDATION, ETC.
The Company will not, in a single transaction or series of related
transactions, consolidate or merge with or into, or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its assets to,
any person or adopt a Plan of Liquidation unless: (i) either (1) the Company
shall be the surviving or continuing corporation or (2) the person (if other
than the Company) formed by such consolidation or into which the Company is
merged or the person which acquires by conveyance, transfer or lease the
properties and assets of the Company substantially as an entirety or in the case
of a Plan of Liquidation, the person to which assets of the Company have been
transferred (x) shall be a corporation organized and validly existing under the
laws of the United States or any State thereof or the District of Columbia and
(y) shall expressly assume, by supplemental indenture (in form and substance
satisfactory to the Trustee), executed and delivered to the Trustee, the due and
punctual payment of the principal of, and premium, if any, and interest on all
of the Notes and the performance of every covenant of the Notes and the
Indenture on the part of the Company to be performed or observed; (ii)
immediately after giving effect to such transaction and the assumption
contemplated by clause (y) above, the Company (in the case of clause (1) of the
foregoing clause (i)) or such person (in the case of clause (2) thereof) shall
have a Consolidated Net Worth (immediately after the transaction but prior to
any purchase accounting adjustments relating to such transaction) equal to or
greater than the Consolidated Net Worth of the Company immediately prior to such
transaction; (iii) immediately before and after giving effect to such
transaction and the assumption contemplated by clause (y) above (including
giving effect to any Indebtedness and Acquired Indebtedness incurred or
anticipated to be incurred in connection with or in respect of the transaction),
no Default and
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no Event of Default shall have occurred or be continuing; (iv) the Company or
such person shall have delivered to the Trustee (A) an Officers' Certificate and
an Opinion of Counsel (which counsel shall not be in-house counsel of the
Company) each stating that such consolidation, merger, conveyance, transfer or
lease or Plan of Liquidation and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture, comply with this
provision of the Indenture and that all conditions precedent in the Indenture
relating to such transaction have been satisfied and (B) a certificate from the
Company's independent certified public accountants stating that the Company has
made the calculation required by clause (ii) above in accordance with the terms
of the Indenture; and (v) neither the Company nor any Subsidiary of the Company
nor such person, as the case may be, would thereupon become obligated with
respect to any Indebtedness (including Acquired Indebtedness), nor any of its
property or assets subject to any Lien, unless the Company or such Subsidiary or
such person, as the case may be, could incur such Indebtedness (including
Acquired Indebtedness) or create such Lien under the Indenture (giving effect to
such person being bound by all the terms of the Indenture).
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Subsidiaries of the
Company the Capital Stock of which constitutes all or substantially all of the
properties and assets of the Company shall be deemed to be the transfer of all
or substantially all of the properties and assets of the Company.
Upon any such consolidation, merger, conveyance, lease or transfer in
accordance with the foregoing, the successor person formed by such consolidation
or into which the Company is merged or to which such conveyance, lease or
transfer is made will succeed to, and be substituted for, and may exercise every
right and power of, the Company under the Indenture with the same effect as if
such successor had been named as the Company therein, and thereafter (except in
the case of a sale, assignment, transfer, lease, conveyance or other
disposition) the predecessor corporation will be relieved of all further
obligations and covenants under the Indenture and the Notes.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture:
(a) the Company defaults in the payment of interest on the Notes when
the same becomes due and payable and the Default continues for a period of
30 days;
(b) the Company defaults in the payment of the stated principal amount
of the Notes when the same becomes due and payable at maturity, upon
acceleration or redemption pursuant to an offer to purchase required under
the Indenture or otherwise;
(c) the Company fails to comply in all material respects with any of its
other agreements contained in the Notes, the Indenture (including, without
limitation, under the provisions of "-- Certain Covenants--Change of
Control," "--Certain Covenants--Limitation on Sale of Assets" and "--Merger,
Consolidation, Etc.") or the Pledge Agreement, and the Default continues for
the period and after the notice specified below;
(d) there shall be any default or defaults in the payment of principal
or interest under one or more agreements, instruments, mortgages, bonds,
debentures or other evidences of Indebtedness under which the Company or WCI
then has outstanding Indebtedness in excess of $7.5 million, individually or
in the aggregate;
(e) there shall be any default or defaults under one or more agreements,
instruments, mortgages,
bonds, debentures or other evidences of Indebtedness under which the Company
or WCI then has outstanding Indebtedness in excess of $7.5 million,
individually or in the aggregate, and such default or defaults have resulted
in the acceleration of the maturity of such Indebtedness;
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(f) the Company or WCI fails to perform any term, covenant, condition or
provision of one or more agreements, instruments, mortgages, bonds,
debentures or other evidences of Indebtedness under which the Company or WCI
then has outstanding Indebtedness in excess of $7.5 million, individually or
in the aggregate, and such failure to perform results in the commencement of
judicial proceedings to foreclose upon any assets of the Company or WCI
securing such Indebtedness or the holders of such Indebtedness shall have
exercised any right under applicable law or applicable security documents to
take ownership of any such assets in lieu of foreclosure;
(g) one or more judgments, orders or decrees for the payment of money
which either individually or in the aggregate at any one time exceeds $7.5
million shall be rendered against the Company or WCI by a court of competent
jurisdiction and shall remain undischarged and unbonded for a period (during
which execution shall not be effectively stayed) of 60 consecutive days
after such judgment becomes final and nonappealable;
(h) the Company or WCI (1) admits in writing its inability to pay its
debts generally as they become due, (2) commences a voluntary case or
proceeding under any Bankruptcy Law with respect to itself, (3) consents to
the entry of a judgment, decree or order for relief against it in an
involuntary case or proceeding under any Bankruptcy Law, (4) consents to the
appointment of a Custodian of it or for substantially all of its property,
(5) consents to or acquiesces in the institution of a bankruptcy or an
insolvency proceeding against it, (6) makes a general assignment for the
benefit of its creditors, or (7) takes any corporate action to authorize or
effect any of the foregoing;
(i) a court of competent jurisdiction enters a judgment, decree or order
for relief in respect of the Company or WCI in an involuntary case or
proceeding under any Bankruptcy Law, which shall (1) approve as properly
filed a petition seeking reorganization, arrangement, adjustment or
composition in respect of the Company or WCI, (2) appoint a Custodian of the
Company or WCI or for substantially all of its property or (3) order the
winding-up or liquidation of its affairs, and such judgment, decree or order
shall remain unstayed and in effect for a period of 60 consecutive days; or
(j) the Pledge Agreement ceases to be in full force and effect or the
Pledge Agreement ceases to give the Trustee the Liens, rights, powers and
privileges purported to be created thereby in any material respect.
A Default under clause (c) above (other than in the case of any Default
under the provisions of "--Certain Covenants--Limitation on Sale of Assets,"
"--Certain Covenants--Change of Control,"
"--Certain Covenants--Ownership of WCI Stock," "--Certain Covenants--Limitation
on Business Activities" or "--Merger, Consolidation, Etc.," which Defaults shall
be Events of Default without the notice and without the passage of time
specified in this paragraph) is not an Event of Default until the Trustee
notifies the Company, or the Holders of at least 25% in principal amount of the
outstanding Notes notify the Company and the Trustee, of the Default and the
Company does not cure the Default within 30 days after receipt of the notice.
The notice must specify the Default, demand that it be remedied and state that
the notice is a "Notice of Default." Such notice shall be given by the Trustee
if so requested by the Holders of at least 25% in principal amount of the Notes
then outstanding.
If an Event of Default (other than an Event of Default specified in clause
(h) or (i) above) occurs and is continuing, then and in every such case the
Trustee or the Holders of not less than 25% in aggregate principal amount of the
then outstanding Notes may declare the unpaid principal of, premium, if any, and
accrued and unpaid interest on, all the Notes then outstanding to be due and
payable, by a notice in writing to the Company (and to the Trustee, if given by
Holders) and upon such declaration such principal amount, premium, if any, and
accrued and unpaid interest will become immediately due and payable,
notwithstanding anything contained in the Indenture or the Notes to the
contrary. If an Event of Default specified in clause (h) or (i) above occurs,
all unpaid principal of, and premium, if any, and accrued and unpaid interest
on, the Notes then outstanding will ipso facto become immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder.
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Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to the provisions of the Indenture relating
to the duties of the Trustee, the Trustee is under no obligation to exercise any
of its rights or powers under the Indenture at the request, order or direction
of any of the Holders, unless such Holders have offered to the Trustee
reasonable indemnity. Subject to all provisions of the Indenture and applicable
law, the Holders of a majority in aggregate principal amount of the then
outstanding Notes have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee. The Trustee may withhold from
Holders notice of any continuing Default or Event of Default (except a Default
or Event of Default in the payment of principal of or premium, if any, or
interest on the Notes or that resulted from the failure to comply with the
provisions of "--Certain Covenants--Change of Control" or "--Merger,
Consolidation, Etc.") if it determines that withholding notice is in their
interest. The Holders of a majority in aggregate principal amount of the Notes
then outstanding by notice to the Trustee may rescind an acceleration and its
consequences if all existing Events of Default (other than the nonpayment of
principal of and premium, if any, and interest on the Notes which has become due
solely by virtue of such acceleration) have been cured or waived and if the
rescission would not conflict with any judgment or decree. No such rescission
shall affect any subsequent Default or impair any right consequent thereto.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding may, on behalf of the Holders of all the Notes, waive any past
Default or Event of Default under the Indenture and its consequences, except
Default in the payment of principal of or premium, if any, or interest on the
Notes or in respect of a covenant or provision of the Indenture which cannot be
modified or amended without the consent of all Holders.
Under the Indenture, the Company is required to provide an Officers'
Certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof. In addition, for each fiscal year, the
Company's independent certified public accountants are required to certify to
the Trustee that they have reviewed the terms of the Indenture and the Notes as
they relate to accounting matters and whether, during the course of their audit
examination, any Default or Event of Default has come to their attention, and
specifying the nature and period of existence of any such Default or Event of
Default.
AMENDMENT, SUPPLEMENT AND WAIVER
The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the Holders of not less than a majority in aggregate
principal amount of the then outstanding Notes, to enter into any supplemental
indenture for the purpose of adding, changing or eliminating any of the
provisions of the Indenture or the Pledge Agreement or of modifying in any
manner the rights of the Holders under the Indenture or the Pledge Agreement;
PROVIDED that no such supplemental indenture may without the consent of the
Holder of each outstanding Note affected thereby: (i) reduce the amount of Notes
whose holders must consent to an amendment or waiver; (ii) reduce the rate of,
or extend the time for payment of, interest, including defaulted interest, on
any Note; (iii) reduce the principal of or premium on or change the fixed
maturity of any Note or alter the redemption provisions with respect thereto;
(iv) make the principal of, or interest on, any Note payable in money other than
as provided for in the Indenture and the Notes; (v) make any change in
provisions relating to waivers of defaults, the ability of Holders to enforce
their right under the Indenture or the Pledge Agreement or in the matters
discussed in these clauses (i) through (ix); (vi) waive a default in the payment
of principal of or interest on, or redemption or repurchase payment with respect
to, any Notes, including, without limitation, a failure to make payment when
required upon a Change of Control or after an Asset Sale Offer (including an
offer to purchase with respect to an Asset Sale involving the Capital Stock of
WCI); (vii) adversely affect the ranking of the
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Notes; (viii) change the Maturity Date or alter the redemption provisions in a
manner adverse to Holders; or (ix) after the Company's obligation to purchase
the Notes arises thereunder, amend, modify or change the obligation of the
Company to make and consummate a Change of Control Offer in the event of a
Change of Control or an Asset Sale Offer in the event of an Asset Sale
(including an Asset Sale involving the Capital Stock of WCI) or waive any
default in the performance thereof or modify any of the provisions or
definitions with respect to any such offers.
In addition to the foregoing, other than in compliance with the Indenture
(including the provisions of the "Limitation on Sale of Assets" covenant), no
portion of the Collateral may be released without the consent of the Holders of
at least 75% in aggregate principal amount of the then outstanding Notes.
DEFEASANCE
The Indenture provides that the Company may terminate its obligations under
the Notes, the Indenture and the Pledge Agreement if: (i) all Notes previously
authenticated and delivered have been delivered to the Trustee for cancellation
or the Company has paid all sums payable by it thereunder, or (ii) the Company
has irrevocably deposited or caused to be deposited with the Trustee or the
Paying Agent and conveyed all right, title and interest for the benefit of the
Holders of such Notes, under the terms of an irrevocable trust agreement in form
and substance satisfactory to the Trustee, as trust funds in trust solely for
the benefit of the Holders for that purpose, money or United States government
obligations maturing as to principal and interest in such amounts and at such
times as are sufficient without consideration of any reinvestment of such
interest to pay principal of, premium, if any, and interest on such outstanding
Notes to maturity; PROVIDED that, among other things, the Company shall have
delivered to the Trustee (i) either (a) a ruling directed to the Trustee
received from the Internal Revenue Service to the effect that the Holders of
such Notes will not recognize income, gain or loss for Federal income tax
purposes as a result of the Company's exercise of its option under the
defeasance provision of the Indenture and will be subject to Federal income tax
on the same amount and in the same manner and at the same times as would have
been the case if such option had not been exercised or (b) an Opinion of Counsel
to the same effect as the ruling described in clause (a) above accompanied by a
ruling to that effect published by the Internal Revenue Service, unless there
has been a change in the applicable Federal income tax law since the date of the
Indenture such that a ruling from the Internal Revenue Service is no longer
required, and (ii) an Opinion of Counsel to the effect that, after the passage
of 90 days following the deposit, assuming no intervening bankruptcy and that no
Holder of a Note is an insider of the Company, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally. Certain obligations of
the Company under the Indenture or the Notes, including the payment of interest
and principal, shall remain in full force and effect until such Notes have been
paid in full. Notwithstanding the foregoing, the Opinion of Counsel required
above with respect to a defeasance need not be delivered if all Notes not
theretofore delivered to the Trustee for cancellation (x) have become due and
payable or (y) will become due and payable on the maturity date within one year
under arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the Company.
GOVERNING LAW
The Indenture provides that it, the Pledge Agreement and the Notes are
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
State Street Bank and Trust Company is serving as Trustee under the
Indenture.
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The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent person would exercise or
use under the circumstances in the conduct of such person's own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a person or any of its
Subsidiaries assumed by the Company in connection with the acquisition of assets
by the Company from such person.
"Affiliate" of any specified person means any other person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"control" when used with respect to any person means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"affiliated," "controlling" and "controlled" have meanings correlative of the
foregoing. For purposes of "--Certain Covenants--Limitation on Transactions with
Affiliates," the term "Affiliate" shall include any person who, as a result of
any transaction described therein, would become an Affiliate.
"Applicable Premium" means, with respect to a Note, the excess of (A) the
present value of all remaining required interest and principal payments due on
such Note, computed using a discount rate equal to the Treasury Rate plus 100
basis points, over (B) the then outstanding principal amount of such Note;
PROVIDED, HOWEVER, that in no event will the Applicable Premium exceed the
amount of the applicable redemption price upon an optional redemption less 100%
of the then outstanding principal amount of such Note at any time on or after
February 1, 2002.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease, assignment or other transfer for value by the Company to any
person, in one transaction or a series of related transactions, of (i) any
Capital Stock of any Subsidiary of the Company; or (ii) any other properties or
assets of the Company. For the purposes of this definition, the term "Asset
Sale" shall not include any sale, issuance, conveyance, transfer, lease or other
disposition of properties or assets that is consummated in accordance with the
provisions of "--Merger, Consolidation, Etc." above.
"Bankruptcy Law" means Title 11 of the U.S. Code or any similar Federal,
state or foreign law for the relief of debtors.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participation or other equivalents (however designated) of such
person's capital stock, whether outstanding at the Issue Date or issued after
the Issue Date, and any and all rights, warrants or options exchangeable for or
convertible into such capital stock (but excluding any debt security that is
exchangeable for or convertible into such capital stock).
"Capitalized Lease Obligation" means, as to any person, the obligations of
such person under a Capital Lease and, for purposes of this Indenture, the
amount of such obligations at any date shall be the capitalized amount of such
obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit
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of the United States, in each case maturing within two years from the date of
acquisition thereof; (ii) marketable direct obligations issued by any state of
the United States of America or any political subdivision of any such state or
any public instrumentality thereof maturing within two years from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ("S&P"), or Moody's Investors
Service, Inc. ("Moody's"); (iii) commercial paper maturing no more than two
years from the date of creation thereof and, at the time of acquisition, having
a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within two years from
the date of acquisition thereof issued by any commercial bank organized under
the laws of the United States of America or any state thereof or the District of
Columbia or any U.S. branch of a foreign bank having at the date of acquisition
thereof combined capital and surplus of not less than $500,000,000; (v)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clause (i) above entered into with any bank
meeting the qualifications specified in clause (iv) above; and (vi) investments
in money market funds which invest substantially all their assets in securities
of the types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company or Renco to any person or group of related persons for purposes of
Section 13(d) of the Exchange Act (a "Group") (other than a Permitted Holder or
a Group controlled by a Permitted Holder), together with any Affiliates thereof
(whether or not otherwise in compliance with the provisions of the Indenture);
(ii) the approval by the holders of Capital Stock of the Company or Renco, as
the case may be, of any plan or proposal for the liquidation or dissolution of
the Company or Renco, as the case may be (whether or not otherwise in compliance
with the provisions of the Indenture); (iii) the acquisition in one or more
transactions of "beneficial ownership" (within the meaning of Rules 13d-3 and
13d-5 under the Exchange Act, except that a person shall be deemed to have
"beneficial ownership" of all securities that such person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time) by any person, entity or Group (other than a Permitted Holder or a
Group controlled by any Permitted Holder) of any Capital Stock of the Company or
Renco such that, as a result of such acquisition, such person, entity or Group
either (A) beneficially owns (within the meaning of Rules 13d-3 and 13d-5 under
the Exchange Act), directly or indirectly, more than 50% of the Company's or
Renco's then outstanding voting securities entitled to vote on a regular basis
in an election for a majority of the Board of Directors of the Company or Renco
or (B) otherwise has the ability to elect, directly or indirectly, a majority of
the members of the Company's or Renco's Board of Directors; or (iv) the
shareholders of Renco as of the Issue Date and the Permitted Holders shall cease
to own at least 50% of the equity of Renco owned by such shareholders on the
Issue Date.
"Commission" means the Securities and Exchange Commission.
"Consolidated Net Income" means, with respect to any person for any period,
the net income (or loss) of such person and its Subsidiaries, on a consolidated
basis for such period determined in accordance with GAAP; provided that (i) the
net income of any person in which such person or any Subsidiary of such person
has an ownership interest with a third party shall be included only to the
extent of the amount that has actually been received by such person or its
Wholly-Owned Subsidiaries in the form of dividends or other distributions during
such period (subject to, in the case of any dividend or distribution received by
a Wholly-Owned Subsidiary of such Person, the restrictions set forth in clause
(ii) below) and (ii) the net income of any Subsidiary of such person that is
subject to any restriction or limitation on the payment of dividends or the
making of other distributions shall be excluded to the extent of such
restriction or limitation; provided, further, that there shall be excluded (a)
the net income (or loss) of any person (acquired in a pooling of interests
transaction) accrued prior to the date it becomes a Subsidiary of such person or
is merged into or consolidated with such person or any Subsidiary of such
person, (b) any net
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gain (or loss) resulting from an Asset Sale by such person or any of its
Subsidiaries and (c) any extraordinary, unusual or nonrecurring gains or losses
(and related tax effects) in accordance with GAAP.
"Consolidated Net Worth" means, with respect to any person at any date, the
sum of (i) the consolidated stockholders' equity of such person less the amount
of such stockholders' equity attributable to Disqualified Capital Stock of such
person and its Subsidiaries, as determined on a consolidated basis in accordance
with GAAP consistently applied and (ii) the amount of any Preferred Stock of
such person not included in the stockholders' equity of such person in
accordance with GAAP, which Preferred Stock does not constitute Disqualified
Capital Stock.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Capital Stock" means any class of Capital Stock which, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, in whole or in part, on or
prior to the Maturity Date.
"Event of Default" has the meaning set forth under "--Events of Default"
herein.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Extraordinary Distribution" means any and all dividends, cash, instruments
and other property and proceeds received, receivable or otherwise distributed on
WCI Pledged Stock constituting (i) any liquidating dividend or other liquidating
distribution or other similar extraordinary dividend or distribution; (ii) any
dividend or other distribution in respect of WCI Pledged Stock in the form of
Capital Stock or any other property or assets (including cash and Cash
Equivalents) to the extent the Fair Market Value (determined at the time of the
dividend or distribution) of all dividends and other distributions in respect of
WCI Pledged Stock made on or after the Issue Date to and including the date of
such dividend or other distribution exceeds 100% of the Consolidated Net Income
of WCI accrued on a cumulative basis subsequent to January 31, 1998.
"Fair Market Value" means, with respect to any asset, the price which could
be negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing buyer, neither of whom is under undue pressure or
compulsion to complete the transaction. Fair Market Value of any asset of the
Company and its Subsidiaries shall be determined by the Board of Directors of
the Company acting in good faith and shall be evidenced by a Board Resolution
thereof delivered to the Trustee; PROVIDED that with respect to any Asset Sale
which involves in excess of $5.0 million, the Fair Market Value of any such
asset or assets shall be determined by an Independent Financial Advisor.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Indebtedness" means with respect to any person, without duplication, (i)
all obligations of such person for borrowed money, (ii) all obligations of such
person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such person, (iv) all obligations of such
person issued or assumed as the deferred purchase price of property or services,
all conditional sale obligations and all obligations under any title retention
agreement (but excluding trade accounts payable, accrued expenses and deferred
taxes arising in the ordinary course of business), (v) all obligations of such
person for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction entered into in the ordinary course of
business, (vi) all obligations of any other person of the type referred to in
clauses (i) through (v) which are secured by any Lien on any property or asset
of such
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first person and the amount of such obligation shall be the lesser of the value
of such property or asset or the amount of the obligation so secured, (vii) all
guarantees of Indebtedness by such person, (viii) Disqualified Capital Stock
valued at the greater of its voluntary or involuntary maximum fixed repurchase
price plus accrued and unpaid dividends, (ix) all obligations under Interest
Rate Protection Obligations of such person and (x) any amendment, supplement,
modification, deferral, renewal, extension or refunding of any liability of the
types referred to in clauses (i) through (ix) above. For purposes hereof, the
"maximum fixed repurchase price" of any Disqualified Capital Stock which does
not have a fixed repurchase price shall be calculated in accordance with the
terms of such Disqualified Capital Stock as if such Disqualified Capital Stock
were purchased on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture, and if such price is based upon, or
measured by, the Fair Market Value of such Disqualified Capital Stock, such Fair
Market Value to be determined in good faith by the Board of Directors of the
person issuing such Disqualified Capital Stock.
"Independent Financial Advisor" means an accounting, appraisal or investment
banking firm of nationally recognized standing that is, in the reasonable and
good faith judgment of the Board of Directors of the Company, qualified to
perform the task for which such firm has been engaged and disinterested and
independent with respect to the Company and its Affiliates.
"Interest Rate Protection Obligations" means the obligations of any person
pursuant to any arrangement with any other person, whereby, directly or
indirectly, such person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such other
person calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements.
"Investment" means, with respect to any person, any advance, loan, guarantee
or other extension of credit or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others or otherwise), or any purchase or
acquisition by such person of any Capital Stock, bonds, notes, debentures or
other securities or evidences of Indebtedness issued by, any other person.
Investments shall exclude extensions of trade credit on commercially reasonable
terms in accordance with normal trade practices.
"Issue Date" means the date on which the Notes offered hereby are originally
issued under the Indenture.
"Lien" means (x) any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind including, without limitation, any
conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell and any filing of or agreement to
file a financing statement as debtor under the Uniform Commercial Code or any
similar statute and (y) any agreement to enter into any of the foregoing.
"Maturity Date" means February 1, 2005.
"Net Cash Income" means, with respect to any period, the net income (or
loss) of the Company, on an unconsolidated basis for such period determined in
accordance with GAAP excluding (i) any extraordinary, unusual or nonrecurring
gains or losses (and the related tax effects) and (ii) equity in the earnings of
Subsidiaries of the Company, but including dividends from such Subsidiaries to
the extent such amount has been received by the Company in cash or Cash
Equivalents during such period.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents (except to the extent that such obligations are financed or sold
with recourse to the Company) net of (i) brokerage commissions and other fees
and expenses (including fees and expenses of legal counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes payable as a
direct result of such Asset Sale and (iii) appropriate amounts to be provided by
the
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Company, as a reserve required in accordance with GAAP consistently applied
against any liabilities associated with such Asset Sale and retained by the
Company, after such Asset Sale, including, without limitation, under any
indemnification obligations associated with such Asset Sale, all as reflected in
an Officers' Certificate delivered to the Trustee.
"Permitted Holders" means Ira Leon Rennert and his Affiliates, estate, heirs
and legatees, and the legal representatives of any of the foregoing, including,
without limitation, the trustee of any trust of which one or more of the
foregoing are the sole beneficiaries.
"Permitted Indebtedness" means (i) any Indebtedness of the Company in an
aggregate amount not to exceed $15 million in aggregate principal amount at any
time outstanding, (ii) any Indebtedness of the Company to Renco in an aggregate
amount not to exceed $15 million in aggregate principal amount at any time
outstanding; PROVIDED that any such Indebtedness is contractually subordinated
in right of payment to the Company's obligations under the Notes; PROVIDED,
FURTHER, that if as of any date any person other than Renco or one of its
Wholly-Owned Subsidiaries owns or holds any such Indebtedness or holds a Lien in
respect of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness pursuant to this clause
(ii), (iii) the Notes and (iv) any renewals, extensions, substitutions,
refundings, refinancings or replacements of the Notes, so long as such renewal,
extension, substitution, refunding, refinancing or replacement does not result
in an increase in the aggregate principal amount of the outstanding Indebtedness
represented thereby.
"Permitted Liens" means (i) pledges or deposits by such person under
worker's compensation laws, unemployment insurance laws or similar legislation,
or good faith deposits in connection with bids, tenders, contracts (other than
for the payment of Indebtedness) or leases to which such person is a party, or
deposits to secure public statutory obligations of such person or deposits to
secure surety or appeal bonds to which such person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, (ii)
Liens imposed by law, such as landlords', carriers', warehousemen's and
mechanics' Liens or bankers' Liens incurred in the ordinary course of business
for sums which are not yet due or are being contested in good faith and for
which adequate provision has been made, (iii) Liens for taxes not yet subject to
penalties for non-payment or which are being contested in good faith and by
appropriate proceedings, if adequate reserve, as may be required by GAAP, shall
have been made therefor, (iv) Liens in favor of issuers of surety bonds or
appeal bonds issued pursuant to the request of and for the account of such
person in the ordinary course of its business, (v) Liens to support trade
letters of credit issued in the ordinary course of business, (vi) survey
exceptions, encumbrances, easements or reservations of, or rights of others for,
rights of way, sewers, electric lines, telegraph and telephone lines and other
similar purposes, or zoning or other restrictions on the use of real property,
(vii) Liens arising from judgments, decrees or attachments in circumstances not
constituting an Event of Default and (viii) Liens permitted by the Pledge
Agreement.
"person" means any individual, corporation, partnership, joint venture,
trust, estate, unincorporated organization or government or any agency or
political subdivision thereof.
"Plan of Liquidation" means, with respect to any person, a plan that
provides for, contemplates or the effectuation of which is preceded or
accompanied by (whether or not substantially contemporaneously, in phases or
otherwise) (i) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of such person otherwise than as an entirety or
substantially as an entirety and (ii) the distribution of all or substantially
all of the proceeds of such sale, lease, conveyance or other disposition and all
or substantially all of the remaining assets of such person to holders of
Capital Stock of such person.
"Preferred Stock" means, with respect to any person, any and all shares,
interests, participation or other equivalents (however designated) of such
person's preferred or preference stock, whether outstanding on the date hereof
or issued after the date of the Indenture, and including, without limitation,
all classes and series of preferred or preference stock of such person.
71
<PAGE>
"Qualified Capital Stock" means, with respect to any person, any Capital
Stock of such person that is not Disqualified Capital Stock or convertible into
or exchangeable or exercisable for Disqualified Capital Stock.
"Renco" means The Renco Group, Inc., a New York corporation, which is the
parent of the Company, or any successor thereto.
"Subsidiary" of any person means (i) any corporation of which the
outstanding capital stock having at least a majority of the votes entitled to be
cast in the election of directors under ordinary circumstances shall at the time
be owned, directly or indirectly, by such person or (ii) any other person of
which at least a majority of the voting interest under ordinary circumstances is
at the time owned, directly or indirectly, by such person. For purposes of this
definition, any directors' qualifying shares or investments by foreign nationals
mandated by applicable law shall be disregarded in determining the ownership of
a Subsidiary.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled by, and
published in, the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the date
fixed for repurchase of the Notes following an Asset Sale consisting of the
Capital Stock of WCI (or, if such Statistical Release is no longer published,
any publicly available source of similar market data)) most nearly equal to the
then remaining life of the Notes until the Maturity Date; PROVIDED, HOWEVER,
that if the remaining life of the Notes is not equal to the constant maturity of
a United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that if the Maturity
Date is within one year, the weekly average yield on actually traded United
States Treasury securities adjusted to a constant maturity of one year shall be
used.
"Wholly-Owned Subsidiary" means, with respect to any person, any Subsidiary
of such person all the outstanding shares of Capital Stock (other than
directors' qualifying shares, if applicable) of which are owned directly by such
person or another Wholly-Owned Subsidiary of such person.
72
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following summary is based on the tax laws of the United States in
effect on the date of this Prospectus, as well as judicial and administrative
interpretations thereof (in final or proposed form) available on or before such
date. The foregoing laws and interpretations thereof are subject to change,
which could apply retroactively.
The exchange of Old Notes for Exchange Notes pursuant to the Exchange Offer
will not be a taxable event for federal income tax purposes. A holder's holding
period for Exchange Notes will include the holding period for Old Notes. HOLDERS
SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES OF EXCHANGING OLD NOTES FOR EXCHANGE NOTES.
PLAN OF DISTRIBUTION
A broker-dealer that is the holder of Old Notes that were acquired for the
account of such broker-dealer as a result of market-making or other trading
activities (other than Old Notes acquired directly from the Company or any
affiliate of the Company) may exchange such Old Notes for Exchange Notes
pursuant to the Exchange Offer; provided, that each broker-dealer that receives
Exchange Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as a result of market-making or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. The Company has agreed that for a period of 180 days
after consummation of the Exchange Offer, it will make this Prospectus, as it
may be amended or supplemented from time to time, available to any broker-dealer
for use in connection with any such resale. In addition, until , 1998,
all dealers effecting transactions in the Exchange Notes may be required to
deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other holder of Exchange Notes. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after consummation of the Exchange Offer, the
Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer and to the Company's performance of, or
compliance with, the Registration Rights Agreement (other than commissions or
concessions of any brokers or dealers) and will indemnify the holders of the
Notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
73
<PAGE>
LEGAL MATTERS
Certain legal matters related to the Notes being offered hereby are being
passed upon for the Company by Cadwalader, Wickersham & Taft, New York, New
York.
EXPERTS
The audited balance sheet of Renco Steel Holdings, Inc. as of January 21,
1998, the audited consolidated financial statements and schedule of Renco Steel
Holdings, Inc. and subsidiaries and predecessor as of October 31, 1996 and 1997,
and for each of the years in the three year period ended October 31, 1997, and
the audited consolidated financial statements of WCI Steel, Inc. and
subsidiaries as of October 31, 1996 and 1997, and for each of the years in the
three year period ended October 31, 1997, have been included in the Registration
Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
RENCO STEEL HOLDINGS, INC.
Independent Auditors' Report............................................................................... F-2
Balance Sheet as of January 21, 1998....................................................................... F-3
Notes to Balance Sheet..................................................................................... F-4
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Independent Auditors' Report............................................................................... F-5
Consolidated Balance Sheets as of October 31, 1996 and 1997 and unaudited as of January 31, 1998........... F-6
Consolidated Statements of Operations for the years ended October 31, 1995, 1996 and 1997 and unaudited for
the three months ended January 31, 1997 and 1998......................................................... F-7
Consolidated Statements of Shareholder's Equity (Deficit) for the years ended October 31, 1995, 1996 and
1997 and unaudited for the three months ended January 31, 1998........................................... F-8
Consolidated Statements of Cash Flows for the years ended October 31, 1995, 1996 and 1997 and unaudited for
the three months ended January 31, 1997 and 1998......................................................... F-9
Notes to Consolidated Financial Statements................................................................. F-10
WCI STEEL, INC. AND SUBSIDIARIES
Independent Auditors' Report............................................................................... F-21
Consolidated Balance Sheets as of October 31, 1996 and 1997 and unaudited as of January 31, 1998........... F-22
Consolidated Statements of Operations for the years ended October 31, 1995, 1996 and 1997 and unaudited for
the three months ended January 31, 1997 and 1998......................................................... F-23
Consolidated Statements of Shareholder's Equity (Deficit) for the years ended October 31, 1995, 1996 and
1997 and unaudited for the three months ended January 31, 1998........................................... F-24
Consolidated Statements of Cash Flows for the years ended October 31, 1995, 1996 and 1997 and unaudited for
the three months ended January 31, 1997 and 1998......................................................... F-25
Notes to Consolidated Financial Statements................................................................. F-26
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholder and Board of Directors
Renco Steel Holdings, Inc.:
We have audited the accompanying balance sheet of Renco Steel Holdings, Inc.
(a wholly-owned subsidiary of The Renco Group, Inc.) as of January 21, 1998.
This financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit of a balance sheet includes examining, on a test basis,
evidence supporting the amounts and disclosures in that balance sheet. An audit
of a balance sheet also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Renco Steel Holdings, Inc. as of
January 21, 1998, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Cleveland, Ohio
January 21, 1998
F-2
<PAGE>
RENCO STEEL HOLDINGS, INC.
BALANCE SHEET
JANUARY 21, 1998
ASSETS
<TABLE>
<S> <C>
Cash................................................................................ $ 1,000
---------
Total assets.................................................................... $ 1,000
---------
---------
</TABLE>
SHAREHOLDER'S EQUITY
<TABLE>
<S> <C>
Common stock, no par value, $.01 stated value, 850 shares authorized,
100 shares issued and outstanding................................................. $ 1
Additional paid-in capital.......................................................... 999
---------
Total shareholder's equity...................................................... $ 1,000
---------
---------
</TABLE>
See accompanying notes to the balance sheet
F-3
<PAGE>
RENCO STEEL HOLDINGS, INC.
NOTES TO BALANCE SHEET
JANUARY 21, 1998
(1) ORGANIZATION
Renco Steel Holdings, Inc. (the Company) is a holding company incorporated
in the State of Ohio on January 20, 1998 and is a wholly-owned subsidiary of The
Renco Group, Inc. (Renco).
(2) PROPOSED ISSUANCE OF SENIOR SECURED NOTES
The Company proposes to sell $120 million of senior secured notes due 2005
(the Notes). Immediately preceding such sale, Renco is expected to contribute to
the Company all the common stock of its subsidiary, WCI Steel, Inc. (WCI). To
secure the Notes, the Company will grant a first priority security interest in
the common stock of WCI. As of October 31, 1997, WCI had a shareholder's deficit
of $90.9 million. The net proceeds of the sale of the Notes will be used to pay
a $100.0 million dividend to Renco, provide approximately $15.6 million of cash
to the Company and pay fees and expenses related to the offering of the Notes.
(3)EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF THE INDEPENDENT
AUDITOR
In February 1998 the Company issued the $120 million principal amount
10.875% senior secured notes due 2005 (Notes) with a discount of $434,400. The
Company used the net proceeds of the Notes to pay a $100 million dividend to
Renco, provide cash to the Company and pay related fees and expenses.
Immediately following the issuance of the Notes and the use of proceeds thereon,
including payment of estimated transaction expenses, the Company estimates the
net proceeds to be retained by the Company to be $15.6 million. Interest on the
Notes is payable semiannually in arrears on February 1 and August 1 of each year
commencing August 1, 1998. Immediately preceding the issuance of the Notes,
Renco contributed to the Company all the common stock of its subsidiary, WCI
Steel, Inc. (WCI). To secure the Notes, the Company granted a first priority
security interest in the common stock of WCI. The indenture relating to the
Notes contains numerous covenants and prohibititions that limit the financial
activities of the Company, including among others, limitations on the incurrence
of additional indebtedness and additional liens, limitations on the payment of
dividends and requirements with respect to the sale of assets.
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholder and Board of Directors
Renco Steel Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Renco Steel
Holdings, Inc. and subsidiaries and predecessor (a wholly-owned subsidiary of
The Renco Group, Inc.) as of October 31, 1997 and 1996, and the related
consolidated statements of operations, shareholder's equity (deficit), and cash
flows for each of the years in the three-year period ended October 31, 1997.
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Renco Steel
Holdings, Inc. and subsidiaries and predecessor as of October 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended October 31, 1997, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Cleveland, Ohio
January 29, 1998
F-5
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
---------------------- -----------
<S> <C> <C> <C>
1996 1997 1998
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................................. $ 90,401 $ 18,989 $ 11,667
Short-term investments.................................................... 49,146 -- --
Accounts receivable, less allowances for doubtful accounts of $1,600,
$1,627 and $1,527, respectively......................................... 65,869 65,202 70,337
Inventories............................................................... 96,675 107,414 104,867
Recoverable income taxes.................................................. -- 4,273 791
Deferred income taxes..................................................... 10,637 8,188 8,470
Prepaid expenses.......................................................... 1,244 1,640 2,066
---------- ---------- -----------
Total current assets.................................................... 313,972 205,706 198,198
Property, plant and equipment, net.......................................... 205,121 277,473 275,105
Intangible pension asset.................................................... 27,505 16,505 15,510
Excess of cost over acquired net assets, net................................ -- 13,627 13,485
Other assets, net........................................................... 20,861 20,564 18,209
---------- ---------- -----------
Total assets............................................................ $ 567,459 $ 533,875 $ 520,507
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt......................................... $ 2,448 $ 1,319 $ 382
Accounts payable.......................................................... 79,138 64,123 61,726
Accrued liabilities....................................................... 40,697 51,504 44,280
Income taxes.............................................................. 10,049 1,737 1,876
---------- ---------- -----------
Total current liabilities............................................... 132,332 118,683 108,264
Long-term debt, excluding current portion................................... 209,058 301,618 301,590
Deferred income taxes....................................................... 4,365 28,075 28,238
Postretirement health care benefits......................................... 81,795 86,474 87,987
Pension benefits, excluding current portion................................. 34,011 31,579 30,242
Minority interest........................................................... 12,408 -- --
Other liabilities........................................................... 26,012 16,575 15,034
---------- ---------- -----------
Total liabilities....................................................... 499,981 583,004 571,355
---------- ---------- -----------
Shareholder's equity (deficit)
Common stock, no par value, stated value $.01 per share, 850 shares
authorized, 100 shares issued and outstanding at January 31, 1998......... -- -- --
Common stock of WCI, no par value, stated value $.01 per share, 40,000,000
shares authorized, 36,623,700, 100 and 100 shares issued at October 31,
1996 and 1997 and January 31, 1998, respectively.......................... 366 -- --
Additional paid-in capital.................................................. 570 -- 1
Retained earnings (deficit)................................................. 67,742 (49,129) (50,849)
Treasury stock of WCI at cost, 222,300 shares at October 31, 1996........... (1,200) -- --
---------- ---------- -----------
Total shareholder's equity (deficit).................................... 67,478 (49,129) (50,848)
Commitments and contingencies............................................... -- -- --
---------- ---------- -----------
Total liabilities and shareholder's equity (deficit).................... $ 567,459 $ 533,875 $ 520,507
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED OCTOBER 31, JANUARY 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net sales............................................ $ 630,990 $ 660,801 $ 668,470 $ 160,907 $ 166,592
Operating costs and expenses
Cost of products sold.............................. 544,789 550,609 547,545 131,609 141,848
Depreciation and amortization...................... 21,178 22,547 26,777 6,445 7,359
Selling, general and administrative expenses....... 19,675 22,067 29,355 14,016 4,049
---------- ---------- ---------- ---------- ----------
585,642 595,223 603,677 152,070 153,256
---------- ---------- ---------- ---------- ----------
Operating income................................. 45,348 65,578 64,793 8,837 13,336
---------- ---------- ---------- ---------- ----------
Other income (expense)
Interest expense................................... (25,787) (24,968) (31,690) (7,525) (8,014)
Interest and other income, net..................... 6,212 6,545 1,239 651 299
Minority interest.................................. (2,465) (2,944) (423) (423) --
---------- ---------- ---------- ---------- ----------
(22,040) (21,367) (30,874) (7,297) (7,715)
---------- ---------- ---------- ---------- ----------
Income before income taxes and extraordinary
loss........................................... 23,308 44,211 33,919 1,540 5,621
Income tax expense................................... 10,313 19,108 13,251 843 2,041
---------- ---------- ---------- ---------- ----------
Income before extraordinary loss................. 12,995 25,103 20,668 697 3,580
Extraordinary loss on early retirement of debt, net
of income taxes.................................... -- -- 19,606 19,606 --
---------- ---------- ---------- ---------- ----------
Net income (loss)................................ $ 12,995 $ 25,103 $ 1,062 $ (18,908) $ 3,580
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
YEARS ENDED OCTOBER 31, 1997, 1996, AND 1995
AND
THREE MONTHS ENDED JANUARY 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL RETAINED SHAREHOLDER'S
PREFERRED COMMON PAID-IN EARNINGS TREASURY EQUITY
STOCK STOCK CAPITAL (DEFICIT) STOCK (DEFICIT)
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1994.......................... $ -- $ 366 $ 300 $ 36,211 $ -- $ 36,877
Net income........................................... -- -- -- 12,995 -- 12,995
Other................................................ -- -- 158 -- -- 158
----- ----- ----- ----------- --------- ------------
Balance at October 31, 1995.......................... -- 366 458 49,206 -- 50,030
Net income........................................... -- -- -- 25,503 -- 25,103
Dividends paid on Common Stock....................... -- -- -- (6,567) -- (6,567)
Treasury stock purchases............................. -- -- -- -- (1,200) (1,200)
Other................................................ -- -- 112 -- -- 112
----- ----- ----- ----------- --------- ------------
Balance at October 31, 1996.......................... -- 366 570 67,742 (1,200) 67,478
Net income........................................... -- -- -- 1,062 -- 1,062
Dividends paid on Common Stock....................... -- -- -- (118,000) -- (118,000)
Repurchase of minority interest in subsidiary........ -- (366) (901) 67 1,200 --
Other................................................ -- -- 331 -- -- 331
----- ----- ----- ----------- --------- ------------
Balance at October 31, 1997.......................... -- -- -- (49,129) -- (49,129)
Issuance of common stock at inception of the
Company............................................ -- -- 1 -- -- 1
Net income........................................... -- -- -- 3,580 -- 3,580
Dividends paid on Common Stock....................... -- -- -- (5,300) -- (5,300)
----- ----- ----- ----------- --------- ------------
Balance at January 31, 1998.......................... $ -- $ -- $ 1 $ (50,849) $ -- $ (50,848)
----- ----- ----- ----------- --------- ------------
----- ----- ----- ----------- --------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED OCTOBER 31, JANUARY 31,
-------------------------------- ---------------------
1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................ $ 12,995 $ 25,103 $ 1,062 $ (18,908) $ 3,580
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization........................ 19,713 19,617 23,846 5,712 6,626
Amortization of deferred maintenance costs........... 1,465 2,930 2,931 733 733
Amortization of financing costs...................... 2,180 2,180 1,435 404 337
Postretirement health care benefits.................. 10,066 5,508 3,960 761 1,514
Pension benefits..................................... -- 6,507 5,101 1,500 1,361
Provision for losses on accounts receivable.......... 117 (658) 27 -- (100)
Deferred income taxes................................ 3,118 (5,537) 5,581 (572) 203
Extraordinary loss................................... -- -- 32,786 32,786 --
Minority interest in earnings of WCI................. 2,465 2,944 423 423 --
Other................................................ (836) (7) 350 360 (35)
Cash provided (used) by changes in certain assets and
liabilities, net of acquisition of minority
interest
Accounts receivable................................ 39,696 (31,595) 640 5,125 (5,035)
Inventories........................................ 7,334 4,414 (9,618) (9,211) 2,546
Prepaid expenses and other assets.................. (1,031) (132) (389) 481 911
Accounts payable................................... (25,209) 31,398 (15,015) (7,785) (2,397)
Accrued liabilities................................ (4,823) 1,113 9,707 3,332 (8,976)
Income taxes payable and recoverable, net.......... (11,275) 14,398 (13,816) (16,189) 3,299
Other liabilities.................................. 4,756 (182) (9,437) (4,224) (1,543)
--------- --------- ---------- ---------- ---------
Net cash provided (used) by operating
activities..................................... 60,731 78,001 39,574 (5,272) 3,024
--------- --------- ---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment............... (14,575) (35,384) (39,902) (12,548) (4,192)
Deferred blast furnace maintenance costs................. (11,598) -- -- -- --
Gross proceeds from the sale of assets................... 2,818 497 135 -- 110
Purchase of minority interest in WCI..................... -- -- (56,934) (56,934) --
Short-term investments, net.............................. (12,282) (36,864) 49,146 49,146 --
--------- --------- ---------- ---------- ---------
Net cash provided (used) by investing
activities..................................... (35,637) (71,751) (47,555) (20,336) (4,082)
--------- --------- ---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of Senior Secured Notes....... -- -- 290,103 290,387 --
Repurchase of Senior Notes............................... -- -- (233,085) (233,085) --
Dividends paid........................................... -- (6,567) (118,000) (108,000) (5,300)
Principal payments on other long-term debt............... (2,254) (2,348) (2,449) (915) (965)
Purchases of treasury stock of WCI....................... -- (1,200) -- -- --
Issuance of common stock of the Company.................. -- -- -- -- 1
--------- --------- ---------- ---------- ---------
Net cash used by financing activities............ (2,254) (10,115) (63,431) (51,613) (6,264)
--------- --------- ---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents..... 22,840 (3,871) (71,412) (77,221) (7,322)
Cash and cash equivalents at beginning of period......... 71,426 94,266 90,401 90,401 18,989
--------- --------- ---------- ---------- ---------
Cash and cash equivalents at end of period............... $ 94,266 $ 90,401 $ 18,989 $ 13,180 $ 11,667
--------- --------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------
Supplemental disclosure of cash flow information
Cash paid for interest................................. $ 23,718 $ 22,888 $ 21,412 $ 5,436 $ 15,194
Cash paid for income taxes............................. 18,471 10,247 8,306 4,425 40
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
Renco Steel Holdings, Inc. (Renco Steel) is a holding company incorporated
in the State of Ohio which was formed on January 20, 1998 and is a wholly owned
subsidiary of The Renco Group, Inc. (Renco). On January 29, 1998, Renco
contributed to Renco Steel its interest in its wholly owned subsidiary WCI
Steel, Inc. (WCI or Predecessor). Accordingly the accompanying consolidated
financial statements include the accounts of Renco Steel and WCI (the Company).
The Company's consolidated financial statements have been prepared as a
reorganization of companies under common control in a manner similar to a
pooling of interests. Renco's investment in WCI included the effects of certain
purchase accounting adjustments related to the acquisition of treasury stock by
WCI that were not reflected in the financial statements of WCI.
Accordingly the Company's consolidated financial statements include the
accounts of WCI and reflect purchase accounting adjustments of $44.1 million in
the aggregate relating to the purchase of minority interest in WCI in fiscal
1997 (see note 4). The purchase accounting adjustments reflect differences in
the basis of accounting for certain assets and liabilities in Renco Steel's
financial statements as compared to WCI's financial statements and affect the
valuation of inventories, property, plant and equipment, intangible pension
assets, excess of cost over net assets acquired, deferred income taxes,
postretirement health care benefits and the related depreciation and
amortization. All significant intercompany profits, transactions, and balances
have been eliminated in consolidation.
(B) NATURE OF OPERATIONS
Renco Steel has no operating history.
WCI is a niche oriented integrated producer of value-added, custom steel
products. WCI produces a wide range of custom flat rolled products at its
primary facility in Warren, Ohio, including high carbon, alloy and high
strength, silicon electrical and galvanized steel. WCI's primary customers are
steel converters, steel service centers, construction product companies,
electrical equipment manufacturers and to a lesser extent, automobile and
automotive parts manufacturers located principally in the U.S.
During 1997 and 1996, no single customer accounted for 10% or more of net
sales. During 1995, sales to WCI's largest customer accounted for 10.0% of net
sales. Concentration of credit risk related to trade receivables is limited due
to the large number of customers in a variety of industries and geographic
locations.
Since its inception, WCI has had labor agreements with the United
Steelworkers of America (USWA) and other organized labor organizations. The USWA
represents approximately 75% of WCI's employees. WCI has a four-year agreement
with the USWA that expires September 1, 1999.
(C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and short-term investments
with maturities of three months or less from the date of acquisition.
F-10
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) SHORT-TERM INVESTMENTS
Short-term investments consist of United States government or agency issues
which have maturities of less than one year but greater than three months when
purchased. These investments are stated at cost plus accrued interest which
approximates market value.
(E) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by
the last-in, first-out (LIFO) method.
(F) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation is
calculated on the straight-line method over the estimated useful lives of the
assets (buildings 20 to 30 years and machinery and equipment 4 to 25 years with
a weighted average of 18 years). Expenditures for normal repairs and maintenance
are charged to expense as incurred.
(G) EXCESS OF COST OVER ACQUIRED NET ASSETS
Cost in excess of net assets acquired represents the excess of cost over the
fair value of net assets resulting from the Equity Tender Offer (see note 4)
which is being amortized on the straight line method over 25 years. The Company
periodically monitors the asset value by assessing whether the asset can be
recovered over its remaining useful life through undiscounted cash flows
generated by the underlying business.
(H) OTHER ASSETS
Other assets include deferred financing costs which are amortized using the
effective yield method over the term of the related financing and deferred blast
furnace maintenance costs which are amortized using the straight-line method
over a six-year period.
(I) INCOME TAXES
The Company is included in the consolidated income tax return of Renco.
Under the terms of the tax sharing agreement with Renco, income taxes are
allocated to the Company on a separate return basis, except that transactions
between the Company, its subsidiaries, Renco and Renco's other subsidiaries are
accounted for on a cash basis and the Company does not receive the benefit of
net operating tax loss carryforwards, unless such tax losses were a result of
timing differences between the Company's accounting for tax and financial
reporting purposes.
(J) ENVIRONMENTAL COMPLIANCE COSTS
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial expenditures are probable, and the cost can be
reasonably estimated.
F-11
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Generally, the timing of these accruals coincides with the earlier of completion
of a feasibility study or development of, or commitment to, a plan of action
based on the then known facts.
(K) USE OF ESTIMATES IN PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
---------------------- ------------
<S> <C> <C> <C>
1996 1997 1998
<CAPTION>
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Raw materials........................................... $ 40,828 $ 33,725 $ 33,889
Finished and semi-finished product...................... 62,340 82,216 79,152
Supplies................................................ 393 561 540
---------- ---------- ------------
103,561 116,502 113,581
Less LIFO reserve....................................... 6,886 9,088 8,714
---------- ---------- ------------
$ 96,675 $ 107,414 $ 104,867
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
<S> <C> <C>
1996 1997
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land and improvements................................................. $ 493 $ 463
Buildings............................................................. 25,641 27,433
Machinery and equipment............................................... 254,118 369,544
Construction in progress.............................................. 32,558 6,265
---------- ----------
312,810 403,705
Less accumulated depreciation......................................... 107,689 126,232
---------- ----------
$ 205,121 $ 277,473
---------- ----------
---------- ----------
</TABLE>
F-12
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
---------------------- ------------
<S> <C> <C> <C>
1996 1997 1998
<CAPTION>
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Senior Secured Notes with interest at 10% payable
semi-annually, due 2004............................... $ -- $ 300,000 $ 300,000
Senior Notes with interest at 10.5% payable semi-
annually, due 2002.................................... 206,400 280 280
Revolving Credit Facility(Revolver) with interest at
prime plus 0.5% (9.00% at October 31, 1997) payable
monthly............................................... -- -- --
Other................................................... 5,106 2,657 1,692
---------- ---------- ------------
211,506 302,937 301,972
Less current portion of long-term debt.................. 2,448 1,319 382
---------- ---------- ------------
$ 209,058 $ 301,618 $ 301,590
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
WCI has a $100,000,000 Revolver secured by and subject to eligible
inventories and receivables as defined, reduced by any outstanding letters of
credit. The Revolver is subject to an annual commitment fee of .5% of the unused
balance up to $75,000,000 payable monthly. There were no borrowings outstanding
under the Revolver as of or during the year ended October 31, 1997. The
Revolver, which expires December 29, 1999, also provides for up to an aggregate
amount of $20,000,000 in letters of credit. WCI had approximately $5,536,000 in
letters of credit outstanding at October 31, 1997. The Revolver is subject to a
penalty of $500,000 if terminated, without being refinanced with the same
lender, prior to December 29, 1998 and $250,000 thereafter if terminated before
expiration.
On November 27, 1996 WCI Steel Holdings, Inc., a wholly-owned subsidiary of
Renco, completed a tender offer in which it purchased substantially all the
outstanding shares of Common Stock of WCI not held by Renco (Equity Tender
Offer). Following the completion of the Equity Tender Offer, WCI Steel Holdings,
Inc. was merged with and into WCI with WCI surviving as a wholly-owned
subsidiary of Renco. The total consideration paid for the common stock tendered
and the common stock reacquired as a result of the merger of WCI Steel Holdings,
Inc. with and into WCI was approximately $56,934,000, including related
expenses.
On the same date, WCI completed the sale of $300,000,000 10% senior secured
notes (Senior Secured Notes) due 2004. The proceeds from the Senior Secured
Notes, with existing cash balances of WCI, were used to complete the Equity
Tender Offer, a tender offer in which WCI acquired $206,120,000 of the
$206,400,000 aggregate principal amount of the then outstanding Senior Notes at
a rate of $1,125 per $1,000 principal amount outstanding plus accrued interest,
pay a $108,000,000 dividend to Renco, make contractual compensation payments to
certain executives of WCI and pay related transaction costs (Transactions). As a
result of these Transactions, WCI recognized an extraordinary loss of
$19,606,000, net of income tax benefits of $13,180,000, and compensation
expenses of approximately $8,577,000 in the first quarter of fiscal 1997.
F-13
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM DEBT (CONTINUED)
The Senior Secured Notes are secured by a second priority lien on
substantially all of the existing property, plant and equipment of WCI which
will become a first priority lien if all of the Senior Notes are extinguished.
The second priority lien is shared with a lien held by the VEBA Trust discussed
in Note 8.
WCI's Revolver and Senior Secured Notes contain certain financial and other
covenants, including maintenance of specified levels of net worth as defined,
working capital, and debt service and limitations on capital expenditures.
Additional covenants limit the incurrence of additional indebtedness, payments
affecting subsidiaries, transactions with affiliates, sale/leaseback
transactions, impairment of security interest, consolidations, mergers and
transfer of WCI's assets. WCI is permitted to declare and pay dividends, and
make other transactions with affiliates provided no condition of default exists
or will exist, and the accumulated amount of such transactions is no greater
than fifty percent (50%) of the consolidated net income as defined (less 100% of
any consolidated net loss) earned for periods subsequent to October 31, 1996
when taken as a single accounting period less management fees paid to Renco in
excess of $1,200,000 annually for the same period. Under these agreements
$4,296,000 was available for dividends and other transactions with affiliates at
October 31, 1997. See note 14.
Aggregate principal payments on long-term debt for the five years subsequent
to October 31, 1997 are as follows: $1,319,000 in 1998, $116,000 in 1999,
$122,000 in 2000, $128,000 in 2001, and $415,000 in 2002.
As of October 31, 1997, the fair value of the Senior Secured Notes was
$313,500,000 based on the quoted market price.
(5) ACCRUED LIABILITIES
Accrued liabilities included employment related costs of $28,442,000 and
$26,026,000 and interest of $12,555,000 and $3,712,000 at October 31, 1997 and
1996, respectively.
(6) EMPLOYEE COMPENSATION PLANS
WCI has variable compensation plans for the benefit of substantially all
employees. The amount of compensation due under these plans is based on WCI's
income as defined under each plan. Total expense under the plans was
$24,588,000, $14,000,000, and $11,093,000 for the years ended October 31, 1997,
1996, and 1995, respectively. Certain amounts under these plans represent
deferred compensation.
(7) PENSION PLANS
WCI has defined contribution retirement plans that cover substantially all
employees. WCI funds these retirement plan contributions as accrued. WCI's
contributions to the plans are based on employee age, length of service and
compensation. WCI contributions, paid or accrued, aggregated approximately
$5,929,000, $5,376,000 and $4,988,000 for the years ended October 31, 1997,
1996, and 1995, respectively.
WCI sponsors a defined benefit pension plan which covers substantially all
bargained-for employees, provides minimum pension benefits based on age, years
of service and benefits provided under WCI's defined contribution plan and a
predecessor company's defined benefit plan. WCI intends to make future
contributions to the plan in amounts that meet or exceed the minimum funding
requirements of ERISA.
F-14
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) PENSION PLANS (CONTINUED)
The following table sets forth the actuarial present value of benefit
obligations and funded status of the plan:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
<S> <C> <C>
1996 1997
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of
$31,912 and $32,833, respectively................................ $ 47,947 $ 48,519
---------- ----------
---------- ----------
Projected benefit obligation....................................... $ 48,498 $ 49,077
Plan assets at fair value.......................................... 13,936 15,930
---------- ----------
Projected benefit obligation in excess of plan assets.............. 34,562 33,147
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions.................... 10,937 14,976
Unrecognized prior service cost.................................... (38,993) (31,949)
Additional minimum liability....................................... 27,505 16,505
---------- ----------
Accrued pension cost............................................... 34,011 32,679
Less pension liability due within one year......................... -- 1,100
---------- ----------
Long-term pension liability........................................ $ 34,011 $ 31,579
---------- ----------
---------- ----------
</TABLE>
Plan assets consist primarily of listed domestic and foreign common stocks
and corporate and government bonds. An assumed discount rate of 7.25% and 7.5%
in 1997 and 1996, respectively, and an expected return on plan assets of 8.5%
were used for purposes of valuing the benefits under the defined benefit pension
plan.
The following table sets forth the components of pension expense:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
<S> <C> <C>
1996 1997
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Service cost........................................................... $ (213) $ (332)
Interest cost.......................................................... 3,477 3,404
Actual return on plan assets........................................... (828) (3,188)
Amortization of unrecognized:
Prior service cost................................................... 3,831 3,756
Net gain and deferral................................................ 290 1,486
--------- ---------
$ 6,557 $ 5,126
--------- ---------
--------- ---------
</TABLE>
No pension expense related to this plan was recognized during 1995 as a
result of the plan being adopted on October 27, 1995.
(8) POSTRETIREMENT HEALTH CARE BENEFITS
WCI provides postretirement health care and life insurance benefits to
substantially all employees who retire from WCI upon meeting certain age and
length of service eligibility requirements.
F-15
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) POSTRETIREMENT HEALTH CARE BENEFITS (CONTINUED)
The following table sets forth the plan's accumulated postretirement benefit
obligation (APBO):
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------
<S> <C> <C>
1996 1997
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees.......................................................... $ 15,374 $ 23,923
Fully eligible active plan participants........................... 33,877 32,641
Other active participants......................................... 40,294 52,434
--------- ----------
89,545 108,998
Plan assets at fair value........................................... 3,332 8,485
--------- ----------
APBO in excess of plan assets....................................... 86,213 100,513
Unrecognized prior service cost resulting from
plan amendments................................................... (4,356) (6,528)
Unrecognized net loss from past experience different from that
assumed and from changes in assumptions........................... (62) (7,511)
--------- ----------
Accrued postretirement benefit cost................................. $ 81,795 $ 86,474
--------- ----------
--------- ----------
</TABLE>
Plan assets consist primarily of listed common stocks and corporate and
government bonds. The APBO was determined using a discount rate of 7.25% and
7.5% in 1997 and 1996, respectively, an expected return on plan assets of 8.5%,
and an assumed health care cost trend rate of 8% in 1998, gradually declining to
5% after 2003. Assuming a 1% increase in the health care cost trend rate, the
APBO at October 31, 1997 would increase by $19,099,000 along with an increase in
the 1997 service and interest cost components of $1,710,000.
Net periodic postretirement benefit costs included the following components:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost................................................. $ 2,562 $ 2,272 $ 2,232
Interest cost................................................ 7,007 6,541 7,260
Actual return on plan assets................................. -- (188) (1,254)
Net amortization and deferral................................ 1,025 1,698 2,004
--------- --------- ---------
Net periodic postretirement benefit cost..................... $ 10,594 $ 10,323 $ 10,242
--------- --------- ---------
--------- --------- ---------
</TABLE>
Total claims paid by WCI during the years ended October 31, 1997, 1996 and
1995 were $2,383,000, $1,671,000 and $528,000, respectively.
In addition, WCI is required to contribute a minimum of $.50 per hour worked
by certain hourly employees to a Voluntary Employees Beneficiaries Trust (VEBA
Trust) established to fund future postretirement health care and life insurance
benefits. Contributions to the trust amounted to $3,899,000 and $3,144,000
during 1997 and 1996, respectively. In accordance with WCI's labor contract, WCI
will continue to pay current claims as incurred until the trust assets exceed
50% of the APBO for the hourly employees who are beneficiaries of the trust.
F-16
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES
The provision for income tax expense (benefit) is comprised of the
following:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes
Current.................................................... $ 5,770 $ 18,861 $ 8,301
Deferred................................................... 2,662 (3,714) 3,476
State income taxes
Current.................................................... 1,427 5,784 600
Deferred................................................... 454 (1,823) 874
--------- --------- ---------
Provision for income taxes................................... $ 10,313 $ 19,108 $ 13,251
--------- --------- ---------
--------- --------- ---------
</TABLE>
In addition to the above income taxes, WCI recognized $13,180,000 of current
income tax benefits in 1997 related to the extraordinary loss on the early
retirement of debt (see note 4).
A reconciliation between income tax expense reported and income tax expense
computed by applying the federal statutory rate to income before income taxes
and extraordinary loss follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income taxes at federal statutory rate....................... $ 9,020 $ 16,502 $ 12,020
State income taxes, net of federal income tax benefit........ 1,223 2,574 958
Other........................................................ 70 32 273
--------- --------- ---------
$ 10,313 $ 19,108 $ 13,251
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income taxes result from temporary differences in the financial
basis and tax basis of assets and liabilities. Total deferred tax assets
amounted to approximately $53,617,000 and $54,719,000 as of October 31, 1997 and
1996; the most significant items comprising the deferred tax assets were
postretirement benefits of $32,137,000 and $27,516,000, respectively, and
compensation accruals of $7,137,000 and $10,968,000, respectively. Total
deferred tax liabilities amounted to approximately $73,504,000 and $48,447,000
as of October 31, 1997 and 1996, respectively, consisting primarily of deferred
taxes on inventory of $3,977,000 and $2,939,000, respectively, and fixed assets
of $68,000,000 and $45,276,000, respectively. The Company had no valuation
allowance for realization of deferred tax assets as of October 31, 1997 or 1996.
As a result of the tax sharing agreement discussed in Note 1(i), the
Company's recoverable income taxes of $4,273,000 at October 31, 1997 is due from
Renco.
(10) LEASES
WCI leases a portion of its operating and data processing equipment. Minimum
future lease payments under noncancellable operating leases are $1,555,000,
$1,257,000, $934,000, $513,000, and $7,000 for the years ending October 31,
1998, 1999, 2000, 2001 and 2002, respectively. Rent expense for noncancellable
F-17
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) LEASES (CONTINUED)
operating leases amounted to approximately $1,386,000, $1,094,000, and
$1,033,000, for the years ended October 31, 1997, 1996, and 1995, respectively.
(11) AGREEMENT WITH THE RENCO GROUP, INC.
WCI has a management services agreement with Renco under which Renco
provides certain management services to WCI. Under terms of this agreement, WCI
is charged a monthly fee of $100,000. The term of this agreement extends to
October 31, 1998. Total expense for management services fees amounted to
$1,200,000 for each of the years ended October 31, 1997, 1996, and 1995. At
October 31, 1996, $480,000 was owed by WCI to Renco for management services
fees.
To obtain the advantages of volume, Renco purchases certain insurance
coverage for its subsidiaries, including the Company, and the actual cost of
such insurance, without markup, is reimbursed by the covered subsidiaries. The
major areas of the Company's insurance coverage obtained under the Renco
programs are property, business interruption, general, product and auto
liability and workers' compensation (other than Ohio for which WCI is self
insured). In fiscal 1997, 1996 and 1995, WCI incurred costs of approximately
$1.7 million, $2.0 million and $1.7 million, respectively, under the Renco
insurance program. The Company believes that its insurance costs under this
program were less than it would have incurred if it had obtained its insurance
directly.
(12) COMMITMENTS AND CONTINGENCIES
At October 31, 1997, WCI had commitments to purchase data processing
services of approximately $24,811,000 in the aggregate over the remaining 4.5
years of its management information systems agreement and purchased services of
approximately $5,463,000, $5,322,000 and $5,573,000 in 1997, 1996 and 1995,
respectively, under the agreement. At October 31, 1997, at pricing then in
effect, WCI had firm commitments for the purchase of raw materials and gases of
approximately $33,758,000 in 1998 and $35,591,000 thereafter. In addition, at
October 31, 1997 WCI had commitments for capital expenditures of approximately
$8,052,000.
In common with much of the steel industry, WCI's facilities are located on
sites that have been used for heavy industrial purposes for decades. WCI is and
will continue to be subject to numerous federal, state and local environmental
laws and regulations governing, among other things, air emissions, waste water
discharge and solid and hazardous waste disposal. WCI believes that it has made
and intends to continue to make the necessary expenditures for environmental
remediation and compliance with environmental laws and regulations.
Environmental laws and regulations have changed rapidly in recent years, and WCI
may be subject to more stringent environmental laws and regulations in the
future. During 1997 the EPA proposed new standards regulating particulate matter
and ozone emissions. Data relating to these standards is to be collected and
analyzed with implementation as early as 2004. These standards have been the
subject of significant discussion throughout federal and state governments, and
changes to the standards or the implementation date may be made prior to final
approval. Like much of the steel, utilities and other industries, WCI's current
operations are not expected to comply with these proposed standards. WCI cannot
currently assess the impact of these proposed standards on its results of
operations or financial condition. Compliance with more stringent environmental
laws and regulations could have a material adverse effect on the Company's
financial condition and results of operations.
F-18
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES (CONTINUED)
On June 29, 1995, the Department of Justice (DOJ), on behalf of the
Environmental Protection Agency (EPA), instituted a civil action against WCI
under the Clean Water Act in the United States District Court for the Northern
District of Ohio. The action alleges numerous violations of WCI's National
Pollution Discharge Elimination System permit alleged to have occurred during
the years 1989 through 1996, inclusive. On March 29, 1996, the Department of
Justice on behalf of the EPA, instituted another civil action against WCI in the
same court under the Clean Air Act alleging violations by WCI of the work
practice, inspection and notice requirements for demolition and renovation of
the National Emission Standard for Hazardous Air Pollutants for Asbestos and
also violations of the particulate standard and the opacity limits applicable to
WCI's facilities in Warren, Ohio. Each action seeks a civil penalty not to
exceed the statutory maximum of $25,000 per day per violation and also seeks an
injunction against continuing violations. WCI believes that imposition of the
statutory maximum penalty for the alleged violations is unlikely based upon past
judicial penalties imposed under the Clean Water Act and the Clean Air Act, and
that it has defenses to liability. By letter dated November 1, 1996, EPA's
Region V Water Division Director requested information pursuant to the Clean
Water Act from WCI relating to the Warren facility, including, information as to
the effect of a prohibition against federal procurement of WCI's products on
WCI's business. WCI responded to the EPA's request on December 2, 1996. WCI has
not been notified that the EPA will seek a federal procurement prohibition based
on alleged permit violations. However, there can be no assurance that a federal
procurement prohibition will not be imposed. WCI is negotiating with the EPA
toward a settlement of these matters. If WCI is unable to reach a negotiated
settlement, and if a substantial penalty similar to the statutory maximum
penalty or federal procurement prohibition were imposed, it could have a
material adverse effect on the operating results or financial condition of the
Company, the extent of which WCI is unable to estimate at this time. Discovery
has been completed in the Clean Water Act civil action, but no trial date has
been set. The Clean Air Act civil action is in discovery and has a trial date
scheduled for May 1998. See note 14.
WCI has obtained a Resource Conservation and Recovery Act (RCRA) storage
permit for waste pickle liquor at its Warren facility acid regeneration plant.
As a provision of the permit, WCI will be required to undertake a corrective
action program with respect to historical material handling practices at the
Warren facility. In April 1997 WCI received notice from the EPA that it had
approved a workplan for the first investigation step of the corrective action
program, the RCRA Facility Investigation (RFI). The workplan identifies thirteen
historical solid waste management units which are the subject of the RFI. The
final scope of the corrective action required to remediate or reclaim any
contamination that may be present at or emanating from the Warren facility is
dependent upon the findings of the RFI and the development and approval of a
corrective action program. Accordingly, WCI is unable at this time to estimate
the final cost of the corrective action program or the period over which such
costs may be incurred and there can be no assurance that it will not have a
material adverse effect on the financial condition of the Company.
On January 23, 1996, two retired employees instituted an action against WCI
and the USWA in the United States District Court for the Northern District of
Ohio alleging in substance that certain distributions made by WCI to employees
and benefit plans violated certain agreements, the Employee Retirement Income
Security Act, the National Labor Relations Act and common law. On July 31, 1997,
the court granted WCI's motion to dismiss this action and entered judgment in
favor of WCI and the USWA. The plaintiffs have filed an appeal regarding the
court's decision to dismiss.
F-19
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES (CONTINUED)
On April 5, 1996, an employee instituted an action for damages against WCI
in the Court of Common Pleas, Trumbull County, Ohio alleging that, under Ohio
common law, her privacy rights were violated and that she has been subjected to
sexual harassment. On April 28, 1997 the plaintiff filed for summary judgment.
WCI denies plaintiff's allegations of liability and has opposed the plaintiff's
motion for summary judgment on which the court has yet to rule. The court has
set a trial date in February 1998.
In addition to the above matters, WCI is contingently liable with respect to
lawsuits and other claims incidental to the ordinary course of its operations. A
liability has been established for an amount, which WCI believes is adequate,
based on information currently available, to cover the costs to resolve the
above described matters, including remediation, if any, except for any costs of
corrective action that may result from the RFI for which no estimate can
currently be made. The outcome of the above described matters could have a
material adverse effect on the future operating results of WCI in a particular
quarterly or annual period, however, WCI believes that the effect of such
matters will not have a material adverse effect on WCI's consolidated financial
position.
(13) SELECTED QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly results for the years
ended October 31, 1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED 1997 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net sales................................... $ 160,907 $ 172,634 $ 165,917 $ 169,012
Gross margin................................ 29,298 31,343 31,559 28,725
Income before extraordinary loss............ 697 7,184 7,557 5,230
Net income (loss)........................... (18,908) 7,184 7,557 5,230
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED 1996 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net sales................................... $ 148,493 $ 166,959 $ 174,695 $ 170,654
Gross margin................................ 22,989 26,261 29,430 31,512
Net income.................................. 4,024 5,497 7,644 7,938
</TABLE>
During the three months ended January 31, 1997, WCI recognized $8,577,000 of
compensation expenses and an extraordinary loss, net of income taxes, of
$19,606,000 related to the Transactions. During the three months ended October
31, 1997 and 1996, WCI recorded a charge of $2,123,000 and a benefit of
$1,042,000, respectively, under the LIFO inventory valuation method.
(14) EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF THE INDEPENDENT
AUDITOR
SENIOR NOTES OFFERING
In February 1998, Renco Steel issued $120 million principal amount 10.875%
senior secured notes due 2005. These notes are secured by a pledge of all the
outstanding capital stock of WCI. Renco Steel intends to meet its debt service
obligations from its cash and investment balances (estimated to be $15.6 million
immediately following the issuance of the notes and use of proceeds thereon,
including payment of estimated transaction expenses) and earnings thereon and
through distributions from WCI, including
F-20
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF THE INDEPENDENT
AUDITOR (CONTINUED)
payments pursuant to the tax sharing agreement and dividends as permitted under
WCI's outstanding indebtedness as described in note 4.
COMMITMENTS AND CONTINGENCIES
Discovery has been completed in both the Clean Water Act and Clean Air Act
civil actions described in note 12. The Company currently is negotiating a
consent decree with the EPA with respect to the Clean Water Act civil action.
The trial date for the Clean Air Act civil action has been rescheduled for
August 1998.
On December 17, 1997, WCI received a compliance order from the EPA alleging
certain violations of WCI's NPDES permit, including exceedances of permit limits
for pH and oil and grease and failure to identify and sample for residual
chlorine. WCI is investigating the alleged exceedances.
On May 11, 1998, the DOJ, on behalf of the EPA, instituted a civil action
against WCI under RCRA in the United States District Court for the Northern
District of Ohio. The action seeks injunctive relief and civil penalties against
WCI for alleged violations of RCRA, the Ohio Administrative Code (OAC) and WCI's
hazardous waste management permit issued pursuant to RCRA and OAC related to
WCI's management of hazardous waste in surface impoundments at WCI's Warren,
Ohio facility. The action alleges that from September 1988 to the present, WCI
operated hazardous waste management units at the Warren facility without the
proper permits pursuant to RCRA and seeks civil penalties not to exceed the
statutory maximum of $25,000 per day per violation for each day of violation
prior to January 30, 1997 and $27,500 per day per violation for each day of
violation on or after January 30, 1997. WCI intends to assert several defenses,
including that these claims are subject to a five-year statute of limitations.
WCI believes that imposition of the statutory maximum penalty is unlikely based
on past judicial penalties imposed under RCRA. However, there can be no
assurance that WCI will not be found to have liability and, if it has liability,
that the statutory maximum penalty will not be imposed. If the statutory maximum
penalty or other substantial penalty were imposed, it could have a material
adverse effect on the financial condition or results of operations of WCI and
the Company.
With respect to the action instituted against WCI on April 5, 1996 discussed
in note 12, the court has rescheduled the trial date for August 1998.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholder and Board of Directors
WCI Steel Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of WCI Steel,
Inc. and subsidiaries (a wholly-owned subsidiary of The Renco Group, Inc.) as of
October 31, 1997 and 1996, and the related consolidated statements of
operations, shareholder's equity (deficit), and cash flows for each of the years
in the three-year period ended October 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of WCI Steel,
Inc. and subsidiaries as of October 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Cleveland, Ohio
December 4, 1997
F-22
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
---------------------- -----------
<S> <C> <C> <C>
1996 1997 1998
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................................. $ 90,395 $ 18,989 $ 11,666
Short-term investments.................................................... 49,146 -- --
Accounts receivable, less allowances for doubtful accounts of $1,600,
$1,627 and $1,527, respectively......................................... 65,869 65,202 70,337
Inventories............................................................... 96,675 106,293 103,747
Recoverable income taxes.................................................. -- 4,273 791
Deferred income taxes..................................................... 10,637 8,188 8,470
Prepaid expenses.......................................................... 1,244 1,640 2,066
---------- ---------- -----------
Total current assets.................................................... 313,966 204,585 197,077
Property, plant and equipment, net.......................................... 205,121 224,620 223,057
Intangible pension asset.................................................... 27,505 20,982 19,984
Other assets, net........................................................... 20,861 20,564 18,156
---------- ---------- -----------
Total assets............................................................ $ 567,453 $ 470,751 $ 458,274
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt......................................... $ 2,448 $ 1,319 $ 382
Accounts payable.......................................................... 79,138 64,123 61,726
Accrued liabilities....................................................... 40,697 51,504 44,228
Income taxes.............................................................. 10,049 1,737 1,876
---------- ---------- -----------
Total current liabilities............................................... 132,332 118,683 108,212
Long-term debt, excluding current portion................................... 209,058 301,618 301,590
Deferred income taxes....................................................... 4,365 7,497 7,982
Postretirement health care benefits......................................... 81,795 85,755 87,269
Pension benefits, excluding current portion................................. 34,011 31,489 30,152
Other liabilities........................................................... 26,012 16,575 15,034
---------- ---------- -----------
Total liabilities....................................................... 487,573 561,617 550,239
---------- ---------- -----------
Shareholder's equity (deficit)
Preferred stock, par value $1,000 per share, 5,000 shares authorized, none
issued.................................................................... -- -- --
Common stock, no par value, stated value $.01 per share, 40,000,000 shares
authorized, 36,623,700, 100 and 100 shares issued at October 31, 1996 and
1997 and January 31, 1998, respectively................................... 366 -- --
Additional paid-in capital.................................................. 570 -- --
Retained earnings (deficit)................................................. 80,144 (90,866) (91,965)
Treasury stock at cost, 222,300 shares at October 31,1996................... (1,200) -- --
---------- ---------- -----------
Total shareholder's equity (deficit).................................... 79,880 (90,866) (91,965)
Commitments and contingencies............................................... -- -- --
---------- ---------- -----------
Total liabilities and shareholder's equity (deficit).................... $ 567,453 $ 470,751 $ 458,274
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED OCTOBER 31, JANUARY 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net sales............................................ $ 630,990 $ 660,801 $ 668,470 $ 160,907 $ 166,592
Operating costs and expenses
Cost of products sold.............................. 544,789 550,609 547,545 131,609 141,848
Depreciation and amortization...................... 21,178 22,547 23,174 5,544 6,413
Selling, general and administrative expenses....... 19,675 22,074 29,355 14,016 4,052
---------- ---------- ---------- ---------- ----------
585,642 595,230 600,074 151,169 152,313
---------- ---------- ---------- ---------- ----------
Operating income................................. 45,348 65,571 68,396 9,738 14,279
---------- ---------- ---------- ---------- ----------
Other income (expense)
Interest expense................................... (25,787) (24,968) (31,690) (7,525) (8,014)
Interest and other income, net..................... 6,212 6,545 1,239 651 299
---------- ---------- ---------- ---------- ----------
(19,575) (18,423) (30,451) (6,874) (7,715)
---------- ---------- ---------- ---------- ----------
Income before income taxes and extraordinary
loss........................................... 25,773 47,148 37,945 2,864 6,564
Income tax expense................................... 10,313 19,108 14,482 1,151 2,363
---------- ---------- ---------- ---------- ----------
Income before extraordinary loss................. 15,460 28,040 23,463 1,713 4,201
Extraordinary loss on early retirement of debt, net
of income taxes.................................... -- -- 19,606 19,606 --
---------- ---------- ---------- ---------- ----------
Net income (loss)................................ $ 15,460 $ 28,040 $ 3,857 $ (17,893) $ 4,201
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
YEARS ENDED OCTOBER 31, 1995, 1996, AND 1997
AND THREE MONTHS ENDED JANUARY 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL RETAINED SHAREHOLDER'S
PREFERRED COMMON PAID-IN EARNINGS TREASURY EQUITY
STOCK STOCK CAPITAL (DEFICIT) STOCK (DEFICIT)
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1994.......................... -- $ 366 $ 300 $ 43,211 -- $ 43,877
Net income........................................... -- -- -- 15,460 -- 15,460
Other................................................ -- -- 158 -- -- 158
----- ----- ----- ----------- --------- ------------
Balance at October 31, 1995.......................... -- 366 458 58,671 -- 59,495
Net income........................................... -- -- -- 28,040 -- 28,040
Dividends paid on Common Stock....................... -- -- -- (6,567) -- (6,567)
Treasury stock purchases............................. -- -- -- -- $ (1,200) (1,200)
Other................................................ -- -- 112 -- -- 112
----- ----- ----- ----------- --------- ------------
Balance at October 31, 1996.......................... -- 366 570 80,144 (1,200) 79,880
Net income........................................... -- -- -- 3,857 -- 3,857
Dividends paid on Common Stock....................... -- -- -- (118,000) -- (118,000)
Repurchase of Common Stock........................... -- (366) (901) (56,867) 1,200 (56,934)
Other................................................ -- -- 331 -- -- 331
----- ----- ----- ----------- --------- ------------
Balance at October 31, 1997.......................... -- -- -- (90,866) -- (90,866)
Net income........................................... -- -- -- 4,201 -- 4,201
Dividends paid on Common Stock....................... -- -- -- (5,300) -- (5,300)
----- ----- ----- ----------- --------- ------------
Balance at January 31, 1998.......................... -- -- -- $ (91,965) -- $ (91,965)
----- ----- ----- ----------- --------- ------------
----- ----- ----- ----------- --------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED OCTOBER 31, JANUARY 31,
-------------------------------- --------------------
1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................... $ 15,460 $ 28,040 $ 3,857 $ (17,893) $ 4,201
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization....................... 19,713 19,617 20,243 4,811 5,680
Amortization of deferred maintenance costs.......... 1,465 2,930 2,931 733 733
Amortization of financing costs..................... 2,180 2,180 1,435 404 337
Postretirement health care benefits................. 10,066 5,508 3,960 761 1,514
Pension benefits.................................... -- 6,507 5,101 1,500 1,361
Provision for losses on accounts receivable......... 117 (658) 27 -- (100)
Deferred income taxes............................... 3,118 (5,537) 5,581 (572) 203
Extraordinary loss.................................. -- -- 32,786 32,786 --
Other............................................... (836) (6) 356 359 (35)
Cash provided (used) by changes in certain assets
and liabilities
Accounts receivable............................... 39,696 (31,595) 640 5,125 (5,035)
Inventories....................................... 7,334 4,414 (9,618) (9,211) 2,546
Prepaid expenses and other assets................. (1,031) (132) (389) 481 911
Accounts payable.................................. (25,209) 31,398 (15,015) (7,785) (2,397)
Accrued liabilities............................... (4,823) 1,113 9,707 3,332 (8,976)
Income taxes payable and recoverable, net......... (11,275) 14,398 (12,585) (15,881) 3,621
Other liabilities................................. 4,756 (182) (9,437) (4,224) (1,540)
---------- --------- --------- --------- ---------
Net cash provided (used) by operating
activities.................................... 60,731 77,995 39,580 (5,274) 3,024
---------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment.............. (14,575) (35,384) (39,902) (12,548) (4,192)
Deferred blast furnace maintenance costs................ (11,598) -- -- -- --
Gross proceeds from the sale of assets.................. 2,818 497 135 -- 110
Short-term investments, net............................. (12,282) (36,864) 49,146 49,146 --
---------- --------- --------- --------- ---------
Net cash provided (used) by investing
activities.................................... (35,637) (71,751) 9,379 36,598 (4,082)
---------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of Senior Secured Notes...... -- -- 290,103 290,387 --
Repurchase of Senior Notes.............................. -- -- (233,085) (233,085) --
Repurchase of Common Stock.............................. -- -- (56,934) (56,926) --
Dividends paid.......................................... -- (6,567) (118,000) (108,000) (5,300)
Principal payments on other long-term debt.............. (2,254) (2,348) (2,449) (915) (965)
Purchases of treasury stock............................. -- (1,200) -- -- --
---------- --------- --------- --------- ---------
Net cash used by financing activities........... (2,254) (10,115) (120,365) (108,539) (6,265)
---------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... 22,840 (3,871) (71,406) (77,215) (7,323)
Cash and cash equivalents at beginning of period........ 71,426 94,266 90,395 90,395 18,989
---------- --------- --------- --------- ---------
Cash and cash equivalents at end of period.............. $ 94,266 $ 90,395 $ 18,989 $ 13,180 $ 11,666
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Supplemental disclosure of cash flow information
Cash paid for interest................................ $ 23,718 $ 22,888 $ 21,412 $ 5,436 $ 15,194
Cash paid for income taxes............................ 18,471 10,247 8,306 4,425 40
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
WCI Steel, Inc. (WCI) is a wholly-owned subsidiary of The Renco Group, Inc.
(Renco or Parent). See note 14.
(A) NATURE OF OPERATIONS
WCI is a niche oriented integrated producer of value-added, custom steel
products. WCI produces a wide range of custom flat rolled products at its
primary facility in Warren, Ohio, including high carbon, alloy and high
strength, silicon electrical and galvanized steel. WCI's primary customers are
steel converters, steel service centers, construction product companies,
electrical equipment manufacturers and to a lesser extent, automobile and
automotive parts manufacturers located principally in the U.S.
During 1997 and 1996, no single customer accounted for 10% or more of net
sales. During 1995, sales to WCI's largest customer accounted for 10.0% of net
sales. Concentration of credit risk related to trade receivables is limited due
to the large number of customers in a variety of industries and geographic
locations.
Since its inception, WCI has had labor agreements with the United
Steelworkers of America (USWA) and other organized labor organizations. The USWA
represents approximately 75% of WCI's employees. WCI has a four-year agreement
with the USWA that expires September 1, 1999.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of WCI and its
wholly-owned subsidiaries. All significant intercompany profits, transactions,
and balances have been eliminated in consolidation.
(C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and short-term investments
with maturities of three months or less from the date of acquisition.
(D) SHORT-TERM INVESTMENTS
Short-term investments consist of United States government or agency issues
which have maturities of less than one year but greater than three months when
purchased. These investments are stated at cost plus accrued interest which
approximates market value.
(E) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by
the last-in, first-out (LIFO) method.
(F) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation is
calculated on the straight-line method over the estimated useful lives of the
assets (buildings 20 to 30 years and machinery and equipment 4 to 25 years with
a weighted average of 18 years). Expenditures for normal repairs and maintenance
are charged to expense as incurred.
F-27
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) OTHER ASSETS
Other assets include deferred financing costs which are amortized using the
effective yield method over the term of the related financing and deferred blast
furnace maintenance costs which are amortized using the straight-line method
over a six-year period.
(H) INCOME TAXES
WCI is included in the consolidated income tax return of Renco. Under the
terms of the tax sharing agreement with Renco, income taxes are allocated to WCI
on a separate return basis, except that transactions between WCI, its
subsidiaries, Renco and Renco's other subsidiaries are accounted for on a cash
basis and WCI does not receive the benefit of net operating tax loss
carryforwards, unless such tax losses were a result of timing differences
between WCI's accounting for tax and financial reporting purposes.
(I) ENVIRONMENTAL COMPLIANCE COSTS
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial expenditures are probable, and the cost can be
reasonably estimated. Generally, the timing of these accruals coincides with the
earlier of completion of a feasibility study or WCI's development of, or
commitment to, a plan of action based on the then known facts.
(J) USE OF ESTIMATES IN PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
---------------------- -----------
<S> <C> <C> <C>
1996 1997 1998
<CAPTION>
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Raw materials........................................... $ 40,828 $ 33,725 $ 33,889
Finished and semi-finished product...................... 62,340 82,216 79,152
Supplies................................................ 393 561 540
---------- ---------- -----------
103,561 116,502 113,581
Less LIFO reserve....................................... 6,886 10,209 9,834
---------- ---------- -----------
$ 96,675 $ 106,293 $ 103,747
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-28
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
<S> <C> <C>
1996 1997
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land and improvements................................................. $ 493 $ 463
Buildings............................................................. 25,641 27,433
Machinery and equipment............................................... 254,118 313,628
Construction in progress.............................................. 32,558 6,265
---------- ----------
312,810 347,789
Less accumulated depreciation......................................... 107,689 123,169
---------- ----------
$ 205,121 $ 224,620
---------- ----------
---------- ----------
</TABLE>
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
---------------------- -----------
<S> <C> <C> <C>
1996 1997 1998
<CAPTION>
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Senior Secured Notes with interest at 10% payable
semi-annually, due 2004............................... -- $ 300,000 $ 300,000
Senior Notes with interest at 10.5% payable semi-
annually, due 2002.................................... $ 206,400 280 280
Revolving Credit Facility(Revolver) with interest at
prime plus 0.5% (9.00% at October 31, 1997) payable
monthly............................................... -- -- --
Other................................................... 5,106 2,657 1,692
---------- ---------- -----------
211,506 302,937 301,972
Less current portion of long-term debt.................. 2,448 1,319 382
---------- ---------- -----------
$ 209,058 $ 301,618 $ 301,590
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
WCI has a $100,000,000 Revolver secured by and subject to eligible
inventories and receivables as defined, reduced by any outstanding letters of
credit. The Revolver is subject to an annual commitment fee of .5% of the unused
balance up to $75,000,000 payable monthly. There were no borrowings outstanding
under the Revolver as of or during the year ended October 31, 1997. The
Revolver, which expires December 29, 1999, also provides for up to an aggregate
amount of $20,000,000 in letters of credit. WCI had approximately $5,536,000 in
letters of credit outstanding at October 31, 1997. The Revolver is subject to a
penalty of $500,000 if terminated, without being refinanced with the same
lender, prior to December 29, 1998 and $250,000 thereafter if terminated before
expiration.
On November 27, 1996 WCI Steel Holdings, Inc., a wholly-owned subsidiary of
The Renco Group, Inc., completed a tender offer in which it purchased
substantially all the outstanding shares of Common Stock of WCI not held by
Renco (Equity Tender Offer). Following the completion of the Equity Tender
Offer, WCI Steel Holdings, Inc. was merged with and into WCI with WCI surviving
as a wholly-owned subsidiary of Renco. The total consideration paid for the
common stock tendered and the common stock
F-29
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM DEBT (CONTINUED)
reacquired as a result of the merger of WCI Steel Holdings, Inc. with and into
WCI was approximately $56,934,000, including related expenses.
On the same date, WCI completed the sale of $300,000,000 10% senior secured
notes (Senior Secured Notes) due 2004. The proceeds from the Senior Secured
Notes, with existing cash balances of WCI, were used to complete the Equity
Tender Offer, a tender offer in which WCI acquired $206,120,000 of the
$206,400,000 aggregate principal amount of the then outstanding Senior Notes at
a rate of $1,125 per $1,000 principal amount outstanding plus accrued interest,
pay a $108,000,000 dividend to Renco, make contractual compensation payments to
certain executives of WCI and pay related transaction costs (Transactions). As a
result of these Transactions, WCI recognized an extraordinary loss of
$19,606,000, net of income tax benefits of $13,180,000, and compensation
expenses of approximately $8,577,000 in the first quarter of fiscal 1997.
The Senior Secured Notes are secured by a second priority lien on
substantially all of the existing property, plant and equipment of WCI which
will become a first priority lien if all of the Senior Notes are extinguished.
The second priority lien is shared with a lien held by the VEBA Trust discussed
in Note 8.
WCI's Revolver and Senior Secured Notes contain certain financial and other
covenants, including maintenance of specified levels of net worth as defined,
working capital, and debt service and limitations on capital expenditures.
Additional covenants limit the incurrence of additional indebtedness, payments
affecting subsidiaries, transactions with affiliates, sale/leaseback
transactions, impairment of security interest, consolidations, mergers and
transfer of WCI's assets. WCI is permitted to declare and pay dividends, and
make other transactions with affiliates provided no condition of default exists
or will exist, and the accumulated amount of such transactions is no greater
than fifty percent (50%) of the consolidated net income as defined (less 100% of
any consolidated net loss) earned for periods subsequent to October 31, 1996
when taken as a single accounting period less management fees paid to Renco in
excess of $1,200,000 annually for the same period. Under these agreements
$4,296,000 was available for dividends and other transactions with affiliates at
October 31, 1997. See note 14.
Aggregate principal payments on long-term debt for the five years subsequent
to October 31, 1997 are as follows: $1,319,000 in 1998, $116,000 in 1999,
$122,000 in 2000, $128,000 in 2001, and $415,000 in 2002.
As of October 31, 1997, the fair value of the Senior Secured Notes was
$313,500,000 based on the quoted market price.
(5) ACCRUED LIABILITIES
Accrued liabilities included employment related costs of $28,442,000 and
$26,026,000 and interest of $12,555,000 and $3,712,000 at October 31, 1997 and
1996, respectively.
(6) EMPLOYEE COMPENSATION PLANS
WCI has variable compensation plans for the benefit of substantially all
employees. The amount of compensation due under these plans is based on WCI's
income as defined under each plan. Total expense under the plans was
$24,588,000, $14,000,000, and $11,093,000 for the years ended October 31, 1997,
1996, and 1995, respectively. Certain amounts under these plans represent
deferred compensation.
F-30
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) PENSION PLANS
WCI has defined contribution retirement plans that cover substantially all
employees. WCI funds these retirement plan contributions as accrued. WCI's
contributions to the plans are based on employee age, length of service and
compensation. WCI contributions, paid or accrued, aggregated approximately
$5,929,000, $5,376,000 and $4,988,000 for the years ended October 31, 1997,
1996, and 1995, respectively.
WCI sponsors a defined benefit pension plan which covers substantially all
bargained-for employees, provides minimum pension benefits based on age, years
of service and benefits provided under WCI's defined contribution plan and a
predecessor company's defined benefit plan. WCI intends to make future
contributions to the plan in amounts that meet or exceed the minimum funding
requirements of ERISA.
The following table sets forth the actuarial present value of benefit
obligations and funded status of the plan:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
<S> <C> <C>
1996 1997
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of
$31,912 and $32,833, respectively................................ $ 47,947 $ 48,519
---------- ----------
---------- ----------
Projected benefit obligation....................................... $ 48,498 $ 49,077
Plan assets at fair value.......................................... 13,936 15,930
---------- ----------
Projected benefit obligation in excess of plan assets.............. 34,562 33,147
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions.................... 10,937 13,697
Unrecognized prior service cost.................................... (38,993) (35,237)
Additional minimum liability....................................... 27,505 20,982
---------- ----------
Accrued pension cost............................................... 34,011 32,589
Less pension liability due within one year......................... -- 1,100
---------- ----------
Long-term pension liability........................................ $ 34,011 $ 31,489
---------- ----------
---------- ----------
</TABLE>
Plan assets consist primarily of listed domestic and foreign common stocks
and corporate and government bonds. An assumed discount rate of 7.25% and 7.5%
in 1997 and 1996, respectively, and an expected return on plan assets of 8.5%
were used for purposes of valuing the benefits under the defined benefit pension
plan.
F-31
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) PENSION PLANS (CONTINUED)
The following table sets forth the components of pension expense:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
<S> <C> <C>
1996 1997
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Service cost........................................................... $ (213) $ (332)
Interest cost.......................................................... 3,477 3,404
Actual return on plan assets........................................... (828) (3,188)
Amortization of unrecognized:
Prior service cost................................................... 3,831 3,756
Net gain and deferral................................................ 290 1,486
--------- ---------
$ 6,557 $ 5,126
--------- ---------
--------- ---------
</TABLE>
No pension expense related to this plan was recognized during 1995 as a
result of the plan being adopted on October 27, 1995.
(8) POSTRETIREMENT HEALTH CARE BENEFITS
WCI provides postretirement health care and life insurance benefits to
substantially all employees who retire from WCI upon meeting certain age and
length of service eligibility requirements.
The following table sets forth the plan's accumulated postretirement benefit
obligation (APBO):
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------
<S> <C> <C>
1996 1997
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees.......................................................... $ 15,374 $ 23,923
Fully eligible active plan participants........................... 33,877 32,641
Other active participants......................................... 40,294 52,434
---------- ---------
89,545 108,998
Plan assets at fair value........................................... 3,332 8,485
---------- ---------
APBO in excess of plan assets....................................... 86,213 100,513
Unrecognized prior service cost resulting from
plan amendments................................................... (4,356) (6,859)
Unrecognized net loss from past experience different from that
assumed and from changes in assumptions........................... (62) (7,899)
---------- ---------
Accrued postretirement benefit cost................................. $ 81,795 $ 85,755
---------- ---------
---------- ---------
</TABLE>
Plan assets consist primarily of listed common stocks and corporate and
government bonds. The APBO was determined using a discount rate of 7.25% and
7.5% in 1997 and 1996, respectively, an expected return on plan assets of 8.5%,
and an assumed health care cost trend rate of 8% in 1998, gradually declining to
5% after 2003. Assuming a 1% increase in the health care cost trend rate, the
APBO at October 31, 1997 would increase by $19,099,000 along with an increase in
the 1997 service and interest cost components of $1,710,000.
F-32
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) POSTRETIREMENT HEALTH CARE BENEFITS (CONTINUED)
Net periodic postretirement benefit costs included the following components:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost................................................. 2,562 $ 2,272 $ 2,232
Interest cost................................................ 7,007 6,541 7,260
Actual return on plan assets................................. -- (188) (1,254)
Net amortization and deferral................................ 1,025 1,698 2,004
--------- --------- ---------
Net periodic postretirement benefit cost..................... $ 10,594 $ 10,323 $ 10,242
--------- --------- ---------
--------- --------- ---------
</TABLE>
Total claims paid by WCI during the years ended October 31, 1997, 1996 and
1995 were $2,383,000, $1,671,000 and $528,000, respectively.
In addition, WCI is required to contribute a minimum of $.50 per hour worked
by certain hourly employees to a Voluntary Employees Beneficiaries Trust (VEBA
Trust) established to fund future postretirement health care and life insurance
benefits. Contributions to the trust amounted to $3,899,000 and $3,144,000
during 1997 and 1996, respectively. In accordance with WCI's labor contract, WCI
will continue to pay current claims as incurred until the trust assets exceed
50% of the APBO for the hourly employees who are beneficiaries of the trust.
(9) INCOME TAXES
The provision for income tax expense (benefit) is comprised of the
following:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes
Current.................................................... $ 5,770 $ 18,861 $ 8,301
Deferred................................................... 2,662 (3,714) 4,461
State income taxes
Current.................................................... 1,427 5,784 600
Deferred................................................... 454 (1,823) 1,120
--------- --------- ---------
Provision for income taxes................................... $ 10,313 $ 19,108 $ 14,482
--------- --------- ---------
--------- --------- ---------
</TABLE>
In addition to the above income taxes, WCI recognized $13,180,000 of current
income tax benefits in 1997 related to the extraordinary loss on the early
retirement of debt (see note 4).
F-33
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES (CONTINUED)
A reconciliation between income tax expense reported and income tax expense
computed by applying the federal statutory rate to income before income taxes
and extraordinary loss follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income taxes at federal statutory rate....................... $ 9,020 $ 16,502 $ 13,282
State income taxes, net of federal income tax benefit........ 1,223 2,574 1,118
Other........................................................ 70 32 82
--------- --------- ---------
$ 10,313 $ 19,108 $ 14,482
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income taxes result from temporary differences in the financial
basis and tax basis of assets and liabilities. Total deferred tax assets
amounted to approximately $51,492,000 and $54,719,000 as of October 31, 1997 and
1996; the most significant items comprising the deferred tax assets were
postretirement benefits of $30,084,000 and $27,516,000, respectively, and
compensation accruals of $7,137,000 and $10,968,000, respectively. Total
deferred tax liabilities amounted to approximately $50,801,000 and $48,447,000
as of October 31, 1997 and 1996, respectively, consisting primarily of deferred
taxes on inventory of $3,526,000 and $2,939,000, respectively, and fixed assets
of $46,810,000 and $45,276,000, respectively. WCI had no valuation allowance for
realization of deferred tax assets as of October 31, 1997 or 1996.
As a result of the tax sharing agreement discussed in Note 1 (h), WCI's
recoverable income taxes of $4,273,000 at October 31, 1997 is due from Renco.
(10) LEASES
WCI leases a portion of its operating and data processing equipment. Minimum
future lease payments under noncancellable operating leases are $1,555,000,
$1,257,000, $934,000, $513,000, and $7,000 for the years ending October 31,
1998, 1999, 2000, 2001 and 2002, respectively. Rent expense for noncancellable
operating leases amounted to approximately $1,386,000, $1,094,000, and
$1,033,000, for the years ended October 31, 1997, 1996, and 1995, respectively.
(11) AGREEMENT WITH THE RENCO GROUP, INC.
WCI has a management services agreement with Renco under which Renco
provides certain management services to WCI. Under terms of this agreement, WCI
is charged a monthly fee of $100,000. The term of this agreement extends to
October 31, 1998. Total expense for management services fees amounted to
$1,200,000 for each of the years ended October 31, 1997, 1996, and 1995. At
October 31, 1996, $480,000 was owed by WCI to Renco for management services
fees.
To obtain the advantages of volume, Renco purchases certain insurance
coverage for its subsidiaries, including WCI, and the actual cost of such
insurance, without markup, is reimbursed by the covered subsidiaries. The major
areas of WCI's insurance coverage obtained under the Renco programs are
property, business interruption, general, product and auto liability and
workers' compensation (other than Ohio for which WCI is self insured). In fiscal
1997, 1996 and 1995, WCI incurred costs of approximately $1.7 million, $2.0
million and $1.7 million, respectively, under the Renco insurance program. WCI
believes
F-34
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) AGREEMENT WITH THE RENCO GROUP, INC. (CONTINUED)
that its insurance costs under this program were less than it would have
incurred if it had obtained its insurance directly.
(12) COMMITMENTS AND CONTINGENCIES
At October 31, 1997, WCI had commitments to purchase data processing
services of approximately $24,811,000 in the aggregate over the remaining 4.5
years of its management information systems agreement and purchased services of
approximately $5,463,000, $5,322,000 and $5,573,000 in 1997, 1996 and 1995,
respectively, under the agreement. At October 31, 1997, at pricing then in
effect, WCI had firm commitments for the purchase of raw materials and gases of
approximately $33,758,000 in 1998 and $35,591,000 thereafter. In addition, at
October 31, 1997 WCI had commitments for capital expenditures of approximately
$8,052,000.
In common with much of the steel industry, WCI's facilities are located on
sites that have been used for heavy industrial purposes for decades. WCI is and
will continue to be subject to numerous federal, state and local environmental
laws and regulations governing, among other things, air emissions, waste water
discharge and solid and hazardous waste disposal. WCI believes that it has made
and intends to continue to make the necessary expenditures for environmental
remediation and compliance with environmental laws and regulations.
Environmental laws and regulations have changed rapidly in recent years, and WCI
may be subject to more stringent environmental laws and regulations in the
future. During 1997 the EPA proposed new standards regulating particulate matter
and ozone emissions. Data relating to these standards is to be collected and
analyzed with implementation as early as 2004. These standards have been the
subject of significant discussion throughout federal and state governments, and
changes to the standards or the implementation date may be made prior to final
approval. Like much of the steel, utilities and other industries, WCI's current
operations are not expected to comply with these proposed standards. WCI cannot
currently assess the impact of these proposed standards on its results of
operations or financial condition. Compliance with more stringent environmental
laws and regulations could have a material adverse effect on WCI's financial
condition and results of operations.
On June 29, 1995, the Department of Justice (DOJ), on behalf of the
Environmental Protection Agency (EPA), instituted a civil action against WCI
under the Clean Water Act in the United States District Court for the Northern
District of Ohio. The action alleges numerous violations of WCI's National
Pollution Discharge Elimination System permit alleged to have occurred during
the years 1989 through 1996, inclusive. On March 29, 1996, the Department of
Justice on behalf of the EPA, instituted another civil action against WCI in the
same court under the Clean Air Act alleging violations by WCI of the work
practice, inspection and notice requirements for demolition and renovation of
the National Emission Standard for Hazardous Air Pollutants for Asbestos and
also violations of the particulate standard and the opacity limits applicable to
WCI's facilities in Warren, Ohio. Each action seeks a civil penalty not to
exceed the statutory maximum of $25,000 per day per violation and also seeks an
injunction against continuing violations. WCI believes that imposition of the
statutory maximum penalty for the alleged violations is unlikely based upon past
judicial penalties imposed under the Clean Water Act and the Clean Air Act, and
that it has defenses to liability. By letter dated November 1, 1996, EPA's
Region V Water Division Director requested information pursuant to the Clean
Water Act from WCI relating to the Warren facility, including, information as to
the effect of a prohibition against federal procurement of WCI's products on
WCI's business. WCI responded to the EPA's request on December 2, 1996. WCI has
not been notified that the EPA will seek a federal procurement prohibition based
on alleged permit violations. However,
F-35
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES (CONTINUED)
there can be no assurance that a federal procurement prohibition will not be
imposed. WCI is negotiating with the EPA toward a settlement of these matters.
If WCI is unable to reach a negotiated settlement, and if a substantial penalty
similar to the statutory maximum penalty or federal procurement prohibition were
imposed, it could have a material adverse effect on the operating results or
financial condition of WCI, the extent of which WCI is unable to estimate at
this time. These actions are in discovery. The Clean Air Act civil action has a
trial date scheduled for May 1998. No trial date has been established for the
Clean Water Act civil action. See note 14.
WCI has obtained a Resource Conservation and Recovery Act (RCRA) storage
permit for waste pickle liquor at its Warren facility acid regeneration plant.
As a provision of the permit, WCI will be required to undertake a corrective
action program with respect to historical material handling practices at the
Warren facility. In April 1997 WCI received notice from the EPA that it had
approved a workplan for the first investigation step of the corrective action
program, the RCRA Facility Investigation (RFI). The workplan identifies thirteen
historical solid waste management units which are the subject of the RFI. The
final scope of the corrective action required to remediate or reclaim any
contamination that may be present at or emanating from the Warren facility is
dependent upon the findings of the RFI and the development and approval of a
corrective action program. Accordingly, WCI is unable at this time to estimate
the final cost of the corrective action program or the period over which such
costs may be incurred and there can be no assurance that it will not have a
material adverse effect on the financial condition of WCI.
On January 23, 1996, two retired employees instituted an action against WCI
and the USWA in the United States District Court for the Northern District of
Ohio alleging in substance that certain distributions made by WCI to employees
and benefit plans violated certain agreements, the Employee Retirement Income
Security Act, the National Labor Relations Act and common law. On July 31, 1997,
the court granted WCI's motion to dismiss this action and entered judgment in
favor of WCI and the USWA. The plaintiffs have filed an appeal regarding the
court's decision to dismiss.
On April 5, 1996, an employee instituted an action for damages against WCI
in the Court of Common Pleas, Trumbull County, Ohio alleging that, under Ohio
common law, her privacy rights were violated and that she has been subjected to
sexual harassment. On April 28, 1997 the plaintiff filed for summary judgment.
WCI denies plaintiff's allegations of liability and has opposed the plaintiff's
motion for summary judgment on which the court has yet to rule. The court has
set a trial date in February 1998. See note 14.
In addition to the above matters, WCI is contingently liable with respect to
lawsuits and other claims incidental to the ordinary course of its operations. A
liability has been established for an amount, which WCI believes is adequate,
based on information currently available, to cover the costs to resolve the
above described matters, including remediation, if any, except for any costs of
corrective action that may result from the RFI for which no estimate can
currently be made. The outcome of the above described matters could have a
material adverse effect on the future operating results of WCI in a particular
quarterly or annual period, however, WCI believes that the effect of such
matters will not have a material adverse effect on WCI's consolidated financial
position.
F-36
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) SELECTED QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly results for the years
ended October 31, 1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED 1997 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net sales................................... $ 160,907 $ 172,634 $ 165,917 $ 169,012
Gross margin................................ 29,298 31,343 31,559 28,725
Income before extraordinary loss............ 1,713 7,777 8,150 5,823
Net income (loss)........................... (17,893) 7,777 8,150 5,823
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED 1996 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net sales................................... $ 148,493 $ 166,959 $ 174,695 $ 170,654
Gross margin................................ 22,989 26,261 29,430 31,512
Net income.................................. 4,788 6,194 8,130 8,928
</TABLE>
During the three months ended January 31, 1997, WCI recognized $8,577,000 of
compensation expenses and an extraordinary loss, net of income taxes, of
$19,606,000 related to the Transactions. During the three months ended October
31, 1997 and 1996, WCI recorded a charge of $2,123,000 and a benefit of
$1,042,000, respectively, under the LIFO inventory valuation method.
(14) EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF THE INDEPENDENT
AUDITOR
RENCO STEEL HOLDINGS, INC.
Renco Steel Holdings, Inc. (Renco Steel) is a holding company formed by
Renco in January 1998 which owns all the outstanding shares of capital stock of
WCI. As a result, WCI is a wholly-owned subsidiary of Renco Steel and an
indirect wholly-owned subsidiary of Renco.
In February 1998, Renco Steel issued $120 million principal amount 10.875%
senior secured notes due 2005. These notes are secured by a pledge of all the
outstanding capital stock of WCI. Renco Steel intends to meet its debt service
obligations from its cash and investment balances (estimated to be $15.6 million
immediately following the issuance of the notes and use of proceeds thereon,
including payment of estimated transaction expenses) and earnings thereon and
through distributions from WCI, including payments pursuant to the tax sharing
agreement and dividends as permitted under WCI's outstanding indebtedness as
described in note 4.
COMMITMENTS AND CONTINGENCIES
Discovery has been completed in both the Clean Water Act and Clean Air Act
civil actions described in note 12. The Company currently is negotiating a
consent decree with the EPA with respect to the Clean Water Act civil
litigation. The trial date for the Clean Air Act civil action has been
rescheduled for August 1998.
On December 17, 1997, WCI received a compliance order from the EPA alleging
certain violations of WCI's NPDES permit, including exceedances of permit limits
for pH and oil and grease and failure to identify and sample for residual
chlorine. WCI is investigating the alleged exceedances.
On May 11, 1998, the DOJ on behalf of the EPA, instituted a civil action
against WCI under RCRA in the United States District Court for the Northern
District of Ohio. The action seeks injunctive relief and civil penalties against
WCI for alleged violations of RCRA, the Ohio Administrative Code (OAC) and
F-37
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF THE INDEPENDENT
AUDITOR (CONTINUED)
WCI's hazardous waste management permit issued pursuant to RCRA and OAC related
to WCI's management of hazardous waste in surface impoundments at WCI's Warren,
Ohio facility. The action alleges that from September 1988 to the present, WCI
operated hazardous waste management units at the Warren facility without the
proper permits pursuant to RCRA and seeks civil penalties not to exceed the
statutory maximum of $25,000 per day per violation for each day of violation
prior to January 30, 1997 and $27,500 per day per violation for each day of
violation on or after January 30, 1997. WCI intends to assert several defenses,
including that these claims are subject to a five-year statute of limitations.
WCI believes that imposition of the statutory maximum penalty is unlikely based
on past judicial penalties imposed under RCRA. However, there can be no
assurance that WCI will not be found to have liability and, if it has liability,
that the statutory maximum penalty will not be imposed. If the statutory maximum
penalty or other substantial penalty were imposed, it could have a material
adverse effect on the financial condition or results of operations of WCI.
With respect to the action instituted against WCI on April 5, 1996 discussed
in note 12, the court has rescheduled the trial date for August 1998.
F-38
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information............................ 2
Forward-Looking Statements....................... 2
Prospectus Summary............................... 3
Risk Factors..................................... 13
Use of Proceeds.................................. 21
Capitalization................................... 22
Unaudited Pro Forma Condensed Consolidated
Financial Data................................. 23
Selected Consolidated Financial Data............. 28
The Exchange Offer............................... 30
Management's Discussion and Analysis
of Results of Operations and Financial
Condition...................................... 36
Business......................................... 42
Management....................................... 52
Stock Ownership and Certain Relationships and
Transactions................................... 53
Description of the Notes......................... 55
Certain U.S. Federal Income Tax Considerations... 73
Plan of Distribution............................. 73
Legal Matters.................................... 74
Experts.......................................... 74
Index to Consolidated Financial
Statements..................................... F-1
</TABLE>
UNTIL , 1998 (40 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
RENCO STEEL
HOLDINGS, INC.
OFFER TO EXCHANGE ITS
10 7/8% SENIOR SECURED NOTES
DUE 2005, SERIES B,
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933,
AS AMENDED,
FOR ANY AND ALL OF ITS OUTSTANDING
10 7/8% SENIOR SECURED NOTES
DUE 2005, SERIES A
--------------
PROSPECTUS
--------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1701.13(E)(1) of the Ohio General Corporation Law (the "OGCL")
provides that a corporation may indemnify a person made or threatened to be made
a party to any proceeding, other than a proceeding by or in the right of the
corporation, by reason of such person's official capacity as an officer,
director, employee or agent of the corporation, or if such person is or was
serving at the request of the corporation as a director, trustee, officer,
employee, or agent of another corporation, domestic or foreign, nonprofit or for
profit, partnership, joint venture, trust or other enterprise, against
judgments, fines, expenses, including attorney's fees, and disbursements paid in
settlement incurred by such person in connection with the proceeding, if such
person (a) acted in good faith and in a manner such person reasonably believed
to be in, or not opposed to, the best interests of the corporation; and (b) in
the case of a criminal proceeding, had no reason to believe such person's
conduct was unlawful.
Section 1701.13(E)(2) of the OGCL further provides that a corporation may
indemnify a person made or threatened to be made a party to any proceeding by or
in the right of the corporation to procure a judgment in its favor, by reason of
such person's official capacity as an officer, director, employee or agent of
the corporation or if such person is or was serving at the request of the
corporation as a director, trustee, officer, employee, or agent of another
corporation, domestic or foreign, nonprofit or for profit, partnership, joint
venture, trust or other enterprise, against expenses, including attorney's fees,
and disbursements paid in settlement incurred by such person in connection with
the proceeding, if such person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, the best interests of the
corporation, except that the corporation may not indemnify such person for (a)
any proceeding as to which such person is adjudged to be liable for negligence
or misconduct in the performance of such person's duty to the corporation,
unless the court in which such proceeding is brought determines that, despite
the adjudication of liability, such person is entitled to indemnity for such
expenses as the court shall deem proper; and (b) any proceeding in which the
only liability asserted against a director is pursuant to Section 1701.95 of the
Revised Code of Ohio.
Section 1701.13(E)(3) of the OGCL further provides that to the extent a
director, trustee, officer, employee, or agent of a corporation is successful on
the merits or in defense of any proceeding brought under Sections 1701.13(E)(1)
and 1701.13(E)(2) of the OGCL, a corporation shall indemnify such person against
expenses, including attorney's fees, incurred by such person in connection with
the proceeding.
In addition, Section 1701.13(E)(a) of the OGCL provides that, unless
otherwise provided by a corporation's articles of incorporation or code of
regulations at the time of a director's act or omission, and unless the only
liability asserted against a director in a proceeding is pursuant to Section
1701.95 of the Revised Code of Ohio, if a director is made or threatened to be
made a party to a proceeding brought under Sections 1701.13(E)(1) and
1701.13(E)(2) of the OGCL, such person is entitled to payment or reimbursement
by a corporation of expenses, including attorney's fees, incurred by such person
in advance of the final disposition of the proceeding, upon receipt of an
undertaking by or on behalf of such person agreeing to (a) repay all amounts
paid or reimbursed by the corporation if it is ultimately determined that such
person's act or omission was undertaken with deliberate intent to cause injury
to the corporation or undertaken with reckless disregard for the best interests
of the corporation; and (b) cooperate with the corporation concerning the
proceeding. Expenses, including attorney's fees, incurred by a corporation's
director, trustee, officer, employee, or agent in a proceeding brought under
Sections 1701.13(E)(1) and 1701.13(E)(2) of the OGCL may be paid by the
corporation as they are incurred in advance of the final disposition of the
proceeding upon the receipt of an undertaking from such person to repay all
amounts paid or reimbursed by the corporation if it is ultimately determined
that such person is not entitled to be indemnified by the corporation.
II-1
<PAGE>
Finally, Section 1701.13(E)(6) of the OGCL provides that a corporation's
articles of incorporation or code of regulations may extend further
indemnification rights in addition to those provided by Section 1701.13 of the
OGCL.
The indemnification provisions of Section 32 of the Registrant's Code of
Regulations are set forth below in full:
SECTION 32. INDEMNIFICATION
(a) The Corporation shall indemnify any director or officer or any
former director or officer of the Corporation or any person who is or
has served at the request of the Corporation as a director, officer, or
trustee of another corporation, joint venture, trust or other enterprise
against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative or investigative,
other than an action by or in the right of the corporation, to which he
was, is, or is threatened to be made a party by reason of the fact that
he is or was such director, officer, or trustee, provided it is
determined in the manner set forth in paragraph (c) of this section that
he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation and that, with
respect to any criminal action or proceeding, he had no reasonable cause
to believe his conduct was unlawful.
(b) In the case of any threatened, pending or completed action or
suit by or in the right of the Corporation, the Corporation shall
indemnify each person indicated in paragraph (a) of this section against
expenses, including attorney's fees, actually and reasonably incurred in
connection with the defense or settlement thereof, provided it is
determined in the manner set forth in paragraph (c) of this section that
he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation except that no
indemnification shall be made in respect of any claim, issue, or matter
as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the
Corporation unless and only to the extent that the court of common pleas
or the court in which such action or suit was brought shall determined
upon application that, despite the adjudication of liability, but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses as the court of
common pleas or such other court shall deem proper.
(c) The determinations referred to in paragraphs (a) and (b) of this
section shall be made (1) by a majority vote of a quorum consisting of
directors of the Corporation who were not and are not parties to or
threatened with any such action, suit or proceeding, or (2) if such a
quorum is not obtainable or if a majority vote of a quorum of
disinterested directors so directs, in a written opinion by independent
legal counsel other than an attorney, or a firm having associated with
it an attorney, who has been retained by or who has performed services
for the Corporation, or any person to be indemnified, within the past
five years, or (3) by the shareholders, or (4) by the court of common
pleas or the court in which such action, suit or proceeding was brought.
(d) Expenses, including attorneys' fees, incurred in defending any
action, suit, or proceeding referred to in paragraphs (a) and (b) of
this section, may be paid by the Corporation in advance of the final
disposition of such action, suit, or proceeding as authorized by the
directors in the specific case upon receipt of an undertaking by or on
behalf of the director, officer, or trustee to repay such amount, unless
it shall ultimately be determined that he is entitled to be indemnified
by the Corporation as authorized in this section.
II-2
<PAGE>
(e) The indemnification provided by this section shall not be deemed
exclusive (1) of any other rights to which those seeking indemnification
may be entitled under the articles, the regulations, any agreement, any
insurance purchase by the Corporation, vote of shareholders of
disinterested directors, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office,
or of (2) the power of the Corporation to indemnify any person who is or
was an employee or agent of the Corporation or of another corporation,
joint venture, trust or other enterprise which he is serving or has
served at the request of the Corporation, to the same extent and in the
same situation and subject to the same determinations as are hereinabove
set forth with respect to a director, officer, or trustee. As used in
this paragraph (e) references to the "Corporation" include all
constituent corporations in a consolidation or merger in which the
Corporation or a predecessor to the Corporation by consolidation or
merger was involved. The indemnification provided by this section shall
continue as to a person who has ceased to be a director, officer, or
trustee and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 -- Articles of Incorporation of the Registrant, filed January 20, 1998.(9)
3.2 -- Code of Regulations of the Registrant.(9)
4.1 -- Indenture, dated as of February 3, 1998, by and between the Registrant, as issuer, and State Street
Bank and Trust Company, as trustee, relating to the 10 7/8% Senior Secured Notes due 2005, Series A
and the 10 7/8% Senior Secured Notes due 2005, Series B of the Registrant (containing, as exhibits,
specimens of the Series A Senior Secured Notes and Series B Senior Secured Notes).(9)
4.2 -- Purchase Agreement, dated January 29, 1998, between Donaldson, Lufkin and Jenrette Securities
Corporation and the Registrant, relating to the 10 7/8% Senior Secured Notes due 2005.(9)
4.3 -- Registration Rights Agreement, dated as of February 3, 1998, by and between Donaldson, Lufkin &
Jenrette Securities Corporation and the Registrant, relating to the 10 7/8% Senior Secured Notes due
2005.(9)
4.4 -- Form Letter of Transmittal.(9)
5.1 -- Opinion of Cadwalader, Wickersham & Taft.
8.1 -- Opinion of Cadwalader, Wickersham & Taft (included in Exhibit 5.1).
10.1 -- Amended and Restated Loan and Security Agreement, dated December 29, 1992, between WCI and Congress
Financial Corporation and Security Pacific Business Credit Inc. (the "WCI Revolving Credit
Agreement").(1)
10.1.1 -- Amendment No. 1 to the WCI Revolving Credit Agreement, dated December 14, 1993.(2)
10.1.2 -- Amendment No. 2 to the WCI Revolving Credit Agreement, dated July 13, 1994.(3)
10.1.3 -- Amendment No. 3 to the WCI Revolving Credit Agreement, dated March 28, 1995.(4)
10.1.4 -- Amendment No. 4 to the WCI Revolving Credit Agreement, dated February 23, 1996.(5)
10.1.5 -- Amendment No. 5 to the WCI Revolving Credit Agreement, dated March 8, 1996.(5)
10.1.6 -- Amendment No. 6 to the WCI Revolving Credit Agreement, dated June 17, 1996.(6)
10.1.7 -- Amendment No. 7 to the WCI Revolving Credit Agreement, dated November 27, 1996.(7)
10.1.8 -- Amendment No. 8 to the WCI Revolving Credit Agreement, dated October 31, 1997.(8)
10.2 -- Intercreditor Agreement, dated December 14, 1993, among the Shawmut Bank Connecticut, National
Association, Congress Financial Corporation and Security Pacific Business Credit Inc.(2)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
10.3 -- Intercreditor Agreement, dated November 27, 1996, between Fleet National Bank and Congress Financial
Corporation.(7)
10.4 -- Intercreditor Agreement, dated November 27, 1996, among Fleet National Bank, Bank One Trust Company,
N.A. and WCI.(7)
10.5 -- Indemnification Agreement, dated as of November 27, 1996, between WCI and Bank One Trust Company,
N.A.(7)
10.6 -- Promissory Note, dated August 31, 1988, in the original principal amount of $5,552,000 made by WCI
to LTV Steel Company, Inc.(1)
10.7 -- Loan Agreement, dated as of May 1, 1990, between the Director of Development of the State of Ohio
and Youngstown Sinter Company (Ohio Enterprise Bond Fund Program).(1)
10.8 -- Agreement, dated June 11, 1990, between the City of Youngstown, Ohio and Youngstown Sinter Company
(with UDAG Grant Agreement).(1)
10.9 -- Pledge Agreement, dated as of February 3, 1998, by the Registrant, as pledgor, in favor of State
Street Bank and Trust Company, as trustee.(9)
12 -- Statement regarding computation of ratios.
21 -- List of Subsidiaries of Registrant.(9)
23.1 -- Consent of Cadwalader, Wickersham & Taft (included in Exhibit 5.1).
23.2 -- Consent of KPMG Peat Marwick LLP--Registrant.
23.3 -- Consent of KPMG Peat Marwick LLP--WCI.
24 -- Power of Attorney (included on the signature page).(9)
25 -- Statement of Eligibility and Qualification on Form T-1 of State Street Bank and Trust Company.(9)
</TABLE>
- ------------------------
(1) Incorporated by reference to WCI's Registration Statement on Form S-4, as
amended (File No. 33-58648), originally filed with the Commission on
February 23, 1993.
(2) Incorporated by reference to WCI's Registration Statement on Form S-4 (File
No. 33-74108), originally filed with the Commission on January 14, 1994.
(3) Incorporated by reference to WCI's Pre-Effective Amendment No. 3 to
Registration Statement on Form S-1 (File No. 33-75722), filed with the
Commission on May 4, 1994.
(4) Incorporated by reference to WCI's Form 10-Q for the quarterly period ended
April 30, 1995.
(5) Incorporated by reference to WCI's Form 10-Q for the quarterly period ended
April 30, 1996.
(6) Incorporated by reference to WCI's Form 10-Q for the quarterly period ended
July 31, 1996.
(7) Incorporated by reference to WCI's Registration Statement on Form S-4, as
amended (File No. 333-18019), originally filed with the Commission on
December 17, 1996.
(8) Incorporated by reference to WCI's Form 10-K for the fiscal year ended
October 31, 1997.
(9) Previously filed.
(b) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or the
notes thereto.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable. In the event
II-4
<PAGE>
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply be means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on May 18, 1998.
RENCO STEEL HOLDINGS, INC.
By: /s/ IRA LEON RENNERT
------------------------------------------
IRA LEON RENNERT
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on May 18, 1998
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ------------------------------------------------------
<C> <S>
/s/ IRA LEON RENNERT Chairman of the Board and Director
-------------------------------------------
IRA LEON RENNERT
/s/ JAMES N. CHAPMAN President (Principal Executive Officer)
-------------------------------------------
JAMES N. CHAPMAN
/s/ ROGER L. FAY Vice President and Chief Financial Officer
------------------------------------------- (Principal Financial and Accounting Officer)
ROGER L. FAY
</TABLE>
II-6
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Shareholder and Board of Directors
Renco Steel Holdings, Inc. and Subsidiaries:
Under date of January 29, 1998, we reported on the consolidated balance
sheets of Renco Steel Holdings, Inc. and subsidiaries and predecessor as of
October 31, 1997 and 1996, and the related consolidated statements of income,
shareholder's equity (deficit), and cash flows for each of the years in the
three-year period ended October 31, 1997, which are contained as part of this
report herein. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement schedule
(Schedule II--Valuation and Qualifying Accounts) also contained as part of this
report herein. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
KPMG PEAT MARWICK LLP
Cleveland, Ohio
January 29, 1998
S-1
<PAGE>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE OF DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT ------------------------ BALANCE AT
BEGINNING CHARGED TO CHARGES TO END
CLASSIFICATION OF YEAR EXPENSE(B) OTHER DEDUCTIONS(C) OF YEAR
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS(a):
Year ended October 31, 1997....................... $ 1,600 $ 64 -- $ 37 $ 1,627
Year ended October 31, 1996....................... 2,258 (646) -- 12 1,600
Year ended October 31, 1995....................... 2,400 117 -- 259 2,258
</TABLE>
- ------------------------
(a) Allowance for doubtful accounts is shown as a reduction of accounts
receivable in the Company's Consolidated Financial Statements.
(b) Charges to expense for the provision for doubtful accounts.
(c) Trade receivables written-off.
S-2
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------
<C> <S> <C>
3.1 -- Articles of Incorporation of the Registrant, filed January 20, 1998.(9)
3.2 -- Code of Regulations of the Registrant.(9)
4.1 -- Indenture, dated as of February 3, 1998, by and between the Registrant, as issuer, and State Street
Bank and Trust Company, as trustee, relating to the 10 7/8% Senior Secured Notes due 2005, Series A
and the 10 7/8% Senior Secured Notes due 2005, Series B of the Registrant (containing, as exhibits,
specimens of the Series A Senior Secured Notes and Series B Senior Secured Notes).(9)
4.2 -- Purchase Agreement, dated January 29, 1998, between Donaldson, Lufkin and Jenrette Securities
Corporation and the Registrant, relating to the 10 7/8% Senior Secured Notes due 2005.(9)
4.3 -- Registration Rights Agreement, dated as of February 3, 1998, by and between Donaldson, Lufkin &
Jenrette Securities Corporation and the Registrant, relating to the 10 7/8% Senior Secured Notes due
2005.(9)
4.4 -- Form Letter of Transmittal.(9)
5.1 -- Opinion of Cadwalader, Wickersham & Taft.
8.1 -- Opinion of Cadwalader, Wickersham & Taft (included in Exhibit 5.1).
10.1 -- Amended and Restated Loan and Security Agreement, dated December 29, 1992, between WCI and Congress
Financial Corporation and Security Pacific Business Credit Inc. (the "WCI Revolving Credit
Agreement").(1)
10.1.1 -- Amendment No. 1 to the WCI Revolving Credit Agreement, dated December 14, 1993.(2)
10.1.2 -- Amendment No. 2 to the WCI Revolving Credit Agreement, dated July 13, 1994.(3)
10.1.3 -- Amendment No. 3 to the WCI Revolving Credit Agreement, dated March 28, 1995.(4)
10.1.4 -- Amendment No. 4 to the WCI Revolving Credit Agreement, dated February 23, 1996.(5)
10.1.5 -- Amendment No. 5 to the WCI Revolving Credit Agreement, dated March 8, 1996.(5)
10.1.6 -- Amendment No. 6 to the WCI Revolving Credit Agreement, dated June 17, 1996.(6)
10.1.7 -- Amendment No. 7 to the WCI Revolving Credit Agreement, dated November 27, 1996.(7)
10.1.8 -- Amendment No. 8 to the WCI Revolving Credit Agreement, dated October 31, 1997.(8)
10.2 -- Intercreditor Agreement, dated December 14, 1993, among the Shawmut Bank Connecticut, National
Association, Congress Financial Corporation and Security Pacific Business Credit Inc.(2)
10.3 -- Intercreditor Agreement, dated November 27, 1996, between Fleet National Bank and Congress Financial
Corporation.(7)
10.4 -- Intercreditor Agreement, dated November 27, 1996, among Fleet National Bank, Bank One Trust Company,
N.A. and WCI.(7)
10.5 -- Indemnification Agreement, dated as of November 27, 1996, between WCI and Bank One Trust Company,
N.A.(7)
10.6 -- Promissory Note, dated August 31, 1988, in the original principal amount of $5,552,000 made by WCI
to LTV Steel Company, Inc.(1)
10.7 -- Loan Agreement, dated as of May 1, 1990, between the Director of Development of the State of Ohio
and Youngstown Sinter Company (Ohio Enterprise Bond Fund Program).(1)
10.8 -- Agreement, dated June 11, 1990, between the City of Youngstown, Ohio and Youngstown Sinter Company
(with UDAG Grant Agreement).(1)
10.9 -- Pledge Agreement, dated as of February 3, 1998, by the Registrant, as pledgor, in favor of State
Street Bank and Trust Company, as trustee.(9)
12 -- Statement regarding computation of ratios.
21 -- List of Subsidiaries of Registrant.(9)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------
<C> <S> <C>
23.1 -- Consent of Cadwalader, Wickersham & Taft (included in Exhibit 5.1).
23.2 -- Consent of KPMG Peat Marwick LLP--Registrant.
23.3 -- Consent of KPMG Peat Marwick LLP--WCI.
24 -- Power of Attorney (included on the signature page).(9)
25 -- Statement of Eligibility and Qualification on Form T-1 of State Street Bank and Trust Company.(9)
</TABLE>
- ------------------------
(1) Incorporated by reference to WCI's Registration Statement on Form S-4, as
amended (File No. 33-58648), originally filed with the Commission on
February 23, 1993.
(2) Incorporated by reference to WCI's Registration Statement on Form S-4 (File
No. 33-74108), originally filed with the Commission on January 14, 1994.
(3) Incorporated by reference to WCI's Pre-Effective Amendment No. 3 to
Registration Statement on Form S-1 (File No. 33-75722), filed with the
Commission on May 4, 1994.
(4) Incorporated by reference to WCI's Form 10-Q for the quarterly period ended
April 30, 1995.
(5) Incorporated by reference to WCI's Form 10-Q for the quarterly period ended
April 30, 1996.
(6) Incorporated by reference to WCI's Form 10-Q for the quarterly period ended
July 31, 1996.
(7) Incorporated by reference to WCI's Registration Statement on Form S-4, as
amended (File No. 333-18019), originally filed with the Commission on
December 17, 1996.
(8) Incorporated by reference to WCI's Form 10-K for the fiscal year ended
October 31, 1997.
(9) Previously filed.
<PAGE>
Exhibit 5.1
[Letterhead of Cadwalader, Wickersham & Taft]
May 18, 1998
Renco Steel Holdings, Inc.
1040 Pine Avenue, S.E.
Warren, OH 44483-6528
Re: Registration Statement on Form S-4 related to 10 7/8% Senior Secured Notes
due 2005, Series B
-----------------------------------------------------------------------
Gentlemen:
We have acted as special counsel for Renco Steel Holdings, Inc., an Ohio
corporation (the "Company"), in connection with the preparation of the Company's
Registration Statement on Form S-4 pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), being filed with the Securities and Exchange
Commission (the "Commission") on the date hereof and to which this opinion
letter is an exhibit. The Registration Statement relates to the Company's offer
to exchange its 10 7/8% Senior Secured Notes due 2005, Series B (the "Exchange
Notes") for any and all of its outstanding 10 7/8% Senior Secured Notes due
2005, Series A (the "Old Notes"). The Old Notes were issued, and the Exchange
Notes are to be issued, under an indenture, dated as of February 3, 1998 (the
"Indenture"), between the Company, as issuer, and State Street Bank and Trust
Company, as trustee.
In rendering the opinions expressed below, we have examined and relied upon,
among other things, (a) the Registration Statement, including the Prospectus
constituting a part thereof, (b) the Indenture filed as an exhibit to the
Registration Statement and (c) originals or copies, certified or otherwise
identified to our satisfaction, of such certificates, corporate, public or other
records, and other documents as we have deemed appropriate for the purpose of
rendering this opinion letter. In connection with such examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents and
instruments of all documents and instruments submitted to us as copies or
specimens, and the authenticity of the originals of such documents and
instruments submitted to us as copies or specimens. We have also made such
investigations of law as we have deemed appropriate. In addition, we have
assumed that the Exchange Notes will be executed and delivered in substantially
the form in which they are filed as an exhibit to the Registration Statement.
<PAGE>
Renco Steel Holdings, Inc.
May 18, 1998
Page 2
Based upon the foregoing and subject to the qualifications set forth herein, we
are of the opinion that:
1. The Exchange Notes will be legally and validly issued and binding
obligations of the Company (except to the extent enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer or other similar laws affecting the enforcement of
creditors' rights generally and by the effect of general principles of
equity, regardless of whether enforceability is considered in a proceeding
in equity or at law), when (a) the Registration Statement, as finally
amended, shall have become effective under the Securities Act and the
Indenture shall have been qualified under the Trust Indenture Act of 1939,
as amended, and (b) the Exchange Notes shall have been duly executed,
authenticated and delivered as contemplated in the Registration Statement.
2. The statements made in the Prospectus constituting a part of the
Registration Statement under the caption "Certain U.S. Federal Income Tax
Considerations," insofar as such statements purport to summarize certain
federal income tax laws of the United States of America, constitute a fair
summary of the principal federal income tax consequences of an investment
in the Exchange Notes.
We hereby consent to the filing of this opinion letter as an exhibit to the
Registration Statement and to the reference to this Firm in the Prospectus
constituting a part of the Registration Statement under the caption "Legal
Matters," without admitting that we are "experts" within the meaning of the
Securities Act or the rules and regulations of the Commission issued thereunder
with respect to any part of the Registration Statement, including this exhibit.
Very truly yours,
/s/ Cadwalader, Wickersham & Taft
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
Renco Steel Holdings, Inc.
and Predecessor
---------------------------------------------------------------
Year Ended October 31, Three Months Ended Pro Forma Pro Forma
January 31, Year Three Months
--------------------------------------------------------------- Ended Ended
October 31, January 31,
1993 1994 1995 1996 1997 1997 1998 1997 1998
------ ------ ------ ------ ------ ------ ------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income before taxes and
extraordinary loss. 23,636 51,029 23,308 44,211 33,919 1,540 5,621 20,236 2,199
Fixed charges................. 23,214 28,926 26,066 25,263 32,064 7,609 8,123 45,747 11,545
Minority interest............. -- 1,763 2,465 2,944 423 423 -- 423 --
------ ------ ------ ------ ------ ------ ------ ------- ------
Earnings.................... 46,850 81,718 51,839 72,418 66,406 9,572 13,744 66,406 13,744
Interest expense.............. 18,108 26,437 23,607 22,788 30,255 7,121 7,677 43,305 10,940
Amortization of financing
costs...................... 5,074 2,272 2,180 2,180 1,435 404 337 2,068 496
Rental/Lease interest......... 32 217 279 295 374 84 109 374 109
------ ------ ------ ------ ------ ------ ------ ------- ------
Fixed charges............... 23,214 28,926 26,066 25,263 32,064 7,609 8,123 45,747 11,545
Ratio of earnings to
fixed charges........... 2.0x 2.8x 2.0x 2.9x 2.1x 1.3x 1.7x 1.4x 1.2x
====== ====== ====== ====== ====== ====== ====== ======= ======
</TABLE>
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
The Board of Directors
Renco Steel Holdings, Inc. and Subsidiaries;
The audits referred to in our report dated January 29, 1998, included the
related financial statement schedule as of October 31, 1997, and for each of
the years in the three-year period ended October 31, 1997, included in the
Form S-4 Registration Statement under the Securities Act of 1933. The
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We consent to the use of our report dated January 21, 1998 and January 29,
1998 included herein and to the reference to our firm under the heading
"Experts" in the Form S-4 Registration Statement under the Securities Act of
1933.
KPMG Peat Marwick LLP
Cleveland, Ohio
May 18, 1998
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
The Board of Directors
WCI Steel, Inc. and Subsidiaries
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Form S-4 Registration Statement
under the Securities Act of 1933.
KPMG Peat Marwick LLP
Cleveland, Ohio
May 18, 1998
