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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1997
REGISTRATION NO. 333-18019
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WCI STEEL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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OHIO 3312 34-1585405
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(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
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1040 PINE AVENUE, S.E.
WARREN, OHIO 44483-6528
(330) 841-8314
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------------
BRET W. WISE
VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
1040 PINE AVENUE, S.E.
WARREN, OHIO 44483-6528
(330) 841-8314
(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.
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SUBJECT TO COMPLETION DATED FEBRUARY 11, 1997
PROSPECTUS
, 1997
[LOGO]
OFFER TO EXCHANGE ITS 10% SENIOR SECURED NOTES DUE 2004, SERIES B,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, FOR ANY AND ALL OF ITS OUTSTANDING
10% SENIOR SECURED NOTES DUE 2004, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 4:00 P.M., NEW YORK CITY TIME, ON
, 1997, UNLESS EXTENDED.
WCI Steel, Inc., an Ohio corporation ("WCI" or 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% Senior Secured Notes due 2004, 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%
Senior Secured Notes due 2004, Series A (the "Old Notes"), of which $300 million
principal amount is outstanding. The Exchange Notes and the Old Notes are
collectively referred to herein as the "Notes."
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 4:00 p.m., New York City time, on
, 1997, unless the Exchange Offer is extended (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 4:00 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 and secured ratably by the same collateral as the Old Notes, and will be
entitled to the benefits of the same indenture, dated as of November 27, 1996
(the "Indenture"), between the Company and Fleet National Bank, 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 November 27, 1996. 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 is payable semi-annually on June 1 and
December 1 of each year, commencing June 1, 1997, accruing from November 27,
1996 at the rate of 10% per annum. Except as set forth below, the Exchange Notes
will not be redeemable prior to December 1, 2001. 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
December 1, 1999, 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 109% of
the principal amount thereof, together with accrued and unpaid interest, if any,
to the date of redemption; PROVIDED that at least $200 million of Exchange Notes
remain outstanding immediately after any such redemption. Upon the occurrence of
a Change of Control (as defined), each holder of Notes may require the Company
to repurchase such holder's 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 at a purchase price equal
to 100% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of repurchase, 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 to apply for quotation of the Exchange
Notes through the National Association of Securities Dealers Automated Quotation
System. There can be no assurance that an active public market for the Exchange
Notes will develop.
SEE "RISK FACTORS" BEGINNING ON PAGE 14 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.
<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 44483-6528, telephone number: (330) 841-8211.
FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus under the captions "Prospectus
Summary," "Risk Factors," "The Transactions," "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and "Business" and
elsewhere constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. 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, or industry results, 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; industry capacity; industry
trends; competition; raw material costs and availability; currency fluctuations;
the loss of any significant customers; changes in business strategy or
development plans; availability, terms and deployment of capital; availability
of qualified personnel; changes in, or the failure or inability to comply with,
government regulation, including, without limitation, environmental regulations;
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.
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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. HOLDERS OF OLD NOTES ARE URGED TO READ THIS
PROSPECTUS IN ITS ENTIRETY BEFORE EXCHANGING THEIR OLD NOTES FOR EXCHANGE NOTES.
WCI'S FISCAL YEAR ENDS OCTOBER 31, AND THUS, FOR EXAMPLE, "FISCAL 1996" REFERS
TO THE FISCAL YEAR ENDED OCTOBER 31, 1996.
THE COMPANY
GENERAL
WCI is a niche oriented integrated producer of value-added, custom steel
products. The Company produces a wide range of custom flat rolled products,
including high carbon, alloy and high strength, silicon electrical, terne coated
and galvanized steel. Since fiscal 1991, custom products have increased from
47.2% of total shipments to 57.9% in fiscal 1996. The Company shipped
approximately 1.4 million tons of steel products in fiscal 1996.
WCI produces approximately 135 grades of custom and commodity steel products
that are used in the manufacture of a wide variety of value-added products such
as saw blades, golf club shafts, lawn mower blades, drive chain links, razor
blades, hand and garden tools, electric motors, gasoline tanks, automotive
bumpers and culvert products. These custom grades typically sell at higher
prices than commodity products, resulting in higher operating margins. Since
fiscal 1991, the price of the Company's custom products has averaged $542 per
ton, while commodity products have averaged $383 per ton. WCI's commodity steel
products consist principally of low carbon flat rolled 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. The Company
believes that the small order quantities, narrow widths, specialized chemistries
and other metallurgical properties required to serve these customers make these
markets less attractive to larger integrated steel producers and minimills.
Moreover, most minimill competitors have not offered product in these markets
due to the complex metallurgical requirements of the custom steel grades and the
adverse effect on the productivity of their facilities when producing these
custom products.
WCI believes that it operates at a distinct competitive advantage to other
integrated steel manufacturers due to its low cost structure, its niche oriented
custom product mix and its experienced management team. While categorized as an
integrated mill, management operates WCI with the high efficiency and low
overhead cost structure of a minimill. WCI is among the lowest cost integrated
steel producers in the United States, with one of the lowest labor and overhead
costs per ton in the integrated steel industry given its wide product range. In
addition to low production costs, WCI believes that it has one of the lowest
selling, general and administrative expense structures in the industry at 3.3%
of net sales in fiscal 1996. WCI 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' 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.
Since its inception in 1988, WCI has completed over $270 million of capital
investments designed, in part, to increase productivity, decrease production
costs, expand product range and improve product quality. In particular, the
Company currently is in the process of completing the initial phase of a three
to five year upgrade of its hot strip mill, the scope of which includes
enhancing essentially every element of the mill operation, including the
heating, roughing, finishing, cooling and coiling processes. When
3
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completed in mid-1997, the first phase of the hot strip mill upgrade will
significantly improve product quality and expand WCI's product range, in
addition to improving the mill's productivity and reducing operating costs. WCI
is also currently installing a high-temperature hydrogen anneal facility to
upgrade its product mix and to meet the rising demand in the custom product
market for silicon electrical steels.
In April 1995, the Company completed a major reline of its blast furnace, a
procedure which is performed on a routine basis every eight to ten years. In
December 1991, WCI completed the installation of a twin-strand continuous slab
caster (the "Continuous Caster") and a ladle metallurgy facility (the "LMF") at
a combined cost of approximately $135 million, and all of the Company's products
have been continuously cast since May 1992. The Continuous Caster substantially
reduced the Company's operating costs, dramatically improved the metallurgical
and surface qualities of its products and enabled WCI to participate in markets
where the superiority of continuously cast steel is a competitive strength. See
"Business--Capital Investments." WCI believes that as a result of the capital
investments completed to date, as well as those ongoing presently, the Company
operates and will continue to maintain a modern and efficient integrated steel
mill offering a diverse product mix.
RECENT DEVELOPMENTS
Results for fiscal 1995 and the first two quarters of fiscal 1996 were
adversely impacted by a 54 day labor contract dispute and resulting work
stoppage beginning September 1, 1995 upon the expiration of the Company's
previous collective bargaining agreement with the United Steelworkers of America
(the "USWA"). In particular, WCI's order rate, shipping volume, order backlog
and net sales were significantly reduced during the work stoppage. On October
24, 1995, the Company successfully reached a new four year agreement with the
USWA. Subsequent to entering into such agreement, the Company undertook to
reestablish its order rate and backlog over the first two quarters of fiscal
1996. Since the Company's custom product mix was below levels realized in fiscal
1995, WCI's net sales and operating income were reduced during such periods.
Results for fiscal 1995 were also negatively affected by the planned reline of
the Company's blast furnace discussed above.
Despite the labor contract dispute, the Company has reported strong
operating results during fiscal 1996. For the year ended October 31, 1996, the
Company generated net sales of $660.8 million and net income of $28.0 million.
Moreover, for the fourth quarter of fiscal 1996, custom steel products
represented approximately 65.9% of net tons shipped versus 44.4% during the
first quarter of fiscal 1996, immediately following the settlement of the labor
contract dispute. The Company believes that this rapid return to its custom
product mix reflects the Company's strong relationships with its customers and
the benefits derived from offering niche oriented custom steel products.
CONTROL OF THE COMPANY
All of the Company's issued and outstanding Common Stock is owned by The
Renco Group, Inc. ("Renco"), which is 95.9% 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.
4
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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, $300 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 connection with any sale of
such Exchange Notes. See "Plan of Distribution."
EXPIRATION DATE..................... 4:00 p.m., New York City time, on , 1997,
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.
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5
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ACCRUED INTEREST ON THE EXCHANGE
NOTES AND OLD NOTES............... The Exchange Notes will bear interest from November
27, 1996. 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
4:00 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 "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
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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 4:00
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 4:00
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 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. See "Certain Federal Income Tax
Considerations."
EXCHANGE AGENT...................... Fleet National Bank is serving as exchange agent (the
"Exchange Agent") in connection with the Exchange
Offer. The mailing address of the Exchange Agent is
Fleet National Bank, Corporate Trust Administration,
777 Main Street - CTMO0238, Hartford, Connecticut
06115, Attention: Robert Reynolds. Deliveries by hand
or overnight courier should be addressed to Fleet
National Bank, c/o First Chicago Trust Company of New
York, 14 Wall Street, 8th Floor - Window No. 2, New
York, New York 10005. For information with respect to
the Exchange Offer, call the Exchange Agent at (860)
986-1271 or fax at (860) 986-7908.
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 $300 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 November 27,
1996 (the "Registration Rights Agreement"), by and
between the Company and Donaldson, Lufkin and
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. 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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MATURITY DATE....................... December 1, 2004.
INTEREST PAYMENT DATES.............. June 1 and December 1, commencing June 1, 1997.
OPTIONAL REDEMPTION................. The Exchange Notes will be redeemable at the
Company's option, in whole or in part, at any time on
or after December 1, 2001, 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 December 1, 1999, in the
event of one or more Equity Offerings (as defined),
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 109% of the principal amount thereof,
together with accrued and
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
unpaid interest, if any, to the date of redemption;
provided that at least $200 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 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.
See "Description of the Notes--Certain
Covenants--Change of Control."
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
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 Company's obligations will be secured by a second
priority lien on substantially all of the existing
property, plant and equipment of the Company (other
than inventory, accounts receivable and other current
assets, intangibles and the capital stock or assets
of the Company's subsidiaries), which will become a
first priority lien if all of the Company's 10 1/2%
Senior Notes Due 2002 (the "Existing Notes") cease to
be outstanding ($280,000 in aggregate principal
amount of the Existing Notes are currently
outstanding). A Voluntary Employee Beneficiaries
Association trust fund (the "VEBA Trust"),
established to hold Company contributions to fund
postretirement health care and life insurance
obligations for the benefit of hourly employees, will
also hold a second priority lien on the security for
the Exchange Notes, which lien will remain a second
priority lien even if the lien in favor of the Notes
becomes a first priority lien. See "Risk Factors--
Relating to WCI--Substantial Employee Postretirement
Obligations." Nevertheless, pursuant to an agreement
between the Company and the USWA, the lien held by
the VEBA Trust may not be exercised so long as any
senior indebtedness, including the Notes and the
Existing Notes, is outstanding.
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.
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 payment restrictions
affecting subsidiaries; (e) limitation on transac-
tions with affiliates; (f) limitation on
sale/leaseback transactions; (g) impairment of
security interest; (h) consolidations, mergers and
transfers of all or substantially all of the assets
of the Company; and (i) limitation on preferred stock
of subsidiaries. See "Description of the
Notes--Certain Covenants."
</TABLE>
9
<PAGE>
THE TRANSACTIONS
On October 23, 1996, WCI commenced a tender offer (the "Tender Offer") to
purchase for cash up to all (but not less than a majority in principal amount
outstanding) of the Existing Notes and a related solicitation (the "Consent
Solicitation") of consents to delete or modify certain terms of the indenture
related to the Existing Notes (the "Existing Notes Indenture"). The aggregate
purchase price paid in respect of validly tendered and not withdrawn Existing
Notes and the related consents was 112.5% of their principal amount plus accrued
interest up to, but not including, the date of purchase. The Company received
tenders and consents representing approximately $206.1 million in aggregate
principal amount of the Existing Notes outstanding and consummated the Tender
Offer and the Consent Solicitation on November 27, 1996. The Old Notes Offering
(as defined), the Tender Offer and the Consent Solicitation are referred to
collectively as the "Debt Transactions."
On October 28, 1996, WCI Steel Holdings, Inc. ("Holdings"), a wholly-owned
subsidiary of Renco, commenced a tender offer (the "Equity Tender Offer") to
purchase for cash all of the outstanding shares of common stock, no par value,
$.01 stated value (the "Common Stock"), of the Company. The purchase price paid
in respect of validly tendered shares of Common Stock was $10 per share, net to
the seller in cash. Holdings received tenders of 5,397,623 shares of Common
Stock and consummated the Equity Tender Offer on November 27, 1996. Renco owned
approximately 84% of the outstanding Common Stock prior to the Equity Tender
Offer and contributed its shares of Common Stock to Holdings, which together
with the shares of Common Stock purchased by Holdings in the Equity Tender
Offer, resulted in Holdings owning approximately 99.3% of the outstanding Common
Stock. Immediately after completion of the Equity Tender Offer, Holdings
effected a "short form" merger of Holdings, at the same price per share as in
the Equity Tender Offer, with and into WCI (the "Merger"), with WCI surviving as
a wholly-owned subsidiary of Renco. The Equity Tender Offer and the Merger are
collectively referred to as the "Equity Transactions."
On November 27, 1996, the Company issued and sold the Old Notes (the "Old
Notes Offering"). Also on November 27, 1996, the Company used a portion of the
net proceeds from the Old Notes Offering and its available cash to purchase the
Existing Notes tendered pursuant to the Tender Offer, to purchase the Common
Stock tendered pursuant to the Equity Tender Offer and to fund in escrow the
consideration to be paid to non-tendering shareholders of the Company pursuant
to the Merger. In addition, immediately after the Merger, the Company used a
portion of the net proceeds from the Old Notes Offering and its available cash
to pay a dividend of $108 million to Renco as a return on its investment in the
Company. As a result of the Transactions (as defined) (which includes the
related dividend paid to Renco), WCI's liquidity, including its cash and cash
equivalents and short-term investments, was reduced significantly and its debt
service requirements increased significantly. The Debt Transactions, the Equity
Transactions and the dividend to Renco are referred to collectively as the
"Transactions."
RISK FACTORS
Prospective holders 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 each of the years in the
five fiscal year periods ended October 31, 1996 and the balance sheet data as of
October 31, 1996 have been derived from the consolidated financial statements of
WCI, which financial statements have been audited by KPMG Peat Marwick LLP. The
financial data set forth below should be read in conjunction with WCI's audited
consolidated financial statements and the related notes thereto for the fiscal
years ended October 31, 1994, 1995 and 1996 appearing elsewhere herein and with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31,
-----------------------------------------------------
1992 1993 1994(1) 1995(2) 1996(3)
<S> <C> <C> <C> <C> <C>
(DOLLARS AND TONS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales........................................................... $ 515,708 $ 578,639 $ 709,363 $ 630,990 $ 660,801
Gross margin........................................................ 51,770 86,639 134,753 86,201 110,192
Operating income.................................................... 13,877 46,517 79,996 45,348 65,571
Interest expense.................................................... 13,715 23,182 28,709 25,787 24,968
Interest income..................................................... -- -- 1,377 5,441 6,190
Income before income taxes, extraordinary losses on early retirement
of debt and cumulative effect of change in accounting principle... 424 23,636 52,792 25,773 47,148
Income before extraordinary losses on early retirement of debt and
cumulative effect of change in accounting principle............... 36 14,151 30,853 15,460 28,040
FINANCIAL RATIOS AND OTHER DATA:
EBITDA(4)........................................................... $ 36,265 $ 67,796 $ 99,992 $ 67,297 $ 88,118
Cash flows from operating activities(5)............................. 26,353 60,567 76,922 60,731 77,995
Pro forma interest expense(6)....................................... 33,419
Capital expenditures(5)............................................. 25,477 14,639 14,371 26,173 35,384
Depreciation and amortization....................................... 22,126 20,978 19,868 21,178 22,547
OTHER OPERATING DATA:
Net tons shipped.................................................... 1,209 1,302 1,468 1,222 1,397
Percent custom products............................................. 44.9% 53.9% 56.9% 59.4% 57.9%
Average selling price per net ton shipped........................... $ 427 $ 445 $ 483 $ 516 $ 473
Average cost per net ton shipped.................................... 384 378 391 446 394
Average gross margin per net ton shipped............................ 43 67 92 71 79
Average operating income per net ton shipped........................ 11 36 54 37 47
Order backlog at end of period (tons)............................... 212 301 294 220 255
Average number of active employees.................................. 2,636 2,471 2,323 2,217 2,190
Man-hours per net ton shipped(7).................................... 2.9 2.5 2.3 2.4 2.2
</TABLE>
<TABLE>
<CAPTION>
AS OF
OCTOBER 31, 1996
------------------------
<S> <C> <C>
ACTUAL ADJUSTED(8)
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (excluding cash, cash equivalents and short-term investments)........... $ 42,093(9) $ 62,418
Property, plant and equipment, net...................................................... 205,121 205,121
Total assets............................................................................ 567,453 463,519
Total debt (including current portion).................................................. 211,506 305,386
Shareholders' equity (deficit).......................................................... 79,880 (109,792)
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
11
<PAGE>
(1) Fiscal 1994 Statement of Operations reflects $11.1 million of compensation
expenses related to the Company's initial public offering and the offering
of the Existing Notes.
(2) Fiscal 1995 results were adversely impacted by a 54 day labor contract
dispute and resulting work stoppage commencing September 1, 1995 and a 36
day blast furnace reline commencing on April 1, 1995. See "Prospectus
Summary--The Company--Recent Developments."
(3) The Company'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. See "Prospectus
Summary--The Company--Recent Developments."
(4) EBITDA represents earnings before interest expense (net of interest
income), income taxes and depreciation and amortization. Adjusted EBITDA,
which represents EBITDA adjusted to add back non-cash charges associated
with postretirement health care and life insurance benefits, was $42.4
million, $77.1 million, $109.6 million, $77.4 million and $93.6 million
for fiscal 1992, 1993, 1994, 1995 and 1996, respectively. The trends of
EBITDA and Adjusted 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 and Adjusted EBITDA is
presented because management believes that certain investors use EBITDA
and Adjusted EBITDA as measures of an issuer's historical ability to
service its debt. EBITDA and Adjusted 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 or Adjusted EBITDA to similarly titled
measures of other companies as the definitions of these measures may vary.
(5) See Consolidated Statements of Cash Flows included in the Consolidated
Financial Statements for components of cash flows from operating
activities, investing activities and financing activities for fiscal 1994,
1995 and 1996.
(6) Pro forma interest expense is computed by removing from interest expense
the interest expense associated with the tendered Existing Notes ($22.8
million for fiscal 1996) and adding interest expense on the Notes of $31.2
million for fiscal 1996, including $1.2 million of amortization of
deferred financing costs.
(7) Reflects hours associated with hourly steel production and maintenance
employees.
(8) The Balance Sheet Data as adjusted reflects adjustments to give effect to
the Transactions, as if each had occurred on October 31, 1996 as follows:
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1996
----------------------------------
ACTUAL ADJUSTMENTS ADJUSTED
<S> <C> <C> <C>
Current assets
Cash and cash equivalents....................................... 90,395 (75,350)(a) 15,045
Short-term investments.......................................... 49,146 (49,146)(a) 0
Accounts receivable............................................. 65,869 65,869
Inventories..................................................... 96,675 96,675
Recoverable income taxes........................................ 16,718(b) 16,718
Deferred income taxes........................................... 10,637 10,637
Prepaid expenses................................................ 1,244 1,244
--------- ----------- ----------
Total current assets........................................ 313,966 (107,778) 206,188
Property, plant and equipment, net................................ 205,121 205,121
Intangible pension asset.......................................... 27,505 27,505
Other assets, net................................................. 20,861 3,844(c) 24,705
--------- ----------- ----------
Total assets................................................ $ 567,453 (103,934) 463,519
--------- ----------- ----------
--------- ----------- ----------
Current liabilities
Current portion of long-term debt............................... 2,448 2,448
Accounts payable................................................ 79,138 79,138
Accrued liabilities............................................. 40,697 (3,607)(d) 37,090
Income taxes.................................................... 10,049 10,049
--------- ----------- ----------
Total current liabilities................................... 132,332 (3,607) 128,725
Long-term debt, excluding current portion......................... 2,658 2,658
Existing notes.................................................... 206,400 (206,120)(e) 280
Old Notes......................................................... 0 300,000(e) 300,000
Deferred income taxes............................................. 4,365 4,365
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1996
----------------------------------
ACTUAL ADJUSTMENTS ADJUSTED
Postretirement health benefits.................................... 81,795 81,795
<S> <C> <C> <C>
Pension benefits.................................................. 34,011 34,011
Other liabilities................................................. 26,012 (4,535)(f) 21,477
--------- ----------- ----------
Total liabilities........................................... 487,573 85,738 573,311
Shareholders' equity (deficit):
Preferred stock................................................. 0 0
Common stock, 36,623,700 shares issued and 100 shares issued as
adjusted...................................................... 366 (366) 0
Treasury stock at cost, 222,300 shares, and 0 shares as
adjusted...................................................... (1,200) 1,200 0
Additional paid-in capital...................................... 570 (570) 0
Retained earnings (deficit)..................................... 80,144 (189,936) (109,792)
--------- ----------- ----------
Total stockholders' equity (deficit)........................ 79,880 (189,672)(g) (109,792)
--------- ----------- ----------
Total liabilities and stockholders' equity (deficit)........ $ 567,453 (103,934) 463,519
--------- ----------- ----------
--------- ----------- ----------
</TABLE>
- ------------------------------
(a)
Cash, cash equivalents and short-term invetments decreased by $124.5
million due to $56.9 million paid to repurchase all the common shares of
the Company not held by Renco, $236.7 million used to retire $206.1
million principal amount of the Existing Notes including the premium
paid and accrued interest, the $108 million dividend paid to Renco,
contractual payments to executives of $13.2 million, offset by the net
proceeds on the Old Notes of $290.4 million.
(b)
Reflects the estimated income tax benefits related to the adjustments.
(c)
Reflects deferred financing costs on the Old Notes of $9.6 million, net
of accelerated amortization of deferred financing costs related to the
Existing Notes retired of $5.8 million.
(d)
Represents accrued interest at October 31, 1996 on the Existing Notes
tendered.
(e)
Gives effect to the issuance of the Old Notes and the retirement of the
Exiting Notes tendered.
(f)
Reflects reduction to accrued deferred compensation balances as a result
of contractual payments made to certain executives.
(g)
Shareholders' equity was reduced by $189.7 million reflecting the
repurchase of all outstanding common shares not held by Renco for $56.9
million, including expenses, the extraordinary loss on the retirement of
$206.1 million principal amount of Existing Notes of $19.6 million, net
of income taxes, the $108 million dividend paid to Renco and
compensation expense incurred in connection with the Transactions of
$5.2 million, net of income taxes.
(9) Working capital excludes cash, cash equivalents and short-term investments
of approximately $139.5 million.
13
<PAGE>
RISK FACTORS
HOLDERS OF OLD NOTES SHOULD CAREFULLY CONSIDER THE RISK FACTORS SET FORTH
BELOW AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS.
RELATING TO WCI
SUBSTANTIAL INDEBTEDNESS
WCI has substantial indebtedness and debt service requirements. At October
31, 1996, after giving effect to the Transactions, WCI would have had
outstanding consolidated long-term debt of approximately $305.4 million, which
in addition to the Old Notes is composed of $280,000 aggregate principal amount
of the Existing Notes ranking senior to the Old Notes and to be senior to the
Exchange Notes and approximately $5.4 million of other indebtedness ranking
junior to the Old Notes and to be junior to the Exchange Notes, and a
shareholder's deficit of approximately $109.8 million. In addition, the lien in
favor of the VEBA Trust ranks PARI PASSU with the lien in favor of the Notes (so
long as any Existing Notes remain outstanding). See "--Security" and
"--Substantial Employee Postretirement Obligations." There is no indebtedness of
the Company's subsidiaries that ranks senior or PARI PASSU with the Old Notes or
to be senior or PARI PASSU with the Exchange Notes. Interest due on WCI's
indebtedness in fiscal 1997 is expected to be $30.4 million. Principal due on
WCI's indebtedness through October 31, 2001 is approximately $4.1 million in the
aggregate.
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 WCI's $100.0 million revolving
credit agreement (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 general economic conditions and to
financial, business and other factors affecting the operations of WCI, many of
which are beyond its control.
In addition, the consummation of the Transactions has reduced WCI's
liquidity. If the Company is unable to draw amounts available under the WCI
Revolving Credit Facility, such inability could have a material adverse effect
on the financial condition and results of operations of the Company. Moreover,
an inability of WCI to meet the financial covenants contained in the WCI
Revolving Credit Facility or other indebtedness could result in an acceleration
of amounts due thereunder.
RESTRICTIONS IMPOSED BY TERMS OF WCI'S INDEBTEDNESS
The terms and conditions of the WCI Revolving Credit Facility and the
Indenture impose 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.
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 Revolving Credit
Facility and the Indenture. In the event of any such default, depending on the
actions taken by the lenders under the WCI Revolving Credit Facility, WCI may be
unable to make any payments of principal or interest on the Exchange Notes for a
period of time. In addition, 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
lenders under the WCI Revolving Credit Facility could proceed against certain
collateral securing indebtedness under the WCI Revolving Credit Facility. If
such indebtedness under the WCI Revolving
14
<PAGE>
Credit Facility 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, including the Exchange Notes. See "Description of WCI
Revolving Credit Facility" and "Description of the Notes."
CERTAIN CREDITORS' RIGHTS
The Old Notes Offering and the application of the net 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 WCI 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.
WCI believes that at the time of, or as a result of, the issuance of the Old
Notes and the use of proceeds therefrom, WCI (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, WCI 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 would not occur.
The beliefs with regard to the solvency of WCI are based in part on WCI's
operating history and management's analysis of internal cash flow projections
and estimated values of assets and liabilities of WCI at the time of the Old
Notes Offering. There can no be assurance, however, that a court passing on
these issues would adopt the same methodology or assumptions, or arrive at the
same conclusions.
SECURITY
The Old Notes are, and the Exchange Notes will be, secured by a second
priority lien on, and security interest in, substantially all of WCI's existing
property, plant and equipment, which will become a first priority lien if all of
the Existing Notes cease to be outstanding, as described under "Description of
the Notes--Security." Such security will not extend to WCI's inventory, accounts
receivable and other current
15
<PAGE>
assets, intangibles and the capital stock or assets of WCI's subsidiaries. The
VEBA Trust also holds a second priority lien on the security for the Old Notes
and will hold a second priority lien on the security for the Exchange Notes;
however, such lien will remain a second priority lien even if the lien in favor
of the Notes becomes a first priority lien. The Collateral (as defined) securing
the Old Notes and to secure the Exchange Notes does not secure the WCI Revolving
Credit Facility. See "Description of WCI Revolving Credit Facility--Security."
The net book value of the Collateral on October 31, 1996 was approximately
$198 million and no appraisals of any of the Collateral were prepared in
connection with the Old Notes Offering or have been prepared in connection with
the Exchange Offer. There can be no assurance that the proceeds of the sale of
any Collateral pursuant to the Indenture and the related Security Documents (as
defined) following a declaration of acceleration of the Notes will be sufficient
to satisfy payment of the then outstanding Notes. While any Existing Notes are
outstanding ($280,000 in aggregate principal amount of the Existing Notes are
currently outstanding), such proceeds would be shared on a PRO RATA basis by the
holders of the outstanding Notes and the VEBA Trust, established to hold Company
contributions to fund postretirement health care and life insurance obligations
for the benefit of hourly employees. See "--Substantial Employee Postretirement
Obligations." Any deficiency claim would rank PARI PASSU in right of payment
with all other unsecured senior indebtedness of WCI. Through August 31, 1999,
the Company has the right to terminate the liens granted in favor of the VEBA
Trust by making a cash and/or stock contribution to the VEBA Trust sufficient to
cause the assets of the VEBA Trust to be $32 million. In addition, the ability
of the holders of the Exchange Notes to realize upon the Collateral may be
subject to certain bankruptcy law limitations in the event of a bankruptcy of
WCI. See "Description of the Notes--Certain Bankruptcy Limitations."
The Indenture permits the release of Collateral without substitution of
collateral of equal value under certain circumstances. See "Description of the
Notes--Possession, Use and Release of Collateral."
CONTROL BY RENCO
WCI 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 WCI, Mr. Rennert is, and will continue to be, able to direct
and control the policies of WCI, including mergers, sales of assets and similar
transactions and the election of directors. Mr. Rennert is the sole Director of
the Company.
LABOR RELATIONS
The USWA represents approximately 75% of the Company's employees. In October
1995, the Company negotiated a new collective bargaining agreement with the
USWA, which expires on August 31, 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 the Company's financial condition and results of
operations. The Company experienced a 54 day labor contract dispute and
resulting work stoppage in connection with the negotiation of the current
collective bargaining agreement. There can be no assurance that work stoppages
will not occur in the future in connection with labor negotiations or otherwise.
SUBSTANTIAL EMPLOYEE POSTRETIREMENT OBLIGATIONS
The Company 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
16
<PAGE>
insurance benefit obligations. In addition, in accordance with the Statement of
Financial Accounting Standards No. 87, "Pensions," the Company has recognized a
minimum liability equal to its unfunded accumulated pension benefit obligations.
As of October 31, 1996, the Company had an accumulated unfunded postretirement
health care and life insurance benefit obligation of approximately $86.2 million
(of which approximately $79.2 million relates to hourly employees who are
beneficiaries of the VEBA Trust and the second priority lien in favor of the
VEBA Trust will secure the obligations of the Company for postretirement health
care and life insurance benefits, see "--Security"), and the Company had a
projected pension benefit obligation in excess of plan assets of approximately
$34.6 million. The cash payments for actual postretirement health care and life
insurance claims were approximately $1.7 million during fiscal 1996. The Company
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
"Business--Benefit Plans" and Notes 7 and 8 to the Company'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.
Accordingly, 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 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 financial condition
and results of operations.
On June 29, 1995, the Department of Justice, 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 the
Company'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 the Company in the same court under the Clean Air Act alleging
violations by the Company 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 the Company'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. The Company 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 the Company relating to the Warren facility, including information as to
the effect of a prohibition against federal procurement of the Company's
products on the Company's business. The Company 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. The Company is negotiating with the EPA toward
a settlement of these matters. If the Company 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 and financial condition of the
Company, the extent of which the Company is unable to estimate at this time.
WCI has obtained a storage permit under the Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), for waste pickle liquor at its Warren
facility acid regeneration plant. As a provision of
17
<PAGE>
the permit, the Company will be required to undertake a corrective action
program with respect to historical material handling practices at the Warren
facility. WCI has developed and submitted a workplan for the first investigation
step of the corrective action program, the RCRA Facility Investigation ("RFI"),
to the EPA and is presently negotiating the scope of the RFI with the EPA. The
workplan identifies thirteen historical solid waste management units which are
subject to 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 the corrective action program. Accordingly, the
Company 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
operating results and financial condition of 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-- Environmental Matters" and "Business--Environmental Matters."
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 to seek the admission thereof to trading in the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"). 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 THE INDUSTRY
CYCLICALITY
The steel industry is highly cyclical in nature and is affected
significantly by economic conditions generally. The economic recession of the
early 1990s had an adverse impact on the industry. Most domestic integrated
steel producers suffered substantial losses as a result of that economic
recession and other factors such as high levels of steel imports, worldwide
production overcapacity, a strong U.S. dollar and increased domestic and
international competition. During that time, WCI experienced a decline in net
tons shipped and in average selling price per net ton shipped. While the outlook
for steel companies has improved as a result of the recent increase in steel
demand and higher steel prices, there can be no assurance that these trends will
continue. Additionally, no assurance can be given that other events having an
adverse effect on the steel industry or WCI may not occur, such as an economic
downturn or a further
18
<PAGE>
increase in steel imports, production, the strength of the U.S. dollar, or
domestic or international competition. See "--Competition."
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.
The highly competitive nature of the domestic steel industry has been aggravated
further by the restructuring of certain domestic integrated producers. These
restructurings may result in reduced operating costs and permit such producers
to price their products more competitively. Such restructurings may also promote
the continued operation and modernization of marginal facilities, which could
increase existing overcapacity and lead to further price pressure.
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 in 1996
through 1999. These minimills are expected to compete with the Company primarily
in the commodity flat rolled steel market. In addition, the increased
competition in commodity product markets may result in certain integrated
producers increasing product offerings to compete with the Company's custom
products.
During the early 1990s, the domestic steel market experienced significant
increases in imports of foreign produced flat rolled products. The level of
imports, however, declined somewhat in late 1995 and early 1996. During the same
period, exports of domestically produced flat rolled steel increased
significantly. In recent months, there has been an increase in imports of flat
rolled products, due in part to increases of semi-finished steel purchased by
domestic steel producers and a decrease in exports of flat rolled steel
products. The strength of the U.S. dollar and economy, as well as the strength
of foreign economies, Europe in particular, 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 the 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.
AVAILABILITY OF AND FLUCTUATION IN RAW MATERIAL AND ENERGY COSTS
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 long-term 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 the Company does not own
a coke battery, it is dependent upon commercially available domestic or imported
coke to sustain its operations. The Company has contracts for the purchase of
its estimated coke requirements through 1999 and believes that there will be
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 the Company in the future. See
"Business--Raw Materials."
19
<PAGE>
THE TRANSACTIONS
On October 23, 1996, WCI commenced the Tender Offer to purchase for cash up
to all (but not less than a majority in principal amount outstanding) of the
Existing Notes and a related Consent Solicitation to delete or modify certain
terms of the Existing Notes Indenture. The aggregate purchase price paid in
respect of validly tendered and not withdrawn Existing Notes and the related
consents was 112.5% of their principal amount plus accrued interest up to, but
not including, the date of purchase. The Company received tenders and consents
representing approximately $206.1 million in aggregate principal amount of the
Existing Notes outstanding and consummated the Tender Offer and the Consent
Solicitation on November 27, 1996.
On October 28, 1996, Holdings, a wholly-owned subsidiary of Renco, commenced
the Equity Tender Offer to purchase for cash all of the outstanding shares of
Common Stock of the Company. The purchase price paid in respect of validly
tendered shares of Common Stock was $10 per share, net to the seller in cash.
Holdings received tenders of 5,397,623 shares of Common Stock and consummated
the Equity Tender Offer on November 27, 1996. Renco owned approximately 84% of
the outstanding Common Stock prior to the Equity Tender Offer and contributed
its shares of Common Stock to Holdings, which together with the shares of Common
Stock purchased by Holdings in the Equity Tender Offer, resulted in Holdings
owning approximately 99.3% of the outstanding Common Stock. Immediately after
completion of the Equity Tender Offer, Holdings effected a "short form" Merger
of Holdings, at the same price per share as in the Equity Tender Offer, with and
into WCI, with WCI surviving as a wholly-owned subsidiary of Renco. Shareholders
of WCI who properly exercise their appraisal rights in connection with the
Merger may receive more than $10 per share. In addition, although Renco has
advised WCI that it has no present intention to sell WCI, Renco has agreed that
if within one year of the consummation of the Equity Transactions Renco were to
agree to sell WCI in a transaction in which it would realize value after
expenses in excess of the value represented by the $10 per share offer price,
Renco would at that time pay the allocable difference to the public shareholders
whose shares were acquired in the Equity Transactions.
On November 27, 1996, the Company completed the Old Notes Offering. Also on
November 27, 1996, the Company used a portion of the net proceeds from the Old
Notes Offering and its available cash to purchase the Existing Notes tendered
pursuant to the Tender Offer, to purchase the Common Stock tendered pursuant to
the Equity Tender Offer and to fund in escrow the consideration to be paid to
non-tendering shareholders of the Company pursuant to the Merger. In addition,
immediately after the Merger, the Company used a portion of the net proceeds
from the Old Notes Offering and its available cash to pay a dividend of $108
million to Renco as a return on its investment in the Company. As a result of
the Transactions (which includes the related dividend paid to Renco), WCI's
liquidity, including its cash and cash equivalents and short-term investments,
was reduced significantly and its debt service requirements increased
significantly.
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 indentical 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.
20
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of WCI as of
October 31, 1996 and as adjusted to give effect to the Transactions, including
the application of the net proceeds from the Old Notes Offering. The table below
should be read in conjunction with "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and WCI's consolidated financial
statements and the related notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1996
-----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt, including current portion:
WCI Revolving Credit Facility(1).................................................... $ -- $ --
Existing Notes...................................................................... 206,400 280
Old Notes........................................................................... -- 300,000
Other............................................................................... 5,106 5,106
---------- -----------
Total long-term debt, including current portion................................. 211,506 305,386
---------- -----------
Shareholders' equity (deficit):
Preferred stock, par value $1,000 per share, 5,000 shares authorized, none issued
and outstanding................................................................... -- --
Common stock, no par value, $.01 stated value, 40,000,000 shares authorized,
36,623,700 shares issued and 36,401,400 shares outstanding, and 100 shares issued
and outstanding as adjusted....................................................... 366 0
Treasury stock at cost, 222,300 shares, and 0 shares as adjusted.................... (1,200) --
Additional paid-in capital.......................................................... 570 --
Retained earnings (deficit)......................................................... 80,144 (109,792)
---------- -----------
Total shareholders' equity (deficit)............................................ 79,880 (109,792)
---------- -----------
Total capitalization.................................................................. $ 291,386 $ 195,594
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Represents the Company'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. See "Description of WCI Revolving Credit
Facility."
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for, and the balance sheet
data as of, each of the years in the five fiscal year period ended October 31,
1996 have been derived from the consolidated financial statements of WCI, which
financial statements have been audited by KPMG Peat Marwick LLP. The financial
data set forth below should be read in conjunction with WCI's audited
consolidated financial statements and the related notes thereto for the fiscal
years ended October 31, 1994, 1995 and 1996 appearing elsewhere herein and with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31,
-----------------------------------------------------
1992 1993 1994(1) 1995(2) 1996(3)
<S> <C> <C> <C> <C> <C>
(DOLLARS AND TONS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales............................................................ $ 515,708 $ 578,639 $ 709,363 $ 630,990 $ 660,801
Cost of products sold................................................ 463,938 492,000 574,610 544,789 550,609
--------- --------- --------- --------- ---------
Gross margin......................................................... 51,770 86,639 134,753 86,201 110,192
Depreciation and amortization........................................ 22,126 20,978 19,868 21,178 22,547
Selling, general and administrative expenses......................... 15,767 19,144 34,889 19,675 22,074
--------- --------- --------- --------- ---------
Operating income..................................................... 13,877 46,517 79,996 45,348 65,571
Interest expense..................................................... 13,715 23,182 28,709 25,787 24,968
Interest and other income............................................ 262 301 1,505 6,212 6,545
--------- --------- --------- --------- ---------
Income before income taxes, extraordinary losses on early retirement
of debt and cumulative effect of change in accounting principle.... 424 23,636 52,792 25,773 47,148
Income taxes......................................................... 388 9,485 21,939 10,313 19,108
--------- --------- --------- --------- ---------
Income before extraordinary losses on early retirement of debt and
cumulative effect of change in accounting principle................ $ 36 $ 14,151 $ 30,853 $ 15,460 28,040
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
FINANCIAL RATIOS AND OTHER DATA:
EBITDA(4)............................................................ $ 36,265 $ 67,796 $ 99,992 $ 67,297 88,118
Cash flows from operating activities(5).............................. 26,353 60,567 76,922 60,731 77,995
Pro forma interest expense(6)........................................ 33,419
Capital expenditures(5).............................................. 25,477 14,639 14,371 26,173 35,384
Depreciation and amortization........................................ 22,126 20,978 19,868 21,178 22,547
Ratio of earnings to fixed charges(7)................................ (8) 2.0x 2.8x 2.0x 2.9x
Pro forma ratio of earnings to fixed charges(9)...................... 2.0x
OTHER OPERATING DATA:
Net tons shipped..................................................... 1,209 1,302 1,468 1,222 1,397
Percent custom products.............................................. 44.9% 53.9% 56.9% 59.4% 57.9%
Average selling price per net ton shipped............................ $ 427 $ 445 $ 483 $ 516 473
Average cost per net ton shipped..................................... 384 378 391 446 394
Average gross margin per net ton shipped............................. 43 67 92 71 79
Average operating income per net ton shipped......................... 11 36 54 37 47
Order backlog at end of period (tons)................................ 212 301 294 220 255
Average number of active employees................................... 2,636 2,471 2,323 2,217 2,190
Man-hours per net ton shipped(10).................................... 2.9 2.5 2.3 2.4 2.2
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31,
----------------------------------------------------------------
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS) ACTUAL ADJUSTED(11)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 719 $ 9,366 $ 71,426 $ 106,548 $ 139,541 $ 15,045
Working capital (excluding cash, cash equivalents and
short-term investments)................................... 53,725 49,510 69,193 61,881 42,093 62,418
Property, plant and equipment, net.......................... 212,907 206,951 196,212 189,733 205,121 205,121
Total assets................................................ 381,192 396,342 481,596 519,159 567,453 463,519
Total debt (including current portion)...................... 164,478 136,858 216,108 213,854 211,506 305,386
Shareholders' equity (deficit).............................. 51,974 69,168 43,877 59,495 79,880 (109,792)
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
22
<PAGE>
(1) Fiscal 1994 Statement of Operations reflects $11.1 million of compensation
expenses related to the Company's initial public offering and the offering
of the Existing Notes.
(2) Fiscal 1995 results were adversely impacted by a 54 day labor contract
dispute and resulting work stoppage commencing September 1, 1995 and a 36
day blast furnace reline commencing on April 1, 1995. See "Prospectus
Summary--The Company--Recent Developments."
(3) The Company'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. See "Prospectus
Summary--The Company--Recent Developments."
(4) EBITDA represents earnings before interest expense (net of interest
income), income taxes and depreciation and amortization. Adjusted EBITDA,
which represents EBITDA adjusted to add back non-cash charges associated
with postretirement health care and life insurance benefits, was $42.4
million, $77.1 million, $109.6 million, $77.4 million and $93.6 million
for fiscal 1992, 1993, 1994, 1995 and 1996, respectively. The trends of
EBITDA and Adjusted 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 and Adjusted EBITDA is
presented because management believes that certain investors use EBITDA
and Adjusted EBITDA as measures of an issuer's historical ability to
service its debt. EBITDA and Adjusted 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 or Adjusted EBITDA to similarly titled
measures of other companies as the definitions of these measures may vary.
(5) See Consolidated Statements of Cash Flows included in the Consolidated
Financial Statements for components of cash flows from operating
activities, investing activities and financing activities for fiscal 1994,
1995 and 1996.
(6) Pro forma interest expense is computed by removing from interest expense
the interest expense associated with the tendered Existing Notes ($22.8
million for fiscal 1996) and adding interest expense on the Notes of $31.2
million for fiscal 1996, including $1.2 million of amortization of
deferred financing costs.
(7) 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 less capitalized interest.
(8) Earnings were insufficient to cover fixed charges for the fiscal year
ended October 31, 1992 by $4.0 million.
(9) Pro forma ratio of earnings to fixed charges is computed by adjusting
fixed charges to reflect pro forma interest expense and adjusting earnings
to reflect pro forma interest expense and lower interest income as a
result of lower cash, cash equivalent and short-term investment balances
due to the Transactions.
(10) Reflects hours associated with hourly steel production and maintenance
employees.
(11) The Balance Sheet Data as adjusted reflects adjustments to give effect to
the Transactions, as if each had occurred on October 31, 1996 as follows:
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1996
----------------------------------
ACTUAL ADJUSTMENTS ADJUSTED
<S> <C> <C> <C>
Current assets
Cash and cash equivalents....................................... 90,395 (75,350)(a) 15,045
Short-term investments.......................................... 49,146 (49,146)(a) 0
Accounts receivable............................................. 65,869 65,869
Inventories..................................................... 96,675 96,675
Recoverable income taxes........................................ 16,718(b) 16,718
Deferred income taxes........................................... 10,637 10,637
Prepaid expenses................................................ 1,244 1,244
--------- ----------- ----------
Total current assets........................................ 313,966 (107,778) 206,188
Property, plant and equipment, net................................ 205,121 205,121
Intangible pension asset.......................................... 27,505 27,505
Other assets, net................................................. 20,861 3,844(c) 24,705
--------- ----------- ----------
Total assets................................................ $ 567,453 (103,934) 463,519
--------- ----------- ----------
--------- ----------- ----------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1996
----------------------------------
ACTUAL ADJUSTMENTS ADJUSTED
Current liabilities
<S> <C> <C> <C>
Current portion of long-term debt............................... 2,448 2,448
Accounts payable................................................ 79,138 79,138
Accrued liabilities............................................. 40,697 (3,607)(d) 37,090
Income taxes.................................................... 10,049 10,049
--------- ----------- ----------
Total current liabilities................................... 132,332 (3,607) 128,725
Long-term debt, excluding current portion......................... 2,658 2,658
Existing notes.................................................... 206,400 (206,120)(e) 280
Old Notes......................................................... 0 300,000(e) 300,000
Deferred income taxes............................................. 4,365 4,365
Postretirement health benefits.................................... 81,795 81,795
Pension benefits.................................................. 34,011 34,011
Other liabilities................................................. 26,012 (4,535)(f) 21,477
--------- ----------- ----------
Total liabilities........................................... 487,573 85,738 573,311
Shareholders' equity (deficit):
Preferred stock................................................. 0 0
Common stock, 36,623,700 shares issued and 100 shares issued as
adjusted...................................................... 366 (366) 0
Treasury stock at cost, 222,300 shares, and 0 shares as
adjusted...................................................... (1,200) 1,200 0
Additional paid-in capital...................................... 570 (570) 0
Retained earnings (deficit)..................................... 80,144 (189,936) (109,792)
--------- ----------- ----------
Total stockholders' equity (deficit)........................ 79,880 (189,672)(g) (109,792)
--------- ----------- ----------
Total liabilities and stockholders' equity (deficit)........ $ 567,453 (103,934) 463,519
--------- ----------- ----------
--------- ----------- ----------
</TABLE>
- ------------------------------
(a)
Cash, cash equivalents and short-term invetments decreased by $124.5
million due to $56.9 million paid to repurchase all the common shares of
the Company not held by Renco, $236.7 million used to retire $206.1
million principal amount of the Existing Notes including the premium
paid and accrued interest, the $108 million dividend paid to Renco,
contractual payments to executives of $13.2 million, offset by the net
proceeds on the Old Notes of $290.4 million.
(b)
Reflects the estimated income tax benefits related to the adjustments.
(c)
Reflects deferred financing costs on the Old Notes of $9.6 million, net
of accelerated amortization of deferred financing costs related to the
Existing Notes retired of $5.8 million.
(d)
Represents accrued interest at October 31, 1996 on the Existing Notes
tendered.
(e)
Gives effect to the issuance of the Old Notes and the retirement of the
Exiting Notes tendered.
(f)
Reflects reduction to accrued deferred compensation balances as a result
of contractual payments made to certain executives.
(g)
Shareholders' equity was reduced by $189.7 million reflecting the
repurchase of all outstanding common shares not held by Renco for $56.9
million, including expenses, the extraordinary loss on the retirement of
$206.1 million principal amount of Existing Notes of $19.6 million, net
of income taxes, the $108 million dividend paid to Renco and
compensation expense incurred in connection with the Transactions of
$5.2 million, net of income taxes.
24
<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 November 27, 1996 (the "Purchase Agreement"),
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 November 27, 1996, 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 4:00 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."
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<PAGE>
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.
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 WCI--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 mail to the record
holders of Old Notes an 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.
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INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from November 27, 1996, payable
semiannually on June 1 and December 1 of each year, commencing June 1, 1997, at
the rate of 10% 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 4:00 p.m., New York City
time, on the Expiration Date.
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 4:00 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
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<PAGE>
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 other 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. Neither the Company, the Exchange Agent nor 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 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 in its sole discretion 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 the Expiration Date, 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."
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<PAGE>
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 November 27, 1996 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.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 4:00 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 4:00 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
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<PAGE>
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 March 27, 1997.
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") on
or prior to 30 days after the Exchange Offer Termination Date and use its
reasonable efforts to have the Shelf Registration Statement declared effective
on or prior to 90 days after the Exchange Offer Termination Date.
"Exchange Offer Termination Date" means the date on which the earliest of
any of the following events occurs: (a) the Exchange Offer is not permitted by
applicable law or (b) any holder of Notes notifies the Company within 20
business days following consummation of the Exchange Offer that (i) such holder
was prohibited by law or Commission policy from participating in the Exchange
Offer, (ii) such holder may not resell the Exchange Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and this Prospectus
is not appropriate or available for such resales by such holder or (iii) such
holder is a broker-dealer and holds Old Notes acquired directly from the Company
or its affiliate.
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
Fleet National Bank 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 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
Fleet National Bank Fleet National Bank
Corporate Trust Administration c/o First Chicago Trust Company of New York
777 Main Street - CTMO0238 14 Wall Street
Hartford, Connecticut 06115 8th Floor - Window No. 2
Attention: Robert Reynolds New York, New York 10005
</TABLE>
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<PAGE>
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 $300,000.
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 generally
accepted accounting principles.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
WCI was incorporated on April 13, 1988 to acquire certain steel production
facilities in Warren, Ohio and other assets from LTV Inc. ("LTV") and assume
certain liabilities. Prior to the acquisition, the Warren facility was operated
as a division of LTV, with its primary business objective being to supply other
mills of LTV with commodity hot rolled steel for further processing. Upon WCI's
acquisition of the Warren facility in 1988, the marketing focus shifted from
being a commodity product supplier for other LTV facilities to the development
and sale of higher margin custom products. These custom products, which normally
cost more to produce, sell at higher prices and generally result in higher
operating margins.
Since its inception, WCI has recognized the importance of investing in its
production facilities in order to satisfy customer specifications and to reduce
operating costs. Since 1988, the Company has completed over $270 million of
capital investments including the construction and installation of the
Continuous Caster in December 1991 to decrease production costs, increase its
product range, improve product quality and increase productivity. Presently, the
Company is undertaking a capital program focused on the finishing facilities of
its operations, including a significant upgrade to its hot strip mill expected
to be completed over the next three to five years. In addition to the ongoing
capital investment program, WCI expended on average approximately $69 per net
ton shipped on maintenance expenditures during the period fiscal 1992 through
fiscal 1996 or an average of approximately $89 million annually.
INDUSTRY DEVELOPMENTS
The United States economy has been in an extended period of moderate growth
since 1992. This, in addition to other factors, has resulted in increasing
consumption of steel in the United States from approximately 95 million tons in
1992 to approximately 115 million tons in 1995. This moderate growth trend
continued in 1996.
In addition to the growth of steel consumption, the stronger market allowed
for increases in selling prices through mid-1995, at which time selling prices
began to weaken through the last calendar quarter of 1995. Since that time,
however, the pricing environment improved somewhat during 1996, with the
implementation of several price increases throughout the year.
Results for fiscal 1995 and the first two quarters of fiscal 1996 were
adversely affected by a 54 day labor contract dispute and resulting work
stoppage beginning September 1, 1995 upon the expiration of the Company's
previous collective bargaining agreement with the USWA. In particular, WCI's
order rate, shipping volume, order backlog and net sales were significantly
reduced during the work stoppage. On October 24, 1995, the Company and the USWA
reached agreement on a new four year contract. Subsequent to entering into such
agreement with the USWA, the Company undertook to reestablish its order rate and
backlog over the first and second quarters of fiscal 1996. Since the Company's
custom product mix was below levels realized in fiscal 1995, WCI's net sales and
operating income were reduced during such periods. Results for fiscal 1995 were
also negatively impacted by a scheduled blast furnace reline that resulted in
the idling of all of the Company's steel making equipment for 36 days during
April and May of 1995.
RESULTS OF OPERATIONS
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 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 sales 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
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<PAGE>
accounted for 57.9% of total shipments in fiscal 1996 compared with 59.4% in
fiscal 1995. The sales mix and volume were adversely affected during the first
two quarters of fiscal 1996 by the labor contract dispute and resulting work
stoppage which was concluded October 24, 1995. During the third and fourth
quarters of fiscal 1996, the Company'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 tons
during the same period in fiscal 1995 which was adversely affected by the work
stoppage. As of October 31, 1996, the Company had a backlog of approximately
255,000 tons compared to approximately 220,000 tons at October 31, 1995.
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 the work
stoppage.
Operating income was $65.6 million, $47 per ton shipped, for fiscal 1996
compared to $45.3 million, $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 the
blast furnace reline completed 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 in fiscal 1995 due
primarily to reductions in expense in the fourth quarter fiscal 1995 under the
Company'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 $28.0
million for fiscal 1996 compared to net income of $15.5 million for fiscal 1995.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales in fiscal 1995 were $631.0 million on 1,221,940 tons shipped,
representing an 11.0% decrease in net sales and a 16.8% decrease in shipping
volume compared to fiscal 1994. The labor contract dispute and resulting work
stoppage in the fourth quarter contributed significantly to the decline in
shipments as evidenced by fourth quarter shipments of 208,522 tons in fiscal
1995 compared to 389,636 tons in the fourth quarter of fiscal 1994. During
fiscal 1995, the Company realized $516 per net ton shipped, a 6.8% increase from
the $483 realized in fiscal 1994, reflecting a strong domestic steel market
early in the year which moderated as the year progressed. Custom carbon, alloy
and electrical steel products represented approximately 59.4% of tons shipped in
fiscal 1995 compared to approximately 56.9% in fiscal 1994. As of October 31,
1995, the Company had a sales backlog of approximately 220,000 tons, compared to
approximately 294,000 tons as of October 31, 1994.
Gross margin fell to $86.2 million in fiscal 1995 from $134.8 million in
fiscal 1994. This decrease is primarily the result of excess production costs
and expenses related to idling the facilities during the labor contract dispute
and resulting work stoppage, including salary and benefit costs, bonuses paid in
early November 1995 to hourly and salaried employees following the ratification
of the new collective bargaining agreement and lower shipping volume during the
fourth quarter discussed above. Gross margins prior to the labor contract
dispute were relatively flat compared to fiscal 1994, reflecting higher sales
prices in fiscal 1995 offset by higher costs associated primarily with the blast
furnace reline completed in May 1995.
Operating income was $45.3 million in fiscal 1995, a $34.7 million decrease
from $80.0 million in fiscal 1994. These operating results reflect the decrease
in gross margin discussed above, offset somewhat by lower selling, general and
administrative expenses in fiscal 1995. Selling, general and administrative
expenses decreased $15.2 million in fiscal 1995 primarily as a result of $11.1
million of compensation expenses in fiscal 1994 related to the Company's initial
public stock offering and the offering of the
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<PAGE>
Existing Notes and a $3.9 million reduction in fiscal 1995 related to variable
compensation programs and other expenses tied to the earnings of the Company.
Interest expense decreased $2.9 million to $25.8 million in fiscal 1995,
reflecting the repurchase of $43.6 million aggregate principal amount of
Existing Notes in July 1994 in connection with the Company's initial public
stock offering. Interest and other income increased $4.7 million in fiscal 1995
compared to fiscal 1994 primarily as a result of higher cash and cash
equivalents and short-term investments in fiscal 1995.
Net income decreased to $15.5 million in fiscal 1995 compared to income
before extraordinary losses and an accounting change of $30.9 million in fiscal
1994, primarily as a result of the lower shipping volume and costs incurred
related to the labor contract dispute and resulting work stoppage as well as the
blast furnace reline, all of which were previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
WCI's liquidity requirements result from capital investments, 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 fiscal 1992 from cash provided
by operating activities. The Company's primary sources of liquidity as of
October 31, 1996 consisted of cash and cash equivalents and short-term
investments of $139.5 million and available borrowing under the WCI Revolving
Credit Facility.
The WCI Revolving Credit Facility has a maximum borrowing limit of $100
million, is secured by eligible inventories and receivables, as defined therein,
and expires on December 29, 1999. As of October 31, 1996, 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.
Cash provided by operating activities was $78.0 million in fiscal 1996
compared to $60.7 million and $76.9 million in fiscal 1995 and 1994,
respectively. The increase in operating cash flow in fiscal 1996 compared to
fiscal 1995 resulted from improved profitability and changes in accounts
receivable, inventories, income taxes recoverable and payable and accounts
payable as a result of ceasing operations during the labor contract dispute in
the fourth quarter of fiscal 1995.
As of October 31, 1996, at pricing then in effect, WCI had commitments under
raw material supply contracts of approximately $33.8 million for fiscal 1997,
and $67.5 million thereafter through fiscal 1999.
Capital expenditures were $35.4 million, $26.2 million and $14.4 million
during fiscal 1996, 1995 and 1994, respectively. Capital expenditures are
estimated to be $40 million to $45 million in fiscal 1997, including planned
expenditures for the upgrade of the hot strip mill. The higher level of capital
expenditures in fiscal 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 the Company's capital expenditures in
fiscal 1996 through cash balances and cash provided by operating activities. At
October 31, 1996, the Company had commitments for capital expenditures of
approximately $16.3 million related primarily to the hot strip mill upgrade.
As a result of the Debt Transactions and the Equity Transactions, the
Company will record certain non-recurring charges in the first quarter of fiscal
1997, including (a) extraordinary charges of $19.6 million related to the
premium paid to retire the Existing Notes, accelerated amortization of deferred
financing costs and related expenses, net of income taxes, and (b) compensation
charges of $9.0 million related to contractual payments made to certain
executives. As a result of the Transactions (which includes the related dividend
paid to Renco of $108 million), WCI's liquidity, including its cash and cash
equivalents and short-term investments, was reduced significantly and its debt
service requirements increased significantly. See "Risk Factors--Relating to
WCI--Substantial Indebtedness." Management anticipates that
34
<PAGE>
cash flow from operations and availability under the WCI Revolving Credit
Facility will be sufficient to finance the Company's liquidity needs for the
foreseeable future.
The WCI Revolving Credit Facility and the Indenture governing the Notes
contain numerous covenants and prohibitions that limit the financial activities
of the Company, including requirements that the Company satisfy certain
financial ratios and limitations on the incurrence of additional indebtedness.
See "Description of WCI Revolving Credit Facility" and "Description of the
Notes--Certain Covenants." The ability of the Company to meet its debt service
requirements and to comply with such covenants will be dependent upon future
operating performance and financial results of the Company, which will be
subject to financial, economic, political, competitive and other factors
affecting the Company, many of which are beyond its control.
ENVIRONMENTAL MATTERS
WCI has incurred and, in the future, will continue to incur capital and
operating expenditures for matters relating to environmental control and
monitoring. Capital expenditures for environmental control and monitoring were
$.3 million, $2.3 million and $.5 million in fiscal 1996, 1995 and 1994,
respectively. These expenditures related primarily to a rebuild of a basic
oxygen furnace ("BOF") precipitator. The Company expects that future
environmental capital expenditures will be dependent in part upon the outcome of
certain pending environmental matters. See "Business--Environmental Matters."
Operating costs for control and monitoring equipment, excluding depreciation and
amortization expense, were $9.6 million, $8.9 million and $10.3 million for
fiscal 1996, 1995 and 1994, respectively. Operating costs for fiscal 1997 for
control and monitoring equipment are not expected to increase significantly from
the prior periods.
Environmental laws and regulations have changed rapidly in recent years, and
WCI may become 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. The EPA has asserted certain alleged
environmental violations against the Company which are described in
"Business--Environmental Matters."
35
<PAGE>
BUSINESS
GENERAL
WCI, a niche oriented integrated producer of value-added, custom steel
products, 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 135 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
57.9% of the 1.4 million net tons shipped during fiscal 1996. 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 59.4% of net
tons shipped in fiscal 1995 and 57.9% for fiscal 1996. The Company's sales mix,
and specifically custom product sales, were adversely impacted during the first
and second quarters of fiscal 1996 due to the labor contract dispute and
resulting work stoppage that was settled on October 24, 1995. For the third and
fourth quarters of fiscal 1996, the Company's percentage of custom steel
products was 64.8% of net tons shipped versus 44.4% during the first quarter of
fiscal 1996, immediately following the settlement of the labor contract dispute.
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 135 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, the Company is currently completing the first
phase of a three to five year upgrade to its hot strip mill. The first phase of
the upgrade, expected to be completed in mid-1997, will improve the Company's
product quality and expand WCI's product range.
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
36
<PAGE>
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
$270 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 LMF completed in December 1991 at a combined cost of
$135 million. Since May 1992, the Continuous Caster has enabled the Company to
offer a 100% continuously cast product line which has substantially reduced the
Company'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 the Company's
dependence on iron ore pellets, as well as reduced manufacturing costs by
recycling waste streams from the steel making process. In May 1995, the Company
completed the reline of its blast furnace, a procedure which is performed on a
routine basis every eight to ten years, thereby essentially completing the
upgrade of WCI's primary steelmaking capabilities.
Presently, WCI's capital investment program is focused on its finishing
facilities or the customer end of the mill, the most important of which is the
ongoing phased upgrade to its hot strip mill. Specifically, the Company is
currently in the process of completing the initial phase of a three to five year
program to upgrade its hot strip mill, the scope of which includes enhancing
virtually every element of the mill operation including the heating, roughing,
finishing, cooling and coiling processes. When completed in mid-1997, this
initial phase will significantly improve product quality and expand WCI's
product range, in addition to reducing operating costs. WCI also recently
installed a high-temperature hydrogen anneal facility to meet the rising demand
for silicon electrical steels, an important custom product for WCI.
In addition to the ongoing capital investment program, WCI expended on
average approximately $69 per net ton shipped on maintenance expenditures during
the period fiscal 1992 through fiscal 1996 or an average of approximately $89
million annually. As a result of these expenditures, in addition to the ongoing
capital investment program, the Company 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, the Company obtained in 1995 ISO 9002 certification, an
internationally recognized quality systems standard. The Company undergoes
periodic audits to verify its continued compliance with the standard.
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. WCI's custom steels are used in the manufacture of a variety
of high value-added applications such as saw blades, golf club shafts, lawn
mower blades, drive chain links, razor blades, hand and garden tools, electric
motors, fuel tanks, automotive bumpers and culvert products. 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) to a lesser extent, price. WCI's
commodity steel product sales
37
<PAGE>
consist principally of hot and cold rolled low carbon sheet steel. Many of these
products are sold to customers that manufacture a variety of steel products,
including tubular products, containers and metal stamped parts. In these
markets, WCI competes principally on the basis of price and delivery
performance. Export sales ranged from 0.9% to 2.0% of net sales during the last
three fiscal years.
Estimates about the size of the segments of the domestic steel market
contained in this Prospectus have been developed by the Company primarily from
internal sources, including market and customer data, and to a lesser extent
from published industry data, and reflect the Company's current estimates;
however, no assurance can be given regarding the accuracy of such estimates.
<TABLE>
<CAPTION>
NET TONS SHIPPED PERCENT OF TOTAL
------------------------------- -------------------------------
FISCAL YEAR ENDED OCTOBER 31, FISCAL YEAR ENDED OCTOBER 31,
------------------------------- -------------------------------
1994 1995 1996 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Custom Products:
Hot and Cold Rolled:
High Carbon............................... 268,837 208,583 247,547 18.3% 17.1% 17.7%
Alloy..................................... 62,955 67,159 85,343 4.3 5.5 6.1
High Strength............................. 91,024 82,814 94,055 6.2 6.7 6.7
--------- --------- --------- --------- --------- ---------
Total Hot and Cold Rolled................... 422,816 358,556 426,945 28.8 29.3 30.5
Coated:
Silicon................................... 100,948 86,788 92,678 6.9 7.1 6.6
Galvanized (Non-Culvert).................. 148,157 134,090 130,774 10.1 11.0 9.4
Galvanized (Culvert Coil)................. 139,628 128,505 146,692 9.5 10.5 10.5
Terne..................................... 23,319 18,061 12,208 1.6 1.5 0.9
--------- --------- --------- --------- --------- ---------
Total Coated................................ 412,052 367,444 382,352 28.1 30.1 27.4
--------- --------- --------- --------- --------- ---------
Total Custom Products......................... 834,868 726,000 809,297 56.9 59.4 57.9
Total Commodity............................... 633,227 495,940 587,435 43.1 40.6 42.1
--------- --------- --------- --------- --------- ---------
Total Steel Products.......................... 1,468,095 1,221,940 1,396,732 100.0% 100.0% 100.0%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
CUSTOM PRODUCTS
HIGH CARBON, ALLOY, HIGH STRENGTH. WCI has developed specialty 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. Certain specific physical properties are met by
introducing particular alloys or elements such as chrome, molybdenum, manganese
and vanadium in the LMF or BOF during the steelmaking process or additionally
through other finishing processes such as annealing. 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
in narrow widths, close gauge tolerances, minimal crown profiles and critical
surface qualities. Due to the nature of these customer requirements, high carbon
and alloy custom steels are not manufactured readily by the larger integrated
mills or minimills. The larger integrated producers prefer to produce large
quantities of a particular size and grade, rather than small quantities of
special grades needed by customers in this market. In addition, since the hot
strip mills of large integrated producers and minimills typically are configured
to handle wide sheet steel (60 or more inches wide), it is not cost effective
for them to produce and roll narrow width (less than 36 inches wide) coils to
meet the requirements of these customers.
38
<PAGE>
From 1989 to 1996, WCI has grown its annual custom high carbon, alloy and
high strength hot rolled business by 171%. WCI attributes this increase to the
installation of the Continuous Caster, the implementation of its marketing
strategy and a major competitor ceasing operations. Management believes that
demand from these custom niche markets is relatively stable.
In the high carbon and alloy market, WCI competes primarily with Acme Steel
and Bethlehem Steel (Sparrows Point facility in Maryland) in the United States,
as well as various steel producers in Canada, Europe and Japan. In the high
strength market, WCI competes with various major integrated mills.
Management believes that the domestic market for high carbon steel in fiscal
1996 was approximately 787,000 tons, of which WCI supplied 247,547 tons or
approximately 31.5% of this market. In addition, the estimated market for alloy
steel in fiscal 1996 was approximately 258,000 tons, of which WCI supplied
85,343 tons or approximately 33.1% of this market. WCI supplied 94,055 tons of
high strength steel in fiscal 1996, which represents a small percentage of this
market.
SILICON. Silicon electrical steel is sheet steel that exhibits certain
electrical or magnetic properties as a result of the introduction of silicon at
the BOF during the steelmaking process. Silicon steel is used in the manufacture
of transformers, power generators, lighting ballasts and electric motors. 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.
In response to the rising demand for non-grain oriented silicon electrical
steels, WCI has recently installed a high temperature hydrogen anneal facility.
The expectations for higher demand are based upon a new U.S. government standard
to take effect in October 1997, which requires higher energy efficiency in
electric motors. The new facility will enable WCI to produce improved magnetic
and metallurgical properties and to supply more sophisticated grades of fully
processed, non-grain oriented silicon electrical steels.
Management believes that the market for non-grain oriented silicon steel in
fiscal 1996 was approximately 232,000 tons, of which WCI supplied 92,678 tons or
approximately 39.9% of this market. Presently, WCI's principal competitor in
this category is Armco Inc., which essentially supplies the balance of this
market.
GALVANIZED (NON-CULVERT). 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. Heavy
gauge galvanized steel is used in the manufacture of electrical boxes,
automotive bumpers and grain bins, as well as many other end uses. Light gauge
galvanized steel is used in numerous applications such as automotive
applications, metal building panels and framing, roofing and siding, roof and
floor deck material, heating ducts, as well as metal building studs.
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
believes that its galvanized finishing line provides WCI with a distinct
competitive advantage on heavy gauge applications because it permits the use of
hot rolled sheet directly, as compared to WCI's competitors for which cold
rolled sheet most often is required. By eliminating the cold rolling process,
WCI enjoys a substantial cost advantage, thereby permitting WCI to be more cost
competitive.
In non-culvert galvanized steel, WCI supplied 130,774 tons for fiscal 1996,
which represents a small percentage of the total market. WCI competes with other
integrated producers including Wheeling-
39
<PAGE>
Pittsburgh Corporation ("Wheeling-Pittsburgh"), Weirton Steel Corporation and
National Steel Corporation, as well as independent producers such as Metaltech.
The light gauge galvanized steel sector is among the most rapidly growing in
the steel industry, due to the increased demand for this product from the
automobile and metal building industries. In response to this increased demand,
there has been significant finishing capacity recently added or announced by
other integrated producers and minimills. Since the larger integrated producers
and minimills are concentrating on the fast growing light gauge market and
currently are not equipped to produce steel for heavy gauge applications, WCI
views the heavy gauge segment in which it operates as an attractive niche
market. This market has not been a growth market in the recent past and is not
expected to grow rapidly in the future.
GALVANIZED (CULVERT COIL). A significant niche market for heavy gauge
galvanized sheet is culvert coil to manufacture culvert pipe. Culvert pipe is
used in drainage systems and is tied principally to road construction. WCI
inventories culvert coil in four facilities nationally for quick distribution to
its customer base. WCI estimates that the market for galvanized culvert steel in
fiscal 1996 was approximately 330,000 tons, of which WCI supplied 146,692 tons
or approximately 44.5% of this market. Other significant producers of galvanized
culvert coil are Wheeling-Pittsburgh and Gulf States Steel.
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.
WCI believes that the market for terne steel in fiscal 1996 was
approximately 120,000 tons, of which WCI supplied 12,208 tons or approximately
10.2% of this market. Given the current regulatory concerns involving products
containing lead, demand for terne steel is expected to decrease. Terne accounted
for approximately 1% of the Company's net sales for fiscal 1996. Presently WCI's
principal competitors in this market are USX--U.S. Steel Group and AK Steel.
COMMODITY PRODUCTS
In fiscal 1996, WCI shipped 587,435 tons in the aggregate of hot and cold
rolled low carbon sheet and strip and low carbon semi-finished steel, which
represented approximately 42.1% of the Company'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.
As part of the Company's plan to restart its facility following settlement
of the labor contract dispute, the Company shipped 45,822 tons of semi-finished
steel in the first half of fiscal 1996. The Company did not make any further
shipments of semi-finished product during the balance of fiscal 1996.
MARKETING
WCI's marketing and sales strategy is to focus on increasing sales of custom
products and on becoming a major supplier to its strategic customer base. Over
50% of WCI's shipments are to customers within 200 miles of the Warren facility.
WCI believes that, due to the large number of active and potential customers in
this geographic area, it has a competitive advantage over competitors located
farther away.
On October 31, 1996, WCI employed a direct sales force of ten field
representatives covering potential steel accounts within WCI's geographic
market. WCI has approximately 300 active accounts. The sales force is assisted
in the field by a staff of eight technical service representatives with strong
40
<PAGE>
metallurgical and technical backgrounds. Collectively, the sales force and
technical staff comprise a knowledgeable team qualified to identify and meet
customers' needs.
Sales outside WCI's geographic market are made through four independent
sales representatives on a commission basis. Although transportation costs can
be prohibitive at extreme distances from the Warren facility, select niche
custom products are competitively priced outside WCI's normal target markets.
WCI believes that independent sales representatives provide the most cost
effective method to access these customers. Approximately 4% of WCI's volume in
fiscal 1996 was sold through the independent sales representatives.
Marketing and pricing are centralized at the Warren facility, where the
marketing strategy and the pricing levels are established for all WCI products.
WCI's four person marketing staff works closely with the sales and technical
service representatives to coordinate its sales and marketing strategies.
On October 31, 1996, WCI employed seventeen persons at the Warren facility
who provide customer service and order entry. WCI has a fully automated
computerized sales network that provides the salesforce with up-to-date cost
information for any set of product specifications, as well as timely order
status information.
CUSTOMERS
WCI's 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 targets customers for which it can supply at least 25% of such
customer's steel requirements. Nevertheless, WCI 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's customer base
is dominated by steel converters and steel service centers, which in fiscal 1996
represented 69% 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,
-------------------------------
CUSTOMER CATEGORY 1994 1995 1996
<S> <C> <C> <C>
Conversion/further processing..................................................... 42.8% 39.3% 44.6%
Steel service centers............................................................. 25.4 23.0 24.0
Construction...................................................................... 11.5 13.1 11.5
Electrical equipment.............................................................. 7.3 8.4 7.1
Direct automotive................................................................. 8.9 11.1 8.1
Other............................................................................. 4.1 5.1 4.7
--------- --------- ---------
Total......................................................................... 100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
In fiscal 1996, 1995 and 1994, WCI's twenty largest customers represented
approximately 56%, 56% and 57%, respectively, of net sales with its largest
customer, Worthington Industries, representing approximately 9.8%, 10.0% and
9.9% of net sales, respectively.
BACKLOG
On October 31, 1996, WCI's order backlog was approximately 255,000 net tons
with an approximate value of $128 million compared to approximately 220,000 net
tons with an approximate value of $115 million at October 31, 1995, 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 October 31, 1996
backlog by April 1997.
41
<PAGE>
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 175 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 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 long-term 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 76% of
WCI's iron ore requirements in fiscal 1996, 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 long-term 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
the Company does not own a coke battery, it is dependent upon commercially
available domestic or imported coke to sustain its operations. The Company
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 the Company in the future. See "Risk Factors--Relating to the
Industry--Availability of and Fluctuation in Raw Material and Energy Costs."
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 under a contract that extends to 2001 from a local utility. WCI can
generate approximately 20% of its own electrical needs. Natural gas is also
purchased pursuant to a supply contract that extends to 1997. 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
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<PAGE>
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. The
following table summarizes the primary areas of WCI's capital investments:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
CAPITAL IMPROVEMENTS:
Continuous Caster and LMF................... $ 4,659 $ 69,084 $ 42,489 $ 18,060 $ 1,157 $ 22 $ --
Youngstown Sinter Plant..................... -- 895 7,783 758 30 -- --
Hot Strip Mill Upgrade...................... -- -- -- -- -- -- 432
Hydrogen Anneal Facility.................... -- -- -- -- -- -- 790
Other....................................... 2,809 1,808 -- 45 179 1,077 612
--------- --------- --------- --------- --------- --------- ---------
Total Capital Improvements.............. 7,468 71,787 50,272 18,863 1,366 1,099 1,834
--------- --------- --------- --------- --------- --------- ---------
MAINTENANCE CAPITAL:
Blast Furnace Reline........................ -- -- -- -- -- 5,984 14,847
Mill Rolls.................................. 5,030 5,078 4,689 5,264 4,644 5,172 4,548
Other....................................... 2,086 1,164 536 1,350 8,629 2,116 4,944
--------- --------- --------- --------- --------- --------- ---------
Total Maintenance Capital(1)............ 7,116 6,242 5,225 6,614 13,273 13,272 24,339
--------- --------- --------- --------- --------- --------- ---------
Total Capital Investments....................... $ 14,584 $ 78,029 $ 55,497 $ 25,477 $ 14,639 $ 14,371 $ 26,173
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
1996 TOTAL
<S> <C> <C>
CAPITAL IMPROVEMENTS:
Continuous Caster and LMF................... $ -- $ 135,471
Youngstown Sinter Plant..................... -- 9,466
Hot Strip Mill Upgrade...................... 22,194 22,626
Hydrogen Anneal Facility.................... 2,749 3,539
Other....................................... 1,932 8,462
----------- ---------
Total Capital Improvements.............. 26,875 179,564
----------- ---------
MAINTENANCE CAPITAL:
Blast Furnace Reline........................ -- 20,831
Mill Rolls.................................. 4,744 39,169
Other....................................... 3,765 24,590
----------- ---------
Total Maintenance Capital(1)............ 8,509 84,590
----------- ---------
Total Capital Investments....................... $ 35,384 $ 264,154(2)
----------- ---------
----------- ---------
</TABLE>
- ------------------------------
(1) Since the installation of the Continuous Caster in fiscal 1992, WCI has
expensed an average of approximately $69 per net ton shipped on maintenance
expenditures averaging approximately $89 million annually.
(2) In September and October 1988, the Company completed a blast furnace reline
and purchased mill rolls, for an aggregate cost of approximately $10.0
million.
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, a
twin-strand 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 eight to
ten years, which required the Company to shut down the blast furnace for 36
days. In connection with the reline, the Company 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.
The Company also 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 24% in fiscal 1996.
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.
43
<PAGE>
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.
Accordingly, 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 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 the Company's financial condition and results of operations.
On June 29, 1995, the Department of Justice, on behalf of the EPA,
instituted the CWA Litigation. The action alleges numerous violations of the
Company'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 the Company in the same court under the Clean Air Act alleging
violations by the Company 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 the Company's facilities in
Warren, Ohio. By letter dated November 13, 1996, the EPA's Region V Air and
Radiation Division issued a notice of violation alleging violations on nine days
in 1992, 1993 and 1994 of the particulate standards applicable to the Warren
facility. 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. The Company 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 the Company relating to the Warren facility, including information as to
the effect of a prohibition against federal procurement of the Company's
products on the Company's business. The Company 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. The Company is negotiating with the EPA toward
a settlement of these matters. If the Company 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 and financial condition of the
Company, the extent of which the Company is unable to estimate at this time.
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, the
Company will be required to undertake a corrective action program with respect
to historical material handling practices at the Warren facility. WCI has
developed and submitted a workplan for the first investigation step of the
corrective action program, the RFI, to the EPA and is presently negotiating the
scope of the RFI with the EPA. The workplan identifies thirteen historical solid
waste management units which are subject to 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 the corrective action program.
Accordingly, the Company 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 operating results and financial condition of the Company.
44
<PAGE>
WCI has 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 requires 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 requires WCI to
submit certain financial information and other information needed to evaluate
the facility's compliance with the RCRA and CERCLA requirements. The request
does not identify violations, seek to impose penalties or monetary sanctions or
require the performance of remedial activities or other capital expenditures.
The request seeks information about a specific area at which waste management
occurred at the Warren facility under the 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 the
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.
The Company's acid regeneration plant is subject to the Maximum Achievable
Control Technology Standards which are expected to be promulgated by the EPA
under the Clean Air Act commencing in 1997. The Company expects to have up to
two years to achieve compliance once the standards are finalized. The Company is
presently evaluating alternatives to achieve compliance with likely standards,
including outsourcing the hydrochloric acid recycling. The Company does not
believe that the cost of compliance with the standards will have a material
adverse effect on the operating results or financial condition of the Company.
The Company operates a landfill at its Warren facility which receives waste
materials from the iron and steel-making operations. The Company 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 the
Company's subsidiary, Youngstown Sinter Company, and disposing of any
non-salable or non-recyclable material in the new lined landfill. The new lined
landfill construction, if pursued, is expected to be completed in seven
consecutive phases. The estimated cost through Phase I is approximately $2.7
million to $3.7 million expended over three years. The estimated cost for Phase
II is approximately $1.5 million expended over six years, and the estimated cost
for Phase III is approximately $1.6 million expended over ten years.
EMPLOYEES
As of October 31, 1996, WCI had 540 salaried employees and 1,697 hourly
employees. Most of the hourly employees are located at the Warren facility and
are represented by the USWA with which WCI reached a four year collective
bargaining agreement during 1995 which expires August 31, 1999. The Company's
prior labor agreement with the USWA expired on August 31, 1995. At that time,
the Company and the USWA were unable to reach an agreement resulting in a 54 day
labor contract dispute and work stoppage.
BENEFIT PLANS
HOURLY PROFIT SHARING PLAN
Certain hourly employees represented by the USWA participate in a profit
sharing plan under which the Company pays 12% of pretax income as defined in the
profit sharing agreement. The Company 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.
45
<PAGE>
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 follows the policy of funding contributions as earned on a
monthly basis. Company contributions to the plans are based on employee age,
length of service and compensation.
During 1995, the Company adopted a defined benefit floor offset pension plan
which covers substantially all hourly employees at the Warren facility. The
plan, when combined with benefits from the Company's defined contribution plan
and benefits from an LTV Steel Company, Inc. ("LTV Steel") 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, LTV Steel 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 the Company's
defined contribution plan (as an annuity equivalent) and the LTV Steel defined
benefit pension plan. 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. As part of the
1995 labor agreement with the USWA, the Company agreed to establish the VEBA
Trust to hold Company contributions to fund future postretirement health care
and life insurance obligations. The VEBA Trust holds liens on the Collateral and
certain assets of the Company and one of its subsidiaries to secure the
Company's obligation for postretirement health care benefits. The Company
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 the
Company in the United States District Court for the Northern District of Ohio
alleging in substance that certain distributions made by the Company to
employees and benefit plans violated certain agreements, the Employee Retirement
Income Security Act, the National Labor Relations Act and common law. The
plaintiffs seek declaratory and injunctive relief and damages. Plaintiffs have
brought this action as a class action; however, the court has not ruled as to
whether this action is properly maintainable as a class action. The Company
denies the plaintiffs' allegations of liability and has filed for dismissal of
the action. The court has not yet ruled on the Company's motion.
On April 5, 1996, an employee instituted an action for damages against the
Company 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. In July 1996, the plaintiff moved for an order
permitting her to amend her complaint to add new party plaintiffs alleging a
claim under only the privacy rights cause of action. The Company denies
plaintiff's allegations of liability and has opposed the motion to amend the
complaint. The court has not yet ruled on the plaintiff's motion. Discovery is
underway, and no substantive motions have been made.
For a description of pending litigation related to environmental matters,
see "--Environmental Matters."
46
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
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..................................... 62 Chairman of the Board and Director
Edward R. Caine...................................... 58 President and Chief Executive Officer
Patrick T. Kenney.................................... 56 Vice President, Operations
Patrick G. Tatom..................................... 46 Vice President, Commercial
Bret W. Wise......................................... 36 Vice President, Finance and Chief Financial Officer
</TABLE>
IRA LEON RENNERT has been Chairman, Chief Executive Officer and principal
shareholder of WCI's parent company, Renco (including predecessors), since
Renco's first acquisition in 1975, and Chairman 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. Mr. Rennert was Chairman of the Board, and Renco was majority
shareholder, of Covert Marine, Inc., a wholesale distributor of recreational
boating equipment in Kansas City, Missouri. An order for relief for Covert
Marine, Inc. was entered on October 23, 1992 under Chapter 11 of the Bankruptcy
Code by the United States Bankruptcy Court for the Western District of Missouri.
WCI has never had any business relationship with Covert Marine, Inc.
EDWARD R. CAINE has been President and Chief Executive Officer since April
1, 1996. Mr. Caine was a Director of the Company from April 1, 1996 through
December 16, 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 served as Vice President, Operations since June 1994
and, prior to that, as General Superintendent of Finishing Operations of WCI
since its inception.
PATRICK G. TATOM has served as Vice President, Commercial since November 1,
1995 and served as Vice President, Sales from February 1994 through October 31,
1995 and as General Manager of Sales from September 1988 to February 1994.
BRET W. WISE joined WCI as Vice President, Finance and Chief Financial
Officer effective September 1, 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 31,
1994.
Since December 16, 1996, Mr. Rennert has been the sole Director of the
Company.
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors met five times (four regularly scheduled meetings and
one special meeting) during fiscal 1996. During fiscal 1996, all directors
attended more than 75% of all meetings of the Board of Directors and committees
thereof on which they served.
During fiscal 1996, the standing committees of the Board of Directors
included the Audit Committee and the Compensation Committee. The Audit Committee
and the Compensation Committee have been disolved, and the Board of Directors
has not had a Nominating Committee, and the usual functions of such committees
are performed by the entire Board of Directors. The Audit Committee met twice
during fiscal 1996. The Compensation Committee met once during fiscal 1996.
47
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1996, the Compensation Committee was composed of Arthur W.
Fried, Mr. Rennert and William Schwartz (Messrs. Fried and Schwartz are no
longer Directors). Except as provided below, no member of the Compensation
Committee was, during fiscal 1996, an officer or employee of the Company or any
of its subsidiaries, was formerly an officer of the Company or any of its
subsidiaries or had any relationship requiring disclosure by the Company. Mr.
Rennert is an executive officer of the Company, and Renco has relationships with
the Company as described in "Stock Ownership and Certain Relationships and
Transactions."
During fiscal 1996, no executive officer of the Company served (a) as a
member of the compensation committee (or other board committee performing
equivalent functions or, in the absence of any such committee, the entire board
of directors) of another entity, one of whose executive officers served on the
Compensation Committee, (b) as a director of another entity, one of whose
executive officers served on the Compensation Committee or (c) as a member of
the compensation committee (or other board committee performing equivalent
functions or, in the absence of any such committee, the entire board of
directors) of another entity, one of whose executive officers served as a
Director of the Company.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
of the named executive officers by the Company for services rendered to it in
all capacities during fiscal 1996, 1995 and 1994:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION(1) ----------------------------
FISCAL ---------------------- RESTRICTED LTIP ALL OTHER
NAME AND POSITION YEAR SALARY BONUS STOCK AWARDS(2) PAYOUTS(3) COMPENSATION(4)
<S> <C> <C> <C> <C> <C> <C>
Ira Leon Rennert(5)............. 1996 -- -- -- -- $ 1,200,000
Chairman of the Board 1995 -- -- -- -- 1,200,000
1994 -- -- -- -- 1,200,000
James V. Stack(6)............... 1996 -- -- -- $ 748,164 172,918
President and Chief Executive 1995 -- -- -- 748,164 419,659
Officer (Fiscal 1994 and 1994 $ 265,633 $ 200,000 $ 250,000 97,500 31,251
September 20, 1995 to March
31, 1996)
Edward R. Caine(7).............. 1996 159,616 360,394 115,625 386,945 18,977
President and Chief Executive 1995 -- -- -- -- --
Officer (since April 1, 1996) 1994 -- -- -- -- --
Patrick T. Kenney(8)............ 1996 132,494 50,000 32,375 543,533 14,563
Vice President, Operations 1995 132,129 75,000 -- -- 10,938
1994 115,474 17,500 30,000 39,000 9,559
Patrick G. Tatom(9)............. 1996 130,983 50,000 32,375 404,248 10,782
Vice President, Commercial 1995 130,566 75,000 -- -- 7,813
1994 126,384 40,000 30,000 39,000 7,562
Bret W. Wise(10)................ 1996 142,848 50,000 46,250 310,748 8,275
Vice President, Finance and 1995 132,401 75,000 -- -- 4,875
Chief Financial Officer 1994 22,067 40,000 -- -- 812
</TABLE>
- ------------------------
(1) Value of perquisites and other personal benefits did not exceed the lesser
of $50,000 or 10% of total salary and bonus per named executive officer.
(2) The amounts shown as "Restricted Stock Awards" in the table for each named
executive officer for fiscal 1994 represent the value of the restricted
stock grant award made in July 1994 upon completion
48
<PAGE>
of the Company's initial public stock offering computed as the number of
restricted shares granted multiplied by $10 per common share (the initial
public offering price) and the amounts shown for fiscal 1996 represent the
value of restricted stock grant awards made in June 1996 computed as the
number of restricted shares granted multiplied by the closing market price
for the Common Stock on the last full trading day before the restricted
stock grant award. The number of restricted shares granted to each of the
named executive officers in June 1996 was 25,000 shares to Mr. Caine, 7,000
shares to each of Messrs. Kenney and Tatom and 10,000 shares to Mr. Wise. As
of October 31, 1996, 80,000 restricted common shares were held by the named
executive officers with an aggregate market value of $790,000. The
restriction on 25% of the shares originally granted to the named executive
officers will expire on July 1 of each of 1997, 1999, 2002 and 2004. The
Board of Directors, by resolution, waived the continued employment
requirement with respect to the restricted shares of Mr. Stack upon his
retirement on November 1, 1994, although the restriction on transfers remain
in effect as per the schedule outlined above. The Company has waived the
transfer restrictions applicable to the restricted shares to permit the
holders of such shares to tender their shares in the Equity Tender Offer.
(3) The amounts shown as "LTIP Payouts" in the table for each named executive
officer represent contractual payments under such officer's Net Worth
Appreciation Agreement. See "--Net Worth Appreciation Agreements."
(4) The other compensation shown, except for Mr. Rennert for all periods and Mr.
Stack in fiscal 1996 and fiscal 1995, consists of WCI contributions to a
defined contribution pension plan. See notes (5) and (6) for a description
of all other compensation to Messrs. Rennert and Stack, respectively, in
fiscal 1996.
(5) Mr. Rennert receives no compensation directly from WCI. He is Chairman of
the Board and the principal stockholder of Renco which receives a management
fee from WCI pursuant to a Management Consultant Agreement. The amounts
shown as all other compensation to Mr. Rennert are the management fees paid
by WCI to Renco for each fiscal year. See "Stock Ownership and Certain
Relationships and Transactions."
(6) Compensation shown in fiscal 1994 was earned in the capacity of President
and Chief Executive Officer. Mr. Stack retired effective November 1, 1994
and thereafter served as Vice Chairman of the Board and as a consultant to
the Company. Compensation shown as all other compensation for Mr. Stack in
fiscal 1996 and fiscal 1995 represents amounts earned under a consulting
agreement in the capacity as President and Chief Executive Officer (from
September 20, 1995 through March 31, 1996) and as a consultant to the
Company. See "Stock Ownership and Certain Relationships and Transactions."
For a description of payments to Mr. Stack under his Net Worth Appreciation
Agreement, see "--Net Worth Appreciation Agreements."
(7) Mr. Caine was named President and Chief Executive Officer effective April 1,
1996.
(8) Mr. Kenney was named Vice President, Operations effective June 1, 1994 and,
prior to that date, was General Superintendent, Finishing Operations since
September 1, 1988.
(9) Mr. Tatom was named Vice President, Commercial effective November 1, 1995
and, prior to that date, was Vice President, Sales from May 1, 1994 to
October 31, 1995 and General Manager of Sales from September 1, 1988 through
April 30, 1994.
(10) Mr. Wise was named Vice President, Finance and Chief Financial Officer
effective September 1, 1994. Mr. Wise has a severance pay agreement that
provides for severance pay based on his base salary if his employment is
terminated other than for "cause" prior to August 31, 1997.
NET WORTH APPRECIATION AGREEMENTS
The named executive officers (with the exception of Mr. Rennert) and one
other employee of the Company are each parties to Net Worth Appreciation
Agreements with the Company, pursuant to which each earns as deferred
compensation a fixed percentage of the increase in the net worth of the Company,
as defined, during the term of their employment. The following table summarizes
the Net Worth
49
<PAGE>
Appreciation Agreements now held by the named executive officers, and the
amounts earned thereunder during each of fiscal 1996, 1995 and 1994.
<TABLE>
<CAPTION>
CREDIT AS OF
NET WORTH FISCAL AMOUNT OCTOBER 31,
PERCENTAGE BASE DATE YEAR EARNED 1996(1)
<S> <C> <C> <C> <C> <C>
James V. Stack............................... 5%(2) 08/31/88 1996 -- $ 5,985,322
1995 --
1994 $ 4,572,107
Edward R. Caine.............................. 5%(3)(4) 04/01/96 1996 1,038,711 651,766
1995 --
1994 --
Patrick T. Kenney............................%(121/4) 08/31/88 1996 602,250 2,806,655
%(3)(5) 3/4 06/01/94 1995 363,550
1994 1,656,345
Patrick G. Tatom............................. 2%(3)(6) 05/01/94 1996 602,250 2,017,385
1995 363,550
1994 1,455,168
Bret W. Wise................................. 2%(3)(7) 08/01/94 1996 602,250 879,645
1995 363,550
1994 223,927
</TABLE>
- ------------------------
(1) Represents gross aggregate amount earned under the applicable agreement less
any amounts paid under the agreements through October 31, 1996.
(2) Fully vested. Accruals for Mr. Stack ceased upon his retirement on November
1, 1994. In December 1996, Mr. Stack and the Company reached an agreement
that the Company will pay Mr. Stack four quarterly installments of
$1,166,893 commencing February 1, 1997, representing the net present value
of amounts due him, and in full satisfaction of all amounts due him, under
his Net Worth Appreciation Agreement.
(3) Subject to earlier partial vesting in certain cases (E.G. death or
discontinuance of employment due to disability).
(4) Vests as to 3% on April 1, 1999, and as to an additional 1% on each of April
1, 2000 and 2001, provided that in each case Mr. Caine remains in the employ
of the Company until the applicable vesting date.
(5) Vests as to 0.45% on October 31, 1997 and as to an additional 0.15% on each
of October 31, 1998 and October 31, 1999, provided that in each case Mr.
Kenney remains in the employ of the Company until the applicable vesting
date.
(6) Vests as to 1.2% on May 1, 1997 and as to an additional 0.4% on each of May
1, 1998 and May 1, 1999, provided that in each case Mr. Tatom remains in the
employ of the Company until the applicable vesting date.
(7) Vests as to 1.2% on September 1, 1997 and as to an additional 0.4% on each
of September 1, 1998 and September 1, 1999, provided that in each case Mr.
Wise remains in the employ of the Company until the applicable vesting date.
The Net Worth Appreciation Agreements also provide that active participants
receive an annual payment of 5% of the balance of their accumulated deferred
compensation amount as of the end of the previous fiscal year, subject to
certain annual minimum and maximum amounts and subject to reductions based upon
amounts received under the Net Worth Appreciation Agreements as a result of
dividends paid
50
<PAGE>
by the Company in such fiscal year. In the event of payment of a dividend or a
sale of WCI, the active participants are entitled to receive a percentage of the
dividend or a percentage of the net proceeds received from the sale (less an
amount derived from the net worth of the Company at the effective date of their
respective agreement) equal to their full net worth percentage under their
agreement. As a result of the Transactions, approximately $13.2 million in the
aggregate was paid to Messrs. Caine, Kenney, Tatom and Wise and one other
employee of the Company pursuant to the Net Worth Appreciation Agreements. Such
payments reduced the amounts shown above owed to such persons under their Net
Worth Appreciation Agreements.
Active participants are also entitled to receive the balance of the vested
amount earned under their Net Worth Appreciation Agreement in 40 equal quarterly
payments commencing upon the earliest of age 62, ten years after the termination
of their employment, or twenty years after the date the participant was first
employed by the Company. Receipt by each employee of his payment is conditioned
on his observance of his confidentiality and non-compete agreement with the
Company.
51
<PAGE>
STOCK OWNERSHIP AND CERTAIN RELATIONSHIPS AND TRANSACTIONS
The following table sets forth certain information as of January 31, 1997
regarding the beneficial ownership of Common Stock by each beneficial owner of
5% or more of the Common Stock, 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
AS OF JANUARY 31, 1997
------------------------------
<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
All directors and executive officers as a group (5 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 seven trusts established
by him (but of which he is not a trustee) for himself and members of his
family of a total of 95.9% 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, 1998 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, 1995, WCI paid management fees to Renco in
the amount of $1,200,000. The Company 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 the
Company could obtain such services from unaffiliated entities.
WCI is included in the consolidated federal 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
and Renco and its other subsidiaries are accounted for on a cash basis and not
on an accrual basis. WCI is not entitled to the benefit of net tax loss
carryforwards, unless such tax losses were a result of timing differences
between WCI's accounting for tax and financial reporting purposes. As of October
31, 1996, WCI had no net operating tax loss carryforwards. Renco has agreed to
indemnify WCI for any tax imposed on or paid by WCI in excess of the amount
payable by WCI and its subsidiaries under the tax sharing agreement. As of
October 31, 1995, WCI had recoverable income taxes of $6.0 million under this
agreement, representing estimated tax payments made by the Company to Renco in
excess of the Company's actual tax liability due to the unexpected losses
incurred by the Company in the last quarter of fiscal 1995. The above amount was
fully recovered by July 31, 1996.
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To obtain the advantages of volume, Renco purchases certain insurance
coverages 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 the Company 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 1996, the Company
incurred costs of approximately $2.0 million 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.
Effective November 1, 1994, Mr. Stack and the Company entered into a
Consulting Agreement under which Mr. Stack was to receive an annual retainer fee
of $150,000 in fiscal 1995 and $100,000 annually thereafter in return for
consultation and advice relating to: the Company's blast furnace reline
completed in 1995; general conditions in the steel industry; WCI's operations,
business plans, and capital expenditure plans; special projects; and other
matters as agreed to between the Chairman of the Board or President of WCI and
Mr. Stack. On September 20, 1995, Mr. Stack, at the request of the Board of
Directors, resumed the duties of President and Chief Executive Officer upon the
resignation of the then President. In recognition of the increased
responsibilities assumed by Mr. Stack effective September 20, 1995, and
continuing until the election of Edward R. Caine as President and Chief
Executive Officer by the Board of Directors effective as of April 1, 1996, Mr.
Stack's remuneration under the Consulting Agreement was adjusted to provide for
a one-time fee of $250,000 and the annual retainer fee was adjusted to $275,000
during such period. The agreement extends from year-to-year unless terminated as
of any year end by notice by either party. In addition, Renco has agreed to
indemnify Mr. Stack against, and reimburse him for, any incremental cost or
expense he may incur or be required to pay because of his resumption of and
continuation in office as President of the Company.
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DESCRIPTION OF THE NOTES
The Old Notes were and the Exchange Notes will be issued under the
Indenture. The following summary of the material provisions of the Indenture
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. The definitions of certain capitalized
terms used in the following summary are set forth below under "--Certain
Definitions."
GENERAL
The Notes will mature on December 1, 2004. Each Note will bear interest at
the rate set forth on the cover page hereof from the date of issuance or from
the most recent interest payment date to which interest has been paid, payable
semiannually in arrears on June 1 and December 1 each year, commencing June 1,
1997, to the person in whose name the Note (or any predecessor Note) is
registered at the close of business on the May 15 or November 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
WCI 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 WCI 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 WCI, at any time on or after December 1, 2001, 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 December 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2001.............................................................................. 105.000%
2002.............................................................................. 103.333%
2003.............................................................................. 101.000%
</TABLE>
OPTIONAL REDEMPTION UPON EQUITY OFFERINGS
In addition, at any time prior to December 1, 1999, WCI 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 109% plus accrued interest to the
redemption date; provided that at least $200 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, WCI
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 WCI (other than to any Subsidiary of WCI).
SINKING FUND
There will be no mandatory sinking fund payments for the Notes.
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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
The indebtedness of WCI evidenced by the Notes ranks senior in right of
payment to all senior subordinated and subordinated indebtedness of WCI, and
PARI PASSU with all other existing and future senior indebtedness of WCI.
SECURITY
Pursuant to the Security Documents, WCI has assigned and pledged as
collateral to the Trustee for the benefit of the Trustee and the Holders of the
Notes a security interest in certain of its existing real and personal property
summarized below, whether now owned or, in the case of certain personal property
located on real property constituting Collateral, hereafter acquired, together
with the proceeds therefrom. The Collateral for the Notes initially represents
substantially all of the property, plant and equipment of WCI (other than
inventory, accounts receivable, or other current assets, intangibles and the
capital stock or assets of WCI's subsidiaries). In addition, certain
improvements and equipment constructed or acquired, as applicable, after the
Issue Date which are not an integral part of (or the replacement of an integral
part of) WCI's operations at the Warren, Ohio facility as in existence on the
Issue Date will not constitute Collateral. The foregoing exclusion from the
Collateral may in the future necessitate the release of a portion of the real
property constituting a portion of the Collateral on which such improvements or
equipment may be located. The security interest in the Collateral is a second
priority lien (such lien ranking junior only to the existing lien on such
Collateral for the benefit of the holders of the Existing Notes to the extent
any Existing Notes remain outstanding). In addition, such second priority lien
will be PARI PASSU with the lien granted to the VEBA Trust; PROVIDED that at
such time as no Existing Notes remain outstanding, the security interest in the
Collateral for the benefit of the Holders of the Notes shall become a first
priority lien and the lien of the VEBA Trust shall remain a second priority lien
junior to the lien for the benefit of the Holders of the Notes. See "Risk
Factors--Relating to WCI--Substantial Employee Postretirement Obligations."
Nevertheless, pursuant to an agreement between WCI and the USWA, the lien held
by the VEBA Trust may not be exercised so long as any senior indebtedness,
including the Notes and the Existing Notes, is outstanding.
No appraisals of any of the Collateral were prepared in connection with the
Old Notes Offering or have been prepared in connection with the Exchange Offer.
The net book value of the Collateral as of October 31, 1996 was approximately
$198 million. There can be no assurance that the proceeds of any sale of the
Collateral in whole or in part pursuant to the Indenture and the related
Security Documents following an Event of Default would be sufficient to satisfy
payments due on the Notes. See "Risk Factors--Relating to WCI--Security." In
addition, the ability of the Holders of Notes to realize upon the
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Collateral may be subject to certain bankruptcy law limitations in the event of
a bankruptcy. See "-- Certain Bankruptcy Limitations" below.
WCI is permitted to transfer all or a portion of the Collateral to one or
more of its Wholly-Owned Subsidiaries; PROVIDED that any such Wholly-Owned
Subsidiary executes a senior guarantee (secured by the Collateral transferred)
of WCI's obligations under the Notes and the Indenture. See "--Certain
Covenants--Future Guarantees."
The collateral release provisions of the Indenture permit the release of
Collateral without substitution of collateral of equal value under certain
circumstances. See "--Release of Collateral." As described under "--Certain
Covenants--Limitation on Sale of Assets," the Net Cash Proceeds of such Asset
Sales may be required to be utilized to make an offer to purchase Notes. To the
extent an offer to purchase Notes is not subscribed to by Holders thereof on the
basis described under "--Certain Covenants--Limitation on Sale of Assets," the
unutilized Net Cash Proceeds may be retained by WCI, free of the lien of the
Indenture and the Security Documents.
Pursuant to the Security Documents, WCI has assigned and pledged to the
Trustee, for its benefit and the benefit of the Holders of the Notes, each of
the following assets: (a) all machinery and equipment owned by WCI on the Issue
Date and located at the facility in Warren, Ohio (together with all improvements
and additions thereto and replacements thereof); (b) the instruments deposited
or required to be deposited in the Collateral Account upon the sale or other
disposition of Collateral; (c) WCI's interest in the real property consisting of
the owned facility located in Warren, Ohio and described under
"Business--Facilities" above (together with all additions, improvements and
accessions thereto) (the "Real Property Collateral"); and (d) all proceeds and
products of any and all of the foregoing.
The personal property Collateral is pledged pursuant to a security agreement
between WCI and the Trustee (the "Security Agreement") and the Real Property
Collateral is pledged pursuant to mortgages (the "Mortgages").
If an Event of Default occurs under the Indenture and a declaration of
acceleration of the Notes occurs as a result thereof, the Trustee, on behalf of
the Holders of the Notes, in addition to any rights or remedies available to it
under the Indenture, may take such action as it deems advisable to protect and
enforce its rights in the Collateral, including the institution of foreclosure
proceedings. The proceeds received by the Trustee from any foreclosure will be
applied by the Trustee first to pay the expenses of such foreclosure and fees
and other amounts then payable to the Trustee under the Indenture, and
thereafter to pay the principal, premium, if any, and interest on the Notes. If,
at the time of such foreclosure proceeding, the VEBA Trust has a mortgage lien
which is PARI PASSU with the mortgage lien in favor of the Trustee, such
proceeds would be shared on a PRO RATA basis by the Holders of the outstanding
Notes and the VEBA Trust.
Dispositions of Real Property Collateral may be subject to delay pursuant to
an intercreditor agreement entered into with the lenders under the WCI Revolving
Credit Facility. Such intercreditor agreement provides that the Trustee will
provide access to and use of the real property and, under certain circumstances,
may delay liquidation of the real property for a period of time to permit the
agent for the lenders under the WCI Revolving Credit Facility to conduct an
orderly liquidation of inventory located on the real property (including,
without limitation, the processing of work in process).
Real property pledged as security to a lender may be subject to known and
unforeseen environmental risks. Under CERCLA, a secured lender may be held
liable, in certain limited circumstances, for the costs of remediating or
preventing releases or threatened releases of hazardous substances at or from a
mortgaged property. There may be similar risks under various state laws and
common law theories. Lender liability may be imposed where the lender actually
participates in the management or operational affairs of the mortgaged property
with certain exceptions.
Under the Indenture, the Trustee may, prior to taking certain actions,
request that Holders of Notes provide an indemnification against its costs,
expenses and liabilities. It is possible that CERCLA (or
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analogous) cleanup costs could become a liability of the Trustee and cause a
loss to any Holders of Notes that provided an indemnification. In addition, such
Holders may act directly rather than through the Trustee, in specified
circumstances, in order to pursue a remedy under the Indenture. If Holders of
Notes exercise that right, they could, under certain circumstances, be subject
to the risks of environmental liability discussed above.
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 WCI prior to the Trustee having repossessed and disposed of the
Collateral. Under the 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 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."
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INDEBTEDNESS
(a) WCI will not, and will not cause or permit any of its Subsidiaries to,
directly or indirectly, 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; PROVIDED that WCI may incur
Indebtedness (including Acquired Indebtedness) if: (A) no Default or Event of
Default shall have occurred and be continuing at the time of the proposed
incurrence thereof or shall occur as a result of such proposed incurrence, and
(B) after giving effect to such proposed incurrence, the Consolidated Fixed
Charge Coverage Ratio of WCI is at least equal to 2.5 to 1.0. Notwithstanding
the foregoing, a Subsidiary of WCI may incur Acquired Indebtedness to the extent
such Indebtedness could have been incurred by the Company pursuant to the
PROVISO in the immediately preceding sentence.
(b) WCI shall not, directly or indirectly, 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 WCI 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 WCI.
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LIMITATION ON RESTRICTED PAYMENTS
WCI will not, and will not permit any of its Subsidiaries to, directly or
indirectly, after the Issue Date (a) declare or pay any dividend or make any
distribution on WCI's Capital Stock or make any payment to holders of such
Capital Stock (other than dividends or distributions payable in Qualified
Capital Stock of WCI), (b) purchase, redeem or otherwise acquire or retire for
value any Qualified Capital Stock of WCI or any warrants, rights or options to
purchase or acquire shares of any class of such Capital Stock, other than the
exchange of such Capital Stock for Qualified Capital Stock, (c) purchase,
redeem, prepay, defease or otherwise acquire or retire for value, prior to any
scheduled maturity, scheduled repayment or scheduled sinking fund payment,
Disqualified Capital Stock of WCI or Indebtedness of WCI that is expressly
subordinate in right of payment to the Notes or (d) make any Investment
(excluding any Permitted Investment) (each of the foregoing actions set forth in
clauses (a), (b), (c) and (d) 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 WCI or such
Subsidiary, as the case may be, pursuant to such Restricted Payment) shall
exceed the sum of:
(x) 50% of the cumulative Consolidated Net Income (or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss) of WCI
earned subsequent to October 31, 1996 and prior to the date the Restricted
Payment occurs (treating such period as a single accounting period);
(y) 100% of the aggregate net proceeds, including the Fair Market Value
of property other than cash, received by WCI from any person (other than a
Subsidiary of WCI) from the issuance and sale subsequent to the Issue Date
of Qualified Capital Stock of WCI (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 WCI or any Subsidiary of WCI, 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); and
(z) 100% of the aggregate net proceeds, including the Fair Market Value
of property other than cash, received by WCI from any person (other than a
Subsidiary of WCI) from the issuance and sale of Disqualified Capital Stock
and/or Indebtedness, in each case that has been converted into or exchanged
for Qualified Capital Stock of WCI after the Issue Date.
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 WCI or Indebtedness of WCI
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 WCI) of shares of Qualified Capital
Stock;
(3) the acquisition of Indebtedness of WCI that is expressly subordinate
in right of payment to the Notes either (i) solely in exchange for
Indebtedness of WCI which is expressly subordinate in right of payment to
the Notes at least to the extent that the Indebtedness being acquired is
subordinated to the Notes and has no scheduled principal prepayment dates
prior to the scheduled final maturity date of the Indebtedness being
exchanged or (ii) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Subsidiary of WCI) of Indebtedness
of WCI which is expressly subordinate in right of payment to the Notes at
least to the extent that the Indebtedness being acquired is subordinated to
the Notes and has no scheduled principal prepayment dates prior the
scheduled final maturity date of the Indebtedness being refinanced;
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(4) the making of payments by WCI 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 applicable state taxing authority, as the
case may be, pursuant to a tax sharing agreement between WCI and Renco
(which tax sharing agreement provides that the payments thereunder shall not
exceed the amount WCI would have been required to pay for taxes on a
stand-alone basis, except that WCI will not have the benefit of any of its
tax loss carryforwards unless such tax losses were a result of timing
differences between WCI's accounting for tax and financial reporting
purposes, and which tax sharing agreement also provides that transactions
between WCI and Renco and its 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 WCI and its
Subsidiaries;
(5) the payment by WCI or any of its Subsidiaries of a management fee to
Renco in an amount not to exceed $100,000 in any month;
(6) the payment by WCI of a dividend to Renco on the Issue Date not to
exceed an amount currently estimated to be approximately $108 million; and
(7) the making of a loan to Holdings on the Issue Date not to exceed $60
million which loan will be extinguished immediately after the merger of
Holdings with and into WCI, which will occur on, or as soon as reasonably
practicable after, the Issue Date;
PROVIDED that in the case of clauses (2), (3) and (5), 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),
(4), (5), (6) or (7)) 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) or
clause (z), as the case may be, of the first paragraph of this section.
LIMITATION ON SALE OF ASSETS
WCI will not, and will not permit any of its Subsidiaries to, 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 WCI or such Subsidiary is
in the form of cash or Cash Equivalents, (iii) if such Asset Sale involves
Collateral it shall be in compliance with the provisions described under
"--Release of Collateral," and (iv) WCI or such Subsidiary shall apply the Net
Cash Proceeds of such Asset Sale within 180 days of receipt thereof, as follows:
(a) first, to the extent such Net Cash Proceeds are received from an
Asset Sale not involving the sale, transfer or disposition of Collateral
("Non-Collateral Proceeds"), to repay (and, in the case of a revolving
credit facility, effect a permanent reduction in the commitment thereunder)
any Indebtedness secured by the assets involved in such Asset Sale or
otherwise required to be repaid with the proceeds thereof (including
repurchasing any Existing Notes required to be repurchased pursuant to the
indenture governing the Existing Notes), and
(b) second, with respect to any Non-Collateral Proceeds remaining after
application pursuant to the preceding paragraph (a) and any Net Cash
Proceeds received from an Asset Sale involving Collateral (after
repurchasing any Existing Notes required to be repurchased pursuant to the
indenture governing the Existing Notes) ("Collateral Proceeds" and, together
with such remaining Non-Collateral Proceeds, the "Available Amount"), WCI
shall 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,
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however, that WCI will not be required to apply pursuant to this paragraph
(b) Net Cash Proceeds received from any Asset Sale if, and only to the
extent that, such Net Cash Proceeds are applied to a Related Business
Investment within 180 days of such Asset Sale and, if the Net Cash Proceeds
so invested were Collateral Proceeds, the property and assets constituting
such Related Business Investment and any other non-cash consideration
received as a result of such Asset Sale are made subject to the Lien of the
Indenture and the applicable Security Documents; PROVIDED, FURTHER, that to
the extent any such assets subject to an Asset Sale constituted Collateral,
any property and assets constituting a Related Business Investment and any
other non-cash consideration received as a result of such Asset Sale shall
not consist of inventory or receivables and shall constitute Collateral
under the terms of the Indenture and under the terms of the Security
Documents; PROVIDED, FURTHER, that if at any time any non-cash consideration
received by WCI or any Subsidiary of WCI, as the case may be, 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; and
PROVIDED, FURTHER, that WCI may defer the Asset Sale Offer until there is an
aggregate unutilized Available Amount equal to or in excess of $5 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 million, shall be
applied as required pursuant to this paragraph). To the extent the Asset
Sale Offer is not fully subscribed to by Holders of the Notes, WCI may
obtain a release of the unutilized portion of the Available Amount from the
Lien of the Security Documents.
All Collateral Proceeds shall constitute Trust Moneys and shall be delivered
by WCI (or the applicable Subsidiary) to the Trustee and shall be deposited in
the Collateral Account in accordance with the Indenture. Collateral Proceeds so
deposited may be withdrawn from the Collateral Account pursuant to the
Indenture.
In the event of the transfer of substantially all (but not all) of the
property and assets of WCI 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 WCI 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 WCI or its Subsidiaries deemed to be sold shall be deemed to be
Net Cash Proceeds for purposes of this covenant.
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.
If an offer is made to repurchase the Notes pursuant to an Asset Sale Offer,
WCI will and will cause its Subsidiaries to 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, WCI 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
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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. WCI 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, WCI 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 WCI
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. WCI 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 WCI and purchases
all Notes validly tendered and not withdrawn under such Change of Control Offer.
WCI 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 WCI
is required to purchase Notes as described above.
LIMITATION ON LIENS
WCI will not, and will not permit any of its Subsidiaries to, directly or
indirectly, 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
Security Documents and the Liens expressly permitted by the applicable Security
Document, including the Liens, if any, on the Issue Date in favor of the holders
of the Existing Notes and the Liens in favor of the VEBA Trust and (ii) upon any
other properties or assets of WCI (including, without limitation, any Capital
Stock of a Subsidiary) or any of their Subsidiaries 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) Liens existing on the Issue Date to the extent and in the manner such
Liens are in effect on the Issue Date, including, without limitation, Liens
securing Indebtedness under the WCI Revolving Credit Facility as of the Issue
Date and (b) Permitted Liens.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES
WCI will not, and will not permit any of its Subsidiaries to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any Subsidiary of WCI to: (a) pay
dividends or make any other distributions on its Capital Stock, or any other
interest or participation in, or measured by, its profits, owned by WCI or by
any Subsidiary of WCI, or pay any Indebtedness owed to WCI or a Subsidiary of
WCI; (b) make loans or advances to WCI or a Subsidiary of WCI; or (c) transfer
any of its properties or assets to WCI or to any Subsidiary of WCI, except for
such encumbrances or restrictions existing under or by reason of: (i) applicable
law; (ii) the Indenture and the indenture governing the Existing Notes; (iii)
customary nonassignment provisions of any lease governing a leasehold interest
of WCI or any Subsidiary of WCI; (iv) any instrument governing Indebtedness of a
person acquired by WCI or any Subsidiary of WCI at the time of such acquisition,
which encumbrance or restriction is not applicable to any person, or the
properties or assets of any person, other than the person or its Subsidiaries so
acquired; (v) any written agreement existing on the Issue Date; PROVIDED that
the term of any such agreement shall not be extended beyond the term as in
effect on the Issue Date and no such
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agreement shall be modified or amended in such a manner as to make the
encumbrance or restriction more restrictive than as in effect on the Issue Date;
(vi) Indebtedness existing and as in effect on the Issue Date, including,
without limitation, the WCI Revolving Credit Facility or any refinancing,
refunding, replacement or extensions thereof; PROVIDED that any such encumbrance
or restriction contained in any refinancing, refunding, replacement or extension
of the WCI Revolving Credit Facility shall be no more restrictive than such
encumbrance or restriction contained in the WCI Revolving Credit Facility as in
effect on the Issue Date; and (vii) Indebtedness incurred in accordance with the
Indenture; provided that such encumbrance or restriction shall be no more
restrictive than any encumbrance or restriction contained in the WCI Revolving
Credit Facility as in effect on the Issue Date.
LIMITATION ON SALE/LEASEBACK TRANSACTIONS
WCI shall not, and shall not permit any of its Subsidiaries to, enter into
any Sale/leaseback. Notwithstanding the foregoing, WCI and its Subsidiaries may
enter into a Sale/leaseback involving only the sale or transfer of assets
acquired after the Issue Date and not constituting Collateral if (i) after
giving pro forma effect to any such Sale/leaseback, WCI shall be in compliance
with the "Limitation on Indebtedness" covenant described above, (ii) the sale
price in such Sale/leaseback is at least equal to the Fair Market Value of such
property and (iii) WCI or such Subsidiary shall apply the Net Cash Proceeds of
the sale as provided under "Limitation on Sale of Assets" above, to the extent
required by such provision.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
(a) WCI will not, and will not permit any of its Subsidiaries to, directly
or indirectly, 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 WCI or any
Subsidiary of WCI (other than transactions between WCI and a Wholly-Owned
Subsidiary of WCI or between Wholly-Owned Subsidiaries of WCI) (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 WCI or the relevant Subsidiary in the aggregate than those
that might reasonably have been obtained in a comparable transaction by WCI or
such Subsidiary on an arm's-length basis (as determined in good faith by the
Board of Directors of WCI, as evidenced by a Board Resolution) from a person
that is not an Affiliate; PROVIDED that except as otherwise provided by (b)
below, neither WCI nor any of its Subsidiaries shall enter into an Affiliate
Transaction or series of related Affiliate Transactions involving or having a
value of more than $5.0 million unless WCI or such Subsidiary, as the case may
be, has 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 WCI or such Subsidiary, as the case may
be, and such terms are no less favorable to WCI or such Subsidiary, as the case
may be, 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," (ii) the payment by WCI or any of its Subsidiaries of a management
fee to Renco in an amount not to exceed $100,000 in any month and any other
amounts payable under the Management Consultant Agreement as in effect on the
Issue Date and (iii) reasonable and customary regular fees to directors of WCI
who are not employees of WCI.
IMPAIRMENT OF SECURITY INTEREST
WCI shall not, and shall 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 favor of the Trustee, on behalf
of itself and the Holders of the Notes, with respect to the Collateral, and WCI
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 Security Documents.
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LIMITATION ON PREFERRED STOCK OF SUBSIDIARIES
WCI will not permit any Subsidiary of WCI to issue any Preferred Stock
(except to WCI or a Wholly-Owned Subsidiary of WCI), nor will WCI permit any
person (other than WCI or a Wholly-Owned Subsidiary of WCI) to hold any
Preferred Stock of a Subsidiary of WCI.
FUTURE GUARANTEES
WCI or any of its Wholly-Owned Subsidiaries may transfer, in one transaction
or a series of related transactions, any Collateral to any Wholly-Owned
Subsidiary of WCI, if such transferee Wholly-Owned Subsidiary shall (i) execute
and deliver to the Trustee a supplemental indenture in form reasonably
satisfactory to the Trustee pursuant to which such Wholly-Owned Subsidiary shall
unconditionally guarantee on a senior secured basis (secured by the Collateral
so transferred) all of WCI's obligations under the Notes and the Indenture, (ii)
take all necessary action to cause the Lien on such Collateral in favor of the
Trustee to remain in full force and effect at all times, (iii) deliver to the
Trustee an opinion of counsel that such supplemental indenture and any other
documents required to comply with clause (ii) above have been duly authorized,
executed and delivered by such Wholly-Owned Subsidiary and the supplemental
indenture and each such other document constitutes a legal, valid, binding and
enforceable obligation of such Wholly-Owned Subsidiary and (iv) take such
further action and execute and deliver such other documents specified in the
Indenture or otherwise reasonably requested by the Trustee to effectuate the
foregoing.
REPORTS
So long as any Note is outstanding, WCI 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 WCI is required
to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act
or which WCI would be required to file with the Commission if WCI 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.
Other than the merger of WCI Holdings, Inc. with and into WCI on, or as soon
as reasonably practicable after, the Issue Date (provided that WCI Holdings,
Inc. has no Indebtedness outstanding other than Indebtedness owing to WCI not to
exceed $60 million), WCI 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) WCI shall be
the surviving or continuing corporation or (2) the person (if other than WCI),
formed by such consolidation or into which WCI is merged or the person which
acquires by conveyance, transfer or lease the properties and assets of WCI
substantially as an entirety or in the case of a Plan of Liquidation, or the
person to which assets of WCI 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 WCI
to be performed or observed; (ii) immediately 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 such
transaction), WCI (in the case of clause (1) of the foregoing clause (i)) or
such
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person (in the case of clause (2) thereof) (a) 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 WCI immediately prior to such transaction and (b)
shall be able to incur (assuming a market rate of interest with respect thereto)
at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) as
if it were WCI under paragraph (a) of "--Certain Covenants--Limitation on
Indebtedness" above; (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 no Event of Default shall have occurred or be continuing; (iv)
WCI 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 WCI) 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 WCI's independent certified public accountants stating that WCI
has made the calculations required by clause (ii) above in accordance with the
terms of the Indenture; and (v) neither WCI nor any Subsidiary of WCI 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 WCI 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 WCI
the Capital Stock of which constitutes all or substantially all of the
properties and assets of WCI shall be deemed to be the transfer of all or
substantially all of the properties and assets of WCI.
Upon any such consolidation, merger, conveyance, lease or transfer in
accordance with the foregoing, the successor person formed by such consolidation
or into which WCI 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, WCI under the Indenture with the same effect as if such successor had
been named as WCI 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) WCI 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) WCI 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) WCI fails to comply in all material respects with any of its other
agreements contained in the Notes or 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."), 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
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under which WCI or any Subsidiary of WCI then has outstanding Indebtedness
in excess of $7,500,000, 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 WCI or any Subsidiary of WCI then has outstanding Indebtedness
in excess of $7,500,000, individually or in the aggregate, and such default
or defaults have resulted in the acceleration of the maturity of such
Indebtedness;
(f) WCI or any of its Subsidiaries 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 WCI or any
of its Subsidiaries then has outstanding Indebtedness in excess of
$7,500,000, individually or in the aggregate, and such failure to perform
results in the commencement of judicial proceedings to foreclose upon any
assets of WCI or any of its Subsidiaries 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
$7,500,000 shall be rendered against WCI or any of its Subsidiaries 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) WCI or any Significant Subsidiary of 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 WCI or any Significant Subsidiary of 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 WCI or any Significant Subsidiary of
WCI, (2) appoint a Custodian of WCI, or any Significant Subsidiary of 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; and
(j) any of the Security Documents ceases to be in full force and effect
or any of the Security Documents 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--Limitation on
Preferred Stock of Subsidiaries," 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 WCI, or the Holders of at least 25% in principal amount of the
outstanding Notes notify WCI and the Trustee, of the Default and WCI 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
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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 WCI (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 due and payable without
any declaration or other act on the part of the Trustee or any Holder.
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, WCI 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, WCI'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 WCI 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 Security Documents or of modifying in any manner the rights of
the Holders under the Indenture or the Security Documents; 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
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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 Security Documents 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; (vii)
adversely affect the ranking of the Notes; (viii) change the Maturity Date or
alter the redemption provisions in a manner adverse to Holders; or (ix) after
WCI's obligation to purchase the Notes arises thereunder, amend, modify or
change the obligation of WCI 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 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, 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 WCI may terminate its obligations under the
Notes, and the Indenture if: (i) all Notes previously authenticated and
delivered have been delivered to the Trustee for cancellation or WCI has paid
all sums payable by it thereunder, or (ii) WCI 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, WCI 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 WCI'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, 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 WCI 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.
POSSESSION, USE AND RELEASE OF COLLATERAL
Unless an Event of Default shall have occurred and be continuing, WCI has
the right to remain in possession and retain exclusive control of the Collateral
securing the Notes (other than any cash, securities, obligations or Cash
Equivalents constituting a part of the Collateral and deposited with the Trustee
in the Collateral Account and other than as set forth in the Security
Documents), or freely operate the Collateral and to collect, invest and dispose
of any income therefrom.
RELEASE OF COLLATERAL
Upon compliance by WCI with the conditions set forth below in respect of any
Asset Sale Release, and upon delivery by WCI to the Trustee of an Opinion of
Counsel to the effect that such conditions have
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been met, the Trustee will release the Released Interests (as hereinafter
defined) from the Lien of the Security Documents and reconvey the Released
Interests to WCI.
ASSET SALE RELEASE
WCI has the right to obtain a release of items of Collateral (the "Released
Interests") subject to an Asset Sale upon compliance with the condition that WCI
deliver to the Trustee the following:
(a) A notice from WCI requesting the release of Released Interests, (i)
describing the proposed Released Interests, (ii) specifying the value of such
Released Interests on a date within 60 days of such notice (the "Valuation
Date"), (iii) stating that the purchase price received is at least equal to the
Fair Market Value of the Released Interests, (iv) stating that the release of
such Released Interests will not interfere with the Trustee's ability to realize
the value of the remaining Collateral and will not impair the maintenance and
operation of the remaining Collateral and (v) certifying that such Asset Sale
complies with the terms and conditions of the Indenture with respect thereto;
(b) An Officers' Certificate of WCI stating that (i) such Asset Sale covers
only the Released Interests and complies with the terms and conditions of the
Indenture with respect to Asset Sales, (ii) all Net Cash Proceeds from the sale
of any of the Released Interests will be applied pursuant to the provisions of
the Indenture in respect of Asset Sales, (iii) there is no Default or Event of
Default in effect or continuing on the date thereof, the Valuation Date or the
date of such Asset Sale, (iv) the release of the Collateral will not result in a
Default or Event of Default under the Indenture, and (v) all conditions
precedent in the Indenture relating to the release in question have been
complied with;
(c) The Net Cash Proceeds and other non-cash consideration from the Asset
Sale required to be delivered to the Trustee pursuant to the Indenture; and
(d) All documentation required by the TIA prior to the release of Collateral
by the Trustee.
DISPOSITION OF COLLATERAL WITHOUT RELEASE
So long as no Event of Default shall have occurred and be continuing, WCI
may, without any release or consent by the Trustee, sell or otherwise dispose of
any machinery, equipment, furniture, apparatus, tools or implements or other
similar property subject to the Lien of the Security Documents, which may have
become worn out or obsolete, not exceeding individually, in Fair Market Value,
$250,000.
USE OF TRUST MONEYS
All Trust Moneys (including, without limitation, all Collateral Proceeds)
shall be held by the Trustee as a part of the Collateral securing the Notes and,
so long as no Event of Default shall have occurred and be continuing, may either
(i) be released in accordance with "Possession, Use and Release of Collateral"
above if such Trust Moneys represent Collateral Proceeds in respect of any Asset
Sale or (ii) at the direction of the Company be applied by the Trustee from time
to time to the payment of the principal of, premium, if any, and interest on any
Notes at maturity or upon redemption or to the purchase of Notes upon tender or
in the open market or at private sale or upon any exchange or in any one or more
of such ways, in each case in compliance with the Indenture. The Company may
also withdraw Trust Moneys constituting the proceeds of insurance upon any part
of the Collateral or an award for any Collateral taken by eminent domain to
reimburse the Company for repair or replacement of such Collateral, subject to
certain conditions.
The Trustee shall be entitled to apply any Trust Moneys to the cure of any
Default or Event of Default under the Indenture. Trust Moneys deposited with the
Trustee shall be invested in Cash Equivalents pursuant to the direction of the
Company and, so long as no Event of Default shall have occurred and be
continuing, the Company shall be entitled to any interest or dividends accrued,
earned or paid on such Cash Equivalents.
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GOVERNING LAW
The Indenture provides that it and the Notes will be 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
Fleet National Bank is serving as Trustee under the Indenture and is acting
as collateral agent or the mortgagee, as applicable, under the Security
Documents.
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 WCI, 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 existing at the time such person becomes a Subsidiary of WCI or
assumed in connection with the acquisition of assets from such person,
including, without limitation, Indebtedness incurred by such person in
connection with, or in anticipation or contemplation of, such person becoming a
Subsidiary of WCI or such acquisition.
"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.
"Asset Acquisition" means (i) an Investment by WCI or any Subsidiary of WCI
in any other person pursuant to which such person shall become a Subsidiary of
WCI or any Subsidiary of WCI or shall be merged with WCI or any Subsidiary of
WCI or (ii) the acquisition by WCI or any Subsidiary of WCI of the assets of any
person which constitute all or substantially all of the assets of such person or
any division or line of business of such person.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease, assignment or other transfer for value by WCI or any of its
Subsidiaries (including, without limitation, any Sale/leaseback (other than a
Sale/leaseback of an asset constituting Collateral)) to any person, in one
transaction or a series of related transactions, of (i) any Capital Stock of any
Subsidiary of WCI; (ii) all or substantially all of the properties and assets of
any division or line of business of WCI or any Subsidiary of WCI; or (iii) any
other properties or assets of WCI or any Subsidiary of WCI other than in the
ordinary course of business. 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.
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"Bankruptcy Law" means Title 11 of the U.S. Code or any similar Federal,
state or foreign law for the relief of debtors.
"Capital Expenditures" shall mean payments for any assets, or improvements,
replacements, substitutions or additions thereto, that have a useful life of
more than one year and which, in accordance with GAAP consistently applied, are
required to be capitalized (as opposed to expensed in the period in which the
payment occurred).
"Capital Lease," as applied to any person, means any lease of (or any
agreement conveying the right to use) any property (whether real, personal or
mixed) by such person as lessee which, in conformity with GAAP, is required to
be accounted for as a capital lease on the balance sheet of such person.
"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 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 Corporation or Moody's Investors
Service, Inc.; (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 Standard & Poor's Corporation or at least P-1 from Moody's
Investors Service, Inc.; (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. Notwithstanding the foregoing, for purposes of clause (i) of the
definition of "Permitted Investment", 20% of the Cash Equivalents may include
securities having a rating of at least BBB by Standard & Poor's Corporation and
Baa by Moody's Investors Service, Inc.
"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 WCI
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 WCI or Renco, as the case may be, of
any plan or proposal for the liquidation or dissolution of WCI 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
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Holder) of any Capital Stock of WCI 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 WCI'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 WCI or Renco or (B) otherwise has the ability to elect, directly
or indirectly, a majority of the members of WCI'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.
"Collateral" means, collectively, all of the property and assets (including,
without limitation, Trust Moneys) that are from time to time subject to the
Security Documents.
"Collateral Account" means the collateral account to be established pursuant
to the Indenture.
"Commission" means the Securities and Exchange Commission.
"Consolidated EBITDA" means, with respect to any person, for any period, the
sum (without duplication) of (i) Consolidated Net Income, (ii) to the extent
Consolidated Net Income has been reduced thereby, all income taxes of such
person and its Subsidiaries paid or accrued in accordance with GAAP for such
period (other than income taxes attributable to extraordinary, unusual or
non-recurring gains or losses), Consolidated Interest Expense (net of any
interest income), amortization expense (including amortization of deferred
financing costs) and depreciation expense and (iii) other non-cash items other
than non-cash interest reducing Consolidated Net Income (including, without
limitation, any non-cash charges in respect of post-employment benefits for
health care, life insurance and long-term disability benefits required in
accordance with GAAP) less other non-cash items increasing Consolidated Net
Income, all as determined on a consolidated basis for such person and its
Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
person, the ratio of Consolidated EBITDA of such person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such person for the Four Quarter Period. For purposes of this definition, if the
Transaction Date occurs prior to the date on which four full fiscal quarters
have elapsed subsequent to the Issue Date and financial statements with respect
thereto are available, "Consolidated EBITDA" and "Consolidated Fixed Charges"
shall be calculated, in the case of WCI, after giving effect on a PRO FORMA
basis to the issuance of the Notes and the application of the net proceeds
therefrom as if the Notes were issued on the first day of the Four Quarter
Period. In addition to and without limitation of the foregoing, for purposes of
this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be
calculated after giving effect on a PRO FORMA basis for the period of such
calculation to (i) the incurrence of any Indebtedness of such person or any of
its Subsidiaries giving rise to the need to make such calculation and any
incurrence of other Indebtedness at any time on or after the first day of the
Four Quarter Period and on or prior to the Transaction Date (the "Reference
Period"), as if such incurrence occurred on the first day of the Reference
Period and (ii) any Asset Sales or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such person or one of its Subsidiaries (including any
person who becomes a Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness) occurring during
the Reference Period, as if such Asset Sale or Asset Acquisition (including the
incurrence, assumption or liability for any such Indebtedness or Acquired
Indebtedness) occurred on the first day of the Reference Period. If such person
or any of its Subsidiaries directly or indirectly guarantees Indebtedness of a
third person, the preceding sentence shall give effect to the incurrence of such
guaranteed Indebtedness as if such person or any Subsidiary of such person had
directly incurred or otherwise assumed such guaranteed Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of this "Consolidated Fixed
Charge Coverage Ratio," (1) interest on Indebtedness determined on a fluctuating
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basis as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal to
the rate of interest on such Indebtedness in effect on the Transaction Date; (2)
if interest on any Indebtedness actually incurred on the Transaction Date may
optionally be determined at an interest rate based upon a factor of a prime or
similar rate, a eurocurrency interbank offered rate, or other rates, then the
interest rate in effect on the Transaction Date will be deemed to have been in
effect during the Reference Period; and (3) notwithstanding clause (1) above,
interest on Indebtedness determined on a fluctuating basis, to the extent such
interest is covered by agreements relating to Interest Rate Protection
Obligations, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements. In calculating the
Consolidated Fixed Charge Coverage Ratio, and giving pro forma effect to any
incurrence of Indebtedness during the Reference Period, pro forma effect shall
be given to the use of the proceeds thereof to permanently repay or retire
Indebtedness.
"Consolidated Fixed Charges" means, with respect to any person for any
period, the sum of, without duplication, the amounts for such period, taken as a
single accounting period, of (i) Consolidated Interest Expense (net of any
interest income) less non-cash amortization of deferred financing costs and (ii)
the product of (x) the amount of all dividends declared, paid or accrued on
Preferred Stock of such person during such period times (y) a fraction, the
numerator of which is one and the denominator of which is one minus the then
current effective consolidated Federal, state, local and foreign tax rate
(expressed as a decimal number between 1 and 0) of such person during such
period (as reflected in the audited consolidated financial statements of such
person for the most recently completed fiscal year). "Consolidated Interest
Expense" means, with respect to any person for any period, without duplication,
the sum of (i) the interest expense of such person and its Subsidiaries for such
period as determined on a consolidated basis in accordance with GAAP
consistently applied, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Protection Obligations
(including any amortization of discounts), (c) the interest portion of any
deferred payment obligation and (d) all accrued interest, and (ii) the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by such person and its Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP consistently applied.
"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 gain (or loss) resulting from an Asset Sale by such person
or any of its Subsidiaries, (c) any extraordinary, unusual or nonrecurring gains
or losses (and related tax effects) in accordance with GAAP and (d) any
compensation-related expenses arising as a result of the Transactions.
"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.
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"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default (as defined in the Indenture).
"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.
"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 WCI
and its Subsidiaries shall be determined by the Board of Directors of WCI 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 $5,000,000, 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 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 WCI, qualified to perform the
task for which such firm has been engaged and disinterested and independent with
respect to WCI 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
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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 direct or indirect
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. For the purposes of
the "Limitation on Restricted Payments" covenant, the amount of any Investment
shall be the original cost of such Investment plus the cost of all additional
Investments by the Company or any of its Subsidiaries, without any adjustments
for increases or decreases in value, or write-ups, write-downs or write-offs
with respect to such Investment, reduced by the payment of dividends or
distributions in connection with such Investment or any other amounts received
in respect of such Investment.
"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.
"Management Consultant Agreement" means the management agreement effective
October 1, 1992 between Renco and WCI.
"Maturity Date" means December 1, 2004.
"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 WCI or any Subsidiary of WCI) 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 WCI or any Subsidiary of WCI, as the case may be, as a reserve
required in accordance with GAAP consistently applied against any liabilities
associated with such Asset Sale and retained by WCI or any Subsidiary of WCI, as
the case may be, after such Asset Sale, including, without limitation, pension
and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as reflected in an Officers' Certificate
delivered to the Trustee.
"Operating Lease" means, as applied to any person, any lease (including,
without limitation, leases that may be terminated by the lessee at any time) of
any property (whether real, personal or mixed) that is not a Capital Lease other
than any such lease under which that person is the lessor.
"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 WCI and its
Subsidiaries under the WCI Revolving Credit Facility in an aggregate amount not
to exceed $100 million in aggregate principal amount at any time outstanding
plus any interest, fees and expenses from time to time owed thereunder less the
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amount of any Indebtedness under the WCI Revolving Credit Facility required to
be repaid and repaid with the net cash proceeds of an asset sale pursuant to the
terms of the WCI Revolving Credit Facility and such repayment effects a
permanent reduction in the commitment thereunder, PROVIDED that at no time shall
the sum of the aggregate principal amount outstanding under the WCI Revolving
Credit Facility pursuant to this clause (i) and the amount outstanding under
clause (iii) below exceed $100 million in the aggregate, (ii) the Notes and any
Existing Notes outstanding on the Issue Date, (iii) all obligations of WCI and
its Subsidiaries for the reimbursement of any obligor on any letter of credit
not to exceed $20 million at any time outstanding; PROVIDED that at no time
shall the sum of the amount outstanding under this clause (iii) and the
aggregate principal amount outstanding under the WCI Revolving Credit Facility
pursuant to clause (i) above exceed $100 million in the aggregate, (iv) the
subordinated note of WCI payable to LTV Steel Company, Inc. in the principal
amount of approximately $1.9 million less any principal payments thereof, (v)
Indebtedness of the Youngstown Sinter Company represented by the State Economic
Development Revenue Bonds (Ohio Enterprise Bond Fund), Series 1990-2 (Youngstown
Sinter Company Project) as in effect on the Issue Date in the principal amount
of approximately $1.9 million less any principal payments thereof, (vi)
Indebtedness of the Youngstown Sinter Company represented by the Urban
Development Action Grant as in effect on the Issue Date in the principal amount
of approximately $1.6 million less any principal payments thereof, (vii)
purchase money Indebtedness and any Indebtedness incurred for Capitalized Lease
Obligations not to exceed $10 million in the aggregate at any time outstanding,
(viii) Interest Rate Protection Obligations to the extent the notional principal
amount of such Interest Rate Protection Obligations does not exceed the
principal amount of the Indebtedness to which such Interest Rate Protection
Obligations relate, (ix) additional Indebtedness not to exceed $20 million in
the aggregate at any time outstanding, (x) Indebtedness owed by WCI or any of
its Wholly-Owned Subsidiaries to any Wholly-Owned Subsidiary of WCI or any
Indebtedness owed to WCI by a Wholly-Owned Subsidiary of WCI; PROVIDED that in
the case of Indebtedness owed by WCI to any Wholly-Owned Subsidiary of WCI, such
Indebtedness is subordinated to the Notes, (xi) any renewals, extensions,
substitutions, refundings, refinancings or replacements of any Indebtedness
described in the preceding clauses (i) and (ii) above and this clause (xi), 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 (except if such Indebtedness
refinances Indebtedness under the WCI Revolving Credit Facility or any other
agreement providing for subsequent borrowings, does not result in an increase in
the commitment available under the WCI Revolving Credit Facility or such other
agreement), (xii) any guarantees of the foregoing and (xiii) trade accounts
payable to the extent they constitute Indebtedness.
"Permitted Investment" means (i) cash and Cash Equivalents, (ii) any
Investment by WCI or any of its Subsidiaries in WCI or any Wholly-Owned
Subsidiary of WCI, (iii) any Related Business Investment in assets other than
the type described in clause (iv) below, (iv) Related Business Investments by
WCI or any of its Subsidiaries in joint ventures, partnerships or persons that
are not Wholly-Owned Subsidiaries in an amount not to exceed $25 million in the
aggregate; provided that in no event shall such Related Business Investments
pursuant to this clause (iv) exceed $5 million in any one fiscal year, (v)
Investments by WCI or any Subsidiary of WCI in another person, if as a result of
such Investment (a) such other person becomes a Wholly-Owned Subsidiary of WCI
or (b) such other person is merged or consolidated with or into, or transfers or
conveys all or substantially all of its assets to, WCI or a Wholly-Owned
Subsidiary of WCI, (vi) Investments received in connection with the bankruptcy
or reorganization of suppliers and customers and in settlement of delinquent
obligations of, and other disputes with, customers and suppliers, in each case
arising in the ordinary course of business, (vii) the non-cash proceeds of any
Asset Sale and (viii) loans and advances to employees of WCI and its
Subsidiaries made in the ordinary course of business.
"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
75
<PAGE>
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 securing Indebtedness permitted under clause (vii) of the definition
of Permitted Indebtedness; provided that the Fair Market Value of the asset at
the time of the incurrence of the Indebtedness subject to the Lien shall not
exceed the principal amount of the Indebtedness secured, (viii) Liens with
respect to Acquired Indebtedness permitted to be incurred in accordance with the
"--Limitation on Indebtedness" covenant above; provided that such Liens secured
such Acquired Indebtedness at the time of the incurrence of such Acquired
Indebtedness by WCI and were not incurred in connection with, or in anticipation
of, the incurrence of such Acquired Indebtedness by WCI; PROVIDED, FURTHER, that
such Liens do not extend to or cover any property or assets of WCI other than
the property or assets that secured the Acquired Indebtedness prior to the time
such Indebtedness became Acquired Indebtedness of WCI and are no more favorable
to the lienholders than those securing the Acquired Indebtedness prior to the
incurrence of such Acquired Indebtedness by WCI, (ix) Liens arising from
judgments, decrees or attachments in circumstances not constituting an Event of
Default, (x) Liens in favor of the trustee of the VEBA Trust existing on the
Issue Date or thereafter arising pursuant to agreements in effect on the Issue
Date, (xi) Liens on assets or property (including any real property upon which
such assets or property are or will be located) securing Indebtedness incurred
to purchase or construct such assets or property, which Indebtedness is
permitted to be incurred under the Indenture and (xii) Liens permitted by the
Security Documents.
"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.
"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms of the Indenture, a calculation in accordance with
Article 11 of Regulation S-X under the Securities Act.
"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.
76
<PAGE>
"Related Business Investment" means any Investment, Capital Expenditure or
other expenditure by WCI or any Subsidiary of WCI which is related to the
business of WCI and its Subsidiaries as it is conducted on the Issue Date.
"Renco" means The Renco Group, Inc., a New York corporation, which is the
ultimate parent of WCI, or any successor thereto.
"Sale/leaseback" means any lease, whether an Operating Lease or a Capital
Lease, whereby WCI or any of its Subsidiaries, directly or indirectly, becomes
or remains liable as lessee or as guarantor or other surety, of any property
(whether real or personal or mixed) whether now owned or hereafter acquired, (i)
that WCI or its Subsidiaries, as the case may be, has sold or transferred or is
to sell or transfer to any other person (other than WCI), or (ii) that WCI or
any of its Subsidiaries, as the case may be, intends to use for substantially
the same purpose as any other property that has been or is to be sold or
transferred by WCI or any such Subsidiary to any person (other than WCI) in
connection with such lease.
"Security Documents" means the Security Agreement and the Mortgages referred
to under "Security" above and the documentation relating to the Collateral
Account.
"Significant Subsidiary" means any Subsidiary of WCI that satisfies the
criteria for a "significant subsidiary" set forth in Rule 1.02(v) of Regulation
S-X under the Securities Act.
"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.
"WCI Revolving Credit Facility" means the Amended and Restated Loan and
Security Agreement dated as of December 29, 1992, as amended, among WCI, the
lending institutions named therein and Congress Financial Corporation, as agent,
as the same may be amended, restated, supplemented or otherwise modified from
time to time, and includes any agreement renewing, refinancing or replacing all
or any portion of the Indebtedness under such agreement.
"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.
77
<PAGE>
DESCRIPTION OF WCI REVOLVING CREDIT FACILITY
The following description of the WCI Revolving Credit Facility does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all of the provisions thereof.
GENERAL
As of January 31, 1997, no amounts were outstanding under the WCI Revolving
Credit Facility with the revolving credit lenders (the "Revolving Credit
Lenders"), exclusive of $5.5 million in outstanding letters of credit. Under the
WCI Revolving Credit Facility, the Revolving Credit Lenders will, in their
discretion, lend and relend to WCI up to not more than the sum of (a) 85% of the
Net Amount of Eligible Accounts (as defined in the WCI Revolving Credit
Facility) plus (b) 60% of the Value of Eligible Inventory (as defined in the WCI
Revolving Credit Facility) (but not more than a loan value of $60 million) up to
the limit of $100 million. WCI's collections from accounts are applied to reduce
the loan balance, which may be reborrowed up to the aforesaid limits. The
Revolving Credit Lenders may extend up to $20 million of letter of credit
accommodations within the limits set forth above.
INTEREST
Interest on WCI's loan balance is payable monthly at the prime rate plus
1/2% changing monthly with each change in such prime rate, or at the Company's
option, the Eurodollar Rate plus 2 1/2%, up to $20 million in Eurodollar Rate
loans and the Eurodollar Rate plus 3% on Eurodollar Rate loans exceeding $20
million, provided the Eurodollar Rate portion does not exceed 75% of the total
loan outstanding. The interest rate on January 31, 1997 was 8 3/4% using the the
prime rate plus 1/2%. In the event of a default by WCI under the WCI Revolving
Credit Facility, the interest rate would be 2 1/2% per annum in excess of such
prime rate and 5% per annum in excess of the Eurodollar Rate for all Eurodollar
Rate loans.
SECURITY
As security for the indebtedness of WCI to the Revolving Credit Lenders, WCI
has granted to them a first priority security interest in all of its inventory
(including raw material, work in process, semi-finished and finished goods and
supplies) and accounts, contract rights, documents and instruments arising from
the sale or other disposition of inventory or rendition of services and related
rights and general intangibles (other than trademarks and patents).
TERM
The WCI Revolving Credit Facility continues until December 29, 1999 and from
year to year thereafter, provided that either WCI or the Revolving Credit
Lenders may terminate the agreement at December 29, 1999 or any subsequent
anniversary date on 60 days' advance written notice. WCI paid the Revolving
Credit Lenders a customary fee in consideration of their consent to the
Transactions.
CERTAIN COVENANTS
In addition to customary covenants, the WCI Revolving Credit Facility
requires that WCI: (a) maintain Consolidated Adjusted Working Capital (as
defined in the WCI Revolving Credit Facility) and Consolidated Adjusted Net
Worth (as defined in the WCI Revolving Credit Facility), (b) limit Capital
Expenditures (as defined in the WCI Revolving Credit Facility), (c) not incur
any indebtedness other than the Notes, indebtedness under the WCI Revolving
Credit Agreement and certain other indebtedness and (d) not permit any liens to
exist on any of its property, except the liens in favor of the Revolving Credit
Lenders and the holders of the Notes and certain other liens.
78
<PAGE>
EVENTS OF DEFAULT
The WCI Revolving Credit Agreement contains certain events of default,
including, without limitation, the following: (a) the failure of WCI or its
subsidiaries to pay any of its obligations to the lenders when due; (b) any
failure by WCI or its subsidiaries to pay principal or interest on any
indebtedness or contingent obligation in an individual or aggregate principal
amount in excess of $500,000 or more, after any applicable grace period, or any
breach or default by WCI or its subsidiaries of any term of any indebtedness or
contingent obligation in an individual or aggregate principal amount of $500,000
or more; (c) any default by WCI or its subsidiaries in the performance or
observance of the conditions and covenants of the WCI Revolving Credit Agreement
or related agreements, beyond any applicable cure period; (d) any representation
or warranty made by WCI to the Revolving Credit Lenders proving to be false in
any material respect; (e) the rendering of a judgment which remains unvacated,
unbonded or unstayed for a period of 30 days against WCI or any of its
subsidiaries which exceeds, in any individual amount or in the aggregate,
$500,000; (f) certain events of bankruptcy or insolvency of WCI; and (g) the
occurrence of certain change of control events.
79
<PAGE>
CERTAIN 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 the Expiration Date, 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 , 1997, all dealers
affecting 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.
80
<PAGE>
LEGAL MATTERS
Certain legal matters related to the Exchange Notes being offered hereby are
being passed upon for WCI by Cadwalader, Wickersham & Taft, New York, New York.
EXPERTS
The audited consolidated financial statements and schedule of WCI Steel,
Inc. and subsidiaries as of October 31, 1995 and 1996, and for each of the years
in the three year period ended October 31, 1996 have been included in the
Registration Statement in reliance upon the report 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.
81
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
Independent Auditors' Report....................................................................... F-2
Consolidated Balance Sheets as of October 31, 1995 and 1996........................................ F-3
Consolidated Statements of Income for the years ended October 31, 1994, 1995 and 1996.............. F-4
Consolidated Statements of Shareholders' Equity for the years ended October 31, 1994, 1995 and
1996............................................................................................. F-5
Consolidated Statements of Cash Flows for the years ended October 31, 1994, 1995 and 1996.......... F-6
Notes to Consolidated Financial Statements......................................................... F-7 to F-18
</TABLE>
F-1
<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, 1996 and 1995, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended October 31, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 31, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Cleveland, Ohio
December 4, 1996
F-2
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
Current assets
Cash and cash equivalents.............................................................. $ 94,266 $ 90,395
Short-term investments................................................................. 12,282 49,146
Accounts receivable, less allowances for doubtful accounts of $2,258 and $1,600,
respectively......................................................................... 33,616 65,869
Inventories............................................................................ 101,089 96,675
Recoverable income taxes............................................................... 5,960 --
Deferred income taxes.................................................................. 11,102 10,637
Prepaid expenses....................................................................... 1,372 1,244
--------- ----------
Total current assets............................................................... 259,687 313,966
Property, plant and equipment, net....................................................... 189,733 205,121
Intangible pension asset................................................................. 44,028 27,505
Other assets, net........................................................................ 25,711 20,861
--------- ----------
Total assets....................................................................... $ 519,159 $ 567,453
--------- ----------
--------- ----------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Current portion of long-term debt...................................................... $ 2,323 $ 2,448
Accounts payable....................................................................... 47,740 79,138
Accrued liabilities.................................................................... 39,584 40,697
Income taxes........................................................................... 1,611 10,049
--------- ----------
Total current liabilities.......................................................... 91,258 132,332
Long-term debt, excluding current portion................................................ 211,531 209,058
Deferred income taxes.................................................................... 10,367 4,365
Postretirement health benefits........................................................... 76,287 81,795
Pension benefits......................................................................... 44,027 34,011
Other liabilities........................................................................ 26,194 26,012
--------- ----------
Total liabilities.................................................................. 459,664 487,573
--------- ----------
Shareholders' equity
Common stock, stated value $.01, 40,000,000 shares authorized, 36,563,300 and
36,623,700 shares issued at October 31, 1995 and 1996, respectively.................. 366 366
Treasury stock at cost, 222,300 shares................................................. -- (1,200)
Additional paid-in capital............................................................. 458 570
Retained earnings...................................................................... 58,671 80,144
--------- ----------
Total shareholders' equity......................................................... 59,495 79,880
--------- ----------
Commitments and contingencies............................................................ -- --
Total liabilities and shareholders' equity......................................... $ 519,159 $ 567,453
--------- ----------
--------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net Sales ..................................................................... $ 709,363 $ 630,990 $ 660,801
Operating costs and expenses
Cost of products sold........................................................ 574,610 544,789 550,609
Depreciation and amortization ............................................... 19,868 21,178 22,547
Selling, general, and administrative expenses ............................... 34,889 19,675 22,074
---------- ---------- ----------
629,367 585,642 595,230
---------- ---------- ----------
Operating income .......................................................... 79,996 45,348 65,571
---------- ---------- ----------
Other income (expense)
Interest expense ............................................................ (28,709) (25,787) (24,968)
Interest and other income, net .............................................. 1,505 6,212 6,545
---------- ---------- ----------
(27,204) (19,575) (18,423)
---------- ---------- ----------
Income before income taxes, extraordinary losses and cumulative effect of
change in accounting principle .......................................... 52,792 25,773 47,148
Income tax expense............................................................. 21,939 10,313 19,108
---------- ---------- ----------
Income before extraordinary losses and cumulative effect of change in
accounting principle .................................................... 30,853 15,460 28,040
Extraordinary losses on early retirement of debt, net of income taxes ......... (20,214) -- --
Cumulative effect of change in accounting for income taxes..................... 834 -- --
---------- ---------- ----------
Net income ................................................................ $ 11,473 $ 15,460 $ 28,040
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PREFERRED COMMON TREASURY PAID-IN RETAINED SHAREHOLDERS'
STOCK STOCK STOCK CAPITAL EARNINGS EQUITY
----------- ---------- --------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
Balance at October 31, 1993.............. $ 5,000 $ 10,000 -- -- $ 54,168 $ 69,168
Net income............................... -- -- -- -- 11,473 11,473
Capital contribution..................... -- -- -- 4,001 -- 4,001
Common stock split and change to stated
value of $.01 per share................ -- (9,693) -- 9,693 -- --
Issuance of common stock................. -- 58 -- 51,826 -- 51,884
Predecessor basis adjustment............. -- -- -- (65,520) (20,480) (86,000)
Redemption of preferred stock, including
dividends of $1,950.................... (5,000) -- -- -- (1,950) (6,950)
Other.................................... -- 1 -- 300 -- 301
----------- ---------- --------- ----------- ---------- -------------
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)
Purchase of treasury stock............... -- -- (1,200) -- -- (1,200)
Other.................................... -- -- -- 112 -- 112
----------- ---------- --------- ----------- ---------- -------------
Balance at October 31, 1996.............. $ -- $ 366 $ (1,200) $ 570 $ 80,144 $ 79,880
----------- ---------- --------- ----------- ---------- -------------
----------- ---------- --------- ----------- ---------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income........................................................................ $ 11,473 $ 15,460 $ 28,040
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization................................................... 19,868 19,713 19,617
Amortization of deferred blast furnace maintenance costs........................ -- 1,465 2,930
Amortization of financing costs................................................. 2,272 2,180 2,180
Postretirement health benefits.................................................. 9,607 10,066 5,508
Pension benefits................................................................ -- -- 6,507
Provision for losses on accounts receivable..................................... 812 117 (658)
Deferred income taxes........................................................... (3,738) 3,118 (5,537)
Extraordinary losses............................................................ 33,803 -- --
Cumulative effect of change in accounting principle............................. (834) -- --
Expenses paid by Parent net of related tax benefit.............................. 4,000 -- --
Other........................................................................... 720 (836) (6)
Cash provided (used) by changes in certain assets and liabilities
Accounts receivable......................................................... (5,524) 39,696 (31,595)
Inventories................................................................. (13,670) 7,334 4,414
Prepaid expenses and other assets........................................... 1,012 (1,031) (132)
Accounts payable............................................................ (7,960) (25,209) 31,398
Accrued liabilities......................................................... 12,134 (4,823) 1,113
Income taxes payable and recoverable, net................................... 2,572 (11,275) 14,398
Other liabilities........................................................... 10,375 4,756 (182)
--------- --------- ---------
Net cash provided by operating activities................................. 76,922 60,731 77,995
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment...................................... (8,387) (14,575) (35,384)
Deferred blast furnace maintenance costs........................................ (5,984) (11,598) --
Gross proceeds from the sale of assets.......................................... -- 2,818 497
Purchase of short-term investments, net......................................... -- (12,282) (36,864)
--------- --------- ---------
Net cash used by investing activities....................................... (14,371) (35,637) (71,751)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of long-term debt............................................ (170,750) (2,254) (2,348)
Dividends paid on common shares................................................. -- -- (6,567)
Purchases of treasury stock..................................................... -- -- (1,200)
Proceeds from issuance of long-term debt........................................ 250,000 -- --
Net proceeds from issuance of common stock...................................... 51,884 -- --
Redemption of preferred stock, including cumulative dividends................... (6,950) -- --
Predecessor basis adjustment.................................................... (86,000) -- --
Premiums paid on early retirement of debt....................................... (26,656) -- --
Financing costs paid............................................................ (12,019) -- --
--------- --------- ---------
Net cash used by financing activities....................................... (491) (2,254) (10,115)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............................. 62,060 22,840 (3,871)
Cash and cash equivalents at beginning of year.................................... 9,366 71,426 94,266
--------- --------- ---------
Cash and cash equivalents at end of year.......................................... $ 71,426 $ 94,266 $ 90,395
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information..................................
Cash paid for interest.......................................................... $ 25,386 $ 23,718 $ 22,888
Cash paid for income taxes...................................................... 11,561 18,471 10,247
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
At October 31, 1996, WCI Steel, Inc. (Company) was a majority-owned
subsidiary of The Renco Group, Inc. (Renco or Parent). The Company became a
wholly-owned subsidiary of Renco on November 27, 1996 (see Note 4).
(a) NATURE OF OPERATIONS
The Company is a niche oriented integrated producer of value-added, custom
steel products. The Company 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, terne coated and galvanized steel. The Company'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 1996 and 1994, no single customer accounted for more than 10% of net
sales. During 1995, sales to the Company'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 the Company has had labor agreements with the United
Steelworkers of America (USWA) and other labor organizations. The USWA
represents approximately 75% of the Company's employees. The Company has a
four-year agreement with the USWA effective September 1, 1995.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
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
F-7
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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) 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
The Company is included in the consolidated income tax return of Renco.
Under the terms of the present 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.
Effective November 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (Statement 109).
(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 the Company'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.
F-8
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31
---------------------
1995 1996
---------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
Raw materials.......................................................... $ 41,471 $ 40,828
Finished and semi-finished product..................................... 65,979 62,340
Supplies............................................................... 571 393
---------- ---------
108,021 103,561
Less LIFO reserve...................................................... 6,932 6,886
---------- ---------
$ 101,089 $ 96,675
---------- ---------
---------- ---------
</TABLE>
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following:
<TABLE>
<CAPTION>
OCTOBER 31
----------------------
1995 1996
---------- ----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Land and improvements................................................. $ 585 $ 493
Buildings............................................................. 24,965 25,641
Machinery and equipment............................................... 252,988 254,118
Construction in progress.............................................. 4,043 32,558
---------- ----------
282,581 312,810
Less accumulated depreciation......................................... 92,848 107,689
---------- ----------
$ 189,733 $ 205,121
---------- ----------
---------- ----------
</TABLE>
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31
--------------------
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Senior Notes with interest at 10.5% payable
semiannually, due 2002............................... $ 206,400 $ 206,400
Revolving Credit Facility (Revolver) with interest at
prime plus 0.5% (8.75% at October 31, 1996) payable
monthly.............................................. -- --
Other.................................................. 7,454 5,106
--------- ---------
213,854 211,506
Less current portion of long-term debt................. 2,323 2,448
--------- ---------
$ 211,531 $ 209,058
--------- ---------
--------- ---------
</TABLE>
F-9
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
(4) LONG-TERM DEBT (CONTINUED)
The Company 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 1% 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, 1996.
The Revolver, which expires December 29, 1999, also provides for up to an
aggregate amount of $20,000,000 in letters of credit. The Company had
approximately $5,536,000 in letters of credit outstanding at October 31, 1996.
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.
In December 1993 an affiliate of the Company completed the sale of
$250,000,000, 10.5% senior notes (Senior Notes) due 2002. Upon merger of the
affiliate into the Company the Senior Notes became a direct obligation of the
Company. The proceeds from the Senior Notes were used to acquire all of the
outstanding capital stock of the Company for $86,000,000 from Renco, to retire
the Company's then outstanding 12.625% notes at a rate of $1,200 per $1,000
principal amount outstanding plus accrued interest and to cover transaction
costs. Upon completion of these transactions, Renco paid $6,000,000 of bonuses
to certain executives of the Company. The bonuses are reflected as compensation
in the Company's statement of income in fiscal 1994 and as a capital
contribution, net of income taxes.
In July 1994, the Company completed an initial public offering (IPO) of
5,750,000 common shares at $10.00 per share. The net proceeds of the IPO (after
deducting offering transaction expenses and underwriting discounts of $5,616,000
in the aggregate) were $51,884,000, of which $6,950,000 was used to repurchase
all of the outstanding preferred stock of the Company including cumulative
dividends, and the remainder was used to repurchase $43,600,000 aggregate
principal amount Senior Notes.
As a result of the above transactions, the Company recognized extraordinary
losses of $20,214,000 in 1994, net of income tax benefits of $13,589,000,
consisting primarily of premiums paid on the early retirement of debt and
accelerated amortization of deferred financing costs.
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 the Company not held
by Renco (Equity Tender Offer). Following the completion of the tender offer,
WCI Steel Holdings, Inc. was merged with and into the Company with the Company
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 Holdings, Inc. with and into the Company was approximately
$56,922,000, including related expenses.
On the same date, the Company 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 the Company, were used to complete
the Equity Tender Offer, a tender offer in which the Company 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 the Company and pay
related transaction costs. As a result of these transactions, the Company
expects to recognize an extraordinary loss of approximately $19,606,000, net of
taxes, and compensation expenses of approximately $9,026,000 in the first
quarter of fiscal 1997.
F-10
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
(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 the Company
which will become a first priority lien if all of the Senior Notes are
extinguished.
The Company'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 the Company's assets. The Company 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.
Aggregate principal payments on long-term debt for the five years subsequent
to October 31, 1996 are as follows: $2,448,000 in 1997, $1,320,000 in 1998,
$116,000 in 1999, $122,000 in 2000 and $128,000 in 2001.
(5) ACCRUED LIABILITIES
Accrued liabilities included employment related costs of $25,140,000 and
$26,026,000 at October 31, 1995 and 1996, respectively.
(6) EMPLOYEE COMPENSATION PLANS
The Company has a profit sharing plan for the benefit of substantially all
bargained-for employees and a variable compensation plan for the benefit of
substantially all salaried employees. The amount of compensation due under these
plans is based on the Company's pretax income as defined under the agreements in
effect. Total expense under the plans was $15,297,000, $8,455,000 and
$10,936,000 for the years ended October 31, 1994, 1995, and 1996, respectively.
In addition, the Company has deferred compensation agreements with certain
management employees, which are based on changes in the net worth of the
Company, as defined. For the years ended October 31, 1994, 1995, and 1996, the
Company expensed approximately $9,902,000, $2,638,000 and $3,064,000,
respectively, under these plans.
(7) PENSION PLANS
The Company has defined contribution retirement plans that cover
substantially all employees. The Company follows the policy of funding these
retirement plan contributions as accrued. The Company's contributions to the
plans are based on employee age and compensation . The Company contributions,
paid or accrued, aggregated approximately $4,953,000, $4,988,000 and $5,376,000
for the years ended October 31, 1994, 1995, and 1996, respectively.
The Company adopted a defined benefit pension plan on October 27, 1995 which
covers substantially all bargained-for employees, provides minimum pension
benefits based on age, years of service and benefits provided under the
Company's defined contribution plan and a predecessor company's defined
F-11
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
(7) PENSION PLANS (CONTINUED)
benefit plan. The Company intends to make future contributions to the plan in
amounts that meet or exceed the minimum funding requirements of ERISA and the
Internal Revenue Code.
The following table sets forth the funded status of the plan at October 31:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
1995 1996
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of
$38,500 and $31,912, respectively ............................... $ 58,028 $ 47,947
---------- ----------
---------- ----------
Projected benefit obligation ..................................... $ 58,528 $ 48,498
Plan assets at fair value ........................................ 14,001 13,936
---------- ----------
Projected benefit obligation in excess of plan assets ............ 44,527 34,562
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions ................... -- 10,937
Unrecognized prior service cost .................................. (44,528) (38,993)
Additional minimum liability ..................................... 44,028 27,505
---------- ----------
Accrued pension cost ............................................. $ 44,027 $ 34,011
---------- ----------
---------- ----------
</TABLE>
Plan assets consist primarily of listed common stocks and corporate and
government bonds. Statement of Financial Accounting Standards No. 87, Employers'
Accounting for Pensions, requires the Company to recognize a minimum pension
liability equal to the amount by which the actuarial present value of the
accumulated benefit obligation exceeds the fair value of the plan assets.
Accordingly, the Company has recognized a liability in the amount of $44,027,000
and $34,011,000 at October 31, 1995 and 1996. A corresponding amount is
recognized as an intangible asset to the extent of the unrecognized prior
service cost. An intangible asset of $44,028,000 and $27,505,000 was recognized
at October 31, 1995 and 1996 representing unrecognized prior service cost.
An assumed discount rate of 7.5% (6.5% in 1995) and an expected return on
plan assets of 8.5% (7.5% in 1995) were used for purposes of valuing the
benefits under the defined benefit pension plan for 1996.
The following table sets forth the components of pension expense for the
year ended October 31, 1996:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Service cost........................................................ $ (213)
Interest cost....................................................... 3,477
Actual return on plan assets........................................ (828)
Amortization of unrecognized:
Prior service cost.............................................. 3,831
Net gain and deferral........................................... 290
------
$ 6,557
------
------
</TABLE>
F-12
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
(7) PENSION PLANS (CONTINUED)
No pension expense related to this plan was recognized during 1994 or 1995
as a result of the plan being adopted on October 27, 1995.
(8) POSTRETIREMENT HEALTH BENEFITS
The Company provides postretirement health care and life insurance benefits
to substantially all employees who retire from the Company 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
---------------------
1995 1996
---------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
Accumulated postretirement benefit obligation
Retirees............................................................ $ 16,663 $ 15,374
Fully eligible active plan participants............................. 34,492 33,877
Other active participants........................................... 43,087 40,294
---------- ---------
94,242 89,545
Plan assets, primarily stocks, at fair value........................ -- 3,332
APBO in excess of plan assets....................................... 94,242 86,213
Unrecognized prior service cost resulting from plan amendments...... (11,867) (4,356)
Unrecognized net loss from past experience different from that
assumed and from changes in assumptions........................... (6,088) (62)
---------- ---------
Accrued postretirement benefit cost................................. $ 76,287 $ 81,795
---------- ---------
---------- ---------
</TABLE>
The APBO was determined using a discount rate of 7.5% in 1996 (7.0% in 1995)
and an assumed health care cost trend rate of 8% in 1997, gradually declining to
5% after 2003. Assuming a 1% increase in the health care cost trend rate, the
APBO at October 31, 1996 would increase by $16,171,000 along with an increase in
the 1996 service and interest cost components of $1,823,000.
Net periodic postretirement benefit costs included the following components:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost................................................ $ 2,419 $ 2,562 $ 2,272
Interest cost............................................... 6,035 7,007 6,541
Actual return on plan asets................................. -- -- (188)
Net amortization and deferral............................... 1,866 1,025 1,698
--------- --------- ---------
Net periodic postretirement benefit cost.................... $ 10,320 $ 10,594 $ 10,323
--------- --------- ---------
--------- --------- ---------
</TABLE>
Total claims paid during the years ended October 31, 1994, 1995 and 1996
were $713,000, $528,000 and $1,671,000, respectively. In addition, the Company
is required to contribute $.50 per hour worked by
F-13
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
(8) POSTRETIREMENT HEALTH BENEFITS (CONTINUED)
certain hourly employees to a trust established to fund future postretirement
health care and life insurance benefits. Contributions to the trust amounted to
$3,144,000 during 1996. In accordance with the Company's labor contract, the
Company 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
--------------------------------
1994 1995 1996
---------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Federal income taxes
Current................................................. $ 19,419 $ 5,770 $ 18,861
Deferred................................................ (2,105) 2,662 (3,714)
State income taxes
Current................................................. 5,573 1,427 5,784
Deferred................................................ (948) 454 (1,823)
---------- --------- ---------
Provision for income taxes................................ $ 21,939 $ 10,313 $ 19,108
---------- --------- ---------
---------- --------- ---------
</TABLE>
In addition to the above income taxes, the Company recognized $13,589,000 of
current income tax benefits in 1994 related to extraordinary losses 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,
extraordinary losses and cumulative effect of change in accounting principle,
follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Income taxes at federal statuary rate........................ $ 18,477 $ 9,020 $ 16,502
State income taxes, net of federal income tax benefit........ 3,006 1,223 2,574
Other........................................................ 456 70 32
--------- --------- ---------
$ 21,939 $ 10,313 $ 19,108
--------- --------- ---------
--------- --------- ---------
</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 $47,727,000 and $54,719,000 as of October 31, 1995 and
1996 including deferred taxes on postretirement health and pension benefits of
$20,936,000 and $27,516,000, respectively, compensation accruals of $10,102,000
and $10,968,000, respectively, employee benefit accruals of $3,028,000 and
$3,286,000, respectively, state and local tax accruals of $2,080,000 and
$3,133,000, respectively, alternative minimum tax credit carryforwards of
$4,028,000 at October 31, 1995 and other items including allowance for doubtful
accounts, sales allowances, LIFO inventory valuation reserves and other accrued
liabilities. Total deferred tax liabilities amounted to
F-14
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
(9) INCOME TAXES (CONTINUED)
approximately $46,992,000 and $48,447,000 as of October 31, 1995 and 1996,
consisting primarily of deferred taxes on inventory of $3,065,000 and
$2,939,000, respectively, and fixed assets of $43,861,000 and $45,276,000,
respectively. The Company had no valuation allowance for realization of deferred
tax assets as of October 31, 1995 or 1996.
Under the tax sharing agreement discussed in Note 1(h), the Company's
recoverable income taxes of $5,960,000 at October 31, 1995 due from Renco was
fully recovered during 1996.
As discussed in Note 1(h), the Company adopted Statement 109 effective
November 1, 1993, and recognized a cumulative benefit of $834,000 as a change in
accounting principle.
(10) LEASES
The Company leases a portion of its operating and data processing equipment.
Minimum future lease payments under noncancelable operating leases are
$1,209,000, $1,081,000, $823,000, $602,000, and $327,000 for the years ending
October 31, 1997, 1998, 1999, 2000 and 2001, respectively. Rent expense for
noncancelable operating leases amounted to approximately $805,000, $1,033,000
and $1,094,000 for the years ended October 31, 1994, 1995, and 1996,
respectively.
(11) AGREEMENT WITH THE RENCO GROUP, INC.
The Company has a management services agreement with Renco under which Renco
provides certain management services to the Company. Under terms of this
agreement, the Company 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, 1994, 1995,
and 1996. At October 31, 1995 and 1996, $480,000 was owed 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 the Company is
self insured). In fiscal 1994, 1995 and 1996, the Company incurred costs of
approximately $1.5 million, $1.7 million and $2.0 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, 1996, the Company had commitments to purchase data processing
services of approximately $30,252,000 in the aggregate over the remaining 5.5
years of its management information systems agreement and purchased services of
approximately $5,401,000, $5,573,000 and $5,322,000 in 1994, 1995 and 1996,
respectively, under the agreement. At October 31, 1996, at pricing then in
effect, the Company had firm commitments for the purchase of raw materials and
gasses of approximately $33,756,000 in 1997 and $68,591,000 thereafter. In
addition, at October 31, 1996, the Company had commitments for capital
expenditures of approximately $16,346,000 related primarily to the upgrade of
the hot strip mill.
F-15
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
(12) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
Accordingly, 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 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 financial condition
and results of operations.
On June 29, 1995, the Department of Justice, 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 the Company'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 the Company in the
same court under the Clean Air Act alleging violations by the Company 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
the Company'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. The Company 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 the Company relating to the Warren
facility, including information as to the effect of a prohibition against
federal procurement of the Company's products on the Company's business. The
Company 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. The
Company is negotiating with the EPA toward a settlement of these matters. If the
Company 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 and
financial condition of the Company, the extent of which the Company is unable to
estimate at this time.
The Company 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, the Company will be required to undertake a
corrective action program with respect to historical material handling practices
at the Warren facility. The Company has developed and submitted a workplan for
the first investigation step of the corrective action program, the RCRA Facility
Investigation (RFI), to the EPA and is presently negotiating the scope of the
RFI with the EPA. 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, the Company is unable at this time to estimate the final cost of
the corrective action
F-16
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
(12) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 operating
results and financial condition of the Company.
On January 23, 1996, two retired employees instituted an action against the
Company in the United States District Court for the Northern District of Ohio
alleging in substance that certain distributions made by the Company to
employees and benefit plans violated certain agreements, the Employee Retirement
Income Security Act, the National Labor Relations Act and common law. The
plaintiffs seek declaratory and injunctive relief and damages. Plaintiffs have
brought this action as a class action; however, the court has not ruled as to
whether this action is properly maintainable as a class action. The Company
denies the plaintiffs' allegations of liability and has filed for dismissal of
the action. The court has not yet ruled on the Company's motion.
On April 5, 1996, an employee instituted an action for damages against the
Company 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. In July 1996, the plaintiff moved for an order
permitting her to amend her complaint to add new party plaintiffs alleging a
claim under only the privacy rights cause of action. The Company denies
plaintiff's allegations of liability and has opposed the motion to amend the
complaint. The court has not yet ruled on the plaintiff's motion. Discovery is
underway, and no substantive motions have been made.
A liability has been established for an amount, which the Company 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 the Company in
a particular quarterly or annual period, however, the Company believes that the
effect of such matters will not have a material adverse effect on the Company's
consolidated financial position. In addition to the above matters, the Company
is contingently liable with respect to lawsuits and other claims incidental to
the ordinary course of its operations.
(13) SELECTED QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly results for the years
ended October 31, 1995 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED 1995 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
- ---------------------------------------------------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net sales....................................................... $ 175,099 $ 177,770 $ 170,742 $ 107,379
Gross margin (loss)............................................. 33,850 34,229 31,698 (13,576)
Net income (loss)............................................... 10,909 11,139 9,371 (15,959)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED 1996 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
- ---------------------------------------------------------------- ----------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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>
F-17
<PAGE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
(13) SELECTED QUARTERLY DATA (UNAUDITED) (CONTINUED)
During the three months ended October 31, 1995, the Company experienced a 54
day labor contract dispute and resulting work stoppage. The negative gross
margin and the net loss for the quarter resulted principally from excess
production costs and expenses related to idling equipment during the work
stoppage, including salary and benefit costs, bonuses paid to hourly and
salaried employees upon conclusion of the work stoppage, and lower shipping
volume. In addition, the labor contract dispute and work stoppage adversely
affected the Company's product mix and operating results for the three month
periods ended January 31, 1996 and April 30, 1996.
F-18
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY WCI STEEL, INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. 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 TIME SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Available Information.......................... 2
Forward-Looking Statements..................... 2
Prospectus Summary............................. 3
Risk Factors................................... 14
The Transactions............................... 20
Use of Proceeds................................ 20
Capitalization................................. 21
Selected Consolidated Financial Data........... 22
The Exchange Offer............................. 25
Management's Discussion and Analysis of Results
of Operations and Financial Condition........ 32
Business....................................... 36
Management..................................... 47
Stock Ownership and Certain Relationships and
Transactions................................. 52
Description of the Notes....................... 54
Description of WCI Revolving Credit Facility... 78
Certain Federal Income Tax Considerations...... 80
Plan of Distribution........................... 80
Legal Matters.................................. 81
Experts........................................ 81
Index to Consolidated Financial Statements..... F-1
</TABLE>
UNTIL , 1997 (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.
[LOGO]
OFFER TO EXCHANGE ITS
10% SENIOR SECURED NOTES
DUE 2004, SERIES B,
WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933,
AS AMENDED,
FOR ANY AND ALL OF ITS OUTSTANDING
10% SENIOR SECURED NOTES
DUE 2004, SERIES A
--------------
PROSPECTUS
--------------
, 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<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, member, manager or agent of another
corporation, domestic or foreign, nonprofit or for profit, a limited liability
company, or a 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, member, manager or agent
of another corporation, domestic or foreign, nonprofit or for profit, a limited
liability company, or a 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, member, manager or agent 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
II-1
<PAGE>
paid or reimbursed by the corporation if it is ultimately determined that such
person is not entitled to be indemnified by the corporation.
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.
Registrant's Code of Regulations contains the indemnification provision set
forth below:
ARTICLE V
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened or pending action, suit, or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he, his testator, or intestate is or was a director, officer,
employee or agent of the Company, or is or was serving at the request of the
Company as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust or other enterprise, or as a member of any
committee or similar body against all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding or the defense or
settlement thereof or any claim, issue, or matter therein, to the fullest extent
permitted by the laws of Ohio as they may exist from time to time. To assure
indemnification under this provision of all such persons who are or were
"fiduciaries" of an employee benefit plan governed by the Act of Congress
entitled "Employee Retirement Income Security Act of 1974," as amended from time
to time, this paragraph shall, for the purposes hereof, be interpreted as
follows: an "other enterprise" shall be deemed to include an employee benefit
plan; the Company shall be deemed to have requested a person to serve an
employee benefit plan where the performance by such person of his duties to the
Company also imposes duties on, or otherwise involves services by, such person
to the plan or participants or beneficiaries of the plan; excise taxes assessed
on a person with respect to an employee benefit plan pursuant to said Act of
Congress shall be deemed "fines;" and action taken or omitted by a person with
respect to an employee benefit plan in the performance of such person's duties
for a purpose reasonably believed by such person to be in the interest of the
participants and beneficiaries of the plan shall be deemed to be for a purpose
which is not opposed to the best interests of the Company. The foregoing
provisions of this paragraph shall be deemed to be a contract between the
Company and each director and officer who serves in such capacity at any time
while this paragraph is in effect, and any repeal or modification thereof shall
not affect any rights or obligations then existing with respect to any state of
facts then or theretofore existing or any action, suit or proceeding theretofore
or thereafter brought based in whole or in part upon any such state of facts.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
3.1 --Articles of Incorporation of the Registrant, filed April 13, 1998 and Articles of Amendment filed May
18, 1988, July 15, 1988, November 29, 1991, December 14, 1993 and July 13, 1994.(7)
3.2 --Code of Regulations of the Registrant, as amended December 16, 1996.(12)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
4.1 --Indenture, dated as of December 14, 1993, among Renco Steel, Inc. (which subsequently was merged into
the Registrant), as issuer, the Registrant, as guarantor, and Shawmut Bank Connecticut, National
Association (now known as Fleet National Bank), as trustee, relating to the 10 1/2% Senior Notes Due
2002, Series A and the 10 1/2% Senior Notes Due 2002, Series B of the Registrant (containing, as
exhibits, specimens of the Series A Senior Notes and Series B Senior Notes).(3)
4.1.1 --First Supplemental Indenture to the indenture, dated as of December 14, 1993, among Renco Steel, Inc.
(which subsequently was merged into the Registrant), as issuer, the Registrant, as guarantor, and
Shawmut Bank Connecticut, National Association (now known as Fleet National Bank), as trustee,
relating to the 10 1/2% Senior Notes Due 2002, Series A and the 10 1/2% Senior Notes Due 2002, Series
B of the Registrant (containing, as exhibits, specimens of the Series A Senior Notes and Series B
Senior Notes).(3)
4.1.2 --Second Supplemental Indenture to the indenture, dated as of December 14, 1993, among Renco Steel,
Inc. (which subsequently was merged into the Registrant), as issuer, the Registrant, as guarantor,
and Shawmut Bank Connecticut, National Association (now known as Fleet National Bank), as trustee,
relating to the 10 1/2% Senior Notes Due 2002, Series A and the 10 1/2% Senior Notes Due 2002, Series
B of the Registrant (containing, as exhibits, specimens of the Series A Senior Notes and Series B
Senior Notes).(12)
4.2 --Indenture, dated as of November 27, 1996, between the Registrant, as issuer, and Fleet National Bank,
as trustee, relating to the 10% Senior Secured Notes due 2004, Series A, and the 10% Senior Secured
Notes due 2004, Series B of the Registrant (containing, as exhibits, specimens of the Series A Senior
Secured Notes and Series B Senior Secured Notes).(12)
4.3 --Purchase Agreement, dated November 22, 1996, between Donaldson, Lufkin and Jenrette Securities
Corporation and the Registrant, relating to the 10% Senior Secured Notes due 2004.(12)
4.4 --Registration Rights Agreement, dated as of November 27, 1996, be and between Donaldson, Lufkin &
Jenrette Securities Corporation and the Registrant, relating to the 10% Senior Secured Notes due
2004.(12)
4.5 --Form Letter of Transmittal.(12)
5.1 --Opinion of Cadwalader, Wickersham & Taft (including opinion filed as Exhibit 8.1 and consent filed as
Exhibit 23.1).(12)
8.1 --Opinion of Cadwalader, Wickersham & Taft (included in Exhibit 5.1).(12)
10.1 --[Intentionally Omitted]
10.2 --Net Worth Appreciation Agreement, dated as of September 1, 1988, between the Registrant and James V.
Stack.(1)
10.2.1 --Amendment, dated November 15, 1993, to the Net Worth Appreciation Agreements between the Registrant
and James V. Stack.(3)
10.2.2 --Amended and Restated Net Worth Appreciation Agreement, effective November 1, 1995, between the
Registrant and Patrick T. Kenney.(12)
10.2.3 --Amended and Restated Net Worth Appreciation Agreement, effective November 1, 1995, between the
Registrant and Patrick G. Tatom.(12)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.2.4 --Amended and Restated Net Worth Appreciation Agreement, effective November 1, 1995, between the
Registrant and Bret W. Wise.(12)
10.2.5 --Severance Pay Agreement, dated August 1, 1994, between the Registrant and Bret W. Wise.(6)
10.2.6 --Consulting Agreement, effective November 1, 1994, between the Registrant and James V. Stack.(7)
10.2.7 --Net Worth Appreciation Agreement, effective April 1, 1996, between the Registrant and Edward R.
Caine.(12)
10.2.8 --Letter, dated December 19, 1996, amending the Net Worth Appreciation Agreement, dated as of September
1, 1988, between the Registrant and James V. Stack.(11)
10.3 --Management Consultant Agreement, dated October 1, 1992, between Registrant and The Renco Group,
Inc.(1)
10.3.1 --Amendment No. 1, dated April 22, 1994, to Management Consultant Agreement.(4)
10.4 --Amended and Restated Loan and Security Agreement dated December 29, 1992 between the Registrant and
Congress Financial Corporation and Security Pacific Business Credit Inc. (the "Revolving Credit
Agreement").(1)
10.4.1 --Amendment No. 1 to the Revolving Credit Agreement, dated December 14, 1993.(3)
10.4.2 --[Intentionally Omitted]
10.4.3 --Indemnification Agreement, dated as of December 14, 1993, among the Registrant and the lenders under
the Revolving Credit Agreement.(3)
10.4.4 --Intercreditor Agreement, dated December 14, 1993, among the Shawmut Bank Connecticut, National
Association, Congress Financial Corporation and Security Pacific Business Credit Inc.(3)
10.4.5 --Amendment No. 2 to the Revolving Credit Agreement, dated July 13, 1994.(5)
10.4.6 --Amendment No. 3 to the Revolving Credit Agreement, dated March 28, 1995.(8)
10.4.7 --Amendment No. 4 to the Revolving Credit Agreement, dated February 23, 1996.(9)
10.4.8 --Amendment No. 5 to the Revolving Credit Agreement, dated March 8, 1996.(9)
10.4.9 --Amendment No. 6 to the Revolving Credit Agreement, dated June 17, 1996.(10)
10.4.10 --Amendment No. 7 to the Revolving Credit Agreement, dated November 27, 1996.(12)
10.4.11 --Intercreditor Agreement, dated November 27, 1996, between Fleet National Bank and Congress Financial
Corporation.(12)
10.5.1 --Intercreditor Agreement, dated November 27, 1996, among Fleet National Bank, Bank One Trust Company,
N.A. and the Registrant.(12)
10.5.2 --Indemnification Agreement, dated as of November 27, 1996, between the Registrant and Bank One Trust
Company, N.A.(12)
10.6 --Promissory Note, dated August 31, 1988, in the original principal amount of $5,552,000 made by the
Registrant 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)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.8 --Agreement, dated June 11, 1990, between the City of Youngstown, Ohio and Youngstown Sinter Company
(with UDAG Grant Agreement).(1)
12 --Statement regarding computation of ratio of earnings to fixed charges.
21 --List of Subsidiaries of Registrant.(2)
23.1 --Consent of Cadwalader, Wickersham & Taft (included in Exhibit 5.1).(12)
23.2 --Consent of KPMG Peat Marwick LLP.
25 --Statement of Eligibility and Qualification on Form T-1 of Fleet National Bank.(12)
</TABLE>
- ------------------------
(1) Incorporated by reference to the same-numbered exhibit filed with the
Company'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 Exhibit 22 filed with the Company's
Registration Statement on Form S-4, as amended (File No. 33-58648),
originally filed with the Commission on February 23, 1993.
(3) Incorporated by reference to the same-numbered exhibit filed with the
Company's Registration Statement on Form S-4 (File No. 33-74108), filed with
the Commission on January 14, 1994.
(4) Incorporated by reference to same-numbered exhibit filed with the Company's
Pre-Effective Amendment No. 2 to Registration Statement on Form S-1 (File
No. 33-75722), filed with the Commission on April 28, 1994.
(5) Incorporated by reference to exhibit 10.4.5 filed with the Company'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.
(6) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended July 31, 1994 (File No. 1-13028).
(7) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended October 31, 1994 (File No. 1-13028).
(8) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended April 30, 1995 (File No. 1-13028).
(9) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended April 30, 1996 (File No. 1-13028).
(10) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended July 31, 1996 (File No. 1-13028).
(11) Incorporated by reference to the Company's Form 10-K for fiscal year ended
October 31, 1996 (File No. 1-13028).
(12) Previously filed.
(b) Financial Statement Schedules.
<TABLE>
<CAPTION>
Schedule II --Valuation and Qualifying Accounts
<S> <C> <C>
</TABLE>
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.
II-5
<PAGE>
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 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
II-6
<PAGE>
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-7
<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 Warren, State of Ohio, on
February 11, 1997.
WCI STEEL, INC.
By: /s/ EDWARD R. CAINE
-----------------------------------------
EDWARD R. CAINE
President and Chief Executive Officer
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 February 11, 1997.
SIGNATURE TITLE
- ------------------------------ ---------------------------
/s/ IRA LEON RENNERT Chairman of the Board and
- ------------------------------ Director
IRA LEON RENNERT
President and Chief
/s/ EDWARD R. CAINE Executive Officer
- ------------------------------ (Principal Executive
EDWARD R. CAINE Officer)
Vice President, Finance and
/s/ BRET W. WISE Chief Financial Officer
- ------------------------------ (Principal Financial and
BRET W. WISE Accounting Officer)
II-8
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Shareholder and Board of Directors
WCI Steel, Inc. and Subsidiaries:
Under date of December 4, 1996, we reported on the consolidated balance
sheets of WCI Steel, Inc. and subsidiaries as of October 31, 1996 and 1995, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended October 31, 1996,
which are included in the Registration Statement. 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) included in the Registration Statement. 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
December 4, 1996
S-1
<PAGE>
WCI STEEL, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT ------------------------ BALANCE AT
BEGINNING CHARGED TO CHARGES TO DEDUCTIONS END
CLASSIFICATION OF YEAR EXPENSE (B) OTHER (C) OF YEAR
- --------------------------------------------------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS (A):
Year ended October 31, 1996...................... $ 2,258 $ (646) -- $ 12 $ 1,600
Year ended October 31, 1995...................... 2,400 117 -- 259 2,258
Year ended October 31, 1994...................... 2,371 812 -- 783 2,400
</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>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
12 -- Statement regarding computation of ratio of earnings to fixed charges.
23.2 -- Consent of KPMG Peat Marwick LLP.
</TABLE>
<PAGE>
EXHIBIT 12
WCI STEEL, INC. AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------
PRO FORMA
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes.................................. 424 23,636 52,792 25,773 47,148 32,846
Fixed charges........................................ 18,243 23,214 28,926 26,066 25,263 33,714
Capitalized interest................................. (4,443) 0 0 0 0 0
--------- --------- --------- --------- --------- -----------
Earnings........................................... 14,224 46,850 81,718 51,839 72,411 66,560
Interest expense..................................... 11,510 18,108 26,437 23,607 22,788 31,145
Amortization of financing costs...................... 2,205 5,074 2,272 2,180 2,180 2,274
Rental/Lease interest................................ 85 32 217 279 295 295
Capitalized interest................................. 4,443 0 0 0 0 0
--------- --------- --------- --------- --------- -----------
Fixed charges...................................... 18,243 23,214 28,926 26,066 25,263 33,714
Ratio of earnings to fixed charges............... 0.8x 2.0x 2.8x 2.0x 2.9x 2.0x
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
WCI Steel, Inc. and Subsidiaries:
The audits referred to in our report dated December 4, 1996, included the
related financial statement schedule as of October 31, 1996 and for
each of the years in the three-year period ended October 31, 1996, 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 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.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Cleveland, Ohio
February 11, 1997
