<PAGE> 1
- -----------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1996.
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-13028
-------
WCI STEEL, INC.
(Exact name of registrant as specified in its charter)
OHIO 34-1585405
(State of incorporation) (I.R.S. Employer Identification No.)
1040 PINE AVE., S.E., WARREN, OHIO 44483-6528
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 841-8314
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of exchange on which registered
------------------- ------------------------------------
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the last 90 days.
/ X / Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definite proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. / X /
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant at January 28, 1997 was $0.
<PAGE> 2
The number of shares of Common Stock (no par value, $.01 stated value) of the
registrant outstanding as of January 28, 1997 was 100.
DOCUMENTS INCORPORATED BY REFERENCE
None.
- -----------------------------------------------------------------------------
<PAGE> 3
WCI STEEL, INC. AND SUBSIDIARIES
FORM 10-K
INDEX
--------------------------------
PART I Page No.
- ------------------------------------------------------------------ --------
Item 1. Business 4
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II
- ------------------------------------------------------------------
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 22
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 46
PART III
- ------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant 47
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners
and Management 52
Item 13. Certain Relationships and Related Transactions 53
PART IV
- ------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedule,
and Reports on Form 8-K 55
Financial Statement Schedule
(including Independent Auditors Report on Financial
Statement Schedule) 55
Signatures 57
Exhibit Index 58
<PAGE> 4
PART I
ITEM 1. BUSINESS
GENERAL
WCI Steel, Inc. (WCI or Company), 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 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
a 54 day labor contract dispute and resulting work stoppage that began
September 1, 1995 upon expiration of the Company's previous collective
bargaining agreement with the United Steelworkers of America (the USWA). 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
<PAGE> 5
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 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 Ladle Metallurgy
Facility (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
has also recently installed a high-temperature hydrogen anneal facility to
meet the rising demand for silicon electrical steels, an important custom
product for WCI.
<PAGE> 6
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 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 herein 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.
<PAGE> 7
<TABLE>
<CAPTION>
Net Tons Shipped Percent of Total
Fiscal Year Ended Fiscal Year Ended
October 31, 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 Basic Oxygen Furnace (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
<PAGE> 8
customers.
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
<PAGE> 9
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-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.
<PAGE> 10
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 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.
<PAGE> 11
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 years 1994, 1995, and 1996, WCI's twenty largest customers
represented approximately 57%, 56%, and 56%, respectively, of net sales with
its largest customer, Worthington Industries, representing approximately
9.9%, 10.0% and 9.8% of net sales.
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.
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
<PAGE> 12
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.
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 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.
<PAGE> 13
CAPITAL INVESTMENT
WCI believes that is 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 1996 Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital
Improvements:
Continuous
Caster-LMF....$ 4,659 $69,084 $42,489 $18,060 $ 1,157 $ 22 $ - $ - $135,471
Youngstown
Sinter Plt.... - 895 7,783 758 30 - - - 9,466
Hot Strip Mill
Upgrade....... - - - - - - 432 22,194 22,626
Hydrogen Anneal
Facility...... - - - - - - 790 2,749 3,539
Other.......... 2,809 1,808 - 45 179 1,077 612 1,932 8,462
------- ------- ------- ------- ------- ------- ------- ------- --------
Total Capital
Improvements. 7,468 71,787 50,272 18,863 1,366 1,099 1,834 26,875 179,564
Maintenance
Capital:
Blast Fce
Reline........ - - - - - 5,984 14,847 - 20,831
Mill Rolls..... 5,030 5,078 4,689 5,264 4,644 5,172 4,548 4,744 39,169
Other.......... 2,086 1,164 536 1,350 8,629 2,116 4,944 3,765 24,590
------- ------- ------- ------- ------- ------- ------- ------- --------
Total Maint.
Capital(1)... 7,116 6,242 5,225 6,614 13,273 13,272 24,339 8,509 84,590
------- ------- ------- ------- ------- ------- ------- ------- --------
Total Capital
Investments....$14,584 $78,029 $55,497 $25,477 $14,639 $14,371 $26,173 $35,384 $264,154(2)
- ------------------------
<FN>
(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.
</FN>
</TABLE>
<PAGE> 14
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 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 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 (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 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
<PAGE> 15
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
financial condition of the Company.
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 and existing landfill closure,
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.
<PAGE> 16
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.
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.
<PAGE> 17
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 a
trust to hold contributions to fund future postretirement health care and
life insurance obligations. This trust holds liens on certain assets of the
Company and one of its subsidiaries to secure the Company's obligation for
postretirement health care benefits. Company contributions are $.50 per hour
or a minimum of approximately $1.5 million per year.
ITEM 2. PROPERTIES
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 during 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.
WCI believes that its facilities are well maintained and they are considered
satisfactory for their purposes.
ITEM 3. LEGAL PROCEEDINGS
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.
<PAGE> 18
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
"Item 1. Business-Environmental Matters."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended October 31, 1996.
<PAGE> 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Effective November 27, 1996, the Company became a direct wholly-owned
subsidiary of The Renco Group, Inc. (Renco) and its common stock ceased being
traded on the New York Stock Exchange. Accordingly, there is no established
public trading market for the Company's common stock. As of January 27,
1997, the Company had one shareholder. The Company paid no cash dividends on
its common stock during fiscal 1995 and paid cash dividends of $0.18 per
common share during fiscal 1996 based on the then outstanding shares. See
Note 4 to the Consolidated Financial Statements, Part II, Item 8 for
limitations on dividends.
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
1992 1993 1994(1) 1995(2) 1996(3)
(Dollars and tons in thousands, except per ton amounts)
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ========
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
Balance Sheet Data:
Cash, cash equivalents and
short-term investments....... 719 9,366 71,426 106,548 139,541
Working capital (excluding
cash, cash equivalents and
short-term investments)...... 53,725 49,510 69,193 61,881 42,093
Property, plant and equipment,
net.......................... 212,907 206,951 196,212 189,733 205,121
Total assets.................. 381,192 396,342 481,596 519,159 567,453
Total debt (including current
portion)..................... 164,478 136,858 216,108 213,854 211,506
Shareholders' equity.......... 51,974 69,168 43,877 59,495 79,880
- ------------------------
<PAGE> 21
<FN>
(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 10.5%
senior 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.
(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.
</FN>
</TABLE>
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Unless otherwise indicated, references to a year are to the Company's fiscal
year ended October 31.
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 calendar year 1992 to approximately 115 million tons in calendar year
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. During
1996, however, the pricing environment improved, 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.
<PAGE> 23
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 1995 were also negatively impacted by a scheduled blast furnace
reline that resulted in the idling of all 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 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
1995. Net sales per ton shipped declined 8.3% to $473 compared to $516 for
1995 due to lower prices realized in the spot market as well as a change in
product mix. The 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 accounted for 57.9% of total
shipments in 1996 compared with 59.4% in 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 1995. Shipments for the three months ended October 31, 1996 were
342,147 tons compared to 208,522 during the same period in fiscal 1995 which
was adversely effected 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 1996 compared to $86.2 million in 1995.
The increase in gross margin reflects higher volume and improved per ton
operating costs, offset somewhat by the lower sales prices in 1996 and the
changes in product mix mentioned above, and a loss of $13.6 million of gross
margin during the fourth quarter of 1995 as a result of the work stoppage.
Operating income was $65.6 million, $47 per ton shipped, for 1996 compared to
$45.3 million, $37 per ton shipped, for 1995. The results for 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 of 1995 and higher selling, general and
administrative expenses in the fourth quarter of 1996 compared to the same
period in 1995. Selling, general and administrative expenses for the fourth
quarter of 1996 were $3.3 million higher than in 1995 due primarily to
reductions in expense in the fourth quarter of 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 1996 compared to net income of $15.5 million for 1995.
<PAGE> 24
Fiscal 1995 Compared to Fiscal 1994
Net sales in 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 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 1995 compared to
389,636 tons in the fourth quarter of 1994. During 1995 the Company realized
$516 per net ton shipped, a 6.8% increase from the $483 realized in 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 1995 compared to
approximately 56.9% in 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 margins fell to $86.2 million in 1995 from $134.8 million in 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 salary employees following the ratification
of the new collective bargaining agreement and the lower shipping volumes
during the fourth quarter discussed above. Gross margins prior to the labor
contract dispute were relatively flat compared to 1994 reflecting higher
sales prices in 1995 offset by higher costs associated primarily with the
blast furnace reline completed in May 1995.
Operating income was $45.3 million in 1995, a $34.7 million decrease from
$80.0 million in 1994. These operating results reflect the decrease in gross
margins discussed above offset somewhat by lower selling, general and
administrative expenses in 1995. Selling, general and administrative
expenses decreased $15.2 million in 1995 primarily as a result of $11.1
million of compensation expenses in 1994 related to the Company's initial
public stock offering and senior notes offering and a $3.9 million reduction
in 1995 related to variable compensation programs and other expenses tied to
the earnings or net worth of the Company.
Interest expense decreased $2.9 million to $25.8 million in 1995 reflecting
the repurchase of $43.6 million aggregate principal amount of senior notes in
July 1994 in connection with the Company's initial public stock offering.
Interest and other income increased $4.7 million in 1995 compared to 1994 as
a result of higher cash and cash equivalents and short-term investments in
1995.
Net income decreased to $15.5 million in 1995 compared to income before
extraordinary losses and an accounting change of $30.9 million in 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 are discussed above.
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
WCI's liquidity requirements result from capital investments, working capital
requirements, postretirement healthcare and pension funding, interest expense
and, to a lesser extent, principal payments on its indebtedness. WCI has met
these requirements in each fiscal year since 1992 from cash 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 for 1996 compared to
$60.7 million and $76.9 million for 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 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 1997, and
$67.5 million thereafter through fiscal 1999.
Capital expenditures were $35.4 million, $26.2 million and $14.4 million
during 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 1996 reflect expenditures on the hot strip mill
upgrade and hydrogen anneal facility and expenditures in 1995 reflect the
blast furnace reline. Management has funded the Company's capital
expenditures in 1996, 1995 and 1994 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.
On November 27, 1996 WCI Steel Holdings, Inc., a wholly-owned subsidiary of
Renco, completed a tender offer in which it purchased substantially all the
outstanding shares of common stock of 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 to non-tendering shareholders pursuant
to the merger of WCI Holdings, Inc. with and into the Company was
approximately $56,922,000, including related expenses.
<PAGE> 26
On the same date, the Company completed the sale of $300,000,000 10% Senior
Secured Notes due 2004 (Senior Secured Notes). The proceeds from the Senior
Secured Notes, with existing cash balances of the Company, were used to
complete the Equity Tender Offer, complete 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 $1,125.00 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. The Company's
liquidity was significantly reduced and its debt service requirements
significantly increased as a result of these transactions. The Company may
defease the remaining $280,000 principal amount of Senior Notes by depositing
with the trustee money and/or U.S. government obligations sufficient to make
payments with respect to the Senior Notes. Management anticipates that cash
flow from operations and availability under the Company's revolving credit
facility will be sufficient to finance the Company's liquidity needs for the
foreseeable future.
The WCI Revolving Credit Facility and Senior Secured 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. 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
expenditures for matters relating to environmental control and monitoring.
Capital expenditures for environmental control and monitoring were $0.3
million, $2.3 million and $0.5 million in 1996, 1995, and 1994, respectively.
These expenditures related primarily to a rebuild of a basic oxygen furnace
precipitator. The Company expects that future environmental capital
expenditures will be dependent in part upon the outcome of certain pending
environmental matters. Operating costs for control and monitoring equipment,
excluding depreciation and amortization expense, were $9.6 million, $8.9
million and $10.3 million for 1996, 1995 and 1994, respectively. Operating
costs for fiscal 1997 for control and monitoring equipment are not expected
to increase significantly from the prior periods.
Environmental laws and regulations have changed rapidly in recent years, and
WCI may be subject to more stringent environmental laws and regulations in
the future. Compliance with more stringent environmental laws and regulations
could have a material adverse effect on WCI's consolidated financial position
and future results of operations. In addition, the U.S. Environmental
Protection Agency has asserted certain alleged environmental violations
against the Company which are described in Note 12 to the Consolidated
Financial Statements.
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
( Dollars in thousands, except per share amount )
October 31,
------------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.........................$ 90,395 $ 94,266
Short-term investments............................ 49,146 12,282
Accounts receivable, less allowances for doubtful
accounts of $1,600 and $2,258, respectively..... 65,869 33,616
Inventories....................................... 96,675 101,089
Recoverable income taxes.......................... - 5,960
Deferred income taxes............................. 10,637 11,102
Prepaid expenses.................................. 1,244 1,372
--------- ---------
Total current assets......................... 313,966 259,687
Property, plant and equipment, net.................. 205,121 189,733
Intangible pension asset............................ 27,505 44,028
Other assets, net................................... 20,861 25,711
--------- ---------
Total assets............................$ 567,453 $ 519,159
========= =========
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt.................$ 2,448 $ 2,323
Accounts payable.................................. 79,138 47,740
Accrued liabilities............................... 40,697 39,584
Income taxes...................................... 10,049 1,611
--------- ---------
Total current liabilities.................... 132,332 91,258
Long-term debt, excluding current portion........... 209,058 211,531
Deferred income taxes............................... 4,365 10,367
Postretirement health benefits...................... 81,795 76,287
Pension benefits.................................... 34,011 44,027
Other liabilities................................... 26,012 26,194
--------- ---------
Total liabilities....................... 487,573 459,664
--------- ---------
Shareholders' equity
Preferred stock, par value $1,000 per share, 5,000
shares authorized, none issued. ................ - -
Common stock, no par value, stated value $.01 per
share, 40,000,000 shares authorized, 36,623,700
and 36,563,300 shares issued at October 31, 1996
and 1995, respectively.......................... 366 366
Additional paid-in capital........................ 570 458
Retained earnings................................. 80,144 58,671
Treasury stock at cost, 222,300 shares at October
31,1996. ....................................... (1,200) -
--------- ---------
Total shareholders' equity............... 79,880 59,495
Commitments and contingencies....................... - -
Total liabilities and --------- ---------
shareholders' equity....................$ 567,453 $ 519,159
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Years ended October 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Net sales.......................................$ 660,801 $ 630,990 $ 709,363
Operating costs and expenses
Cost of products sold.......................... 550,609 544,789 574,610
Depreciation and amortization.................. 22,547 21,178 19,868
Selling, general and administrative expenses... 22,074 19,675 34,889
--------- --------- ---------
595,230 585,642 629,367
--------- --------- ---------
Operating income................................ 65,571 45,348 79,996
--------- --------- ---------
Other income (expense)
Interest expense............................... (24,968) (25,787) (28,709)
Interest and other income, net................. 6,545 6,212 1,505
--------- --------- ---------
(18,423) (19,575) (27,204)
--------- --------- ---------
Income before income taxes, extraordinary
losses and cumulative effect of change in
accounting principle....................... 47,148 25,773 52,792
Income tax expense.............................. 19,108 10,313 21,939
--------- --------- ---------
Income before extraordinary losses and
cumulative effect of change in accounting
principle.................................. 28,040 15,460 30,853
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......................................$ 28,040 $ 15,460 $ 11,473
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 29
<TABLE>
<CAPTION>
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share amount)
Years ended October 31, 1996, 1995, and 1994
-------------------------------------------------------------
Additional Total
Preferred Common Paid-In Retained Treasury Shareholders'
Stock Stock Capital Earnings Stock Equity
--------- -------- -------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
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)
Treasury stock purchases.......... - - - - (1,200) (1,200)
Other............................. - - 112 - - 112
-------- -------- ------- -------- -------- --------
Balance at October 31, 1996.......$ - $ 366 $ 570 $ 80,144 $ (1,200) $ 79,880
======== ======== ======= ======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 30
<TABLE>
<CAPTION>
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended October 31,
--------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.....................................$ 28,040 $ 15,460 $ 11,473
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization................ 19,617 19,713 19,868
Amortization of deferred blast furnace
maintenance costs.......................... 2,930 1,465 -
Amortization of financing costs.............. 2,180 2,180 2,272
Postretirement health benefits............... 5,508 10,066 9,607
Pension benefits............................. 6,507 - -
Provision for losses on accounts receivable.. (658) 117 812
Deferred income taxes........................ (5,537) 3,118 (3,738)
Extraordinary losses......................... - - 33,803
Cumulative effect of change in accounting
principle.................................. - - (834)
Expenses paid by Parent net of related
tax benefit................................ - - 4,000
Other........................................ (6) (836) 720
Cash provided (used) by changes in certain
assets and liabilities
Accounts receivable........................ (31,595) 39,696 (5,524)
Inventories................................ 4,414 7,334 (13,670)
Prepaid expenses and other assets.......... (132) (1,031) 1,012
Accounts payable........................... 31,398 (25,209) (7,960)
Accrued liabilities........................ 1,113 (4,823) 12,134
Income taxes payable and recoverable, net.. 14,398 (11,275) 2,572
Other liabilities.......................... (182) 4,756 10,375
--------- --------- ---------
Net cash provided by operating activities...... 77,995 60,731 76,922
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment... (35,384) (14,575) (8,387)
Deferred blast furnace maintenance costs..... - (11,598) (5,984)
Gross proceeds from the sale of assets....... 497 2,818 -
Purchase of short-term investments, net...... (36,864) (12,282) -
--------- --------- ---------
Net cash used by investing activities.......... (71,751) (35,637) (14,371)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principle payments of long-term debt......... (2,348) (2,254) (170,750)
Dividends paid............................... (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........ (10,115) (2,254) (491)
Net (decrease) increase in cash and cash
equivalents................................ (3,871) 22,840 62,060
Cash and cash equivalents at beginning
of year.................................... 94,266 71,426 9,366
--------- --------- ---------
Cash and cash equivalents at end of year.....$ 90,395 $ 94,266 $ 71,426
========= ========= =========
<PAGE> 31
Supplemental disclosure of cash flow
information
Cash paid for interest...................$ 22,888 $ 23,718 $ 25,386
Cash paid for income taxes .............. 10,247 18,471 11,561
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 32
WCI STEEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 organized 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.
<PAGE> 33
(f) Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is
calculated on the straight-line method over the estimated useful lives
of the assets (buildings 20 to 30 years and machinery and equipment
4 to 25 years with a weighted average of 18 years). Expenditures for
normal repairs and maintenance are charged to expense as incurred.
(g) 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 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.
<PAGE> 34
(2) Inventories
- -----------------------------------------------------------------------------
Inventories consist of the following:
October 31,
------------------------
1996 1995
(Dollars in thousands)
Raw materials........................$ 40,828 $ 41,471
Finished and semi-finished product... 62,340 65,979
Supplies............................. 393 571
--------- ---------
103,561 108,021
Less LIFO reserve.................... 6,886 6,932
--------- ---------
$ 96,675 $ 101,089
========= =========
(3) Property, Plant and Equipment
- -----------------------------------------------------------------------------
Property, plant and equipment is comprised of the following:
October 31,
------------------------
1996 1995
(Dollars in thousands)
Land and improvements................ $ 493 $ 585
Buildings............................ 25,641 24,965
Machinery and equipment.............. 254,118 252,988
Construction in progress............. 32,558 4,043
--------- ---------
312,810 282,581
Less accumulated depreciation........ 107,689 92,848
--------- ---------
$ 205,121 $ 189,733
========= =========
(4) Long-Term Debt
- -----------------------------------------------------------------------------
Long-term debt consists of the following:
October 31,
-----------------------
1996 1995
(Dollars in thousands)
Senior Notes with interest at 10.5%
payable semi-annually, 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................................. 5,106 7,454
--------- ---------
211,506 213,854
Less current portion of long-term
debt................................ 2,448 2,323
--------- ---------
$ 209,058 $ 211,531
========= =========
<PAGE> 35
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.
<PAGE> 36
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.
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 $26,026,000 and
$25,140,000 at October 31, 1996 and 1995, 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. Total expense under the plans was
$10,936,000, $8,455,000 and $15,297,000 for the years ended October 31,
1996, 1995, and 1994, respectively.
<PAGE> 37
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, 1996, 1995,
and 1994, the Company expensed approximately $3,064,000, $2,638,000 and
$9,902,000, 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
$5,376,000, $4,988,000 and $4,953,000 for the years ended October 31,
1996, 1995, and 1994, 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 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:
Actuarial present value of benefit obligations (dollars in thousands):
October 31,
---------------------
1996 1995
(Dollars in thousands)
Accumulated benefit obligation, including
vested benefits of $31,912 and $38,500,
respectively............................... $ 47,947 $ 58,028
======== ========
Projected benefit obligation................. $ 48,498 $ 58,528
Plan assets at fair value.................... 13,936 14,001
-------- --------
Projected benefit obligation in excess
of plan assets............................. 34,562 44,527
Unrecognized net gain from past experience
different from that assumed and effects
of changes in assumptions.................. 10,937 -
Unrecognized prior service cost.............. (38,993) (44,528)
Additional minimum liability................. 27,505 44,028
-------- --------
Accrued pension cost......................... $ 34,011 $ 44,027
======== ========
<PAGE> 38
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 $34,011,000 and $44,027,000 at October 31,
1996 and 1995. A corresponding amount is recognized as an intangible
asset to the extent of the unrecognized prior service cost. An
intangible asset of $27,505,000 and $44,028,000 was recognized at
October 31, 1996 and 1995 representing unrecognized prior service cost.
An assumed discount rate of 7.5% (6.5% in 1995) and an expected return on
plan assets of 8.5% (7.5% in 1995) were used for purposes of valuing the
benefits under the defined benefit pension plan for 1996.
The following table sets forth the components of pension expense for the
year ended October 31, 1996:
(Dollars in thousands)
Service cost.....................................$ (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
=======
No pension expense related to this plan was recognized during 1995 or
or 1994 as a result of the plan being adopted on October 27, 1995.
<PAGE> 39
(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):
October 31,
--------------------
1996 1995
(Dollars in thousands)
Accumulated postretirement
benefit obligation
Retirees...................... $ 15,374 $ 16,663
Fully eligible active
plan participants........... 33,877 34,492
Other active
participants................ 40,294 43,087
-------- --------
89,545 94,242
Plan assets, primarily stocks
at fair value............... 3,332 -
-------- --------
APBO in excess of plan assets 86,213 94,242
Unrecognized prior service
cost resulting from plan
amendments.................... (4,356) (11,867)
Unrecognized net loss
from past experience
different from that
assumed and from changes
in assumptions................ (62) (6,088)
-------- --------
Accrued postretirement
benefit cost.................. $ 81,795 $ 76,287
======== ========
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 $1,823,000.
<PAGE> 40
Net periodic postretirement benefit costs included the following
components:
Years Ended October 31,
------------------------------
1996 1995 1994
(Dollars in thousands)
Service cost............$ 2,272 $ 2,562 $ 2,419
Interest cost........... 6,541 7,007 6,035
Actual return on plan
assets................ (188) - -
Net amortization and
deferral.............. 1,698 1,025 1,866
------- ------- -------
Net periodic
postretirement
benefit cost..........$10,323 $10,594 $10,320
======= ======= =======
Total claims paid by the Company during the years ended October 31, 1996,
1995 and 1994 were $1,671,000, $528,000 and $713,000, respectively. In
addition, the Company is required to contribute $.50 per hour worked by
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:
Years Ended October 31,
-------------------------------
1996 1995 1994
(Dollars in thousands)
Federal income taxes
Current................ $ 18,861 $ 5,770 $ 19,419
Deferred............... (3,714) 2,662 (2,105)
State income taxes
Current................ 5,784 1,427 5,573
Deferred............... (1,823) 454 (948)
-------- -------- --------
Provision for
income taxes........... $ 19,108 $ 10,313 $ 21,939
======== ======== ========
In addition to the above income taxes, the Company recognized $13,589,000
of current income tax benefits in 1994 related to extraordinary losses on
the early retirement of debt (see note 4).
<PAGE> 41
A reconciliation between income tax expense reported and income tax
expense computed by applying the federal statutory rate to income before
income taxes, extraordinary losses and cumulative effect of change in
accounting principle, follows:
Years Ended October 31,
-------------------------------
1996 1995 1994
(Dollars in thousands)
Income taxes at federal
statutory rate.........$ 16,502 $ 9,020 $ 18,477
State income taxes, net
of federal income
tax benefit............ 2,574 1,223 3,006
Other.................... 32 70 456
-------- -------- --------
$ 19,108 $ 10,313 $ 21,939
======== ======== ========
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 $54,719,000 and $47,727,000 as of October 31,
1996 and 1995; the most significant items comprising the deferred tax
assets were postretirement health benefits of $27,516,000 and
$20,936,000, respectively, compensation accruals of $10,968,000 and
$10,102,000, respectively, and alternative minimum tax credit
carryforwards of $4,028,000 at October 31, 1995. Total deferred tax
liabilities amounted to approximately $48,447,000 and $46,992,000 as of
October 31, 1996 and 1995, respectively, consisting primarily of deferred
taxes on inventory of $2,939,000 and $3,065,000, respectively, and fixed
assets of $45,276,000 and $43,861,000, respectively. The Company had no
valuation allowance for realization of deferred tax assets as of
October 31, 1996 or 1995.
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 noncancellable 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 noncancellable operating leases
amounted to approximately $1,094,000, $1,033,000, and $805,000, for the
years ended October 31, 1996, 1995, and 1994, respectively.
<PAGE> 42
(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, 1996, 1995, and 1994. At October 31, 1996 and 1995,
$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 1996, 1995
and 1994, the Company incurred costs of approximately $2.0 million, $1.7
million and $1.5 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 $5,322,000, $5,573,000 and
$5,401,000 in 1996, 1995 and 1994, 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.
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
<PAGE> 43
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 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
program or the period over which such costs may be incurred and there can
be no assurance that it would not have a material adverse effect on the
financial condition of 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.
<PAGE> 44
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.
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. 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.
(13) Selected Quarterly Data (Unaudited)
- -----------------------------------------------------------------------------
The following is a summary of unaudited quarterly results for the years
ended October 31, 1996 and 1995:
Three Months Ended 1996 January 31 April 30 July 31 October 31
----------------------------------------------------
(Dollars in thousands)
Net sales................ $ 148,493 $ 166,959 $ 174,695 $ 170,654
Gross margin............. 22,989 26,261 29,430 31,512
Net income............... 4,788 6,194 8,130 8,928
Three Months Ended 1995 January 31 April 30 July 31 October 31
----------------------------------------------------
(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)
During the three months ended October 31, 1995, the Company experienced a
54 day labor contract dispute and resulting work stoppage. The negative
gross margins and the net loss for the quarter resulted principally from
excess production costs and expenses related to idling equipment during
the work stoppage, including salaried and benefit costs, bonuses paid to
hourly and salaried employees upon conclusion of the work stoppage, and
lower shipping volume.
<PAGE> 45
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.
/S/ KPMG PEAT MARWICK LLP
- -------------------------
KPMG Peat Marwick LLP
Cleveland, Ohio
December 4, 1996
<PAGE> 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE> 47
PART III
ITEM 10. DIRECTORS AND OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company:
Name Age Position
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
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.
<PAGE> 48
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 dissolved, 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.
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
"Item 13. Certain Relationships and Related 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.
<PAGE> 49
ITEM 11. 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:
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Long-term
Compensation (1) Compensation
----------------- ---------------------------
Fiscal Restricted LTIP All Other
Name and Position Year Salary Bonus Stock Awards (2) Payouts(3) Compensation (4)
<S> <C> <C> <C> <C> <C>
Ira Leon Rennert(5)... 1996 - - - - $1,200,000
Chairman of the 1995 - - - - 1,200,000
Board 1994 - - - - 1,200,000
James V. Stack(6)..... 1996 - - - $748,164 172,918
President and Chief 1995 - - - 748,164 419,659
Executive Officer 1994 $265,633 $200,000 $250,000 97,500 31,251
(Fiscal 1994 and
Sept. 20, 1995 to
March 31, 1996)
Edward R. Caine(7).... 1996 159,616 360,394 115,625 386,945 18,977
President and Chief 1995 - - - - -
Executive Officer 1994 - - - - -
(since April 1, 1996)
Patrick T. Kenney(8).. 1996 132,494 50,000 32,375 543,533 14,563
Vice President, 1995 132,129 75,000 - - 10,938
Operations 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, 1995 130,566 75,000 - - 7,813
Commercial 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, 1995 132,401 75,000 - - 4,875
Finance and Chief 1994 22,067 40,000 - - 812
Financial Officer
- ----------------------
<FN>
(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 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 was scheduled to 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 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.
<PAGE> 50
(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 (See note 5) and
Mr. Stack in fiscal 1996 and fiscal 1995 (See note 6), consists of WCI contributions to
a defined contribution pension plan.
(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
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.
</FN>
</TABLE>
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 Appreciation Agreements now held by the named
executive officers, and the amounts earned thereunder during each of fiscal
1996, 1995 and 1994.
<PAGE> 51
<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............. 1 1/4%(2) 08/31/88 1996 602,250 2,806,655
3/4%(3)(5) 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
- --------------------
<FN>
(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, the Company and Mr. Stack entered into an agreement that
provides 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.
</FN>
</TABLE>
<PAGE> 52
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 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 $108 million
dividend paid to Renco on November 27, 1996, 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of January 1, 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 1, 1997
-----------------------
Shares of
Name of Beneficial Owners and Address of 5% Beneficial Owners Common Stock Percent
<S> <C> <C>
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%
- --------------------
<FN>
(1) Mr. Rennert is deemed to beneficially own the Common Stock of the Company owned
by Renco due to the ownership by himself and six 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.
</FN>
</TABLE>
<PAGE> 53
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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, 1996, 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.
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). 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
<PAGE> 54
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.
<PAGE> 55
PART IV
ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) Documents Filed as a Part of This Report.
1. Consolidated Financial Statements.
The consolidated financial statements listed below together with the
report thereon of the independent auditors dated December 4, 1996,
are included in this report for ITEM 8. and is incorporated by
reference herein.
Consolidated Balance Sheets at October 31, 1996 and 1995.
Consolidated Statements of Income for the fiscal years ended
October 31, 1996, 1995 and 1994.
Consolidated Statements of Shareholders' Equity for the fiscal
years ended October 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the fiscal years ended
October 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
Independent Auditors Report.
2. Financial Statement Schedule.
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 contained as part
of this report herein. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the
related financial statement schedule (Schedule II - Valuation and
Qualifying Accounts) also contained as part of this report herein.
This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on
the financial statement schedule based on our audits.
In our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
/S/ KPMG PEAT MARWICK LLP
-------------------------
KPMG Peat Marwick LLP
Cleveland, Ohio
December 4, 1996
<PAGE> 56
<TABLE>
<CAPTION>
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)
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
- -------------------------
<FN>
(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.
</FN>
</TABLE>
3. Exhibits Required to be Filed by Item 601 of Regulation S-K.
The information called for by this paragraph is contained in the
Exhibit Index of this report which is incorporated herein by
reference.
(b) Reports on Form 8-K.
No current reports on Form 8-K were filed during the last quarter of
the period covered by this report.
<PAGE> 57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized on
the 29th day of January 1997.
WCI STEEL, INC.
By: /S/ EDWARD R. CAINE
-------------------
Edward R. Caine
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on the 29th day of
January, 1997.
Signature Title
/S/ IRA LEON RENNERT
----------------
Ira Leon Rennert Chairman of the Board and Director
/S/ EDWARD R. CAINE
---------------
Edward R. Caine President and Chief Executive Officer
(principal executive officer)
/S/ BRET W. WISE
------------
Bret W. Wise Vice President, Finance and
Chief Financial Officer
(principal financial and
accounting officer)
Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered
Securities Pursuant to Section 12 of the Act.
No annual report to security holders covering the registrant's last
fiscal year and no proxy statement, form of proxy or other proxy
soliciting material with respect to any annual or other meeting of
security holders has been nor will be sent to security holders.
<PAGE> 58
Exhibit Index
<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.(11)
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).(11)
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).(11)
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.(11)
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.(11)
4.5 --Form Letter of Transmittal.(11)
10.1 --[Intentionally Omitted]
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- -------------------------------------------------------------------------
<C> <S>
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.(11)
10.2.3 --Amended and Restated Net Worth Appreciation Agreement, effective
November 1, 1995, between the Registrant and Patrick G. Tatom.(11)
10.2.4 --Amended and Restated Net Worth Appreciation Agreement, effective
November 1, 1995, between the Registrant and Bret W. Wise.(11)
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.(11)
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.
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)
</TABLE>
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- -------------------------------------------------------------------------
<C> <S>
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.(11)
10.4.11 --Intercreditor Agreement, dated November 27, 1996, between Fleet
National Bank and Congress Financial Corporation.(11)
10.5.1 --Intercreditor Agreement, dated November 27, 1996, among Fleet National
Bank, Bank One Trust Company, N.A. and the Registrant.(11)
10.5.2 --Indemnification Agreement, dated as of November 27, 1996, between the
Registrant and Bank One Trust Company, N.A. (11)
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)
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.(11)
21 --List of Subsidiaries of Registrant.(2)
27 --Financial Data Schedule
- -------------------------
</TABLE>
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- --------------------------------------------------------------------
<C> <S>
<FN>
(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 same-numbered exhibit filed with the Company's
Registration Statement on Form S-4 (File No. 333-18019), filed with the Commission
on December 17, 1996.
</FN>
</TABLE>
[ logo of WCI STEEL ]
[ letterhead of Bret W. Wise, Vice President & CFO ]
December 19, 1996
James V. Stack
5042 Seahouse Avenue
Naples, FL 33940
Dear Jim:
WCI Steel, Inc. hereby offers to pay to you four equal quarterly payments,
commencing February 1, 1997, representing the net present value of amounts
owed you under your Net Worth Appreciation Agreement dated September 1, 1988
and as amended on November 15, 1993 and January 5, 1995 (the "Agreement").
The amount of the quarterly payment of $1,166,893.10 has been computed using
a discount rate of 7.6% and will be paid on each of the first day of February,
May, August, and November 1997, subject to applicable withholding taxes.
By signature below, you agree that the payments described above represent
full satisfaction of all amounts due you by the Company,
The Renco Group, Inc. and any affiliate thereof pursuant to the Agreement
and that the Agreement will terminate upon the final payment on
November 1, 1997.
Sincerely,
/S/ BRET W. WISE
----------------
Bret W. Wise
Vice President, Finance and
Chief Financial Officer
Agreed: /S/ JAMES V. STACK
------------------
James V. Stack
[ bottom of letterhead ]
WCI Steel, Inc., 1040 Pine Avenue, S.E., Warren, Ohio 44483-6528
(330) 841-8314 / Fax (330) 84l-8387
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AT OCTOBER 31, 1996 AND THE
CONSOLIDATED STATEMENTS OF INCOME FOR THE FISCAL YEAR ENDED
OCTOBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 90,395
<SECURITIES> 49,146
<RECEIVABLES> 67,469
<ALLOWANCES> 1,600
<INVENTORY> 96,675
<CURRENT-ASSETS> 313,966
<PP&E> 312,810
<DEPRECIATION> 107,689
<TOTAL-ASSETS> 567,453
<CURRENT-LIABILITIES> 132,332
<BONDS> 209,058
0
0
<COMMON> 366
<OTHER-SE> 79,514
<TOTAL-LIABILITY-AND-EQUITY> 567,453
<SALES> 660,801
<TOTAL-REVENUES> 660,801
<CGS> 550,609
<TOTAL-COSTS> 550,609
<OTHER-EXPENSES> 45,267
<LOSS-PROVISION> (646)
<INTEREST-EXPENSE> 24,698
<INCOME-PRETAX> 47,148
<INCOME-TAX> 19,108
<INCOME-CONTINUING> 28,040
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,040
<EPS-PRIMARY> .77
<EPS-DILUTED> .77
</TABLE>
