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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, 1999.
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 333-18019
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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) 841-8302
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 definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. / X /
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant at December 13, 1999 was $0.
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The number of shares of Common Stock (no par value, $.01 stated value) of the
registrant outstanding as of December 13, 1999 was 100.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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WCI STEEL, INC. AND SUBSIDIARIES
FORM 10-K
INDEX
--------------------------------
PART I Page No.
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Item 1. Business 4
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
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Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 17
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and disagreements with Accountants
on Accounting and Financial Disclosure 40
PART III
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Item 10. Directors and Executive Officers of the Registrant 41
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management 44
Item 13. Certain Relationships and Related Transactions 44
PART IV
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Item 14. Exhibits, Financial Statement Schedule,
and Reports on Form 8-K 46
Financial Statement Schedule
(including Independent Auditors Report on Financial
Statement Schedule) 47
Signatures 49
Exhibit Index 50
<PAGE>
<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 owned
by subsidiaries located in Niles and Youngstown, Ohio, all of which are
situated between Cleveland and Pittsburgh. WCI currently produces
approximately 185 grades of flat rolled custom and commodity steel products.
Total shipments were 1,212,259 tons in fiscal 1999 and 1,412,490 tons in
fiscal 1998 (77,244 tons of which were semi-finished). Custom flat rolled
products, which include high carbon, alloy, high strength, silicon electrical
and galvanized steel, constituted approximately 65.5% of net tons shipped
during fiscal 1999 and 62.4% during fiscal 1998 (66.0% excluding semi-
finished steel shipments). 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. Shipping volume was adversely affected in the first fiscal
quarter of 1999 and, to a lesser extent, the fourth fiscal quarter of 1998 by
a significant increase in imports of foreign produced flat rolled steel. See
"Competition" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PRODUCTS
OVERVIEW
WCI produces a wide range of custom flat rolled steel products, including
high carbon, alloy, high strength, silicon electrical and galvanized steel.
WCI's custom products are characterized by small order quantities,
specialized chemistries, narrow widths and value added processing, with an
emphasis on customer specific quality requirements and delivery performance.
WCI's commodity steel product sales consist principally of hot and cold
rolled low carbon sheet steel. Export sales were approximately 2% of net
sales during the last three fiscal years.
<TABLE>
<CAPTION>
Net Tons Shipped Percent of Total
Fiscal Year Ended Fiscal Year Ended
October 31, October 31,
1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Custom Products:
Hot and Cold
Rolled............. 466,076 502,149 481,740 38.4 35.5 36.2
Coated.............. 328,129 379,045 416,854 27.1 26.9 31.4
------- ------- ------- ---- ---- ----
Total Custom Products 794,205 881,194 898,594 65.5 62.4 67.6
Total Commodity...... 418,054 531,296 430,337 34.5 37.6 32.4
------- ------- ------- ---- ---- ----
Total Steel
Products........... 1,212,259 1,412,490 1,328,931 100.0% 100.0% 100.0%
========= ========= ========= ===== ===== =====
</TABLE>
<PAGE> 5
CUSTOM PRODUCTS
High Carbon, Alloy, High Strength---WCI has developed 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 small order quantities, relatively narrow widths and
specific metallurgical properties. WCI presently produces over 100
specialized chemistries for these markets.
WCI's customers in this sector, in turn, supply end-users which have highly
specific product needs requiring the strip converter to order steel with
close gauge tolerances, minimal crown profiles, critical surface qualities
and, in certain cases, in narrow widths.
In the high carbon and alloy market, WCI competes with several other domestic
integrated producers, as well as various steel producers in Canada, Europe
and Japan. In the high strength market, WCI competes with several major
integrated producers and minimills.
Silicon---Silicon electrical steel is sheet steel that exhibits certain
electrical or magnetic properties. The magnetic properties of this product
permit electric motors to run at high speeds for extended periods of time
with greater efficiency while minimizing heat loss.
The market for electrical sheet steel can be divided into two main segments:
grain oriented silicon sheet and non-grain oriented silicon sheet. The
distinction between grain and non-grain oriented silicon sheet pertains to
the electrical properties of the steel. WCI's silicon annealing line is
designed for production of non-grain oriented silicon sheet and all of WCI's
silicon shipments are in this segment. Presently, there is one domestic
competitor in this segment and several foreign competitors. In addition, the
Company's product also competes with cold rolled motor laminations produced
by several other integrated steelmakers which have been developed as a
substitute product for silicon steel in certain applications.
Galvanized---Galvanized steel is zinc-coated sheet steel produced on WCI's
hot dipped galvanizing line. The market for galvanized sheet steel is
divided into two broad categories: heavy and light gauge steel. Heavy gauge
galvanized steel, which is generally hot rolled based, is used in the
manufacture of electrical boxes, culvert coil and grain bins, as well as many
other end uses.
WCI's galvanized finishing line is well suited to produce heavy gauge hot
rolled steel, and as a result, a majority of WCI's galvanized shipments are
in this sector. WCI competes with several other integrated producers and
minimills, as well as independent producers in the heavy gauge galvanized
steel market.
COMMODITY PRODUCTS
In fiscal 1999, WCI shipped 418,054 tons in the aggregate of hot and cold
rolled low carbon, sheet and strip which represented approximately 34.5% of
the Company's net tons shipped. Hot rolled low carbon sheet is sold to steel
<PAGE> 6
service centers or manufacturers producing a broad array of products,
including tubing, stampings and roll formed parts. Cold rolled sheet and
strip is purchased by service centers, container manufacturers, and the
automotive and appliance industries. In these commodity steel markets, WCI
competes with all major integrated producers and several minimills.
MARKETING
WCI's marketing, sales and customer service functions are coordinated through
three wholly-owned subsidiaries, WCI Steel Sales LP (WCI Sales), WCI Steel
Metallurgical Services Inc. (WCI Metallurgical Services) and WCI Steel
Production Control Services Inc. (WCI Production Services).
WCI Sales is responsible for developing and implementing a sales and
marketing strategy aimed at increasing the sales of custom steel products and
building the strategic customer base. WCI Sales employs a direct sales force
covering approximately 300 active accounts and other potential steel accounts
within WCI's geographic market. Over 50% of WCI Sales' shipments are to
customers within 200 miles of the Warren facility, and as a result of this
concentration of active and potential customers in its service area, WCI
Sales believes that it has a competitive advantage over competitors located
farther away.
Sales outside WCI's geographic market are made through independent sales
representatives on a commission basis. Although transportation costs can be
prohibitive at extreme distances from the Warren facility, select custom
products are competitively priced outside WCI Sales normal target markets.
WCI Sales believes that independent sales representatives provide the most
cost effective method to access these customers. Approximately 4.5% of WCI
Sales' volume in fiscal 1999 was sold through the independent sales
representatives.
Marketing and pricing are centralized at the Warren facility, where the
marketing strategy and pricing levels are established for all WCI products.
WCI Sales has a marketing staff that works closely with the sales and
technical service representatives to coordinate the implementation of the
sales and marketing strategy.
WCI Metallurgical Services is responsible for developing the specialized
chemistries that support WCI's custom product mix. In addition, WCI
Metallurgical has a staff of technical service representatives with strong
metallurgical and technical backgrounds who assist the sales force in the
field. Together, WCI believes the sales force and the technical staff
comprise a knowledgeable team qualified to identify and meet customer needs.
WCI Production Services provides order entry and order status services to
assist WCI Sales in meeting customer needs. WCI Production Services provides
customer service and utilizes a fully-automated computerized sales network
that provides the sales force and customers with product specifications and
timely order status information.
<PAGE> 7
CUSTOMERS
WCI's customer base is dominated by steel converters and steel service
centers, which in fiscal 1999 represented 70.4% of shipments. The remaining
shipments were directly 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 1999 1998 1997
<S> <C> <C> <C>
Conversion/further processing...... 47.4% 47.6% 42.5%
Steel service centers.............. 23.0 24.4 23.3
Construction....................... 13.3 12.1 15.8
Electrical equipment............... 6.1 6.2 7.3
Direct automotive.................. 5.7 4.7 6.3
Other.............................. 4.5 5.0 4.8
------ ------ ------
Total............................ 100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
In fiscal years 1999, 1998 and 1997, WCI's twenty largest customers
represented approximately 59%, 57% and 57%, respectively, of net sales. The
Company's largest customer, Worthington Industries, represented approximately
11.3% of net sales in fiscal 1999.
BACKLOG
On October 31, 1999, WCI's order backlog was approximately 283,000 net tons
with an approximate value of $121 million compared to approximately 155,000
net tons with an approximate value of $76 million at October 31, 1998, 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, 1999
backlog by January 31, 2000. Although customers may cancel orders included
in the backlog, such cancellations have been negligible in the past.
COMPETITION
The domestic steel industry is highly competitive. Despite significant
reductions in raw steel production capacity by major domestic producers in
the 1980's and increasing domestic demand in the 1990's, the domestic
industry continues to be adversely affected by excess world capacity.
In the United States, WCI competes with many other domestic steel companies.
WCI also faces increasing competitive pressures from minimills. Minimills
are generally smaller volume steel producers that use ferrous scrap metals as
their basic raw material. Compared to integrated producers, minimills, which
rely on less capital intensive hot metal sources, have certain advantages.
Because minimills typically are not unionized, they have more flexible work
rules which have resulted in lower employment costs per net ton shipped.
<PAGE> 8
Since 1989, significant flat rolled minimill capacity has been constructed
and these minimills now compete with integrated producers in product areas
that traditionally had not faced significant competition from minimills.
These minimills compete with the Company primarily in the commodity flat
rolled steel market and more recently in certain custom flat rolled steel
markets. In addition, the increased competition in commodity product markets
has resulted in certain integrated producers increasing product offerings to
compete with the Company's custom products. This increased competition has
also increased the price volatility of certain of the Company's custom
products.
During 1998, the domestic steel market experienced significant increases in
imports of foreign produced flat rolled steel and, while steel imports were
lower in 1999, they remain above historical levels. The relative strength of
the U.S. dollar and economy versus the strength of foreign currencies and
economies can significantly affect the import/export trade balance for flat
rolled steel. In the third calendar quarter of 1998, there was an
unprecedented increase in imports of flat rolled steel which caused
significant price decreases in the domestic steel market. The increase in
imported product offerings adversely affected the supply-demand balance and
resulted in a significant reduction in production levels and shipping volume
in late 1998 and early 1999 and continues to adversely affect prices for
domestic producers. Certain domestic steel producers filed unfair trade
cases with the U.S. International Trade Commission in September 1998 claiming
that hot rolled steel, and in June 1999 claiming that cold rolled steel, was
being illegally exported to the United States from various countries at
prices below the producers' cost. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
In addition to competition from domestic and foreign steel producers,
materials such as aluminum, cement, composites, glass and plastics compete as
substitutes for steel in many markets.
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 the
Basic Oxygen Furnace (BOF) process where impurities are removed, recycled
scrap is added and metallurgical properties for end use are determined on a
batch-by-batch basis. WCI's BOF has two vessels, each with a steelmaking
capacity of 182 tons per heat. From the BOF, the heats of steel are sent to
the Ladle Metallurgy Facility (LMF), where the temperature and chemistry of
the steel are adjusted to precise tolerances. In addition, the steel may be
vacuum degassed to further improve its cleanliness. Liquid steel from the
LMF then is formed into slabs through the process of continuous casting. The
twin-strand continuous slab caster (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 usually 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.
<PAGE> 9
RAW MATERIALS
WCI's steelmaking operations are dependent on reliable supplies of various
raw materials, principally iron ore pellets, coke and energy. WCI believes
that it has adequate sources of its principal raw materials to meet its
present needs.
Iron Ore Pellets
WCI has a contract with a major supplier of iron ore pellets for its
requirements through fiscal 2004. Iron ore pellets satisfied approximately
72.1% of WCI's iron requirements in fiscal 1999, while WCI's sinter plant
provided the balance. The iron ore pellet contract requires WCI to purchase
all of its iron ore pellet requirements through 2004 from the contracting
vendor. WCI carries an increased level of iron ore pellet inventory
immediately preceding the winter months, due to the curtailment of vendor
shipments during the winter as a result of the freezing of the Great Lakes.
Coke
Coke is the principal fuel used to produce liquid iron and is an essential
ingredient in steelmaking. WCI has contracts with two integrated steel
producers for its estimated coke requirements through fiscal 2003. WCI's
coke requirements are approximately 600,000 tons per year. The domestic
supply of coke has decreased significantly over the last decade and may
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. Although 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
2003, there can be no assurance to such effect.
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 2002 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 through August
2000. Oxygen is delivered, under a contract that extends to 2002, 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.
ENVIRONMENTAL MATTERS
In common with much of the steel industry, the Company's facilities are
located on sites that have been used for heavy industrial purposes for
decades. The Company 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 management. The Company has made and intends to continue
to make the necessary expenditures for compliance with environmental laws and
regulations. Environmental laws and regulations continue to change and have
generally become more stringent and the Company may be subject to more
<PAGE> 10
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.
The Company is subject to consent decrees as a result of two civil actions
instituted by the Department of Justice (DOJ) on behalf of the Environmental
Protection Agency (EPA). These consent decrees require the Company to
complete certain supplemental environmental projects estimated to cost
between $1.7 million and $2.2 million that will be expended over two years.
The largest of the projects to be undertaken as part of the settlement
involves sediment removal from the Mahoning River at an estimated cost of
$750,000 but not to exceed $1 million. The consent decrees also provide for
stipulated penalties in the event of noncompliance which the Company does not
believe will be material.
The Company was the defendant in an action instituted by DOJ on May 11, 1998
under the Resource Conservation and Recovery Act (RCRA), which alleged
violations of RCRA, the Ohio Administrative Code (OAC) and the Company's
hazardous waste management permit related to the Company's management of
alleged hazardous waste in surface impoundments at the Warren, Ohio facility.
The action alleged that from September 1988 to the present, the Company
operated hazardous waste management units at the Warren facility without the
proper permits and in noncompliance with RCRA. This action sought a civil
penalty of not more than the statutory maximum of $25,000 per day per
violation ($27,500 per day per violation for violations since January 30,
1997) and also an injunction requiring closure of the surface impoundments
and other compliance measures under RCRA. A trial in the RCRA action was
completed in June 1999 and the court rendered its decision in October 1999.
The court's decision requires the Company to pay a $1 million cash penalty
and denied the United States request for injunctive relief. In November
1999, the U.S. filed a motion for the court to reconsider its decision
regarding injunctive relief which was denied. The court's decision is
subject to appeal.
As a condition of a previous RCRA operating permit, the Company is required
to undertake a corrective action program with respect to historical material
handling practices at the Warren facility. The Company is currently
undertaking the first investigation step of the corrective action program,
the RCRA Facility Investigation (RFI), the initial phase of which is expected
to be completed in 2000. The RFI workplan identifies thirteen historical
solid waste management units to be investigated. The final scope of
corrective action required to remediate any contamination that may be present
at or emanating from the Warren facility is dependent upon the completion and
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 any such corrective
action program would not 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 Ohio EPA has issued
a permit to install a new lined landfill to replace this landfill. The plan
involves closure by removal of the present landfill by providing approxi-
mately 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
<PAGE> 11
subsidiary, Youngstown Sinter Company, and disposing of any non-salable or
non-recyclable material in the new lined landfill. Youngstown Sinter Company
is presently exploring modifications to sulfur dioxide emission regulations
applicable to the sinter plant to facilitate compliance with sulfur dioxide
emission limits, as well as allow faster recycling of the present landfill
contents. The Company does not believe that this matter will result in any
material expenditures. 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 and the estimated cost for
Phase II is approximately $2.0 million expended over two years. Engineering
related to the new landfill is expected to begin during fiscal 2000.
EMPLOYEES
As of October 31, 1999, WCI had 506 salaried employees and 1,548 hourly
employees. Most of the employees are located at the Warren facility with
most of the hourly employees being represented by the United Steelworkers of
America (USWA) with which WCI has a five-year collective bargaining agreement
that expires October 31, 2004.
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 Plans
WCI has a defined contribution retirement plan that covers substantially all
salaried employees. WCI funds contributions to this plan as earned on a
monthly basis. Company contributions to the plan are based on employee age
and compensation.
The Company has a defined benefit floor offset pension plan which covers
substantially all hourly employees at the Warren facility. The plan, when
combined with benefits from the Company's defined contribution plan which was
frozen effective September 1, 1999 and benefits from a predecessor company's
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(Benefit Multiplier) times the
number of years of service with WCI or its predecessors. As a result of the
collective bargaining agreement effective September 1, 1999, the Benefit
Multiplier will increase to $52.50 for years of service up to 30 and $70 for
<PAGE> 12
years of service in excess of 30 on September 1, 2001 and will further
increase to $56.25 and $75, respectively, effective September 1, 2003. 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. No named
executive officer is eligible to participate in this plan.
Postretirement Health Care Plans
WCI provides postretirement health care benefits to employees who retire
while meeting certain age and service eligibility requirements. The Company
has established a trust to hold contributions to fund future postretirement
health care and life insurance obligations related to the hourly workforce.
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. As a result of the collective bargaining agreement effective
September 1, 1999, the Company is permitted to pay current claims up to $8.5
million from the trust, after which time the Company will be required to pay
claims from corporate assets.
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 annealing line,
hot-dip galvanizing line and other finishing facilities. The blast furnace
was relined during 1995 as part of its planned maintenance, a procedure which
is performed on a routine basis every six to eight years.
Youngstown Sinter Company, a subsidiary of the Company, 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 useable in the blast
furnace, reducing WCI's iron ore pellet feed requirements by approximately
27.9% in fiscal 1999.
Niles Properties, Inc., a subsidiary of the Company, is located approximately
five miles from the Warren facility, and has approximately 525,000 square
feet of building space with five long-term tenants occupying 70% of the
facility. WCI is continuing to seek other appropriate tenants.
WCI believes that its facilities are well maintained and they are considered
satisfactory for their purposes.
See Note 4 to the Consolidated Financial Statements, Part II, Item 8, for a
description of liens related to the Company's property, plant and equipment.
ITEM 3. LEGAL PROCEEDINGS
On January 23, 1996, two retired employees instituted an action against the
Company and the USWA 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 (ERISA), the National Labor Relations
Act (NLRA) and common law. On July 31, 1997 the court granted the Company's
motion to dismiss this action and entered judgement in favor of the Company
and the USWA. The plaintiffs filed an appeal regarding the court's decision
to dismiss which was heard in June 1998. In March 1999, the appellate court
<PAGE> 13
upheld the dismissal of the claims under ERISA and common law, but reversed
the dismissal of the NLRA claim and remanded to the district court for
further proceedings.
In addition, the Company is involved in various claims and lawsuits
incidental to the ordinary course of business.
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, 1999.
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company is a direct wholly-owned subsidiary of Renco Steel Holdings, Inc.
(Renco Steel) and an indirect wholly-owned subsidiary of The Renco Group,
Inc. (Renco). There is no established public trading market for the
Company's common stock. Since December 1996, the Company has had one
shareholder. The Company paid cash dividends four times during fiscal 1998
aggregating $14,100,000 and once during fiscal 1999 of $3,000,000. See Note
4 to the Consolidated Financial Statements, Part II, Item 8 for limitations
on dividends.
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
1995(1) 1996(2) 1997(3) 1998 1999(4)
(Dollars and tons in thousands, except per ton amounts)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net Sales..................... $630,990 $660,801 $668,470 $665,741 $531,669
Cost of products sold......... 544,789 550,609 547,545 560,951 468,170
-------- -------- -------- -------- --------
Gross margin.................. 86,201 110,192 120,925 104,790 63,499
Depreciation and amortization. 21,178 22,547 23,174 25,240 23,334
Selling, general and
administrative expenses...... 19,675 22,074 29,355 17,343 14,613
-------- -------- -------- -------- --------
Operating income.............. 45,348 65,571 68,396 62,207 25,552
Interest expense.............. 25,787 24,968 31,690 32,057 32,030
Interest and other income..... 6,212 6,545 1,239 2,308 8,062
-------- -------- -------- -------- --------
Income before income taxes
and extraordinary loss on
early retirement of debt..... 25,773 47,148 37,945 32,458 1,584
Income taxes.................. 10,313 19,108 14,482 12,365 (4,279)
-------- -------- -------- -------- --------
Income before extraordinary
loss on early retirement
of debt...................... $ 15,460 $ 28,040 $ 23,463 $ 20,093 $ 5,863
======== ======== ======== ======== ========
Other Operating Data:
Net tons shipped.............. 1,222 1,397 1,329 1,412 1,212
Percent custom products....... 59.4% 57.9% 67.6% 62.4% 65.5%
Average selling price per net
ton shipped.................. $ 516 $ 473 $ 503 $ 471 $ 439
Average cost per net ton
shipped...................... 446 394 412 397 386
Average gross margin per
net ton shipped.............. 71 79 91 74 52
Average operating income per
net ton shipped.............. 37 47 51 44 21
Balance Sheet Data:
Cash, cash equivalents and
short-term investments....... $106,548 $139,541 $ 18,989 $ 62,195 $ 76,349
Working capital (excluding
cash, cash equivalents and
short-term investments)...... 61,881 42,093 66,913 45,645 39,113
Property, plant and equipment,
net.......................... 189,733 205,121 224,620 217,624 208,477
Total assets.................. 519,159 567,453 470,751 460,286 479,944
Total debt (including current
portion)..................... 213,854 211,506 302,937 301,618 301,502
Shareholder's equity (deficit) 59,495 79,880 (90,366) (84,873) (81,731)
<FN>
- ------------------------
(1) 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.
(2) 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.
<PAGE> 16
(3) Fiscal 1997 statement of income reflects $8.6 million of compensation expenses
related to the debt refinancing and equity redemption transactions effected in
November 1997.
(4) Fiscal 1999 statement of income reflects an income tax benefit of $4.3 million
resulting from the subchapter S election described in Note 1(g), a gain of $5.0
million resulting from an agreement with the USWA permitting the Company to pay
certain medical benefits from assets in a trust previously restricted for other
benefits and a benefit of $7.5 million resulting from the LIFO inventory valuation
method.
</FN>
</TABLE>
<PAGE> 17
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.
During calendar year 1998, the United States experienced a significant
increase in imports of steel products and in the third calendar quarter of
1998, steel imports reached record levels and reflected an increase of 56%
over the comparable period of 1997. These imports totaled approximately
30.0% of domestic demand in calendar year 1998 compared to approximately
23.8% in calendar year 1997. While steel imports have been lower in calendar
year 1999, they remain above historical levels and have totaled approximately
25.9% of domestic demand. On September 30, 1998, several domestic producers
filed unfair trade cases against Japan, Russia and Brazil seeking anti-
dumping duties on hot rolled steel imports. From April 1999 through July
1999 the U.S. Department of Commerce announced final antidumping duties
and/or entered into agreements to suspend investigations in the cases against
Japan, Russia and Brazil. On June 2, 1999 several domestic producers filed
unfair trade cases against twelve countries concerning imports of cold rolled
products. On July 19, 1999, the International Trade Commission (ITC) issued
its preliminary determination that the domestic industry was being injured or
threatened with injury as a result of imports from all of the countries. In
November 1999, the U.S. Department of Commerce followed the ITC ruling by
issuing preliminary antidumping duties in these cases. The Commerce
Department also found critical circumstances with respect to certain
producers and, if upheld in the final investigations, will require that
duties imposed would apply retroactively to 90 days prior to the preliminary
determination.
The unprecedented surge in imports created a supply imbalance in the domestic
steel market and resulted in significant decreases in order intake rates,
production levels and shipping volumes for domestic producers during late
1998 and early 1999, including WCI. The import surge also resulted in
significant decreases in selling prices throughout 1999. The Company
believes the pricing environment is improving and has announced price
increases for January 1, 2000. However, due to continuing high levels of
imports and the uncertainty created by the imports, no assurance can be given
that such price increases will be realized.
RESULTS OF OPERATIONS
Fiscal 1999 Compared to Fiscal 1998
Net sales in 1999 were $531.7 million on 1,212,259 tons shipped, representing
a 20.1% decrease in net sales and a 14.2% decrease in tons shipped compared
to 1998. Shipping volume decreased in 1999 due to the surge of imports in
late 1998 which adversely effected shipping volume during the first quarter
of 1999 and, to a lesser extent, the fourth quarter of 1998. In addition,
the Company shipped 77,244 tons of lower value added semi-finished steel
during 1998. Excluding semi-finished steel, net sales per ton shipped
decreased 9.1% to $439 in 1999 compared to $483 for 1998, primarily as a
result of lower selling prices and, to a lesser extent, changes in product
mix. Excluding semi-finished steel, custom carbon, alloy and electrical
steel accounted for 65.5% of shipments in 1999 compared to 66.0% in 1998.
Gross margin (sales less cost of goods sold) was $63.5 million in 1999
compared to $104.8 million in 1998. The decrease in gross margin reflects
<PAGE> 18
lower shipping volume and prices discussed above offset somewhat by lower
production costs, raw material prices, and variable compensation expense.
In addition, gross margin was adversely impacted by the low level of
operations during the first quarter of 1999 as a result of the import surge
in late 1998. During the fourth quarter, the Company incurred $11.0 million
of excess production costs as a result of the idling of much of the facility
due to start-up problems after completion of planned maintenance outage at
the blast furnace. The Company also recorded a LIFO inventory valuation
benefit of $7.5 million in 1999 ($5.7 during the fourth quarter) compared to
$2.7 million in 1998 ($0.8 million during the fourth quarter).
Operating income was $25.6 million, $21 per ton, for 1999 compared to $62.2
million, $44 per ton, for 1998. The decrease in operating income in 1999
reflects the lower gross margin discussed above offset by lower depreciation
expense and a decrease in selling, general and administrative expenses in
1999 primarily due to lower variable compensation expense.
Interest and other income, net was $8.1 million in 1999 compared to $2.3
million in 1998. During the fourth quarter of 1999, the Company recorded a
gain of $5.0 million as a result of an agreement with the United Steelworkers
of America which permits the Company to pay certain medical benefits from
assets in a trust previously restricted for other benefits. This will also
result in the Company recognizing an additional gain of approximately $2.9
million during the first quarter of fiscal year 2000.
As a result of the items discussed above, the Company had income before taxes
of $1.6 million in 1999 compared to $32.5 million in 1998. Effective
November 1, 1998, the Company was designated as a qualified subchapter S
subsidiary by Renco. Accordingly, the Company is generally not subject to
income taxes and recognized an income tax benefit of $4.3 million during 1999
which includes the elimination of net deferred tax liabilities recorded as of
October 31, 1998.
Fiscal 1998 Compared to Fiscal 1997
Net sales in 1998 were $665.7 million on 1,412,490 tons shipped, representing
a 0.4% decrease in net sales and a 6.3% increase in tons shipped compared to
1997. Shipping volume increased in 1998 due to the shipment of 77,244 tons
of lower value added semi-finished steel compared with 22,642 tons in 1997.
Shipments during the fourth quarter of 1998 were 308,284 tons compared to
341,020 tons in the comparable period in 1997. Shipments during the fourth
quarter of 1998 were adversely affected by the surge in the amount of flat
roll steel exported to the United States, as addressed above. Excluding
semi-finished steel, net sales per ton shipped decreased 4.7% to $483 in 1998
compared to $507 for 1997, primarily as a result of lower selling prices and,
to a lesser extent, changes in product mix. Excluding semi-finished steel,
custom carbon, alloy and electrical steel accounted for 66.0% of shipments in
1998 compared to 68.8% in 1997.
Gross margin (sales less cost of goods sold) was $104.8 million in 1998
compared to $120.9 million in 1997. The decrease in gross margin is
primarily attributable to the lower selling prices discussed above offset
somewhat by lower production costs, a LIFO inventory benefit and lower
variable compensation expense in 1998.
Operating income was $62.2 million, $44 per ton, for 1998 compared to $68.4
million, $51 per ton for 1997. The operating results for 1997 include $8.6
<PAGE> 19
million of compensation charges related to the debt refinancing and equity
redemption transactions effected in November 1997. Excluding the charges
incurred as a result of these transactions, operating income was $77.0
million during 1997 or $58 per ton shipped. The decrease in operating income
in 1998 reflects the lower gross margin discussed above and higher
depreciation charges as a result of the hot strip mill upgrade substantially
completed in late 1997, offset by a decrease in selling, general and
administrative expenses in 1998 as a result of lower variable compensation
and legal expenses.
As a result of the items discussed above, income before extraordinary items
was $20.1 million in 1998 compared to $23.5 million in 1997. During 1997 the
Company recognized an extraordinary loss of $19.6 million, net of income
taxes, on the early retirement of $206.1 million principal amount of Senior
Notes. As a result, the Company had net income of $3.9 million for 1997.
LIQUIDITY AND CAPITAL RESOURCES
WCI's liquidity requirements result from capital investments, working capital
requirements, postretirement health care and pension funding, interest
expense and, to a lesser extent, principal payments on its indebtedness. WCI
has met these requirements in each fiscal year since 1992 from cash balances
and cash provided by operating activities. The Company's primary sources of
liquidity as of October 31, 1999 consisted of cash and cash equivalents of
$76.3 million and available borrowing under its $100 million revolving credit
agreement (Revolver).
The Revolver has a maximum borrowing limit of $100 million, is secured by
eligible inventories and receivables, as defined therein, and expires on
December 29, 2003. As of October 31, 1999, WCI had no borrowings outstanding
under the Revolver, with a borrowing limit of $91.8 million based on eligible
inventories and receivables, net of $6.1 million in outstanding letters of
credit.
Cash from Operations
Cash provided by operating activities was $28.7 million for 1999 compared to
$74.1 million and $39.6 million for 1998 and 1997, respectively. The
decrease in operating cash flow in 1999 compared to 1998 resulted primarily
from a decrease in income before taxes as described previously and from
changes in working capital.
As of October 31, 1999, at pricing then in effect, WCI had commitments under
raw material supply contracts of approximately $11.9 million for 2000, $12.3
million for 2001 and $3.0 million thereafter.
Capital Expenditures
Capital expenditures were $11.4 million, $15.6 million and $39.9 million
during 1999, 1998 and 1997, respectively. Subject to market and business
conditions, capital expenditures are expected to range between $20 million
and $25 million in 2000. The higher level of capital investment in 1997
reflects expenditures on an upgrade of the Company's hot strip mill and the
installation of a new hydrogen anneal facility. Management has funded the
Company's capital expenditures in 1999, 1998 and 1997 through cash balances
and cash provided by operating activities. At October 31, 1999, the Company
had commitments for capital expenditures of approximately $5.9 million.
<PAGE> 20
Debt Transactions
Renco Steel is a holding company formed by Renco in January 1998 which owns
all the outstanding shares of capital stock of the Company. In February
1998, Renco Steel issued $120 million principal amount 10.875% Senior Secured
Notes due 2005. These notes are secured by a pledge of all the outstanding
capital stock of the Company. Renco Steel intends to meet its debt service
obligations from its cash balances and earnings thereon and through
distributions from the Company as permitted under the Company's outstanding
indebtedness.
The Revolver and the indenture governing WCI's 10% Senior Secured Notes due
2004 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.
Dividends
During 1999, the Company paid dividends of $3.0 million and expects that
further dividends will be declared and paid up to the amount permitted under
the Senior Secured Notes indenture. As of October 31, 1999, $0.2 million was
available for dividends under the Senior Secured Notes indenture.
Postretirement Benefit Plans
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. Under terms of
the Company's labor contract effective September 1, 1999, the Company is
permitted to pay current claims up to $8.5 million from a trust established
to fund future benefits after which time the Company will be required to pay
claims from corporate assets. Claims paid by the Company totaled $3.1
million, $3.1 million and $2.4 million during 1999, 1998 and 1997,
respectively.
The Company has a defined benefit pension plan which covers substantially all
bargained for employees. Under this plan and the Company's now frozen
defined contribution plan for hourly employees, the Company expensed $7.7
million in 1999. As a result of benefit increases included in the collective
bargaining agreement with the USWA effective September 1, 1999, the Company
expects to incur expenses under the plan of approximately $12.5 million in
2000. The Company contributed $6.7 million and $3.1 million to the plan
during 1999 and 1998, respectively, and made minimal contributions to the
plan during 1997. The Company expects to contribute approximately $4.2
million, $7.5 million and $24.0 million to the plan during 2000, 2001 and
2002, respectively, which is expected to satisfy the minimum funding
requirements of ERISA for those periods.
Environmental Matters
WCI has incurred and, in the future, will continue to incur capital
expenditures for matters relating to environmental control and monitoring.
<PAGE> 21
Capital expenditures for environmental control and monitoring were $0.4
million, $0.5 million and $0.8 million in 1999, 1998 and 1997, respectively.
Operating costs for control and monitoring equipment, excluding depreciation
and amortization expense, were $8.2 million, $9.6 million and $10.8 million
for 1999, 1998 and 1997, respectively. Operating costs for fiscal 2000 for
control and monitoring equipment are not expected to increase significantly
from the prior periods.
Environmental laws and regulations continue to change and generally have
become more stringent, 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.
Year 2000 Business Matters
Many information and process control systems used in the current business
environment were designed to use only two digits in the date field and thus
may not function properly in or after the year 2000. Over the past several
years, the Company has been assessing and modifying its business systems to
be year 2000 ready and has completed the required program changes and the
replacement/upgrading of purchased systems. The Company has completed
testing of the applications and, after completing additional remediation on
approximately 5% of the programs tested, has found them to be year 2000
ready. The Company completed a comprehensive enterprise-wide test for its
business systems in March 1999. Based on the results of this test, the
Company believes that its critical business systems are year 2000 ready. The
Company has completed an inventory and assessment of its process control
environment, including automation, instrumentation and components with
embedded chips. The Company completed testing of the process control systems
and components, including integration tests, during June 1999 and after
completing additional remediation believes that its process control systems
and components are year 2000 ready. The Company does not expect year 2000
issues related to its business systems or process control environment to
cause any significant disruption to operations. The Company incurred $0.4
million of incremental costs to address year 2000 issues during 1999.
In conjunction with its efforts to achieve year 2000 readiness, the Company
is also monitoring the status of the year 2000 readiness programs at its
significant suppliers and business partners through questionnaires which were
sent to each such entity. The Company has received responses from each of
these entities. The Company has evaluated these responses and has made
additional inquiries of critical suppliers to monitor the status of their
year 2000 readiness efforts. The Company has used information learned from
this process to develop its contingency plans to mitigate the impact that may
occur if its critical suppliers are not year 2000 ready on a timely basis.
While the Company has developed contingency plans for the sourcing and
transportation of raw material components critical to its operations, the
Company is presently dependent on single sources for certain of its energy,
raw materials and transportation needs. If certain vendors are unable to
supply the raw materials, energy or transportation services on a timely basis
in the year 2000, it could result in the Company being unable to operate or
require the Company to operate at a reduced level.
<PAGE> 22
Labor Matters
Most of the Company's hourly employees are represented by the USWA, with
which the Company has a five-year collective bargaining agreement effective
September 1, 1999 that expires October 31, 2004. This contract provides for
wage increases of approximately $.50 per hour effective September 1, 1999, $1
per hour effective September 1, 2001 and $1 per hour effective March 1, 2003.
This contract also provides for changes to the Company's defined benefit and
defined contribution plans for hourly employees as previously described.
Accounting Standards
In March 1998, the American Institute of Certified Public Accountants issued
its Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidelines for companies to capitalize or expense costs incurred to
develop or obtain internal-use software. The Company adopted SOP 98-1
effective November 1, 1998. The adoption of SOP 98-1 did not have a material
impact on the Company's results for the year ended October 31, 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities." This new standard requires recognition of all
derivatives as either assets or liabilities at fair value. The Company does
not believe adoption of the standard will have a material effect on either
financial position or results of operations. The Company plans to adopt the
standard effective November 1, 2000, as required.
Forward-Looking Statements
This report includes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 which involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company to differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such risks, uncertainties and
other important factors include, among others: general economic and business
conditions; increasing industry capacity and levels of imports of steel or
steel products; industry trends, including product pricing; competition;
currency fluctuations; the loss of any significant customer; availability of
qualified personnel; effects of future collective bargaining agreements;
major equipment failures; and unanticipated problems encountered in the year
2000 readiness program. These forward-looking statements speak only as of
the date of this report. The Company expressly disclaims any obligation or
undertaking to disseminate any updates or revisions to any forward-looking
statement contained herein to reflect any change in the Company's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
<PAGE>
<PAGE> 23
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,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.........................$ 76,349 $ 62,195
Accounts receivable, less allowances for doubtful
accounts of $874 and $904, respectively......... 57,846 48,724
Inventories....................................... 83,247 87,140
Deferred income taxes............................. - 8,610
Prepaid expenses and other current assets......... 6,236 1,144
--------- ---------
Total current assets......................... 223,678 207,813
Property, plant and equipment, net.................. 208,477 217,624
Intangible pension asset, net....................... 31,895 14,972
Other assets, net................................... 15,894 19,877
--------- ---------
Total assets............................$ 479,944 $ 460,286
========= =========
LIABILITIES and SHAREHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt.................$ 122 $ 116
Accounts payable.................................. 59,730 46,620
Accrued liabilities............................... 48,364 53,237
--------- ---------
Total current liabilities.................... 108,216 99,973
Long-term debt, excluding current portion........... 301,380 301,502
Deferred income taxes............................... - 13,368
Postretirement health care benefits................. 99,706 92,738
Pension benefits.................................... 38,635 23,524
Other liabilities................................... 13,738 14,054
--------- ---------
Total liabilities....................... 561,675 545,159
--------- ---------
Shareholder's equity (deficit)
Preferred stock, par value $1,000 per share, 5,000
shares authorized, none issued. ................ - -
Common stock, no par value, stated value $.01 per
share, 40,000,000 shares authorized, 100 shares
issued and outstanding.......................... - -
Additional paid-in capital........................ 279 -
Accumulated deficit............................... (82,010) (84,873)
--------- ---------
Total shareholder's equity (deficit).... (81,731) (84,873)
Commitments and contingencies....................... - -
Total liabilities and --------- ---------
shareholder's equity (deficit)..........$ 479,944 $ 460,286
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 24
<TABLE>
<CAPTION>
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Years ended October 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales.......................................$ 531,669 $ 665,741 $ 668,470
Operating costs and expenses
Cost of products sold.......................... 468,170 560,951 547,545
Depreciation and amortization.................. 23,334 25,240 23,174
Selling, general and administrative expenses... 14,613 17,343 29,355
--------- --------- ---------
506,117 603,534 600,074
--------- --------- ---------
Operating income............................. 25,552 62,207 68,396
--------- --------- ---------
Other income (expense)
Interest expense............................... (32,030) (32,057) (31,690)
Interest and other income, net................. 8,062 2,308 1,239
--------- --------- ---------
(23,968) (29,749) (30,451)
--------- --------- ---------
Income before income taxes and
extraordinary loss......................... 1,584 32,458 37,945
Income tax (benefit) expense.................... (4,279) 12,365 14,482
--------- --------- ---------
Income before extraordinary loss............. 5,863 20,093 23,463
Extraordinary loss on early retirement of
debt, net of income taxes..................... - - 19,606
--------- --------- ---------
Net income...................................$ 5,863 $ 20,093 $ 3,857
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 25
<TABLE>
<CAPTION>
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(Dollars in thousands)
Years ended October 31, 1999, 1998 and 1997
---------------------------------------------------------
Total
Share-
Additional Retained holder's
Preferred Common Paid-In Earnings Treasury Equity
Stock Stock Capital (Deficit) Stock (Deficit)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1996....... - $ 366 $ 570 $ 80,144 $ (1,200) $ 79,880
Net income........................ - - - 3,857 - 3,857
Dividends paid on Common Stock.... - - - (118,000) - (118,000)
Repurchase of Common Stock........ - (366) (901) (56,867) 1,200 (56,934)
Other............................. - - 331 - - 331
-------- -------- ------- -------- -------- --------
Balance at October 31, 1997....... - - - $(90,866) - $ (90,866)
Net income........................ - - - 20,093 - 20,093
Dividends paid on Common Stock.... - - - (14,100) - (14,100)
-------- -------- ------- -------- -------- --------
Balance at October 31, 1998....... - - - $(84,873) - $(84,873)
Net income........................ - - - 5,863 - 5,863
Dividends paid on Common Stock.... - - - (3,000) - (3,000)
Capital contribution.............. - - 279 - - 279
-------- -------- ------- -------- -------- --------
Balance at October 31, 1999....... - - 279 $(82,010) - $(81,731)
======== ======== ======= ======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended October 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.....................................$ 5,863 $ 20,093 $ 3,857
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization................ 20,400 22,309 20,243
Amortization of deferred maintenance costs... 2,934 2,931 2,931
Amortization of financing costs.............. 1,329 1,321 1,435
Postretirement health care benefits.......... 6,968 6,983 3,960
Pension benefits............................. (2,202) 1,583 5,101
Provision for losses on accounts receivable.. (84) (475) 64
Deferred income taxes........................ (4,758) 5,449 5,581
Extraordinary loss........................... - - 32,786
Other........................................ 429 142 356
Cash provided (used) by changes in certain
assets and liabilities
Accounts receivable........................ (9,038) 16,953 603
Inventories................................ 3,893 19,153 (9,618)
Prepaid expenses and other assets.......... (5,372) (3,069) (389)
Accounts payable........................... 13,110 (17,503) (15,015)
Accrued liabilities........................ (4,483) 731 (2,878)
Other liabilities.......................... (316) (2,521) (9,437)
--------- --------- ---------
Net cash provided by operating activities...... 28,673 74,080 39,580
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment... (11,403) (15,565) (39,902)
Gross proceeds from the sale of assets....... - 110 135
Short-term investments, net.................. - - 49,146
--------- --------- ---------
Net cash (used) provided by investing
activities................................... (11,403) (15,455) 9,379
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of Senior Secured
Notes...................................... - - 290,103
Repurchase of Senior Notes................... - - (233,085)
Repurchase of Common Stock................... - - (56,934)
Dividends paid............................... (3,000) (14,100) (118,000)
Principal payments on other long-term debt... (116) (1,319) (2,449)
--------- --------- ---------
Net cash used by financing activities.......... (3,116) (15,419) (120,365)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. 14,154 43,206 (71,406)
Cash and cash equivalents at beginning
of year...................................... 62,195 18,989 90,395
--------- --------- ---------
Cash and cash equivalents at end of year.......$ 76,349 $ 62,195 $ 18,989
========= ========= =========
Supplemental disclosure of cash flow
information
Cash paid for interest...................$ 30,707 $ 30,763 $ 21,412
Cash paid for income taxes .............. 974 2,050 8,306
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 27
WCI STEEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
- -----------------------------------------------------------------------------
WCI Steel, Inc. (Company or WCI) is a wholly-owned subsidiary of Renco
Steel Holdings, Inc. (Renco Steel) and an indirect wholly-owned
subsidiary of The Renco Group, Inc. (Renco).
(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, high strength, silicon electrical and galvanized steel.
In addition, the Company produces commodity grade low carbon flat rolled
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 United States.
During 1999, sales to the Company's largest customer accounted for 11.3%
of net sales. During 1998 and 1997, no single customer accounted for 10%
or more 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. Approximately 50% of WCI's shipments are to customers
within 200 miles of its primary facility.
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 five-year agreement with the USWA that
expires October 31, 2004.
(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) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the last-in, first-out (LIFO) method.
(e) 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 17 years). Expenditures for
normal repairs and maintenance are charged to expense as incurred.
<PAGE> 28
(f) Other Assets
Deferred financing costs, included in other non-current assets, are
amortized using the effective yield method over the term of the related
financing and deferred blast furnace maintenance costs, also included in
other assets, are amortized using the straight-line method over a
six-year period.
(g) Income Taxes
On January 15, 1999, Renco filed an election with the consent of its
shareholders with the Internal Revenue Service to change its taxable
status from that of a subchapter C corporation to that of a subchapter S
corporation, effective November 1, 1998. At the same time, Renco elected
for the Company to be treated as a qualified subchapter S subsidiary
(QSSS). Most states in which the Company operates will follow similar
tax treatment. QSSS status requires the ultimate shareholders to include
their pro rata share of the Company's income or loss in their individual
tax returns. The Company will continue to provide for state and local
income taxes for the taxing jurisdictions which do not recognize QSSS
status, however, management believes this is not material to the Company.
However, under the "built in gains" provisions of the tax law, federal
and state taxes may become payable and would be charged to the Company's
statement of income. Such taxes are measured by the excess of the fair
market value of assets over their tax bases on the effective date of the
subchapter S subsidiary election if the associated assets are disposed
of within the ten-year post-election period. It is not management's
present intention to trigger any taxes under the built-in-gain provisions
of the tax law.
(h) 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.
(i) 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.
(j) Reclassification
Certain items in the consolidated financial statements for 1998 and 1997
have been reclassified to conform to the 1999 presentation.
<PAGE> 29
(2) Inventories
- -----------------------------------------------------------------------------
Inventories consist of the following:
October 31,
1999 1998
-----------------------
(Dollars in thousands)
Raw materials........................ $ 33,811 $ 36,259
Finished and semi-finished product... 49,386 58,332
Supplies............................. 50 86
--------- ---------
83,247 94,677
Less LIFO reserve.................... - 7,537
--------- ---------
$ 83,247 $ 87,140
========= =========
(3) Property, Plant and Equipment
- -----------------------------------------------------------------------------
Property, plant and equipment is comprised of the following:
October 31,
1999 1998
-----------------------
(Dollars in thousands)
Land and improvements................ $ 435 $ 435
Buildings............................ 27,449 27,445
Machinery and equipment.............. 332,320 327,353
Construction in progress............. 5,379 3,821
--------- ---------
365,583 359,054
Less accumulated depreciation........ 157,106 141,430
--------- ---------
$ 208,477 $ 217,624
========= =========
(4) Long-Term Debt
- -----------------------------------------------------------------------------
Long-term debt consists of the following:
October 31,
1999 1998
-----------------------
(Dollars in thousands)
Senior Secured Notes with interest
at 10% payable semi-annually,
due 2004........................... $ 300,000 $ 300,000
Revolving Credit Facility(Revolver)
with interest at prime rate
(8.25% at October 31, 1999)
payable monthly.................... - -
Other................................ 1,502 1,618
--------- ---------
301,502 301,618
Less current portion of long-term
debt............................... 122 116
--------- ---------
$ 301,380 $ 301,502
========= =========
<PAGE> 30
The $300 million 10% Senior Secured Notes due 2004 (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 10.5% Senior Notes due 2002 (Senior
Notes) are extinguished ($0.3 million currently outstanding). A
Voluntary Employee Beneficiaries Association trust fund, established to
hold Company contributions to fund postretirement health care and life
insurance obligations for the benefit of hourly employees, also holds a
second priority lien on the security for the Senior Secured Notes, which
lien will remain a second priority lien even if the lien in favor of the
Senior Secured Notes becomes a first priority lien.
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 a monthly
service fee of $15,000 and an annual commitment fee of 0.5% of the unused
balance up to $60,000,000 payable monthly. There were no borrowings
outstanding under the Revolver as of or during the year ended October 31,
1999. The Revolver, which expires December 29, 2003, also provides for up
to an aggregate amount of $20,000,000 in letters of credit. The Company
had a borrowing limit of $91,817,000 based on eligible inventory and
receivables net of $6,070,000 in letters of credit outstanding at October
31, 1999. The Revolver is subject to a penalty of $500,000 if
terminated, without being refinanced with the same lender, prior to
December 29, 2001 and $250,000 thereafter if terminated before October
31, 2003.
On November 27, 1996, the Company completed the sale of the Senior
Secured Notes. The proceeds from the Senior Secured Notes, with existing
cash balances of the Company, were used to complete an equity tender
offer in which substantially all the common stock of the Company not
held by Renco, its then parent corporation, was acquired, complete a
tender offer in which the Company acquired $206.1 million principal
amount of the then outstanding Senior Notes at a premium, pay a $108
million dividend to Renco, make contractual compensation payments to
certain executives of the Company and pay related transaction costs.
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.
Under these agreements $175,000 was available for dividends and other
transactions with affiliates at October 31, 1999.
Aggregate principal payments on long-term debt for the five years
subsequent to October 31, 1999 are as follows: $122,000 in 2000,
$128,000 in 2001, $415,000 in 2002, $838,000 in 2003, and $300,000,000
in 2004.
<PAGE> 31
As of October 31, 1999, the fair value of the Senior Secured Notes was
$292,500,000 based on the quoted market price.
(5) Accrued Liabilities
- -----------------------------------------------------------------------------
Accrued liabilities included employment related costs of $25,722,000
and $28,941,000 and interest of $12,522,000 and $12,528,000 at October
31, 1999 and 1998, respectively.
(6) Employee Compensation Plans
- -----------------------------------------------------------------------------
The Company has variable compensation plans for the benefit of
substantially all employees. The amount of compensation due under these
plans is based on the Company's income as defined under each plan. Total
expense under the plans was $2,670,000, $11,761,000 and $24,588,000,
for the years ended October 31, 1999, 1998 and 1997, respectively.
Certain amounts under these plans represent deferred compensation.
(7) Pension Plans
- -----------------------------------------------------------------------------
The Company has defined contribution retirement plans under which it
expensed approximately $5,223,000, $5,684,000 and $5,929,000 for
the years ended October 31, 1999, 1998 and 1997, respectively.
The Company also has a defined benefit pension plan for substantially all
hourly employees which provides minimum pension benefits based on age,
years of service, and benefits provided under the Company's frozen
defined contribution plan and a predecessor company's defined benefit
plan. As a result of the collective bargaining agreement effective
September 1, 1999 with the USWA, the plan was amended to provide an
increase in pension benefits. The following table sets forth the
actuarial present value of benefit obligations and funded status of the
Company's defined benefit pension plan:
October 31,
1999 1998
----------------------
(Dollars in thousands)
Projected benefit obligation................. $ 69,196 $ 47,839
Plan assets at fair value.................... 25,909 19,015
-------- --------
Projected benefit obligation in excess
of plan assets............................. 43,287 28,824
Unrecognized net gain from past experience
different from that assumed and effects
of changes in assumptions.................. 25,654 15,846
Unrecognized prior service cost.............. (57,953) (31,480)
Additional minimum liability................. 31,895 14,972
-------- --------
Accrued pension cost......................... 42,883 28,162
Less pension liability due within one year... 4,248 4,638
-------- --------
Long-term pension liability.................. $ 38,635 $ 23,524
======== ========
<PAGE> 32
An assumed discount rate of 7.5% and 7.0% and an expected return on plan
assets of 9.0% and 8.5% in 1999 and 1998, respectively, were used for
purposes of valuing the benefits under the defined benefit pension plan.
The following table sets forth a reconciliation of the beginning and end
of year projected benefit obligation:
1999 1998
--------- ---------
(Dollars in thousands)
Projected benefit obligation at
beginning of year.......................... $ 47,839 $ 49,077
Service cost................................. 96 (430)
Interest cost................................ 3,107 3,237
Plan amendment............................... 30,230 -
Actuarial gains.............................. (10,224) (2,578)
Benefits paid................................ (1,852) (1,467)
--------- ---------
Projected benefit obligation at end of year.. $ 69,196 $ 47,839
========= =========
The following table sets forth a reconciliation of the beginning and end
of year fair value of plan assets:
1999 1998
--------- ----------
(Dollars in thousands)
Plan assets at beginning of year............. $ 19,015 $ 15,930
Actual return on assets...................... 2,046 1,452
Employer contributions....................... 6,700 3,100
Benefits paid................................ (1,852) (1,467)
--------- ---------
Plan assets at end of year.................. $ 25,909 $ 19,015
========= =========
The following table sets forth the components of pension expense:
Years Ended October 31,
1999 1998 1997
----------------------------------
(Dollars in thousands)
Service cost..................... $ 96 $ (430) $ (332)
Interest cost.................... 3,107 3,237 3,404
Expected return on plan assets... (1,400) (963) (932)
Amortization of unrecognized:
Prior service cost........... 4,056 3,757 3,756
Actuarial gain and losses, net (1,361) (918) (770)
--------- --------- ---------
$ 4,498 $ 4,683 $ 5,126
========= ========= =========
<PAGE> 33
(8) Postretirement Health Care Benefits
- -----------------------------------------------------------------------------
The following table sets forth the accumulated postretirement
benefit obligation (APBO) of the Company's postretirement health care
and life insurance plans:
Years Ended October 31,
1999 1998
-----------------------
(Dollars in thousands)
APBO........................................ $ 124,535 $ 130,821
Plan assets at fair value................... 18,090 12,953
--------- ---------
APBO in excess of plan assets............... 106,445 117,868
Unrecognized prior service cost resulting
from plan amendments...................... (4,059) (5,459)
Unrecognized net loss from past experience
different from that assumed and from
changes in assumptions.................... (2,680) (19,671)
--------- ---------
Accrued postretirement benefit cost......... $ 99,706 $ 92,738
========= =========
The APBO was determined using a discount rate of 7.5% and 7.0% and an
expected return on plan assets of 9.0% and 8.5% in 1999 and 1998,
respectively, and an assumed health care cost trend rate of 7% in 2000,
gradually declining to 5% after 2003. Assuming a 1% increase in the
health care cost trend rate, the APBO at October 31, 1999 would increase
by $20,539,000 along with an increase in the 1999 service and interest
cost components of $2,294,000. Assuming a 1% decrease in the health
care cost trend rates the APBO at October 31, 1999 would decrease by
$16,245,000 along with a decrease in the 1999 service and interest cost
components of $1,784,000. The following table sets forth a
reconciliation of the beginning and end of year APBO:
1999 1998
--------- ---------
(Dollars in thousands)
APBO at beginning of year................... $ 130,821 $ 108,998
Service cost................................ 3,357 3,068
Interest cost............................... 8,670 8,441
Actuarial (gains) losses, net............... (14,937) 13,369
Benefits paid............................... (3,376) (3,055)
--------- ---------
APBO at end of year......................... $ 124,535 $ 130,821
========= =========
<PAGE> 34
The following table sets forth a reconciliation of the beginning and end
of year fair value of plan assets:
1999 1998
--------- ---------
(Dollars in thousands)
Plan assets at beginning of year............ $ 12,953 $ 8,485
Actual return on assets..................... 3,078 1,912
Employer contributions...................... 2,324 2,556
Benefits paid............................... (265) -
--------- ---------
Plan assets at end of year.................. $ 18,090 $ 12,953
========= =========
Net periodic postretirement benefit costs included the following
components:
Years Ended October 31,
1999 1998 1997
---------------------------------
(Dollars in thousands)
Service cost.....................$ 3,357 $ 3,068 $ 2,232
Interest cost.................... 8,670 8,441 7,260
Expected return on plan assets... (1,281) (804) (333)
Amortization of unrecognized:
Prior service cost............. 1,400 1,400 1,400
Actuarial (gain) loss.......... 258 489 (317)
-------- -------- --------
Net periodic postretirement
benefit cost...................$ 12,404 $ 12,594 $ 10,242
========= ========= =========
(9) Income Taxes
- -----------------------------------------------------------------------------
As a result of the change in tax status described in Note 1 (g), the
Company recognized an income tax benefit of $4,279,000 during 1999, which
includes the elimination of net deferred tax liabilities recorded as of
October 31, 1998. As of October 31, 1999, the Company's book bases in
its assets and liabilities exceeded its tax bases by approximately
$9,000,000.
The provision for income tax expense for the years ended October 31, 1998
and 1997 is comprised of the following:
1998 1997
--------- ---------
(Dollars in thousands)
Federal income taxes
Current................................... $ 6,317 $ 8,301
Deferred.................................. 5,009 4,461
State income taxes
Current................................... 599 600
Deferred.................................. 440 1,120
--------- ---------
Provision for
income taxes.............................. $ 12,365 $ 14,482
========= =========
<PAGE> 35
In addition to the above income taxes, the Company recognized $13,180,000
of current income tax benefits in 1997 related to the extraordinary loss
on the early retirement of debt (see note 4).
A reconciliation between income tax expense reported and income tax
expense computed by applying the federal statutory rate to income before
income taxes and extraordinary loss for the years ended 1998 and 1997
follows:
1998 1997
--------- ---------
(Dollars in thousands)
Income taxes at federal
statutory rate.......................... $ 11,360 $ 13,282
State income taxes, net of
federal income tax benefit............... 675 1,118
Other....................................... 330 82
--------- ---------
$ 12,365 $ 14,482
========= =========
Deferred income taxes result from temporary differences in the financial
basis and tax basis of assets and liabilities. Total deferred tax assets
and liabilities amounted to approximately $50,461,000 and $55,219,000 as
of October 31, 1998, respectively. The most significant items comprising
the deferred tax assets were postretirement benefits of $31,141,000 and
compensation accruals of $5,965,000 while deferred tax liabilities
consist primarily of deferred taxes on inventory of $3,065,000 and fixed
assets of $52,037,000. The Company had no valuation allowance for
realization of deferred tax assets as of October 31, 1998.
(10) Leases
- -----------------------------------------------------------------------------
The Company leases a portion of its operating and data processing
equipment. Minimum future lease payments under noncancellable operating
leases are $1,875,000, $1,392,000, $675,000, $403,000, $458,000 and
$61,000 for the years ending October 31, 2000, 2001, 2002, 2003, 2004 and
thereafter, respectively. Rent expense for noncancellable operating
leases amounted to approximately $1,873,000, $1,811,000 and $1,386,000,
for the years ended October 31, 1999, 1998 and 1997, respectively.
(11) Related Party Transactions
- -----------------------------------------------------------------------------
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, 2001. Total expense for
management services fees amounted to $1,200,000 for each of the years
ended October 31, 1999, 1998 and 1997.
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,
<PAGE> 36
general, product and auto liability, workers' compensation (other than
Ohio for which the Company is self insured) and casualty umbrella.
In fiscal 1999, 1998 and 1997, the Company incurred costs of
approximately $1.7 million, $1.8 million and $1.7 million, respectively,
under the Renco insurance program. The Company believes that its
insurance costs under this program were less than it would have incurred
if it had obtained its insurance directly.
Renco Steel is a holding company formed by Renco in January 1998 which
owns all the outstanding shares of capital stock of the Company. In
February 1998, Renco Steel issued $120 million principal amount 10.875%
Senior Secured Notes due 2005. These notes are secured by a pledge of
all the outstanding capital stock of the Company. Renco Steel intends
to meet its debt service obligations from its cash balances and earnings
thereon and through distributions from the Company as permitted under
the Company's outstanding indebtedness as described in Note 4.
(12) Commitments and Contingencies
- -----------------------------------------------------------------------------
At October 31, 1999, the Company had commitments to purchase data
processing services of approximately $13,985,000 in the aggregate over
the remaining 2.5 years of its management information systems agreement
and purchased services of approximately $5,627,000, $5,458,000 and
$5,463,000 in 1999, 1998 and 1997, respectively, under the agreement.
At October 31, 1999, at pricing then in effect, the Company had
firm commitments for the purchase of raw materials and gases of
approximately $11,918,000 in 2000, $12,278,000 in 2001 and $2,994,000
thereafter. In addition, at October 31, 1999 the Company had commitments
for capital expenditures of approximately $5,901,000.
In common with much of the steel industry, the Company's facilities are
located on sites that have been used for heavy industrial purposes for
decades. The Company 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 management. The Company 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 continue to change and have generally become more
stringent, and the Company 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.
The Company is subject to consent decrees as a result of two civil
actions instituted by the Department of Justice (DOJ), on behalf of the
Environmental Protection Agency (EPA). These consent decrees require the
Company to complete certain supplemental environmental projects estimated
to cost between $1.7 million and $2.2 million that will be expended over
two years. The largest of the projects to be undertaken as part of the
settlement involves sediment removal from the Mahoning River at an
estimated cost of $750,000 but not to exceed $1 million. The consent
decrees also provide for stipulated penalties in the event of
noncompliance which the Company does not believe will be material.
The Company was the defendant in an action instituted by DOJ on May 11,
1998 under the Resource Conservation and Recovery Act (RCRA), which
<PAGE> 37
alleged violations of RCRA, the Ohio Administrative Code (OAC) and the
Company's hazardous waste management permit related to the Company's
management of alleged hazardous waste in surface impoundments at the
Warren, Ohio facility. The action alleged that from September 1988 to
the present, the Company operated hazardous waste management units at the
Warren facility without the proper permits and in noncompliance with
RCRA. This action sought a civil penalty of not more than the statutory
maximum of $25,000 per day per violation ($27,500 per day per violation
for violations since January 30, 1997) and also an injunction requiring
closure of the surface impoundments and other compliance measures under
RCRA. A trial in the RCRA action was completed in June 1999 and the
court rendered its decision in October 1999. The court's decision
requires the Company to pay a $1 million cash penalty and denied the
United States request for injunctive relief. In November 1999, the U.S.
filed a motion for the court to reconsider its decision regarding
injunctive relief which was denied. The court's decision is subject to
appeal.
As a condition of a previous RCRA operating permit, the Company is
required to undertake a corrective action program with respect to
historical material handling practices at the Warren facility. The
Company is currently undertaking the first investigation step of the
corrective action program, the RCRA Facility Investigation (RFI), the
initial phase of which is expected to be completed in 2000. The RFI
workplan identifies thirteen historical solid waste management units
to be investigated. The final scope of corrective action required to
remediate any contamination that may be present at or emanating from the
Warren facility is dependent upon the completion and 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 any such corrective
action program would not have a material adverse effect on the operating
results or financial condition of the Company.
On January 23, 1996, two retired employees instituted an action against
the Company and the USWA 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 (ERISA),
the National Labor Relations Act (NLRA) and common law. On July 31,
1997, the court granted the Company's motion to dismiss this action and
entered judgement in favor of the Company and the USWA. The Plaintiffs
filed an appeal regarding the court's decision to dismiss which was heard
in June 1998. In March 1999, the appellate court upheld the dismissal of
the claims under ERISA and common law, but reversed the dismissal of the
NLRA claim and remanded to the district court for further proceedings.
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 business. 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
<PAGE> 38
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, 1999 and 1998:
Three Months Ended 1999
January 31 April 30 July 31 October 31
----------------------------------------------------
(Dollars in thousands)
Net sales............. $ 110,277 $ 139,115 $ 143,086 $ 139,191
Gross margin.......... 8,413 17,263 23,691 14,132
Net income (loss)..... (3,383) 615 6,491 2,140
Three Months Ended 1998
January 31 April 30 July 31 October 31
----------------------------------------------------
(Dollars in thousands)
Net sales............. $ 166,592 $ 177,860 $ 174,947 $ 146,342
Gross margin.......... 24,744 28,656 30,000 21,390
Net income............ 4,201 6,516 7,148 2,228
During the three months ended January 31, 1999, the Company recognized an
income tax benefit of $4,558,000 as a result of the subchapter S election
described in Note 1(g). During the three months ended October 31, 1999
the Company recorded a benefit of $5,662,000 under the LIFO inventory
valuation method. In addition, the Company recorded a gain of $5,046,000
as a result of an agreement with the USWA which permits the Company to
pay certain medical benefits from assets in a trust previously restricted
for other benefits.
<PAGE> 39
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 Renco Steel Holdings,
Inc.) as of October 31, 1999 and 1998, and the related consolidated
statements of income, shareholder's equity (deficit), and cash flows for each
of the years in the three-year period ended October 31, 1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in
the three-year period ended October 31, 1999, in conformity with generally
accepted accounting principles.
/S/ KPMG LLP
- ------------
KPMG LLP
Cleveland, Ohio
December 17, 1999
<PAGE> 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE> 41
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.................. 65 Chairman of the Board and Director
Edward R. Caine................... 61 President and Chief Executive
Officer
Patrick G. Tatom.................. 49 Executive Vice President
David A. Howard................... 40 Vice President, Commercial
John P. Jacunski.................. 34 Vice President, Finance and
Chief Financial Officer
Patrick T. Kenney................. 59 Vice President, Operations
Brian J. Mitchell................. 55 Vice President, Environmental and
Engineering
Ira Leon Rennert has been Chairman, Chief Executive Officer and
principal shareholder of WCI's indirect 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 mining concerns operating in businesses not
competing with WCI, including Renco Metals, Inc., AM General Corporation, The
Doe Run Resources Corporation, Lodestar Holdings, Inc., and Renco Steel
Holdings, Inc.,(WCI's parent company), for all of which he serves as a
Director.
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 G. Tatom has served as Executive Vice President since June 1, 1999
and as Vice President, Commercial from November 1995 to May 1999, Vice
President, Sales from February 1994 through October 1995, and General Manager
of Sales from September 1988 to February 1994.
David A. Howard has served as Vice President, Commercial since June 1, 1999
and as Vice President, Sales from August 1998 through May 1999. Mr. Howard,
who has been with the company since its inception in 1988, has held various
positions within the Company, including Marketing Manager, Regional Sales
Manager and General Manager of Sales.
John P. Jacunski has served as Vice President, Finance and Chief Financial
Officer since November 1, 1999 and as Controller from May 1995 to October
1999. Prior to joining WCI, Mr. Jacunski was a manager with the accounting
and consulting firm of KPMG LLP and had been with that firm in various
capacities from September 1988 through April 1995.
<PAGE> 42
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.
Brian J. Mitchell has served as Vice President, Environmental and Engineering
since June 1, 1999 and, prior to that, as General Superintendent of Primary
Operations of WCI since its inception.
Since December 16, 1996, Mr. Rennert has been the sole Director of the
Company.
The sole director of the Company serves at the pleasure of the Company's sole
shareholder, Renco Steel Holdings, Inc., for an unspecified term. The
executive officers of the Company serve at the pleasure of the Company's sole
director for an unspecified term.
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 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Long-term
Compensation (1) Compensation
----------------- ---------------------------
Fiscal LTIP All Other
Name and Position Year Salary Bonus Payouts(2) Compensation(3)
<S> <C> <C> <C> <C>
Ira Leon Rennert(4)... 1999 - - - $1,200,000
Chairman of the 1998 - - - 1,200,000
Board 1997 - - - 1,200,000
Edward R. Caine....... 1999 $261,425 $100,000 $ 107,500 $ 20,000
President and Chief 1998 259,133 100,000 597,500 20,000
Executive Officer 1997 259,133 100,000 5,900,000 25,370
Patrick G. Tatom...... 1999 $131,067 $ 50,000 $ 43,000 $ 12,501
Executive Vice 1998 131,067 50,000 239,000 12,501
President 1997 131,067 50,000 2,360,000 12,501
David A. Howard....... 1999 $114,551 $ 40,000 $ 21,500 $ 8,253
Vice President, 1998 99,168 40,000 10,542 6,981
Commercial 1997 92,385 25,000 8,333 6,656
John P. Jacunski...... 1999 $106,961 $ 27,908 $ 2,213 $ 6,564
Vice President, 1998 87,910 15,462 10,542 5,395
Finance and Chief 1997 82,936 17,500 8,333 5,089
Financial Officer
Patrick T. Kenney..... 1999 $132,567 $ 50,000 $ 43,000 $ 16,413
Vice President, 1998 132,567 50,000 239,000 16,413
Operations 1997 132,567 50,000 2,360,000 16,413
- ----------------------
<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.
<PAGE> 43
(2) 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 which provides that the executive officers receive a fixed percentage of
any dividend paid by the Company. See "Net Worth Appreciation Agreements."
(3) The other compensation shown, except for Mr. Rennert for all periods (See note 4),
consists of WCI contributions to a defined contribution pension plan.
(4) 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."
</FN>
</TABLE>
Net Worth Appreciation Agreements
The named executive officers (with the exception of Mr. Rennert) are each
parties to Net Worth Appreciation Agreements with the Company, pursuant to
which each earns as deferred compensation a fixed percentage, ranging from
1.25% to 5%, of cumulative net income, as defined, during the term of their
employment as executive officers. Assuming all of the Company's named
executive officers had retired at October 31, 1999 and their respective
maximum percentage had vested, an aggregate of $4,098,000 would have been
payable to such executive officers pursuant to the Net Worth Appreciation
Agreements.
The Net Worth Appreciation Agreements also provide that in the event of
payment of a dividend, the active participants are entitled to receive a
percentage of the dividend equal to their full net worth percentage under
their agreement. In the event substantially all the assets of the Company
are sold, active participants are deemed to be vested and are entitled to
receive a payment equal to their percentage of the net proceeds of the sale
as defined in the agreements. The agreements also provide for payments in
the event of permanent disability or death.
Active participants are entitled to receive the balance of the vested amount
earned under their Net Worth Appreciation Agreement in 40 equal quarterly
payments commencing upon the earlier of age 62 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.
<PAGE> 44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 13, 1999
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, and
subject to certain terms and conditions in the Renco Steel indenture and the
related pledge agreement, 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 December 13, 1999
-----------------------
Shares of
Name of Beneficial Owners and Address of 5% Beneficial Owners Common Stock Percent
<S> <C> <C>
Renco Steel Holdings, Inc.................................... 100 100.0%
1040 Pine Avenue, S.E.
Warren, OH 44483
The Renco Group, Inc.(1)..................................... 100 100.0%
30 Rockefeller Plaza, Suite 4225
New York, NY 10112
Ira Leon Rennert (1)......................................... 100 100.0%
c/o The Renco Group, Inc.
30 Rockefeller Plaza, Suite 4225
New York, NY 10112
All directors and executive officers as a group (7 persons)... 100 100.0%
- --------------------
<FN>
(1) Renco is deemed to beneficially own the Common Stock of the Company owned
by Renco Steel due to the ownership by Renco of all the outstanding shares of
Common Stock of Renco Steel, and Mr. Rennert is deemed to beneficially own the
Common Stock of the Company deemed owned by Renco due to the ownership through
trusts established by him for himself and members of his family of all of the
outstanding Common Stock of Renco.
<FN>
</TABLE>
By virtue of Renco Steel's ownership of all the outstanding shares of Common
Stock of WCI and Renco's ownership of all the outstanding shares of Common
Stock of Renco Steel, and Mr. Rennert's ownership of all the Common 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, 2001 and thereafter shall continue for additional
terms of three years each unless sooner terminated by either party by giving
six months prior written notice. In the year ended October 31, 1999, WCI
<PAGE> 45
incurred management fees 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.
Under the terms of a tax sharing agreement, between WCI and Renco Steel,
income taxes are allocated to WCI on a separate return basis except that
transactions for the purchase of goods and services between WCI and its
subsidiaries and Renco and its other subsidiaries are accounted for on a cash
basis rather than on an accrual basis and WCI does not receive the benefit of
net operating tax loss carryforwards, unless such tax losses were generated
by the net tax timing differences between WCI's financial reporting and tax
return treatment in calculating the allocation of income taxes. Renco Steel
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. On January 15, 1999 Renco elected subchapter S tax treatment
effective November 1, 1998. At the same time, Renco elected for the Company
to be treated as a qualified subchapter S subsidiary (QSSS). While in this
status, the activity within the tax sharing agreement will be applicable only
to prior years audit adjustments and/or current and future year state filings
where QSSS is not recognized and multiple Renco subsidiaries operate.
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, workers' compensation (other than Ohio for which the Company is
self insured) and casualty umbrella. 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
coverage (excluding the Ohio self insured program) are loss sensitive
programs with both fixed and variable premium components. The fixed premium
component for this coverage is allocated to each insured Renco subsidiary
based on factors that include historical guaranteed cost premium, the overall
growth of each subsidiary and an assessment of risk based on loss experience.
The fixed component is subject to revision resulting from the insurance
carrier's audit of actual premium factors. As claims (the variable
component) are paid, each insured within the loss sensitive program is
charged for its claims up to a maximum amount and subject to an overall
maximum for all insured subsidiaries. Each insured Renco subsidiary has been
assigned an individual maximum cost based on historical guaranteed cost
premiums. The overall and individual subsidiary maximums are subject to
revision based on audit of actual premium factors. If an insured Renco
subsidiary reaches its individual maximum cost, the other insured
subsidiaries are required to share proportionately in the excess cost of the
subsidiary which has reached its individual maximum.
In fiscal 1999, the Company incurred costs of approximately $1.7 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.
<PAGE> 46
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 17, 1999, are included in
this report for ITEM 8. and is incorporated by reference herein.
Consolidated Balance Sheets at October 31, 1999 and 1998.
Consolidated Statements of Income for the fiscal years ended
October 31, 1999, 1998 and 1997.
Consolidated Statements of Shareholder's Equity (Deficit) for the
fiscal years ended October 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the fiscal years ended
October 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
2. Financial Statement Schedule.
Independent Auditors' Report on Financial Statement Schedule.
Schedule II - Valuation and Qualifying Accounts.
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 reports on Form 8-K were filed during the last quarter of the period
covered by this report.
<PAGE> 47
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Shareholder and Board of Directors
WCI Steel, Inc. and Subsidiaries:
Under date of December 17, 1999, we reported on the consolidated balance
sheets of WCI Steel, Inc. and subsidiaries as of October 31, 1999 and 1998,
and the related consolidated statements of income, shareholder's equity
(deficit), and cash flows for each of the years in the three-year period
ended October 31, 1999, 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 LLP
- ------------
KPMG LLP
Cleveland, Ohio
December 17, 1999
<PAGE> 48
<TABLE>
<CAPTION>
WCI STEEL, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997.
(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, 1999...... $ 904 $ (84) -- $ (54) $ 874
Year ended October 31, 1998...... 1,627 (475) -- 248 904
Year ended October 31, 1997...... 1,600 64 -- 37 1,627
- -------------------------
<FN>
(a) Allowance for doubtful accounts is shown as a reduction of accounts receivable in the
Company's Consolidated Financial Statements.
(b) Charges (credits) to expense for the provision for doubtful accounts.
(c) Trade receivables written-off.
</FN>
</TABLE>
<PAGE> 49
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 23rd day
of December 1999.
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 23rd day of December, 1999.
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/ John P. Jacunski
----------------
John P. Jacunski 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 or
will be sent to security holders.
<PAGE> 50
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.(4)
3.2 --Code of Regulations of the Registrant, as amended December 16, 1996.(5)
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).(2)
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).(2)
4.1.2 --Second Supplemental Indenture to the indenture, dated as of November 27,
1996, among WCI Steel, Inc., as issuer, the Registrant, as guarantor, and
Fleet National Bank (formerly known as Shawmut Bank Connecticut, National
Association) 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).(5)
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).(5)
10.1 --[Intentionally Omitted]
10.2.2 --Amended and Restated Net Worth Appreciation Agreement, effective November 1,
1995, between the Registrant and Patrick T. Kenney.(5)
10.2.3 --Amended and Restated Net Worth Appreciation Agreement, effective November 1,
1995, between the Registrant and Patrick G. Tatom.(5)
10.2.7 --Net Worth Appreciation Agreement, effective April 1, 1996, between the
Registrant and Edward R. Caine.(5)
10.2.8 --Net Worth Appreciation Agreement, effective August 1, 1998, between the
Registrant and David A. Howard. (7)
10.2.9 --Net Worth Appreciation Agreement, effective June 1, 1999, between the
Registrant and John P. Jacunski.
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.(3)
</TABLE>
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- -------------------------------------------------------------------------------
<C> <S>
10.4.11 --Intercreditor Agreement, dated November 27, 1996, between Fleet National
Bank and Congress Financial Corporation.(5)
10.4.12 --Second Amended and Restated Loan and Security Agreement dated July 30,
1999.(8)
10.4.13 --Guarantee by Registrant, WCI Steel Production Control Services Inc., WCI
Steel Metallurgical Services Inc. and Niles Properties, Inc. in favor of
Congress Financial Corporation and Security Pacific Business Credit, Inc.,
dated October 31, 1997. (6)
10.4.14 --Guarantee by WCI Steel Production Control Services Inc., WCI Steel
Metallurgical Services Inc. and WCI Steel Sales L.P. in favor of Congress
Financial Corporation and Security Pacific Business Credit, Inc., dated
October 31, 1997. (6)
10.5.1 --Intercreditor Agreement, dated November 27, 1996, among Fleet National Bank,
Bank One Trust Company, N.A. and the Registrant.(5)
10.5.2 --Indemnification Agreement, dated as of November 27, 1996, between the
Registrant and Bank One Trust Company, N.A. (5)
10.8 --Agreement, dated June 11, 1990, between the City of Youngstown, Ohio and
Youngstown Sinter Company (with UDAG Grant Agreement).(1)
21 --List of Subsidiaries of Registrant.(6)
27 --Financial Data Schedule.
- ----------------
<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 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.
(3) 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.
(4) Incorporated by reference to the Company's Form 10-K for the fiscal year ended October
31, 1994 (File No. 1-13028).
(5) Incorporated by reference to same-numbered exhibit filed with the Company's
Registration Statement on Form S-4, as amended (File No. 333-18019), originally filed
with the Commission on December 17, 1996.
(6) Incorporated by reference to the Company's Form 10-K for the fiscal year ended October
31, 1997 (File No. 333-18019).
(7) Incorporated by reference to the Company's Form 10-K for the fiscal year ended October
31, 1998 (File No. 333-18019).
(8) Incorporated by reference to the Company's Form 10-Q for the quarterly period ended
July 31, 1999.
</FN>
</TABLE>
WCI STEEL, INC.
1040 PINE AVENUE SE
WARREN, OH 44483-6528
as of June 1, 1999
Mr. John P. Jacunski
9378 Ridgeview Drive
Macedonia, OH 44056
Re: Net Worth Appreciation Participation Agreement
Dear Mr. Jacunski:
In connection with your employment by WCI Steel, Inc. ("Company"),
you are hereby granted a Net Worth Appreciation Agreement ("Agreement")
under which you and the Company agree as follows:
1. On June 1, 2002 provided that you continue to be
continuously employed by the Company from the date hereof through that
date, you shall receive a credit of one and one fifth percent (1-1/5%),
and on each of June 1, 2003 and June 1, 2004, you shall receive an
additional credit of two fifths of one percent (2/5%), provided that
you are continuously employed by the Company to such date, for a
maximum credit, if you remain employed by the Company continuously
through June 1, 2004 of two percent (2%) ("Maximum Credit"). You shall
not receive credit for any partial year of employment, unless your
employment terminates due to death or total disability, in which case
you shall be deemed to be vested in that percentage earned through the
next succeeding June 1st. (up to said Maximum Credit of two percent).
2. Cumulative Net Income Participation Benefit - There is
hereby established for your benefit an unfunded, unsecured, deferred
compensation account (the "Account") to which there shall be credited
an amount equal to (1) the product of a) the total percentage credited
to you under paragraph 1 (a maximum of two percent) multiplied by b)
the Cumulative Net Income (as defined), less (2) the cumulative amount
of payments made to you under paragraph 3. As a result of The Renco
Group, Inc. electing to become a subchapter S corporation for Internal
Revenue Code purposes effective with its fiscal year beginning November
1, 1998 and designating this Company and its subsidiaries as qualified
subchapter S subsidiaries, in determining Cumulative Net Income, as
defined, an assumed net tax rate of 38% shall be applied to
consolidated net income of the Company beginning November 1, 1998. The
Cumulative Net Income is the amount, if any, of 62% of the total of (a)
the cumulative consolidated net income of the Company available to its
Common Stock; plus (b) benefits expensed under this Agreement or
similar Net Worth Appreciation Participation Agreements which reduce
the cumulative consolidated net income in item (a), both from June 1,
1999 through the Measurement Date (as defined). In connection with
this Agreement, you agree to provide 30 days prior written notice of
your intention to voluntarily terminate your employment or retire. In
the event you voluntarily leave the Company's employ, the Measurement
Date for purposes of measuring compensation under this Agreement shall
be the end of the Company's fiscal quarter in which the 30-day notice
period ends. In the event your employment is terminated involuntarily
by the Company, the Measurement Date shall be the end of the fiscal
quarter immediately preceding the termination of your employment. If
there is no positive Cumulative Net Income, no deferred compensation
shall be due you under this Agreement. The determination of the
independent public accountants for the Company as to the Cumulative Net
Income, made in accordance with generally accepted accounting
principles, consistently applied, shall be conclusive. If your
employment shall be terminated for Cause (as defined) at any time, you
shall not receive any future payment under this Agreement. For
purposes of this provision, termination shall be deemed to be for
"Cause" only if the grounds therefore are one or more of the following:
(a) material conduct contrary to the best interests of WCI, (b)
continuing refusal or inability to perform the duties of your position
(other than for reasons of disability), or (c) illegal conduct having a
material impact on WCI.
3. Dividend Participation - If while you are employed by the
Company, the Company shall pay any cash dividend on its Common Stock
from Accumulated Earnings (as defined), or pay management fees to The
Renco Group, Inc., ("Renco"), or other affiliates of Renco other than
subsidiaries of the Company, in excess of one million, two hundred
thousand dollars per year, then the Company shall make a cash payment
to you equal to (a) 62% of the total amount of the cash dividends being
paid and excess management fees multiplied by (b) your Maximum Credit.
Accumulated Earnings is the amount of cumulative consolidated net
income, less dividends paid from Accumulated Earnings, both from
November 1, 1998 to the date of the cash dividend payment. If while
you are employed by the Company, the Company shall pay any cash
dividend on its Common Stock in excess of Accumulated Earnings, then
the Company shall make a cash payment to you equal to the total amount
of the dividend in excess of Accumulated Earnings multiplied by your
Maximum Credit.
4. Payment of Deferred Compensation Balances - Payment to you
of deferred compensation balances earned under this Agreement shall be
made in forty (40) equal quarterly installments, without interest,
commencing three (3) months after the Trigger Date (as defined) and
three (3) month intervals thereafter. The Trigger Date shall be the
earlier of your sixty second birthday, or the completion of twenty
continuous years of employment with the Company. If you remain
employed by the Company after the commencement of payments under the
Agreement, and continue to have earnings or losses under the Agreement,
the amount of the quarterly payment due you shall be recomputed on an
annual basis in the first fiscal quarter of each fiscal year to reflect
the balance of your Account at the end of the previous fiscal year
divided by 40 (i.e., a rolling ten year payment schedule). In the
event of your permanent disability, rendering you unable to engage in
your customary employment, payments measured and paid as described
above, if they have not already commenced, will commence. The period
during which the payments will be made is herein called the "Payment
Period". In the event of your death, your estate or beneficiaries
shall receive a payment, within 90 days of your death, equal to the
present value of the balance of your Account as determined under
Section 2 above computed using (a) 40 equal quarterly installments if
payments to you have not begun or the remaining Payment Period if
payments have previously started and (b) the discount rate used for
computing the present value of annuitized benefits under the provision
of the Internal Revenue Code of 1986 and the regulation thereunder as
the same may be amended from time to time.
5. Sale of Company's Stock or Assets - If, while you shall be
employed by the Company, Renco sells an interest in the Company or if
the Company sells substantially all of its assets, to a person who is
not an affiliate of Ira Leon Rennert, then, upon the closing of such
sale, your Maximum Credit shall be deemed to be vested, and you shall
be entitled to receive a payment equal to your Maximum Credit (2%) of
the Net Proceeds (as defined) of the sale available for the Company's
Common Stock, in kind, on the same terms and conditions as the Company
or its shareholders is being paid. Net Proceeds, for purposes hereof,
shall mean the amount of the proceeds of the sale after deducting: (1)
all expenses of the sale; (2) all applicable taxes owed by the Company;
(3) 38% of all income recorded by the Company on a sale of assets which
is not subject to corporate level tax; (4) all liabilities retained by
the seller; and (5) all amounts to which holders of preferred stock are
entitled. Upon the sale of all or substantially all of the Company's
Assets or Common Stock, and except for such payment, neither you nor
this Company shall have any further rights or liabilities
hereunder.
6. Condition Precedent - During the Payment Period, you shall
comply with the following provisions as a condition precedent to your
right to receive payments:
(a) For the Purposes hereof, all confidential information about
the business and affairs of the Company (including, without limitation,
business plans, product design and specifications, financial,
engineering, and marketing information and information about costs,
manufacturing methods, names of suppliers and customers) constitute
"Company Confidential Information". You further acknowledge that for
some period, you have been a senior officer or manager of the Company.
You further acknowledge that you have in the past had, and will
continue to have, access to and knowledge of Company Confidential
Information, and that improper use or revelation of same by you during
or after the termination of your employment by the Company could cause
serious injury to the business of the Company. Accordingly, you agree
that you will forever keep secret and inviolate all Company
Confidential Information which shall have come or shall hereafter come
into your possession, and that you will not use the same for your own
private benefit, or directly or indirectly for the benefit of others,
and that you will not disclose such Company Confidential Information to
any other person.
(b) You agree that, as long as you are entitled to any part of
the payment, you will not, directly or indirectly, whether as employee,
consultant, proprietor, partner, controlling shareholder or other
capacity engage in the production, marketing, sale of financing
activities of any entity involved in the production of sale of flat
rolled steel products that competes with the Company. Should you
engage in any activity proscribed by the preceding sentence then the
Company's obligation to you to make the payment (or any unpaid part
thereof) shall automatically and permanently cease, and you shall be
deemed to have irrevocably released your right to same.
7. Notice - Any notices to be sent pursuant hereto shall be
sent by hand, certified or registered mail or overnight service to you,
at the address indicated below and to the Company, The Renco Group,
Inc., 30 Rockefeller Plaza, New York, New York 10112, to the attention
of Ira Leon Rennert, or to any other address which any of us may
designate by notice in writing.
8. General - Your rights under this Agreement may not be
assigned, transferred, pledged or hypothecated without the prior
approval of the Company, except that, upon your death, your interest in
the Account will vest in your estate or heirs and that during your
lifetime, you may assign your interest to a revocable or irrevocable
trust for the primary benefit of your spouse or any lineal descendant
of your or your spouse's grandparents. This Agreement sets forth the
entire understanding of you and the Company concerning this subject
matter. Any further additions, deletions or modifications of the
Agreement shall only be made in writing signed by you and the Company.
Please confirm that the foregoing correctly sets forth our full
agreement with respect to your Net Worth Appreciation Participation
Agreement by signing and returning the enclosed copy of this letter.
Very truly yours,
/S/ IRA LEON RENNERT
----------------
Ira Leon Rennert
Chairman of the Board
Confirmed and Agreed to:
/S/ JOHN P. JACUNSKI
----------------
John P. Jacunski
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AT October 31, 1999 AND THE
CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE FISCAL YEAR ENDED
October 31, 1999 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-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 76,349
<SECURITIES> 0
<RECEIVABLES> 58,720
<ALLOWANCES> 874
<INVENTORY> 83,247
<CURRENT-ASSETS> 223,678
<PP&E> 365,583
<DEPRECIATION> 157,106
<TOTAL-ASSETS> 479,944
<CURRENT-LIABILITIES> 108,216
<BONDS> 301,380
0
0
<COMMON> 0
<OTHER-SE> (81,731)
<TOTAL-LIABILITY-AND-EQUITY> 479,944
<SALES> 531,669
<TOTAL-REVENUES> 531,669
<CGS> 468,170
<TOTAL-COSTS> 468,170
<OTHER-EXPENSES> 38,031
<LOSS-PROVISION> (84)
<INTEREST-EXPENSE> 32,030
<INCOME-PRETAX> 1,584
<INCOME-TAX> (4,279)
<INCOME-CONTINUING> 5,863
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,863
<EPS-BASIC> .00
<EPS-DILUTED> .00
</TABLE>
