<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 13, 1996.
REGISTRATION NO. 333-4513
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
RENCO METALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C> <C>
238 NORTH 2200 WEST, SALT LAKE CITY, UT
84116
DELAWARE 3339 13-3724916 (801) 532-2043
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
JURISDICTION OF INDUSTRIAL NUMBER,
INCORPORATION OR CLASSIFICATION CODE IDENTIFICATION INCLUDING AREA CODE, OF REGISTRANT'S
ORGANIZATION) NUMBER) NO.) PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
MAGNESIUM CORPORATION OF AMERICA
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C> <C>
238 NORTH 2200 WEST, SALT LAKE CITY, UT
84116
DELAWARE 3339 06-1030566 (801) 532-2043
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
JURISDICTION OF INDUSTRIAL NUMBER,
INCORPORATION OR CLASSIFICATION CODE IDENTIFICATION INCLUDING AREA CODE, OF REGISTRANT'S
ORGANIZATION) NUMBER) NO.) PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
SABEL INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C> <C>
749 NORTH COURT STREET, MONTGOMERY, AL 36104
ALABAMA 5051 63-0961496 (334) 265-6778
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
JURISDICTION OF INDUSTRIAL NUMBER,
INCORPORATION OR CLASSIFICATION CODE IDENTIFICATION INCLUDING AREA CODE, OF REGISTRANT'S
ORGANIZATION) NUMBER) NO.) PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
IRA LEON RENNERT
ROGER L. FAY
238 NORTH 2200 WEST, SALT LAKE CITY, UT 84116
(801) 532-2043
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MICHAEL C. RYAN, ESQ. WILLIAM M. HARTNETT, ESQ.
CADWALADER, WICKERSHAM & TAFT CAHILL GORDON & REINDEL
100 MAIDEN LANE, NEW YORK, NY 10038 80 PINE STREET, NEW YORK, NY 10005
(212) 504-6000 (212) 701-3000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
RENCO METALS, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501 OF REGULATION S-K
<TABLE>
<CAPTION>
S-1 ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
<C> <S> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front Cover Page; Outside Back
Cover Page
3. Summary of Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Prospectus Summary; Risk Factors;
Selected Consolidated Financial Data
4. Use of Proceeds.................................. Use of Proceeds
5. Determination of Offering Price.................. Not Applicable
6. Dilution......................................... Not Applicable
7. Selling Security Holders......................... Not Applicable
8. Plan of Distribution............................. Outside Front Cover Page;
Underwriting
9. Description of Securities to be Registered....... Description of Senior Notes
10. Interests of Named Experts and Counsel........... Not Applicable
11. Information with Respect to the Registrant....... Outside Front Cover Page; Prospectus
Summary; Risk Factors;
Capitalization; Selected Consolidated
Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Stock Ownership
and Certain Relationships and
Transactions; Description of Senior
Notes; Description of Revolving
Credit Facilities; Index to Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 13, 1996
PROSPECTUS
, 1996
$150,000,000
RENCO METALS, INC.
% SENIOR NOTES DUE 2003
The % Senior Notes due 2003 (the "Senior Notes") are being offered
(the "Offering") by Renco Metals, Inc. (the "Company"). Interest on the Senior
Notes will be payable semi-annually on and of each year,
commencing on , 199 . The Senior Notes will mature on ,
2003. Except as set forth below, the Senior Notes will not be redeemable prior
to , 2000. Thereafter, the Senior Notes will be redeemable at the
option of the Company, in whole or in part, at the redemption prices set forth
herein plus accrued interest to the date of redemption. In addition, at any time
on or prior to , 1999, the Company may, at its option, redeem up to
33% of the original aggregate principal amount of the Senior Notes with the net
cash proceeds of one or more Public Equity Offerings (as defined), at % of
the principal amount thereof plus accrued interest to the date of redemption;
provided that at least $100.0 million of Senior Notes remain outstanding
immediately after any such redemption. Upon the occurrence of a Change of
Control (as defined), each holder of Senior Notes may require the Company to
repurchase such holder's Senior Notes at 101% of the principal amount thereof
plus accrued interest to the date of repurchase. The Company is obligated in
certain instances to make offers to repurchase Senior Notes at a purchase price
equal to 100% of the principal amount thereof plus accrued interest to the date
of repurchase, with the net cash proceeds of certain sales and other
dispositions of assets. See "Description of Senior Notes."
The Senior Notes will be general unsecured obligations of the Company
ranking senior in right of payment to all existing and future subordinated
indebtedness of the Company and will rank pari passu in right of payment with
other senior indebtedness of the Company. The Senior Notes will be
unconditionally guaranteed, jointly and severally, on a senior unsecured basis
by the Company's subsidiaries (the "Guarantors"). However, the Guarantors may
incur indebtedness of up to $40.0 million under their revolving credit
facilities (the "Revolving Credit Facilities"), which are secured by
substantially all of the non-fixed assets of the respective Guarantors.
Therefore, holders of such secured indebtedness, and any other secured
indebtedness of the Company and the Guarantors, will have claims that
effectively rank prior to those of holders of Senior Notes with respect to the
assets securing such indebtedness. See "Description of Senior
Notes -- Guarantees." The Indenture (as defined) permits the Company and the
Guarantors to incur additional indebtedness, including senior indebtedness and
secured indebtedness, subject to certain limitations. See "Description of Senior
Notes -- Limitation on Additional Indebtedness."
On May 24, 1996, the Company commenced a Tender Offer (as defined) to
purchase for cash up to all of the $75 million aggregate principal amount of the
Company's 12% Senior Notes due 2000 (the "Existing Notes") and a related Consent
Solicitation (as defined). Consummation of the Offering is conditioned upon the
receipt by the Company of consents representing at least a majority in aggregate
principal amount of the Existing Notes outstanding.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SENIOR NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UNDERWRITING
PRICE TO THE DISCOUNTS PROCEEDS TO THE
PUBLIC(1) AND COMMISSIONS(2) COMPANY(3)
- -----------------------------------------------------------------------------------------------------------
Per Senior Note............................. % % %
Total....................................... $ $ $
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriter (as defined herein)
against certain liabilities, including liabilities under the Securities Act.
See "Underwriting."
(3) Before deducting expenses related to the Offering payable by the Company,
estimated to be $ .
The Senior Notes are being offered by the Underwriter, subject to prior
sale, when, as and if delivered to and accepted by it and subject to various
prior conditions, including the right to reject orders in whole or in part. It
is expected that delivery of the Senior Notes will be made in New York, New York
on or about , 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
<PAGE> 4
Photo of Magnesium Corporation of America's ('Magcorp') production facility with
caption 'Magcorp's production facility in Rowley, Utah.'
Photo of magnesium anode ingots with caption, 'Magnesium's light weight, high
strength-to-weight ratio and corrosion resistance has led to increasing
worldwide demand.'
Photo of automobile parts made with magnesium alloy with caption 'Magnesium is
an important product in the automobile industry.'
Photo of aluminum cans with caption 'Primary use of magnesium in the aluminum
alloying market is in the production of two piece beverage cans and aluminum
sheet.'
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SENIOR NOTES AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the financial statements
contained elsewhere in this Prospectus. Unless the context otherwise requires,
references to the "Company" mean Renco Metals, Inc., references to "Magcorp"
mean Magnesium Corporation of America, references to "Sabel" mean Sabel
Industries, Inc. and references to "Subsidiaries" and "Guarantors" mean Magcorp
and Sabel, each of which is a wholly-owned subsidiary of the Company. The
Company's fiscal year ends October 31. Therefore, for example, "fiscal year
1995" refers to the fiscal year ended October 31, 1995.
THE COMPANY
The Company is engaged in the production and sale of magnesium and
magnesium alloys through its wholly-owned subsidiary, Magcorp, and diversified
steel service operations through its wholly-owned subsidiary, Sabel. For the
twelve months ended April 30, 1996, the Company had revenues, EBITDA (as
defined) and net income of $197.2 million, $61.8 million and $29.7 million,
respectively.
Magcorp
In 1995, Magcorp was the third largest producer of pure magnesium and
magnesium alloys in North America and the fourth largest producer in the world
outside the Commonwealth of Independent States ("CIS") and People's Republic of
China ("PRC"). Magnesium and magnesium alloys are components in products ranging
from aluminum beverage cans, computer chassis and power tools to complex
castings for the aerospace, automotive and recreation industries. Additionally,
magnesium is used in the production of steel, ductile iron and other metals and
as a reagent in the manufacture of various organic and pharmaceutical products.
Magcorp sells pure magnesium and magnesium alloys to domestic and
international customers. Magcorp's plant, which was constructed in 1972, is
located in Rowley, Utah, and has a nominal annual production capacity of
approximately 41,000 metric tons. Magcorp produced approximately 38,400 metric
tons in fiscal year 1995 and approximately 20,300 metric tons in the six months
ended April 30, 1996. Magcorp accounted for 21% of calendar year 1995 North
American production and 16% of calendar year 1995 global production, excluding
CIS and PRC, according to statistics published by the International Magnesium
Association (the "IMA") and management estimates.
Due to the high-quality brine drawn from the Great Salt Lake and a
proprietary production process, Magcorp is capable of consistently producing
magnesium with a purity level which exceeds the industry standard of 99.8%.
Magcorp offers over 30 different sizes, shapes and weights of primary magnesium
and magnesium alloy products in a range of purity levels to meet customer needs
in all of its major markets.
Limited magnesium supply combined with continued increases in demand
resulted in significant increases in pure magnesium list prices during 1995.
From 1986 to 1995, magnesium demand increased at a compound annual growth rate
("CAGR") of approximately 3.8%. This growth is due to magnesium's inherent
metallurgical properties including its light weight, high strength-to-weight
ratio, excellent corrosion resistance and reactivity with certain elements. As a
result of these characteristics, from 1986 to 1995, the use of magnesium
increased in most of magnesium's largest end markets including aluminum alloying
(3% CAGR), die castings (20% CAGR) and desulfurization in steel production (8%
CAGR).
The increase in demand for magnesium has not resulted in significant
increases in supply. In early 1994, one of the largest domestic producers
significantly reduced its capacity, and that capacity has not been replaced.
North American producers are currently operating at approximately 95% of
capacity. Magcorp's current capacity utilization rate is 96%.
As a result of these industry conditions, list prices for pure magnesium
sold by North American producers in North America increased to record highs in
1995. Pure magnesium list prices increased from $1.43 per pound in 1991 to $1.93
per pound in mid-1995, and have remained stable since such time. Magnesium
regularly sells for prices lower than the list price for pure magnesium, with
price dependent on market segment, chemistry, contract terms, including
negotiated discounts, and quality, with the higher quality magnesium sold by
Magcorp selling at or near list price, and lower quality magnesium, like that
produced in the PRC, selling at substantially below list price. Manufacturers of
lower quality pure magnesium, including those in the PRC, have experienced price
reductions during 1996. Magcorp believes that the price that it will receive for
higher quality pure magnesium sold in the United States may decrease modestly in
the second half of 1996 but remain at levels above 1995.
3
<PAGE> 6
As of March 31, 1996, magnesium producer inventories outside the PRC and
CIS were 30,300 metric tons, which represents approximately five weeks of
supply, compared with normal levels of approximately eight weeks, and up from a
record low of 17,200 metric tons in June 1995. The recent increase in
inventories resulted from slightly higher production of high quality pure
magnesium and an increase in the availability of magnesium produced in the CIS
and PRC.
Management believes that the industry's high capacity utilization rates
will continue through at least the year 2000 due to increasing demand for
magnesium and the high costs and difficulty associated with constructing a new
facility. The magnesium manufacturing process is also highly technical and
proprietary to each company. Management estimates a cost of approximately $500
million to establish a facility with the same production capacity as Magcorp's
facility. One new facility, located in Israel with an estimated annual capacity
of 27,500 metric tons, is expected to begin production in early 1997. The
capacity of the Israeli facility may also be increased, subject to start-up
success, viability and market conditions, from 27,500 to 55,000 metric tons,
with a possible start-up date for the second phase in 1999.
Magcorp's business strategy consists of three principal elements: (i)
maximize sales in markets in which superior margins can be achieved, (ii)
establish and maintain long-term customer relationships through service, product
flexibility and responsiveness and (iii) manage production and overhead costs
aggressively.
In furtherance of its business strategy, Magcorp emphasizes quality,
service and flexibility to meet changing customer specifications. In particular,
management believes that Magcorp's range of products and delivery program has
afforded Magcorp a significant degree of flexibility to meet customer needs
which serves to foster long-term relationships with its core customers.
Additionally, with respect to costs, management has maintained an aggressive
cost management program since 1987 which has resulted in a 28.3% reduction of
direct unit manufacturing costs. Management is committed to pursuing further
efficiencies and cost reductions to maintain its competitive position within the
industry.
To this end, management has developed a capital improvement program
totaling approximately $46 million which encompasses the installation of new
electrolytic cell technology, as well as the installation of a magnesium caster.
The new electrolytic cells are expected to reduce operating costs and improve
manufacturing efficiencies resulting from reductions in: (i) electricity
consumption; (ii) manufacturing labor requirements; (iii) magnesium metal losses
in the manufacturing process; and (iv) chlorine emissions.
The electrolytic cell conversion will commence in early 1997 with the
installation of a prototype cell and, assuming its successful operation, the
conversion of the remaining cells is expected to be completed by 1999.
Management estimates that the magnesium caster will be installed in fiscal year
1997.
Sabel
Sabel is a diversified company primarily involved in the steel service
center, scrap metal and reinforcing bar ("rebar") fabrication businesses.
Through its four steel service centers located in Alabama, Sabel distributes a
full line of hot rolled and cold rolled carbon steel and structural steel to
industrial accounts as well as the general public throughout the Southeast.
Sabel's scrap metal operations process to customer specifications and sell and
transport ferrous and non-ferrous scrap metal to mini- and integrated mills.
Sabel's rebar fabrication operation customizes rebar to sizes and shapes
required for use in building and highway construction. Sabel processes more than
90% of the steel it sells to more than 3,500 customers.
Sabel's business strategy is to maintain and strengthen its presence in
niche markets while emphasizing supplier and customer relationships. Sabel
concentrates on low volume, high margin sales to customers whose order sizes are
not efficiently handled by larger steel service centers and scrap metal
companies. Sabel's ability to provide one-day turnaround service on most
commonly used steel products at competitive prices enables its smaller customers
to implement just in time delivery for material requirements planning. With a
primary focus on the Southeast region, Sabel's geographic proximity to its
customers facilitates this service while minimizing freight costs and delivery
time. Sabel's strong market presence in the region enables it to obtain
contracts for on-site collection of scrap materials from a number of industrial
concerns.
Control of the Company
All of the Company's issued and outstanding capital stock is owned by The
Renco Group, Inc. ("Group"), which is 95.8% owned by Mr. Ira Leon Rennert, the
Chairman and Chief Executive Officer of the Company and Group, and by trusts
established by him for members of his family (but of which he is not a trustee).
As a result of such ownership, Mr. Rennert controls the Company and its
subsidiaries.
4
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................. $150,000,000 aggregate principal amount of % Senior
Notes due 2003 (the "Senior Notes").
Maturity Date...................... , 2003.
Interest Payment Dates............. Interest will accrue from the date of issuance and will
be payable semi-annually on each and
, commencing , 199 .
Optional Redemption................ The Senior Notes are redeemable, in whole or in part, at
the option of the Company on or after , 2000
at the redemption prices set forth herein plus accrued
interest to the redemption date. See "Description of
Senior Notes -- Optional Redemption." In addition, prior
to , 1999, the Company, at its option, may
redeem up to 33% of the aggregate principal amount of
the Senior Notes originally issued with the net proceeds
of one or more Public Equity Offerings at the redemption
price set forth herein plus accrued interest to the date
of redemption; provided that at least $100.0 million of
Senior Notes remain outstanding immediately after such
redemption. See "Description of Senior Notes -- Optional
Redemption Upon Public Equity Offerings."
Change of Control.................. Upon a Change of Control, each holder of Senior Notes
will have the right to require the Company to repurchase
all or a portion of such holder's Senior Notes at a
price of 101% of the principal amount thereof plus
accrued interest to the repurchase date. See
"Description of Senior Notes -- Change of Control."
Asset Sale Proceeds................ The Company is obligated in certain instances to make
offers to purchase the Senior Notes at a redemption
price of 100% of the principal amount thereof plus
accrued interest to the repurchase date with the net
cash proceeds of certain sales or other dispositions of
assets. See "Description of Senior Notes -- Certain
Covenants -- Disposition of Proceeds of Asset Sales."
Guarantees......................... The Senior Notes are guaranteed, jointly and severally,
by the Guarantors on a senior unsecured basis. See
"Description of Senior Notes -- Guarantees."
Ranking............................ The Senior Notes will be senior obligations of the
Company and will rank pari passu with all senior
indebtedness of the Company, including any Existing
Notes that remain outstanding after the Tender Offer,
and will rank senior to all subordinated indebtedness of
the Company.
Use of Proceeds.................... The Company intends to use the net proceeds from the
Offering of the Senior Notes, together with available
cash of the Company, to (i) retire Existing Notes
validly tendered pursuant to the Tender Offer (as
defined), (ii) redeem the Company's existing 10%
Preferred Stock held by Group, (iii) make certain
contractual compensation payments to certain executives
of Magcorp, (iv) pay a dividend to Group and (v) pay
related fees and expenses. See "Use of Proceeds." The
use of the proceeds and the application of the available
cash, together with certain amendments to the Revolving
Credit Facilities, are collectively referred to herein
as the "Transactions."
</TABLE>
5
<PAGE> 8
<TABLE>
<S> <C>
Certain Covenants.................. The Indenture governing the Senior Notes will contain
certain covenants that, among others, limit the type and
amount of additional indebtedness that may be incurred
by the Company or any of its subsidiaries and impose
limitations on investments, loans, advances, the payment
of dividends and the making of certain other payments,
the creation of liens, certain transactions with
affiliates and certain mergers. See "Description of
Senior Notes -- Certain Covenants."
</TABLE>
TENDER OFFER AND CONSENT SOLICITATION
On May 24, 1996, the Company commenced an offer (the "Tender Offer") to
purchase for cash up to all of the Existing Notes and a related solicitation
(the "Consent Solicitation") of consents to delete or modify certain terms of
the indenture under which the Existing Notes were issued. The purchase price to
be paid in respect of the validly tendered Existing Notes and the related
consents is 111% of their principal amount, plus accrued interest up to, but not
including, the date of purchase. Consummation of the Offering is conditioned
upon the receipt by the Company of consents representing at least a majority in
aggregate principal amount of the Existing Notes outstanding.
RISK FACTORS
Prospective purchasers of the Senior Notes should consider carefully all of
the information set forth in this Prospectus and, in particular, should evaluate
the specific factors set forth under "Risk Factors" for risks involved with an
investment in the Senior Notes.
6
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary financial data of the Company for
the six months ended April 30, 1995 and 1996, and for each of the years in the
five fiscal year period ended October 31, 1995, and as of April 30, 1996
(historical and pro forma to give effect to the Transactions). Such summary
information is qualified by, and should be read in conjunction with, the
detailed information and the financial statements appearing elsewhere herein for
the fiscal years ended October 31, 1993, 1994 and 1995 and the notes related
thereto, and the unaudited results for the six months ended April 30, 1995 and
1996. The summary financial data for the six months ended April 30, 1995 and
1996 are unaudited but, in the opinion of management, include all adjustments
(consisting of normal recurring accruals) necessary for the fair presentation of
the financial and operating data for such periods. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
------------------------------------------------------------ --------------------
1991 1992 1993 1994 1995 1995 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $113,649 $117,262 $131,139 $132,950 $185,806 $87,681 $ 99,110
Cost of sales....................... 92,151 95,501 95,313 106,364 121,189 58,900 56,238
Depreciation, depletion, and
amortization...................... 11,627 10,698 7,135 5,604 5,770 2,878 3,369
Selling, general, and administrative
expenses.......................... 14,411 14,499 14,714 16,352 18,470 8,898 8,967
-------- -------- -------- -------- -------- ------- --------
Operating income (loss)............. (4,540) (3,436) 13,977 4,630 40,377 17,005 30,536
Interest income..................... 4 11 56 186 881 210 830
Interest expense.................... 9,736 7,614 7,414 10,208 10,138 5,056 5,034
Income tax expense (benefit)........ (1,424) (331) 2,503 (1,932) 11,143 5,000 9,447
-------- -------- -------- -------- -------- ------- --------
Income (loss) from continuing
operations........................ (12,848) (10,708) 4,116 (3,460) 19,977 7,159 16,885
Extraordinary item(1)............... -- -- 2,930 -- -- -- --
Cumulative effect of accounting
change............................ -- -- -- 30 -- -- --
Net income (loss)................... $(12,848) $(10,708) $ 7,046 $ (3,430) $ 19,977 $ 7,159 $ 16,885
======== ======== ======== ======== ======== ======= ========
Ratio of earnings to fixed
charges(2)(3)..................... -- -- 1.78x -- 3.81x 3.20x 5.85x
FINANCIAL RATIOS AND OTHER DATA:
EBITDA(4)........................... $ 7,715 $ 7,897 $ 21,450 $ 10,792 $ 47,118 $20,138 $ 34,809
Capital expenditures(5)............. 308 751 2,595 3,227 7,185 3,361 5,042
Cash interest expense(6)............ 8,269 6,217 5,769 9,436 9,366 4,670 4,648
Ratio of EBITDA to cash interest
expense........................... -- 1.27x 3.72x 1.14x 5.03x 4.31x 7.49x
PRO FORMA DATA:(7)
Cash interest expense(6)............ 16,866 8,398
Ratio of EBITDA to cash interest
expense........................... 2.79x 4.14x
</TABLE>
<TABLE>
<CAPTION>
AS OF
APRIL 30, 1996
---------------------
PRO
ACTUAL FORMA(8)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (at end of
period):
Working capital................... $ 64,517 $ 41,456
Property, plant, and equipment,
net............................. 33,680 33,680
Total assets...................... 122,301 100,042
Total debt........................ 77,520 152,520
Stockholder's equity (deficit).... 11,823 (81,950)
</TABLE>
- ------------------------------
(1) See Note (9) of Notes to Consolidated Financial Statements included
elsewhere herein.
(2) Fixed charges consist of interest expense, amortization of deferred
financing costs and the portion of rental expense that is representative of
interest expense. Earnings consist of income before taxes plus fixed
charges.
(3) Earnings were insufficient to cover fixed charges by $14.3 million, $11.0
million and $5.4 million for the years ended October 31, 1991, 1992 and
1994, respectively.
(4) EBITDA is defined as earnings before interest expense, provision (benefit)
for income taxes, depreciation, depletion and amortization and non-cash post
retirement medical charges. Information regarding EBITDA is presented
because of its use by certain investors as one measure of an issuer's
historical ability to service its debt. EBITDA should not be considered an
alternative to, or more meaningful than, operating income or cash flow as an
indicator of the Company's operating performance.
(5) Capital expenditures does not include ongoing maintenance expenses of $17.9
million, $19.7 million, $20.9 million, $19.9 million, $23.3 million, $11.0
million and $11.7 million for the years ended October 31, 1991, 1992, 1993,
1994 and 1995 and the six months ended April 30, 1995 and 1996,
respectively, which are included in cost of sales.
(6) Cash interest expense consists of interest expense less amortization of loan
origination and financing fees.
(7) Pro forma to give effect to the Transactions as if they occurred as of the
first day of each period presented. See "Use of Proceeds."
(8) Pro forma to give effect to the Transactions as if they occurred as of April
30, 1996. See "Use of Proceeds" and "Capitalization."
7
<PAGE> 10
RISK FACTORS
Prior to purchasing the Senior Notes offered hereby, prospective purchasers
should consider all of the information set forth in this Prospectus and, in
particular, should evaluate the following risk factors:
HIGH LEVERAGE
After consummation of the Offering, the Company will have significant debt
service obligations. As of April 30, 1996, on a pro forma basis after giving
effect to the Transactions, the Company would have had total long-term
indebtedness of $152.5 million (excluding $1.6 million of outstanding undrawn
letters of credit) and a stockholder's deficit of $82.0 million. The Company's
high level of indebtedness presents substantial risks to the holders of the
Senior Notes, including the risk that the Company might not generate sufficient
cash to service the Senior Notes and its other debt obligations. The ability of
the Company to meet its debt service and other obligations will depend upon its
future performance. The Company is engaged in businesses that are substantially
affected by changes in economic cycles and whose revenues and earnings vary with
the level of general economic activity in the markets they serve as well as by
financial, political, business and other factors, many of which are beyond the
Company's control. The Company's ability to meet its debt service obligations
also may be affected by changes in prevailing interest rates, as borrowings
under the Revolving Credit Facilities bear interest at floating rates. See
"Capitalization."
In the event that internally generated funds and amounts available under
the Revolving Credit Facilities are not sufficient to fund the Company's capital
expenditures and its debt service obligations, including the Senior Notes, the
Company would be required to raise additional funds through the sale of equity
securities, the refinancing of all or part of its indebtedness or the sale of
assets. Each of these alternatives is dependent upon financial, business and
other general economic factors affecting the Company, many of which are beyond
the control of the Company, and there can be no assurance that any such
alternatives would be available to the Company, if at all, on satisfactory
terms. While the Company believes that cash flow generated by operations, along
with borrowing availability to the Guarantors under the Revolving Credit
Facilities, will provide adequate sources of long-term liquidity, a significant
drop in operating cash flows resulting from economic conditions, competition or
other uncertainties beyond the Company's control could increase the need for
refinancing or new capital.
The Indenture governing the Senior Notes and the Revolving Credit
Facilities impose restrictions on the operations and activities of the Company.
The most significant restrictions relate to debt incurrence, investments, sales
of assets and cash distributions by the Company and require the Company to
comply with certain financial covenants. The failure to comply with any of these
restrictions or covenants could result in an event of default under the
applicable instrument, which could permit acceleration of the debt under such
instrument and in some cases acceleration of debt under other instruments that
contain cross-acceleration or cross-default provisions. See "Description of
Senior Notes" and "Description of Revolving Credit Facilities."
Accounts receivable and inventory of each Guarantor are pledged to secure
that Guarantor's obligations under its Revolving Credit Facility and are
available to satisfy the Senior Notes only when such Revolving Credit Facility
obligations are discharged. Generally, the property, plant and equipment of each
Guarantor are unencumbered and are available to satisfy general unsecured
obligations of that Guarantor, including its Guarantee (as defined).
HOLDING COMPANY STRUCTURE; POSSIBLE FRAUDULENT CONVEYANCE ISSUES
The Company is a holding company with no operations of its own. All of the
Company's operating income is generated by the Guarantors. As a result, the
Company will rely upon distributions or advances from the Guarantors to provide
the funds necessary to meet its debt service obligations, including the payment
of principal and interest on the Senior Notes.
Under federal or state fraudulent conveyance laws, the Senior Notes might,
under certain circumstances, be subordinated to existing or future indebtedness
of the Company or found not to be enforceable in accordance with their terms.
Under these statutes, if a court were to find that (i) the Senior Notes were
incurred or the guarantees (the "Guarantees") of the Guarantors were entered
into with the intent of
8
<PAGE> 11
hindering, delaying or defrauding creditors or that the Company received less
than a reasonably equivalent value or fair consideration for the Senior Notes
and (ii) the Company or the Guarantors were insolvent immediately prior to the
time the Senior Notes were issued and the Guarantees were incurred, as the case
may be, were rendered insolvent by the issuance of the Senior Notes or the
Guarantees, were engaged in a business or transaction for which the assets
remaining with the Company or the Guarantors constituted unreasonably small
capital, or intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, such court could void the Company's
and the Guarantors' obligations under the Senior Notes, or subordinate the
Senior Notes and the Guarantees to all other indebtedness of the Company and the
Guarantors, as the case may be. In that event, there would be no assurance that
any repayment on the Senior Notes would ever be recovered by the holders of the
Senior Notes and the Guarantees. Although the definition of insolvency varies
among the jurisdictions, generally, the Company and the Guarantors would be
considered to have been insolvent at the time the Senior Notes were issued if
the sum of its debts were then greater than all of its property at a fair
valuation, or if the then fair saleable value of its assets was less than the
amount that was then required to pay its probable liability on its existing
debts as they become absolute and matured. There can be no assurance as to what
standard a court would apply in order to determine whether the Company or the
Guarantors were "insolvent" as of the date the Senior Notes were issued, or
that, regardless of the method of valuation, a court would not determine that
the Company or the Guarantors were insolvent on that date. Nor can there be any
assurance that a court would not determine, regardless of whether the Company or
the Guarantors were insolvent on the date the Senior Notes were issued, that the
payments constituted fraudulent transfers on another ground.
VOLATILITY OF MAGNESIUM PRICING
List prices for pure magnesium reached historically high levels in the
markets Magcorp serves in 1995 and have remained stable since such time.
Magnesium regularly sells for prices lower than list price for pure magnesium,
with price dependent on market segment, chemistry, contract terms, including
negotiated discounts and quality, with the higher quality magnesium sold by
Magcorp selling at or near list price, and lower quality magnesium, like that
produced in the PRC, selling at substantially below list price. Manufacturers of
lower quality pure magnesium, including these in the PRC, have experienced price
reductions during 1996. Magcorp believes that the price that it will receive for
higher quality pure magnesium sold in the United States may decrease modestly in
the second half of 1996 but remain at levels above 1995. The price that Magcorp
is able to receive for magnesium is particularly sensitive to the availability
of magnesium in the North American market. If there is an increased supply of
magnesium sold in the North American market, prices could decrease. A new
facility, located in Israel with an estimated annual capacity of approximately
27,500 metric tons, is expected to begin producing and selling magnesium by
early 1997 and could result in new imports into the North American marketplace.
The capacity of the Israeli facility may also be increased, subject to start-up
success, viability and market conditions, from 27,500 to 55,000 metric tons,
with a possible start-up date for the second phase of 1999. Increases in
magnesium supplies in the North American marketplace could also result from
increased domestic manufacturing capacity and imports from other magnesium
producing countries, including the PRC. Imports may increase if, among other
things, the antidumping duties against certain Russian Federation imports or
certain Ukrainian imports of pure magnesium, or the antidumping duties and/or
countervailing duties imposed against Canadian imports of pure and alloy
magnesium were removed. See "-- Magnesium Import Issues" below. A material
decrease in the price of magnesium could adversely affect the Company's
operating results. There can be no assurance that current prices will continue.
MAGNESIUM IMPORT ISSUES
There presently exist antidumping duties on certain magnesium imports of
pure magnesium from the Russian Federation, Ukraine and the PRC. On March 30,
1995 the Department of Commerce ("DOC") determined that imports of pure
magnesium from all three countries were dumped in the United States but also
determined that certain Russian producers and traders were not dumping Russian
magnesium. On April 26, 1995, the U.S. International Trade Commission ("ITC")
announced its affirmative determinations that imports from these three countries
were a cause of injury to the domestic magnesium industry.
9
<PAGE> 12
Subsequent to that decision, Magcorp filed an appeal in the U.S. Court of
International Trade ("CIT") of the DOC's determination that certain Russian
producers and traders did not engage in dumping magnesium into the U.S. market.
One of the Ukrainian traders appealed the injury determination entered by the
ITC as to dumped imports of Ukrainian pure magnesium. These appeals have been
fully briefed and have been set for oral argument before the CIT on July 9,
1996. Neither the possible outcome of the appeal process nor the impact of the
determinations or the impact of the appeal process upon the Company's business
can be determined at the present time.
There are antidumping and countervailing duties imposed against imports of
pure and alloy magnesium from Canada. On May 29, 1996, following an
administrative review undertaken by the DOC, the antidumping duty deposit was
reduced to zero on a preliminary basis due to increased pricing levels in the
U.S. market. Any permanent reduction or reversal of such duties could have a
material adverse effect on magnesium pricing in the United States and on
Magcorp's competitive position, depending upon market conditions. See
"Business -- Magcorp -- Legal Proceedings; Pending Trade Issues."
ENVIRONMENTAL MATTERS
The Company and its operations are subject to a variety of federal, state
and local environmental laws and regulations. Such laws relate to, among other
things, the discharge of contaminants into water and air and into and onto land
and the disposal of waste. The Company's cost of compliance with environmental
laws and remediation obligations under such laws has been and is expected to
continue to be significant. Magcorp plans to spend approximately $40 million of
its capital budget by the year 2000 directly or indirectly to meet environmental
regulatory requirements by purchasing new electrolytic cell technology that will
reduce chlorine emissions at the source. See
"Business -- Magcorp -- Environmental Matters."
FLUCTUATIONS IN ENERGY COSTS
Amounts paid by the Company for electricity and natural gas represent the
largest components of the Company's variable costs. The cost of these materials
is subject to market fluctuations caused by factors beyond the Company's
control. Significant increases in the cost of electricity or natural gas, to the
extent not reflected in prices for the Company's products, could materially and
adversely affect the Company's results of operations.
LABOR RELATIONS
Approximately 73% of Magcorp's hourly employees and 20% of Sabel's hourly
employees are covered by collective bargaining or similar agreements that expire
in 1997. The Company believes that it has satisfactory relations with its
employees. There can be no assurance, however, that new labor agreements will be
reached without a work stoppage or strike or will be reached on terms
satisfactory to the Company.
CONTROL BY GROUP
The Company is a wholly owned subsidiary of Group, which is 95.8% owned by
Mr. Ira Leon Rennert and by trusts established by him for members of his family.
Due to its ownership of all the capital stock of the Company, Group will be able
to direct and control the policies of the Company, including mergers, sales of
all or substantially all of the Company's assets and similar transactions, which
transactions may result in a Change of Control under the Indenture governing the
Senior Notes. See "Description of Senior Notes -- Change of Control." The
Company's board of directors has been, and is expected to continue to be,
comprised entirely of designees of Group. Currently, Mr. Rennert is the sole
director of the Company.
LACK OF A PUBLIC MARKET FOR THE SENIOR NOTES
The Senior Notes are new securities for which no market exists. Although
Donaldson, Lufkin & Jenrette Securities Corporation has informed the Company
that it currently intends to make a market in the Senior Notes, it is not
obligated to do so and any such market making may be discontinued at any time
without notice. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Senior Notes.
10
<PAGE> 13
USE OF PROCEEDS
The net proceeds from the Offering will be approximately $144.0 million.
Approximately $83.3 million will be used to provide funds to redeem the Existing
Notes pursuant to the Tender Offer (assuming all of the Existing Notes are
validly tendered) and approximately $8.5 million will be used to redeem the
Company's outstanding 10% Preferred Stock from Group. The balance of the net
proceeds, approximately $52.2 million, plus available cash of the Company of
approximately $25.2 million, will be used to fund a dividend distribution from
the Company to Group and to make certain contractual compensation payments to
certain executives of Magcorp.
The following table summarizes the sources and uses of funds for the
Offering assuming a closing date of July 15, 1996:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C>
Sources:
Senior Notes....................................................... $ 150.0
Estimated available cash(1)........................................ 25.2
------
Total sources.............................................. $ 175.2
======
Uses:
Retire Existing Notes (including premium).......................... $ 83.3
Dividend to Group.................................................. 72.4
Redeem 10% Preferred Stock from Group.............................. 8.5
Contractual compensation payments to Magcorp executives(2)......... 5.0
Transaction fees and expenses...................................... 6.0
------
Total uses................................................. $ 175.2
======
</TABLE>
- ---------------
(1) The amount of the dividend paid to Group and the amount of the contractual
compensation payments to Magcorp executives upon consummation of the
Offering will depend upon available cash.
(2) Upon consummation of the Transactions, certain payments will be made to such
Magcorp executives pursuant to Net Worth Appreciation Agreements. See
"Management -- Executive Compensation -- Net Worth Appreciation Agreements."
11
<PAGE> 14
CAPITALIZATION
The following table sets forth the historical consolidated cash and cash
equivalents and capitalization of the Company as of April 30, 1996, and as
adjusted to give effect to the Transactions. This table should be read in
conjunction with the historical consolidated financial statements of the Company
and notes related thereto presented elsewhere herein.
<TABLE>
<CAPTION>
AS OF APRIL 30, 1996
------------------------
ACTUAL AS ADJUSTED
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents..................................... $32,007 $ 547
======== ========
Long-term debt (including current maturities):
Revolving Credit Facilities(1).............................. $ 2,037 $ 2,037
Existing Notes.............................................. 75,000 --
Senior Notes................................................ -- 150,000
Other....................................................... 483 483
-------- --------
Total long-term debt (including current
maturities)....................................... 77,520 152,520
-------- --------
Stockholder's equity:
10% Preferred Stock, $1,000 par value; 8,500 shares
authorized, issued and outstanding....................... 8,500 --
Common Stock, no par value; 1,000 shares authorized, issued
and outstanding.......................................... 1 1
Additional paid-in-capital.................................. 500 500
Retained earnings (deficit)(2).............................. 3,035 (82,238)
Minimum pension liability adjustment........................ (213) (213)
-------- --------
Total stockholder's equity (deficit)................ $11,823 (81,950)
-------- --------
Total capitalization.......................................... $89,343 $ 70,570
======== ========
</TABLE>
- ------------------------------
(1) At the closing of the Offering, the Revolving Credit Facilities will consist
of two revolving credit facilities of $33.0 million and $7.0 million for
Magcorp and Sabel, respectively, both expiring August 4, 1999. The
outstanding amounts under the Revolving Credit Facilities relate to Sabel
and exclude undrawn amounts under letters of credit issued pursuant to the
Revolving Credit Facilities. See "Description of Revolving Credit
Facilities."
(2) Reflects (i) a non-recurring charge of approximately $8.3 million related to
the premium paid pursuant to the Tender Offer, (ii) a non-recurring charge
of $2.6 million related to the acceleration of unamortized deferred
financing costs associated with the repurchase of the Existing Notes, (iii)
certain contractual compensation payments to Magcorp executives totalling
$5.3 million ($1.4 million of which was previously accrued) and (iv) a
dividend to Group of approximately $71.7 million, net of tax benefits
associated with clauses (i) through (iii) above of $5.3 million. Also
reflects a $4.1 million dividend paid to Group on May 16, 1996. The amount
of the dividend paid to Group and the amount of the contractual compensation
payments to Magcorp executives upon consummation of the Offering will depend
upon available cash.
12
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data of the Company as of
and for the six months ended April 30, 1995 and 1996, and as of and for each of
the years in the five fiscal year period ended October 31, 1995. Such selected
information is qualified by, and should be read in conjunction with, the
detailed information and the financial statements appearing elsewhere herein for
the fiscal years ended October 31, 1993, 1994 and 1995, and the notes related
thereto, and the unaudited results for the six months ended April 30, 1995 and
1996. The selected financial data for the six months ended April 30, 1995 and
1996 are unaudited but, in the opinion of management, include all adjustments
(consisting of normal recurring accruals) necessary for the fair presentation of
the financial and operating data for such periods. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
---------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................. $113,649 $117,262 $131,139 $132,950 $185,806 $87,681 $ 99,110
Cost of sales.............................. 92,151 95,501 95,313 106,364 121,189 58,900 56,238
Depreciation, depletion, and
amortization............................. 11,627 10,698 7,135 5,604 5,770 2,878 3,369
Selling, general, and administrative
expenses................................. 14,411 14,499 14,714 16,352 18,470 8,898 8,967
-------- -------- -------- -------- -------- ------- --------
Operating income (loss).................... (4,540) (3,436) 13,977 4,630 40,377 17,005 30,536
Interest income............................ 4 11 56 186 881 210 830
Interest expense........................... 9,736 7,614 7,414 10,208 10,138 5,056 5,034
Income tax expense (benefit)............... (1,424) (331) 2,503 (1,932) 11,143 5,000 9,447
-------- -------- -------- -------- -------- ------- --------
Income (loss) from continuing operations... (12,848) (10,708) 4,116 (3,460) 19,977 7,159 16,885
Extraordinary item(1)...................... -- -- 2,930 -- -- -- --
Cumulative effect of accounting change..... -- -- -- 30 -- -- --
Net income (loss).......................... $(12,848) $(10,708) $ 7,046 $ (3,430) $ 19,977 $ 7,159 $ 16,885
======== ======== ======== ======== ======== ======= ========
Cash dividends............................. -- -- $ 7,601 -- -- -- $ 9,822
Ratio of earnings to fixed charges(2)(3)... -- -- 1.78x -- 3.81x 3.20x 5.85x
FINANCIAL RATIOS AND OTHER DATA:
EBITDA(4).................................. $ 7,715 $ 7,897 $ 21,450 $ 10,792 $ 47,118 $20,138 $ 34,809
Capital expenditures(5).................... 308 751 2,595 3,227 7,185 3,361 5,042
Cash interest expense(6)................... 8,269 6,217 5,769 9,436 9,366 4,670 4,648
Ratio of EBITDA to cash interest expense... -- 1.27x 3.72x 1.14x 5.03x 4.31x 7.49x
PRO FORMA DATA:(7)
Cash interest expense(6)................... 16,866 8,398
Ratio of EBITDA to cash interest expense... 2.79x 4.14x
BALANCE SHEET DATA (at end of period):
Working capital............................ $ 4,117 $ 16,818 $ 35,186 $ 36,911 $ 58,880 $44,310 $ 64,517
Property, plant, and equipment, net........ 39,568 35,341 32,845 30,862 32,014 31,334 33,680
Total assets............................... 94,066 78,700 90,515 89,038 116,551 99,164 122,301
Total debt................................. 69,644 62,274 75,862 78,839 78,012 78,136 77,520
Stockholder's equity (deficit)............. (8,811) (19,519) (12,000) (15,004) 4,760 (7,845) 11,823
</TABLE>
- ------------------------------
(1) See Note (9) of Notes to Consolidated Financial Statements included
elsewhere herein.
(2) Fixed charges consist of interest expense, amortization of deferred
financing costs and the portion of rental expense that it is representative
of interest expense. Earnings consist of income before taxes plus fixed
charges.
(3) Earnings were insufficient to cover fixed charges by $14.3 million, $11.0
million and $5.4 million for the years ended October 31, 1991, 1992 and
1994, respectively.
(4) EBITDA is defined as earnings before interest expense, provision (benefit)
for income taxes, depreciation, depletion and amortization, and non-cash
post retirement medical charges. Information regarding EBITDA is presented
because of its use by certain investors as one measure of an issuer's
historical ability to service its debt. EBITDA should not be considered an
alternative to, or more meaningful than, operating income or cash flow as an
indicator of the Company's operating performance.
(5) Capital expenditures does not include ongoing maintenance expenses of $17.9
million, $19.7 million, $20.9 million, $19.9 million, $23.3 million, $11.0
million and $11.7 million for the years ended October 31, 1991, 1992, 1993,
1994 and 1995 and the six months ended April 30, 1995 and 1996,
respectively, which are included in cost of sales.
(6) Cash interest expense consists of interest expense less amortization of loan
origination and financing fees.
(7) Pro forma to give effect to the Transactions as if they had occurred as of
the first day of each period presented. See "Use of Proceeds."
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is a holding company incorporated on July 19, 1993 which has
two wholly-owned operating companies, Magcorp and Sabel. Through Magcorp, the
Company is engaged in the production and sale of magnesium and magnesium alloys
for customers throughout the world. Group acquired Magcorp in August 1989. Sabel
is a diversified company in the southeast United States primarily involved in
the steel service center, scrap metal and rebar businesses. Sabel was acquired
by Group in July 1987.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and the notes thereto and other financial
information included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
------------------------------ -----------------
1993 1994 1995 1995 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales by business segment:
Magcorp..................................... $ 97,099 $ 90,745 $136,348 $62,649 $77,103
Sabel....................................... 34,040 42,205 49,458 25,032 22,007
-------- -------- -------- ------- -------
Total sales......................... 131,139 132,950 185,806 87,681 99,110
Cost of sales................................. 95,313 106,364 121,189 58,900 56,238
Depreciation, depletion, and amortization..... 7,135 5,604 5,770 2,878 3,369
Selling, general and administrative
expenses.................................... 14,714 16,352 18,470 8,898 8,967
-------- -------- -------- ------- -------
Total operating income.............. 13,977 4,630 40,377 17,005 30,536
Interest income............................... 56 186 881 210 830
Interest expense.............................. (7,414) (10,208) (10,138) (5,056) (5,034)
-------- -------- -------- ------- -------
Income (loss) before income taxes............. 6,619 (5,392) 31,120 12,159 26,332
Income tax expense (benefit).................. 2,503 (1,932) 11,143 5,000 9,447
-------- -------- -------- ------- -------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
for income taxes............................ 4,116 (3,460) 19,977 7,159 16,885
Extraordinary item -- extinguishment of debt,
net of taxes................................ 2,930 -- -- -- --
Cumulative effect of change in accounting for
income taxes................................ -- 30 -- -- --
-------- -------- -------- ------- -------
Net income (loss)............................. $ 7,046 $ (3,430) $ 19,977 $ 7,159 $16,885
======== ======== ======== ======= =======
</TABLE>
SIX MONTHS ENDED APRIL 30, 1996 COMPARED TO SIX MONTHS ENDED APRIL 30, 1995
Sales for the six month period ended April 30, 1996 increased 13.0% over
the prior period. The increase was attributable to a 23.1% increase in Magcorp's
revenues, which was offset by a 12.1% decrease in Sabel's revenues. Magcorp's
magnesium shipments increased 1.3% and the average selling price increased
21.4%. Both selling price and sales volume were impacted by favorable demand
trends in the magnesium market. Magnesium pricing and volume are dependent on
the overall market supply and demand, and there is no assurance that the current
favorable trends will continue. Sabel's sales decrease was due to a general
weakening of prices and volume throughout all the steel markets in which Sabel
operates.
Cost of sales for the six month period ended April 30, 1996 decreased 4.5%
despite higher sales levels. Magcorp's cost of sales decreased 0.3% primarily
due to decreases in certain energy costs when compared to the corresponding
period in 1995. Magcorp's cost of sales is highly sensitive to acquired energy
costs and levels of production; generally unit costs will increase as production
levels decrease. The cost of sales at Sabel
14
<PAGE> 17
decreased 15.7%, which percentage is higher than the sales percentage decrease
discussed above due to lower costs of goods purchased for resale in the current
period.
Depreciation, depletion, and amortization for the six month period ended
April 30, 1996 increased primarily due to increased depreciation of property,
plant and equipment as the result of recent capital equipment additions.
Selling, general and administrative expenses had no significant change for
the six-month period ended April 30, 1996 from the corresponding period in 1995.
Interest income for the six month period ended April 30, 1996 increased
$0.6 million, due to cash and cash equivalent balances on hand that increased to
an average of $31.0 million in the current period from an average of $10.6
million in the corresponding prior period.
Interest expense had no significant change for the six months ended April
30, 1996 from the corresponding period in 1995.
Income tax expense was 35.9% and 41.1% of pre-tax earnings for the six
months ended April 30, 1996 and 1995, respectively. The primary difference in
the effective rate is attributable to depletion credits allowable for Magcorp's
operations in profitable fiscal years, which were not included in the income tax
provision for the period ended April 30, 1995 due to uncertainties at that date
regarding eligibility for such credits for the full fiscal year.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
Sales for fiscal year 1995 increased 39.8%. Magcorp's sales increased by
50.3%. Both magnesium sales volume and selling price were favorably affected by
the tight supply conditions in the magnesium market. The increased revenues at
Magcorp were the result of a 27.7% increase in sales volume and a 17.4% increase
in selling price. According to IMA statistics, total worldwide market shipments
in 1995 calendar year increased 5.8% over the comparable period in 1994. Sales
at Sabel increased 17.2%, primarily as a result of a 16% volume increase in its
steel service centers, and to a lesser extent higher prices in the steel and
scrap metal markets.
Cost of sales for fiscal year 1995 increased by 13.9% from fiscal year
1994. Magcorp's cost of sales increased by 11.9%. Magcorp's cost of sales did
not increase in the same proportion as sales volume, however, because of certain
economies of scale achieved with higher production levels, together with
decreases in certain energy costs when compared to the corresponding period in
1994. Magcorp's cost of sales is highly sensitive to acquired energy costs and
levels of production; generally unit costs will increase as production levels
decrease. Cost of sales at Sabel increased 19.1%, due to increases in sales
volume and higher cost of products sold. The increasing costs of steel products
is indicative of pricing pressures facing Sabel in the markets in which it
operates.
Depreciation, depletion, and amortization for fiscal year 1995 increased by
3.0% from fiscal year 1994 primarily due to increased depreciation of property,
plant and equipment as a result of recent capital equipment additions.
Selling, general, and administrative expenses for fiscal year 1995
increased 13.0%. The increased expense is attributable to increased costs
associated with increased sales activity and profitable operations at Magcorp,
including profit sharing accruals, as well as increased ongoing legal costs
associated primarily with the import trade cases. See "Risk Factors -- Magnesium
Import Issues." Sabel also experienced increased labor, labor related costs, and
maintenance costs associated with its increased sales activity.
Interest income for fiscal year 1995 increased $0.7 million from fiscal
year 1994 due to cash and cash equivalent balances on hand that increased from
$7.9 million at the beginning of 1995 to $30.1 million by the end of the fiscal
year.
Interest expense had no significant change for fiscal year 1995 from fiscal
year 1994.
15
<PAGE> 18
Income tax expense (benefit) was 35.8% and (35.8%) of pre-tax earnings
(losses) for fiscal years 1995 and 1994, respectively. The effective rate in
1995 included a $1.5 million depletion credit allowable for Magcorp's operations
in profitable years, partially offset by a $0.4 million valuation allowance
charge for deferred tax assets.
FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993
Sales for fiscal year 1994 increased 1.4%. Magcorp's sales decreased 6.5%.
The decreased sales at Magcorp were the result of a 4.5% decline in sales volume
and a 2.1% reduction in selling price. Both sales volume and selling price were
reduced by the effect of low price magnesium imports from the CIS and PRC into
U.S. markets. By-product revenues at Magcorp increased by 103.0%, partially
countering the impact of decreased magnesium sales revenue. Sales at Sabel
increased by 24.0% as a result of recovering steel and scrap metal prices and
increased volume.
Cost of sales for fiscal year 1994 increased 11.6%. Magcorp's cost of sales
increased by 7.5% due to a 13.6% downturn in production rates and increased
acquired energy costs. Magcorp's cost of sales is highly sensitive to acquired
energy costs and levels of production; generally unit costs will increase as
product levels decrease. Sabel's cost of sales increased by 23.8% due to
increased steel costs and increased volume.
Depreciation, depletion, and amortization for fiscal year 1994 decreased by
21.4% from fiscal year 1993. Magcorp accounted for substantially all of the
decrease through a reduction of $1.8 million in the depletion of brine.
Selling, general, and administrative expenses for fiscal year 1994
increased 11.1%, primarily attributable to a 16.1% increase in Sabel's selling,
general and administrative expenses due to increased labor, labor related costs,
and maintenance costs associated with Sabel's higher level of activity.
Interest income had no significant change for fiscal year 1994 from fiscal
year 1993.
Interest expense for fiscal year 1994 increased by 37.7% from fiscal year
1993 primarily as a result of the issuance of the Existing Notes on August 4,
1993, which resulted in a higher average level of debt and a higher average
interest rate. Amortization of financing fees for fiscal year 1994 totaled $0.8
million as compared to $1.6 million in fiscal year 1993.
Income tax expense (benefit) was (35.8%) and 37.8% of pre-tax earnings
(losses) for fiscal years 1994 and 1993, respectively. The effective rate for
fiscal year 1994 included a ($0.7) million adjustment of overaccruals related to
depletion credits from prior years, partially offset by a $0.5 million valuation
allowance charge for deferred tax assets. The Company adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, in the
first quarter of fiscal year 1994, as described in Note 2(f) to the Consolidated
Financial Statements. The resulting cumulative effect of this required change in
accounting for income taxes is reported separately in the consolidated
statements of operations for 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise from working capital requirements,
capital investments, dividend payments, and interest payment obligations. The
Company's primary available source of liquidity is from cash provided by
operating activities. The Company also has available $23.0 million in Revolving
Credit Facilities that provide for advances by the lender to a maximum of $20.0
million for Magcorp and $3.0 million for Sabel, based on specified percentages
of eligible accounts receivable, supplies inventories, and finished goods
inventories net of outstanding letters of credit. As of April 30, 1996, the
unused amounts available to Magcorp and Sabel were approximately $18.4 million
and $1.0 million, respectively. As part of the Transactions, the Revolving
Credit Facilities will be amended, increasing the maximum availability to $33.0
million for Magcorp and $7.0 million for Sabel. See "Description of Revolving
Credit Facilities."
In the six month period ended April 30, 1996, $17.3 million was provided by
operating activities, of which $5.0 million was used in investing activities,
and $10.4 million was used in financing activities (primarily dividends to
Group), resulting in a net increase in cash for the period of $1.9 million. As
of April 30, 1996, the
16
<PAGE> 19
Company has budgeted approximately $11.0 million for capital expenditures over
the remaining six months of the fiscal year. The Company has budgeted
approximately $17 million, $26 million and $19 million for capital expenditures
for fiscal 1997, 1998, and 1999, respectively, of which an estimated $40 million
is related to magnesium process enhancements that will also improve
environmental compliance.
The declaration and payment of dividends by the Company are restricted by
the Company's debt agreements, which generally allow dividends up to 50% of
consolidated net income. Since the Company's October 31, 1995 fiscal year end,
dividends totaling $13.9 million, consisting of $2.5 million of cash dividends
on the Company's preferred stock and $11.4 million of cash dividends on the
Company's common stock, have been paid to Group (including $4.1 million paid on
May 16, 1996, subsequent to the Company's April 30, 1996 fiscal quarter end). As
part of the Transactions, and with the consent of the Company's existing debt
holders, the Company plans to pay a dividend to Group in the amount of
approximately $72.4 million and redeem the $8.5 million of 10% Preferred Stock
owned by Group. See "Use of Proceeds." Based on profitability and after taking
into account the Company's prospects and liquidity needs, the Company plans to
pay quarterly dividends to the extent allowed by the Company's debt agreements.
Management anticipates that existing cash balances and cash generated from
operations, particularly in light of current favorable magnesium pricing trends,
and availability under its Revolving Credit Facilities will be sufficient to
finance the Company's liquidity needs for the foreseeable future.
SEASONALITY AND BACKLOG
In general, the Company's cost of sales and selling, general and
administrative expenses are affected by inflation and the effects of inflation
may be experienced by the Company in future periods. Management believes,
however, that such effects have not been material to the Company during the past
three years. The Company's businesses generally are not seasonal and do not
involve significant sales order backlog.
ENVIRONMENTAL MATTERS
The Company and its operations are subject to an increasing number of
federal, state, and local environmental laws and regulations governing, among
other things, air emissions, waste water discharge, and solid and hazardous
waste disposal. Environmental laws and regulations continue to change rapidly
and it is likely that the Company will be subject to increasingly stringent
environmental standards. Compliance with such laws and regulations is a
significant factor in the Company's operations as it is with all domestic
industrial facilities. The Company believes that it has to date materially
complied with all federal, state, and local environmental regulations and is
committed to maintaining its compliance with these laws. See "Business --
Environmental Matters."
17
<PAGE> 20
BUSINESS
The Company is a holding company with two wholly-owned operating companies,
Magcorp and Sabel. Through Magcorp, the Company is engaged in the production and
sale of magnesium and magnesium alloys for customers throughout the world. Group
acquired Magcorp in August 1989. Sabel is a diversified company in the southeast
United States primarily involved in the steel service center, scrap metal and
rebar businesses. Sabel was acquired by Group in July 1987.
The following table summarizes the percentage of sales attributable to
Magcorp and Sabel during each of the three years ended October 31, 1995 and the
six months ended April 30, 1995 and 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
----------------------------- ------------------
1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C>
Magcorp............................. 74.0% 68.3% 73.4% 71.5% 77.8%
Sabel............................... 26.0% 31.7% 26.6% 28.5% 22.2%
------- ------- ------- ------- -------
Total..................... 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
</TABLE>
MAGCORP
Overview
In 1995, Magcorp was the third largest producer of pure magnesium and
magnesium alloys in North America and the fourth largest producer in the world
outside the CIS and PRC. Magnesium and magnesium alloys are components in
products ranging from aluminum beverage cans, computer chassis and power tools
to complex castings for the aerospace, automotive and recreation industries.
Additionally, magnesium is used in the production of steel, ductile iron and
other metals and as a reagent in the manufacture of various organic and
pharmaceutical products.
Magcorp sells pure magnesium and magnesium alloys to domestic and
international customers. Magcorp's plant, which was constructed in 1972, is
located in Rowley, Utah, and has a nominal annual production capacity of
approximately 41,000 metric tons. Magcorp produced approximately 38,400 metric
tons in fiscal year 1995 and approximately 20,300 metric tons for the six months
ended April 30, 1996. Magcorp accounted for 21% of calendar year 1995 North
American production and 16% of calendar year 1995 global production, excluding
CIS and PRC, according to statistics published by the IMA and management
estimates.
Due to the high-quality brine drawn from the Great Salt Lake and a
proprietary production process, Magcorp is capable of consistently producing
magnesium with a purity level which exceeds the industry standard of 99.8%.
Magcorp offers over 30 different sizes, shapes and weights of primary magnesium
and magnesium alloy products in a range of purity levels to meet customer needs
in all of its major markets.
Primary Magnesium Industry
The seven primary magnesium producers outside the CIS and PRC produced
shipments of 248,700 metric tons of magnesium in calendar year 1995 according to
the IMA. In addition, 55,300 metric tons of magnesium produced in the CIS and
PRC were consumed in markets outside of the CIS and PRC. The Company estimates
that these combined shipments of 304,000 metric tons generated revenues of
approximately $1.0 billion.
The seven producers outside the CIS and PRC include four major producers,
Magcorp, Dow Chemical, Norsk Hydro and Northwest Alloys, that account for
approximately 87% of available production capacity outside the CIS and PRC. Like
Magcorp, Dow Chemical and Norsk Hydro market magnesium products to all the key
end-user markets. Magcorp management estimates that Northwest Alloys, a wholly
owned subsidiary of Alcoa, supplies an estimated 70% of its production capacity
to its parent, Alcoa, and markets the balance of its capacity directly to end
users and through an agency. Northwest Alloys participates primarily in the
aluminum alloying and desulfurization markets and does not participate in the
casting, electro-chemical and
18
<PAGE> 21
metal reduction markets. A Norsk Hydro plant in Canada (one of their two
production facilities) has limited its participation in the U.S. market to the
casting segment in part due to the effect of antidumping and countervailing
duties on their pure magnesium imports to the United States. Magnesium imports
also affect competition and are more fully discussed under "-- Recent Industry
Developments" below.
According to the IMA, North American markets accounted for the majority of
the consumption of magnesium outside the CIS and PRC, accounting for 165,400
metric tons, or 54%, of total consumption in 1995. In addition, Western Europe
and Asia accounted for 24% and 15%, respectively.
The following table presents magnesium consumption in North America
according to the IMA by customer category with the typical end uses of each
category for the calendar years 1991 through 1995:
NORTH AMERICAN CONSUMPTION OF PRIMARY MAGNESIUM
<TABLE>
<CAPTION>
1991
TO 1995
CUSTOMER CATEGORY 1991 1992 1993 1994 1995 CAGR END USES
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS OF METRIC TONS)
Aluminum Alloying...... 61.3 66.2 64.7 73.0 77.6 6.1% Beverage cans, truck panels, home siding,
aircraft and marine alloys.
Desulfurization........ 19.4 24.6 29.3 26.2 22.2 3.4% Steel production from iron.
Die Casting............ 15.2 21.2 22.7 30.6 42.7 29.5% Automotive, electronics and hand tools.
Ductile Iron........... 5.0 6.2 7.4 6.9 6.5 6.8% Pipe production, automotive components and
heavy-earth moving equipment.
Metal Reduction........ 4.4 5.5 3.9 2.4 2.6 (12.3)% Production of titanium, zirconium, beryllium
and uranium. Uses include aerospace, chemical
processing and nuclear products.
Electro-Chemical....... 7.6 6.2 6.3 6.4 6.8 (2.7)% Cast anodes for cathodic protection of
underground steel pipelines.
Others................. 8.4 9.6 8.8 7.2 7.0 (4.5)% Sheet and plate and extrusion stock, gravity
castings for aerospace applications, powder
for flares, chemicals and exotic
pharmaceuticals and perfumes.
----- ----- ----- ----- ----- -----
Total.............. 121.3 139.5 143.1 152.7 165.4 8.1%
===== ===== ===== ===== ===== =====
</TABLE>
The aluminum alloying industry is the single largest user of magnesium and
has accounted for approximately one-half of the magnesium consumption in North
America for the past ten years. In the aluminum alloying process, magnesium is
added to aluminum to improve the rigidity and corrosion resistance of aluminum.
Primary use of magnesium in the aluminum alloying market is in the production of
two piece beverage cans and aluminum sheet, which is used in truck panels, home
siding, aircraft and marine alloy applications.
Magnesium used for the desulfurization of iron in steel production is
effective in reducing steel's sulfur content to very low levels, allowing the
production of uniform, high quality steel with reduced treatment times. As a
result of magnesium use, steel producers enjoy higher productivity and quality
with lower production costs.
Die casting is the fastest growing segment of the domestic magnesium
industry with a CAGR of 29.5% for North America since 1991. In the automotive
industry, the largest end user of die cast magnesium alloys, magnesium is
presently used in the production of clutch housings, valve covers, engine
brackets, steering columns, dashboard frames, seat frames and crash related
energy-absorbing applications, with potential new growth in the electric vehicle
industry.
Magnesium is an important element in the production of ductile iron which
is used on a limited basis in the production of light and heavy trucks,
passenger cars and the production of pipes, valves and fittings. Ductile iron
has replaced gray irons and steel castings in a variety of automotive, light
truck, farm equipment and construction machinery applications including
knuckles, spindles, control arms, brakes and suspension systems. Magnesium is
also used as a reducing agent in the production of titanium, zirconium,
beryllium and uranium.
19
<PAGE> 22
Magnesium cast anodes are value-added products used for cathodic protection
in underground gas and water system pipelines as well as tanks. The anodes
generate an electric current thus protecting the steel from corrosion. As a
result, anodes are gradually consumed and their replacement represents a stable
market.
Other end-use markets which require magnesium include wrought products in
the form of sheet and plate
for applications in tooling fixtures and aerospace, extrusions for luggage and
automotive applications, gravity castings, such as sand castings for airplanes,
helicopters, wheels and other structural castings. Magnesium is also used by
producers of perfumes and exotic pharmaceuticals.
Recent Industry Developments
Limited magnesium supply combined with continued increases in demand
resulted in significant increases in pure magnesium list prices during 1995.
From 1986 to 1995, magnesium demand increased at a CAGR of approximately 3.8%.
This growth is due to magnesium's inherent metallurgical properties including
its light weight, high strength-to-weight ratio, excellent corrosion resistance
and reactivity with certain elements. The introduction of corrosion-resistant
high purity alloys in the 1980s allowed magnesium to compete more aggressively
with other metals in structural applications and has led to an increased number
of proven applications for magnesium as well as a greater confidence in
magnesium's performance. As a result of these characteristics and factors, from
1986 to 1995, the use of magnesium increased in most of magnesium's largest end
markets including: aluminum alloying (3% CAGR), die castings (20% CAGR) and
desulfurization in steel production (8% CAGR).
The increase in demand for magnesium has not resulted in significant
increases in supply. In early 1994, one of the largest domestic producers
significantly reduced its capacity, and that capacity has not been replaced.
North American producers are currently operating at approximately 95% of
capacity. Magcorp's current capacity utilization rate is 96%.
As a result of these industry conditions, list prices for pure magnesium
sold by North American producers in North America increased to record highs in
1995. Pure magnesium list prices increased from $1.43 per pound in 1991 to $1.93
per pound in mid-1995, and have remained stable since such time. Magnesium
regularly sells for prices lower than the list price for pure magnesium, with
price dependent on market segment, chemistry, contract terms, including
negotiated discounts, and quality, with the higher quality magnesium sold by
Magcorp selling at or near list price, and lower quality magnesium, like that
produced in the PRC, selling at substantially below list price. Manufacturers of
lower quality pure magnesium, including those in the PRC, have experienced price
reductions during 1996. Magcorp believes that the price that it will receive for
higher quality pure magnesium sold in the United States may decrease modestly in
the second half of 1996 but remain at levels above 1995.
As of March 31, 1996, magnesium producer inventories outside the PRC and
CIS were 30,300 metric tons, which represents approximately five weeks of
supply, compared with normal levels of approximately eight weeks, and up from a
record low of 17,200 metric tons in June 1995. The recent increase in
inventories resulted from slightly higher production of high quality pure
magnesium and an increase in the availability of magnesium produced in the CIS
and PRC.
Management believes that the industry's high capacity utilization rates
will continue through at least the year 2000 due to increasing demand for
magnesium and the high costs associated with constructing a new facility. The
magnesium manufacturing process is also highly technical and proprietary to each
company. Management estimates a cost of approximately $500 million to establish
a facility with the same production capacity as Magcorp's facility. One new
facility, located in Israel with an estimated annual capacity of 27,500 metric
tons, is expected to begin production in early 1997. The capacity of the Israeli
facility may also be increased, subject to start-up success, viability and
market conditions, from 27,500 to 55,000 metric tons, with a possible start-up
date for the second phase in 1999. In addition to the Israeli facility, three
other potential manufacturers have announced their intent to build a facility in
Canada, Australia and Iceland, respectively. Pilot and feasibility studies have
not been completed for any of these facilities and production is not expected to
begin until at least the year 2000.
Manufacturers in the PRC also have recently become significant exporters of
magnesium. In response to the rise in the price of magnesium, many small
magnesium factories were established in the PRC, many of
20
<PAGE> 23
which produce low quality magnesium. Estimated annual capacity has increased to
approximately 40,000 to 60,000 metric tons. Magcorp believes that increased
capacity may result in an increase in exports, although there is also a belief
that internal PRC consumption of domestically produced magnesium may increase.
Business Strategy
Magcorp's business strategy consists of three principal elements: (i)
maximize sales in markets in which superior margins can be achieved, (ii)
establish and maintain long-term customer relationships through service, product
flexibility and responsiveness and (iii) manage production and overhead costs
aggressively.
In furtherance of its business strategy, Magcorp emphasizes quality,
service and flexibility to meet changing customer specifications. In particular,
management believes that Magcorp's range of products and delivery program has
afforded Magcorp a significant degree of flexibility to meet customer needs
which serves to foster long-term relationships with its core customers.
Additionally, with respect to costs, management has maintained an aggressive
cost management program since 1987 which has resulted in a 28.3% reduction of
direct unit manufacturing costs. Management is committed to pursuing further
efficiencies and cost reductions to maintain its competitive position within the
industry.
Specialty Markets. An integral part of Magcorp's business strategy is to
maximize sales in markets where superior margins can be achieved. These include
the specialty segments such as anodes. Magcorp also focuses on taking advantage
of its production flexibility to maximize sales of special sizes and shapes.
Management believes that there will be significant growth in industry demand in
future years, particularly in the aluminum alloying segment as aluminum is used
more in automotive applications, in desulfurization as more magnesium is used to
promote productivity and in the structural casting segment. Management believes
that Magcorp is strategically well positioned to take advantage of this growth
through its wide product line and superior service. Additionally, Magcorp's size
and production flexibility permit it to respond to changes in market demand
across its end use markets thereby maximizing capacity utilization and
profitability.
Customer Relationships. Magcorp seeks to establish and maintain long-term
relationships with its customers through frequent contacts, flexible delivery,
hands-on technical service, high product performance and a thorough
understanding of the application of the product in the customer's process.
Management believes that its emphasis on customer service is unique in the
industry and serves to foster strong relationships with its core customers.
Cost Management Program. Magcorp management recognizes that product
quality and manufacturing costs must be continually monitored and improved in
order to remain competitive. Magcorp operates with the philosophy of continual
focus on improvement in efficiencies, manufacturing costs and product quality.
Over the past nine years, these efforts have resulted in a reduction in direct
unit manufacturing costs of 28.3%. Unit manufacturing cost reductions realized
since 1987 in three major cost categories are summarized below.
Labor. Labor costs, which include both hourly and salaried staff,
have been reduced by 27.9% per pound. This reduction was achieved through a
combination of staff reduction and economies of scale realized through
increased plant production rates at the facility.
Energy. Energy costs have been reduced by 30.3% per pound. This
reduction resulted from the low cost supply contract entered into with a
local utility, as well as recent favorable pricing due to abundant
inexpensive hydroelectricity generated in the Pacific Northwest region of
the United States. The contract for interruptable power will be in effect
until January 1, 2002. Over the same period, Magcorp has managed to obtain
natural gas price reductions by buying directly from producers and paying
local utilities for transportation and distribution. Recent natural gas
wellhead pricing has also been favorable in the area in which Magcorp
operates.
Maintenance Materials and Cell Rebuild. Maintenance materials and
cell rebuild costs have been reduced by 27.8% per pound. Improved equipment
maintenance techniques, improved electrolytic cell construction and
operation, and changes in maintenance management have contributed to the
cost reduction.
The combination of labor, energy, maintenance materials and cell rebuilds
currently account for 78% of Magcorp's manufacturing costs and, thus, these
major cost categories account for the bulk of the manufacturing cost reductions
over the last nine years.
21
<PAGE> 24
Management has developed a capital improvement program totaling
approximately $46 million which encompasses the installation of new electrolytic
cell technology, as well as the installation of a magnesium caster. The new
electrolytic cells are expected to reduce operating costs and improve
manufacturing efficiencies resulting from reductions in: (i) electricity
consumption, (ii) manufacturing labor requirements, (iii) magnesium metal losses
in the manufacturing process and (iv) chlorine emissions. Additionally, the
magnesium caster is expected to improve product quality, reduce labor
requirements and permit the Company to produce some of the various sizes, shapes
and weights of magnesium ingots at lower cost.
The electrolytic cell conversion will commence in early 1997 with the
installation of a prototype cell and, assuming its successful operation, the
conversion of the remaining cells is expected to be completed by 1999. As a
result, the associated cost reductions and related manufacturing efficiencies
are expected to be realized in the Company's operating results beginning in
fiscal year 1999. Management estimates that the caster will be installed in
fiscal year 1997.
With respect to chlorine emissions, the electrolytic cell conversion is
expected to significantly reduce the Company's emissions, thereby addressing
anticipated regulations imposed under amendments to the Clean Air Act of 1990
(the "Clean Air Act"). See "-- Environmental Matters."
Customers and Markets
Magcorp sells pure magnesium and magnesium alloys to domestic and
international customers in the key end-use markets, including its three largest
segments, aluminum alloying, desulfurization and die castings. Magcorp offers
over 30 different sizes, shapes and weights of primary magnesium and magnesium
alloy products in a range of purity levels to meet customer specifications. All
established and prospective new domestic accounts are handled by Magcorp's staff
of two direct salespersons and four field representatives who receive technical
assistance from plant personnel. Accounts in Europe are handled through a
division of CLIMAX Molybdenum. In Japan, accounts are handled by an agent of
KOHSEI Company, and other agency arrangements handle accounts in Australia and
other parts of the world.
Approximately 83% of Magcorp's annual volume is sold pursuant to contracts
with select customers. In calendar year 1995, Magcorp's 31 largest customers
represented 86% of its total magnesium sales. No customer accounted for more
than 10% of the Company's annual sales on a consolidated basis, and
substantially all of its foreign sales are attributable to Magcorp. The
following table summarizes certain financial information relating to Magcorp's
sales to various geographic areas.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
----------------------------- ----------------------
1993 1994 1995 1995 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Export Sales:
Europe......................... $4,909 $5,804 $ 8,357 $3,507 $4,154
Japan.......................... 3,300 2,826 5,988 2,811 2,142
Canada......................... 463 545 1,050 299 781
Other.......................... 235 104 798 260 922
------ ------ ------- -------- --------
$8,907 $9,279 $16,913 $6,877 $7,999
</TABLE>
Production Process
Magnesium is produced in both pure magnesium and magnesium alloy form. Pure
magnesium metal generally contains a minimum of 99.8% magnesium whereas
magnesium alloys contain other metals such as aluminum or zinc. Magnesium is
produced through either the electrolysis of molten magnesium chloride or the
thermal reduction of magnesium oxide. The electrolysis process utilizes
magnesium chloride feedstock which is obtained from seawater, brine rich in
magnesium chloride, residual bitterns from the processing of potash, dolomite or
magnesium oxide ores. The magnesium oxide furnace feed for the thermal reduction
process can be obtained from magnesium bearing minerals such as dolomite,
brucite or magnesite, which are widely distributed in the earth's crust. The raw
material reserves for either process are virtually inexhaustible. In the United
States, 69% of magnesium production capacity, including Magcorp's, uses the
electrolytic process where seawater or brines are used as the feedstock.
22
<PAGE> 25
Magcorp's production process uses the electrolysis of molten magnesium
chloride to produce magnesium metal. The magnesium chloride feedstock for the
electrolytic process is obtained from the Great Salt Lake, which has a higher
magnesium concentration than seawater.
In the first step of the process, solar evaporation ponds concentrate Great
Salt Lake waters into high grade magnesium chloride brine. The concentrated
brine is further processed to remove impurities such as boron, potassium and
sulfates. Purified brine is spray dried to form a magnesium chloride powder. The
powder is subsequently melted and purified with chlorine and fed into
electrolytic cells, which use direct electrical current to separate the
magnesium metal and chlorine. The chlorine is either recycled for use in the
production process or sold. The magnesium metal is recovered from the cells and
cast into ingots or further processed to produce specialty products.
As part of Magcorp's production of magnesium, Magcorp produces by-products
such as chlorine, calcium chloride and iron chlorides which Magcorp sells into
commercial markets for incremental revenue and cost reduction. By-products not
sold are disposed of pursuant to environmental regulations.
Raw Materials
Magcorp's natural gas requirements are purchased from gas producers or
marketers, transported by a gas transportation company and delivered to the
Rowley facility by a local gas distribution company. Management has negotiated
favorable gas pricing due to the volume of Magcorp's requirements.
Magcorp purchases its electrical requirements from a local utility pursuant
to a contract in effect until January 1, 2002. As is the case with other
industrial facilities, the terms of the contract grant the utility the right to
interrupt electrical power to Magcorp under certain limited circumstances and
with reasonable notice while providing Magcorp with advantageous electricity
rates. If the utility exercises such right, upon any such interruption, Magcorp
can purchase available electricity at market rate. Additionally, Magcorp is able
to produce on average 25% of its electrical power needs through the gas turbines
located at the Rowley facility. The utility has requested a reopening of the
contract. Magcorp has challenged the utility's billing practices under the
contract and is currently pursuing programs to reduce its electricity usage.
Other raw materials critical to plant operations include graphite anodes,
special refractory bricks and sulfuric acid. Magcorp maintains alternative
sources of these raw materials to ensure a secure supply at competitive prices.
Facilities
Magcorp's main facilities include its headquarters located in Salt Lake
City, Utah and its production plant located in Rowley, Utah, approximately 60
miles outside Salt Lake City. Magcorp's senior management, sales and marketing
and administrative functions are based at the Salt Lake City headquarters. All
production takes place at the Rowley facility. Inventory is stored at the Rowley
facility and at a third party leased warehouse space in Utah, as well as
locations throughout the world.
Magcorp's production facilities are located on 4,525 acres of land
immediately adjacent to the Great Salt Lake which is the long-term raw material
source. The brine from the Great Salt Lake is concentrated through one or both
of two solar pond concentrating systems, the Stansbury Basin Pond System and the
Knolls Pond System, to provide the final high grade brine feedstock for the
magnesium plant. The Stansbury System is located about 15 miles and the Knolls
System about 45 miles from the plant site. Both pond systems are capable of
providing high grade brine feedstock to the plant to facilitate nameplate plant
production rates under normal operating conditions.
Magcorp's production facility in Rowley, Utah was constructed in 1972. From
1993 to the present, management has implemented an aggressive cost reduction and
productivity improvement program to increase the facility's output at lower
costs. In 1995, as a result of the cost and productivity initiatives, the
capacity rating of the facility was increased to 40,823 metric tons per year.
This figure corresponds to the ceiling established by the Company's operating
permit with the State of Utah Department of Environmental Quality. Magcorp is
presently operating at 99% of capacity. Magcorp has submitted a request to the
State of Utah to
23
<PAGE> 26
permit annual production of up to 43,545 metric tons, although certain process
equipment modifications would be required to operate consistently at this rate.
Magcorp owns its Salt Lake City administrative offices and Rowley
production facilities. The Knolls Pond Systems is located on land leased from
the State of Utah for a term expiring on December 31, 2016 and on Federal land
under a right-of-way from the Bureau of Land Management of the Department of
Interior which expires in 2023. The Stansbury Pond System is located primarily
on land leased from the State of Utah for a term expiring on March 8, 2010.
Magcorp also holds other easements, rights-of-way and water rights primarily
from the Bureau of Land Management and the State of Utah. Magcorp pays a royalty
to the State of Utah based on its production of magnesium from Great Salt Lake
brine. The Rowley facility is readily accessible by truck and rail.
Employees
As of October 31, 1995, Magcorp had 563 employees, 152 of whom were
salaried and 411 of whom were hourly workers. Approximately 73% of the hourly
employees are represented by the United Steelworkers of America and employed
under a three year collective bargaining contract that expires November 1, 1997
and automatically renews for additional one-year periods (unless written notice
of termination by either party is given). Magcorp believes that its relations
with employees are satisfactory.
Environmental Matters
Magcorp's most significant long-term environmental issue is compliance with
the Clean Air Act. Title III of the Clean Air Act will establish, on a published
schedule, new emission standards for previously unregulated air toxins. These
national emission standards for hazardous air pollutants ("NESHAPS") will be
technology based and will be designed to achieve the maximum control as
determined by a comparison of installations at similar facilities in specific
industry categories.
It is expected that Magcorp will be required to make substantial reductions
in chlorine and hydrogen chloride emissions to meet NESHAPS for primary
magnesium refineries that will be promulgated by the year 2000. In response to
the anticipated regulations imposed under amendments to the Clean Air Act,
Magcorp is planning on acquiring new electrolytic cell technology that will
reduce chlorine emissions at the source. The new cells are also expected to
significantly reduce costs since they have much higher throughput and are more
energy efficient. A prototype cell will be installed and operated in early
calendar year 1997 and, assuming its successful operation, the conversion of the
remaining cells is expected to be completed by 1999. With respect to hydrogen
chloride, Magcorp will install scrubbers to reduce emissions.
Magcorp plans to spend $40 million of its capital budget, including the
capital required for the prototype cell, by the year 2000 directly or indirectly
to meet environmental regulatory requirements, primarily for NESHAPS, and for
anticipated other future requirements. Magcorp believes that these expenditures
required to comply with environmental standards are substantial.
Under Title V of the Clean Air Act, Magcorp will be required to conduct
additional air monitoring and record keeping and will pay operating fees based
on emission levels. The enhanced emission monitoring will require initial
capitalization of about $120,000 and annual operating costs of $100,000. Annual
operating fees are approximately $120,000 and future increases are likely.
Magcorp will close its existing landfill and will open a new landfill in
time to comply with new regulations anticipated to be in effect in three to five
years. The estimated cost of closing the existing landfill and opening the new
landfill is $450,000 given Magcorp's present interpretation of what the new
regulations would require.
In August 1994, the Utah Solid and Hazardous Waste Control Board presented
a proposed Stipulation and Consent Order to Magcorp for resolution of a Notice
of Violation and Compliance Order (the "NOVCO") issued in August 1992 concerning
certain alleged violations of the Utah Solid and Hazardous Waste Act and the
Utah Administrative Code. Magcorp has contested the NOVCO and has requested a
hearing on the alleged violations. Among the issues to be resolved is whether
the wastes being sent to the Rowley facility's industrial wastewater pond are
subject to regulation by the State of Utah, and if so, whether a
24
<PAGE> 27
waste management plan, groundwater management plan and closure plan for the pond
must be developed and implemented. In addition, an issue exists as to whether
piles of material generated in the electrolytic process, which cover an
extensive land area at the Rowley facility, can be classified as a hazardous or
solid waste, and if so, what measures might be required to investigate and
address these piles. If these wastes are ultimately deemed subject to State
regulation and corrective action is required, the costs of compliance could be
material.
Legal Proceedings; Pending Trade Issues
Magnesium Imports from the Russian Federation, Ukraine and PRC
In 1994, Magcorp filed an antidumping petition with the Department of
Commerce ("DOC") and the U.S. International Trade Commission ("ITC") for
imposition of antidumping duties against imports of magnesium from the Russian
Federation, Ukraine and the PRC. In its petition, Magcorp alleged that imports
of pure and alloy magnesium from producers in these countries were being sold in
the United States at less than fair value and had injured the U.S. magnesium
industry with resultant negative financial results, loss of markets, and layoffs
of workers at U.S. magnesium producers. The antidumping duties sought in the
petition generally exceeded 100%, reflecting the level of dumping and impact on
domestic producers. Two unions representing workers at Magcorp and Dow Chemical
were co-petitioners in the filing. Dow Chemical subsequently joined the petition
as a co-petitioner.
On March 30, 1995, the DOC determined that pure magnesium imports from all
three countries were dumped in the United States, but also determined that
certain Russian producers and traders were not dumping Russian magnesium
products. On April 26, 1995, the ITC announced its affirmative determinations
that imports of pure magnesium from those three countries were a cause of injury
to the domestic magnesium industry. The DOC and ITC decisions, taken together,
resulted in the imposition of antidumping duties against imports of pure
magnesium from each of the three countries at the following rates (subject to
revision in future administrative reviews, that can be requested annually
beginning May 1996):
<TABLE>
<CAPTION>
PURE
<S> <C>
Russian Federation................................. 0-100%
Ukraine............................................ 80-104%
PRC................................................ 108%
</TABLE>
No antidumping duties were assessed against magnesium alloys.
On June 7, 1995, one of the traders of Ukrainian magnesium appealed to the
U.S. Court of International Trade the ITC's determination that imports of pure
magnesium from the Ukraine had injured domestic magnesium producers; if the
trader's appeal is successful, the 80-104% antidumping duty determination could
be lifted against Ukrainian imports of pure magnesium. On June 12, 1995, Magcorp
appealed to the U.S. Court of International Trade for review of the DOC's
determination that certain producers and traders of Russian Federation magnesium
had not sold at less than fair value. The cases have been fully briefed and are
set for oral arguments on July 9, 1996. None of the possible outcomes of the
appeal process or the impact of the determinations or the impact of the appeal
process upon the Company's business can be determined at the present time.
Magnesium Imports from Canada
In 1991, Magcorp filed a petition with the DOC and the ITC for imposition
of countervailing and antidumping duties against Canadian and Norwegian
magnesium producers. No duties were imposed on Norwegian imports. In 1993, final
duties for magnesium imported into the United States from Canada (except
magnesium from Timminco) were imposed by the DOC after appeals to panels
established by the U.S.-Canada Free Trade Agreement as follows:
<TABLE>
<S> <C>
Countervailing duties on pure and alloy magnesium imports............ 7.6%
Antidumping duties on pure magnesium imports......................... 21.0%
</TABLE>
25
<PAGE> 28
Administrative reviews initiated by the DOC in September 1993 and 1995 to
determine if the duties should be adjusted are currently ongoing. The final
results of the administrative review covering the time period August 1, 1993
through July 31, 1994, which upheld the final 21.0% antidumping duty, was issued
in September, 1995. On May 29, 1996, the DOC issued the preliminary results of
the antidumping administrative review for the period August 1, 1994 through July
31, 1995. The DOC preliminarily determined that the Canadian producer
demonstrated that it sold pure magnesium at fair value in the United States
during the review period, and reduced the antidumping deposit to zero on the
sale of pure magnesium by Norsk Hydro Canada Inc. ("NHCI" or "the Canadian
producer"). Interested parties will have the opportunity to comment on the
preliminary results and the final results will be issued by October 8, 1996. If
the preliminary results are upheld, then the antidumping duty deposit rate for
NHCI for imports of pure magnesium thereafter will be reduced to zero, subject
to future administrative reviews. If this result becomes final, it could
constitute the first year of a three-year qualifying process in which the
Canadian producer has demonstrated through administrative reviews that it has
sold pure magnesium in the United States at fair value. In connection with the
third consecutive review resulting in a determination that NHCI has not sold
below fair value, NHCI could seek revocation of the antidumping order. An
elimination of or a substantial decrease in these duties could have a material
and adverse impact on magnesium prices, depending upon market conditions.
The Canadian producer has been selling pure and alloy magnesium in the
United States subject to the 7.6% countervailing duty deposit rate.
Approximately 16,300 metric tons of magnesium alloy were imported into the
United States in 1995, approximately 85% of which was from Canada. These trends
continue into early 1996, although the Canadian market share of such imports
increased. In March 1996, the DOC issued the preliminary results of the
countervailing duty administrative review for the period December 6, 1991
through December 31, 1992. The preliminary countervailing duty rate for pure and
alloy magnesium exported by NHCI was 9.9%. If the preliminary results are
upheld, then the countervailing duty deposit rate for exports of pure and alloy
magnesium by NHCI will be 9.9%.
SABEL
Overview
Sabel, founded in 1869, is a diversified company primarily involved in the
steel service center, scrap metal and rebar fabrication businesses. Sabel's
steel service center facilities distribute and process new carbon steel for
large and small industrial accounts as well as the general public. Sabel's scrap
metal operations process to customer specifications and sell and transport
ferrous and non-ferrous scrap metal to mini- and integrated steel mills,
foundries and other related metal companies. Sabel's rebar fabrication operation
customizes rebar to shapes and sizes required for use in building and highway
construction. Additionally, Sabel operates a full-service wholesale center which
sells a variety of tools and plumbing, sprinkler, building and general supplies.
Sabel also operates a plastics recycling service on a customer's premises which
buys and sells all types of commodity and engineering thermoplastics to
bottlers, crate manufacturers and molders.
Business Strategy
Sabel's business strategy is to focus on niche products and services and
emphasize long-term customer and supplier relationships within its served
markets.
Diverse Businesses. Sabel management believes that Sabel operates at a
competitive advantage by maintaining a presence in the scrap metal, rebar and
service center markets. Specifically, Sabel's diverse operations provide it
access to timely information across its served markets prior to its competitors
which generally operate in only one market. This information enables Sabel to
manage its inventory and price changes in a manner which benefits Sabel's
financial performance.
Niche Markets. Sabel also focuses on small volume, high-margin sales to
customers whose order sizes are not efficiently handled by larger steel service
centers and scrap metal companies. Management believes that Sabel's flexibility
to service these customers, enhanced by its ability to provide one-day
turnaround service on most commonly used steel products at competitive prices,
is a unique facet of Sabel's strategy. Sabel's relationship with larger
customers enables Sabel to maintain a specific inventory of steel products. As
26
<PAGE> 29
a result, Sabel's smaller customers benefit from such inventory and are able to
implement "just-in-time" delivery for material requirements planning objectives.
Customer and Supplier Relationships. With a primary focus on the Southeast
region, management believes Sabel's geographic proximity to its customers and
suppliers facilities a high level of customer service while minimizing freight
costs and delivery time. Management believes Sabel's strong market presence in
the region has enabled it to obtain contracts for on-site collection of scrap
materials from a number of industrial concerns.
Description of Products and Markets Served
Steel Service Center. Sabel's steel service center division ("SSC") is
comprised of four facilities located in Montgomery, Dothan, Mobile and
Tuscaloosa, Alabama. This geographic coverage allows Sabel to cost-effectively
service most of Alabama, the Gulf Coast, the panhandle of Florida, Southern
Mississippi, West Georgia and the Atlanta metropolitan area. In fiscal year
1995, SSC accounted for 69% of Sabel's revenues.
SSC specializes in stocking, reprocessing and delivering hot rolled and
cold rolled carbon steel in a variety of sizes and shapes. Purchases of new
steel for reprocessing are spread across approximately 15 steel mills including
both integrated mills and mini-mills, thereby ensuring favorable prices and
availability of product. SSC processes more than 60% of the steel it sells. SSC
has an extensive customer list comprised of approximately 3,000 customers
ranging from large industrial companies to small welding shops. As a result, no
single customer represents in excess of 5% of the division's total sales.
The sales and marketing team at SSC consist of 16 direct salespeople and
six sales representatives covering the Southeast region. All orders are entered
and recorded through SSC's computerized system which facilitates order
processing and delivery. Sabel continually works to improve the efficiency of
this system to provide greater accuracy and speed in order entry.
Scrap Metal. Management believes Sabel's 127 years of experience in the
scrap metal business has fostered a strong reputation for quality and service.
The scrap metal division of Sabel is a full-service scrap metal dealer with two
large scrap yards located in Montgomery. Scrap metal in those yards is collected
from approximately 250 suppliers, primarily industrial suppliers along with
dealers and individual consumers. The scrap metal division sells to
approximately 45 customers, including mini- and integrated steel mills,
foundries and specialized manufacturing entities. As a freight-sensitive
business, a majority of Sabel's scrap is sold to customers within its geographic
area. In fiscal year 1995, the scrap metal division accounted for 18% of Sabel's
revenues.
All scrap processed in the scrap metal division is inspected prior to
shipment to ensure quality and compliance with customer specifications. As a
result, management believes Sabel enjoys a high quality reputation and has an
acceptance rate in excess of 99% for all scrap sold to customers.
Rebar Fabrication Division. Sabel's rebar fabrication division ("RFD"),
also located in Montgomery, purchases stock 60 ft. bars from various rebar
manufacturers and customizes the length, shape and bend according to
construction blueprint plans. Structural bars and wire are widely used in the
construction of buildings and highways. In 1995, RFD contributed 11% of Sabel's
revenues.
Since its formation, RFD has focused on construction projects from dams to
driveways in its markets. Sabel's management believes RFD has established a
strong track record for accuracy of shape and size and for prompt delivery due
to the efficient design of the RFD facility. Orders for RFD's products are
affected by the levels of activity in the construction and building sectors as
well as the conditions in the overall economy.
Other Operations. Other businesses operated by Sabel consist of a
wholesale center which sells a variety of tools and plumbing, sprinkler,
building and general supplies and a plastics recycling service which operates a
portable grinder. These other operations represented 2% of Sabel's fiscal year
1995 revenues.
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<PAGE> 30
Competition
Each of the principal fields in which Sabel is engaged -- steel service
centers, scrap metal and rebar fabrication -- is highly competitive. Sabel
competes with numerous other concerns, some of which are much larger. Sabel is
unable to estimate its competitive position in its market place but believes
that no other company in its trading area offers the same range of services.
Facilities
Sabel's operations are carried out in eight facilities covering
approximately 315,000 square feet across the Southeast region which include four
steel service centers, two scrap metal yards, a rebar fabricating plant and a
wholesale equipment supply center. Most of Sabel's facilities are leased from
entities controlled by the Sabel family. The steel service centers are equipped
to process steel from stock for their customers' needs and the rebar fabricating
plant is equipped to fabricate bars to customer specifications.
Employees
As of October 31, 1995, Sabel had 228 employees, 64 of whom were salaried
and 164 of whom were hourly workers. Of the hourly employees, 33 are represented
by the United Steelworkers of America. The current three year bargaining
contract expires on June 20, 1997. Sabel believes that its relations with
employees are satisfactory.
Environmental Matters
The most significant long-term environmental issue at Sabel's facilities
concerns compliance with storm water regulations under the Clean Water Act that
became effective in 1991. Sabel is actively pursuing a program of compliance,
and it is expected that costs associated with this program will not have a
material adverse effect on the Company's financial position or on future results
of operations.
28
<PAGE> 31
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company, Magcorp and Sabel:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Ira Leon Rennert................. 61 Chairman, Director, and Chief Executive
Officer
Roger L. Fay..................... 50 Vice President, Finance
Michael H. Legge................. 49 President and Chief Executive Officer of
Magcorp
Keith Sabel...................... 45 Director, President and Chief Executive
Officer of Sabel
Justin W. D'Atri................. 68 Director of Sabel
Howard I. Kaplan................. 51 Vice President of Sales and Marketing of
Magcorp
Ron L. Thayer.................... 36 Vice President of Operations of Magcorp
Lee R. Brown..................... 49 Vice President of Human Resources and Public
and Governmental Affairs of Magcorp
Todd R. Ogaard................... 40 Vice President of Finance and Administration
of Magcorp
</TABLE>
IRA LEON RENNERT has been the Chairman, Chief Executive Officer and sole
member of the Board of Directors of the Company since its inception and has been
the Chairman, CEO and principal shareholder of Group since its first acquisition
in 1975. In addition, Mr. Rennert is the Chairman of the Board of all of Group's
subsidiaries including WCI Steel, Inc. and AM General Corporation. Group was the
majority stockholder of Covert Marine, Inc., a wholesale distributor of
recreational boating equipment in Kansas City, Missouri, in respect of which an
order for relief was entered on October 23, 1992 under Chapter 11 of the
Bankruptcy Code by the U.S. Bankruptcy Court for the Western District of
Missouri. The Company has never had any business relationship with Covert
Marine, Inc.
ROGER L. FAY has been Vice President, Finance for the Company since its
inception and has been Vice President, Finance for Group since 1983. Mr. Fay is
a certified public accountant. Before joining Group, Mr. Fay served for twelve
years as a controller of one of Group's subsidiaries.
MICHAEL H. LEGGE was appointed President and Chief Executive Officer of
Magcorp on January 1, 1993. He was most recently Vice President of Operations at
the Rowley facility and has served in several managerial and technical positions
since joining NL Industries, Inc., a predecessor of Magcorp, in 1979.
KEITH SABEL has served in his present position as President and Chief
Executive Officer of Sabel since 1990 and is also a director of Sabel. Mr. Sabel
has been with Sabel in various positions for the past 21 years.
JUSTIN W. D'ATRI has been a practicing attorney in New York, N.Y. since
1952, legal counsel for Group since its inception and Secretary of the Company
since its incorporation. Mr. D'Atri has been the Secretary and a director of
Sabel since 1987, and Secretary of Magcorp since August 1989. Mr. D'Atri was a
director of Covert Marine, Inc. which is discussed under Mr. Rennert's biography
above.
HOWARD I. KAPLAN has served in his present position as Vice President of
Sales and Marketing of Magcorp since 1986. Dr. Kaplan joined AMAX Magnesium, the
former name of Magcorp, in 1981 and served as Manager of Technical Market
Development, Process Control Superintendent and Electrolytics and Cast House
Superintendent. Dr. Kaplan has a Ph.D. from the University of Pennsylvania in
Metallurgy and Materials Science.
RON L. THAYER has served in his present position since January 1, 1993. He
was most recently Operations Superintendent at the Rowley facility and has
served in several managerial and technical positions since
29
<PAGE> 32
joining AMAX Magnesium, the former name of, Magcorp in 1988. Prior to joining
AMAX Magnesium, Mr. Thayer was with Williams Resources, a chemical company in
Denver, Colorado.
LEE R. BROWN has been Vice President of Human Resources at Magcorp since
1984. Mr. Brown joined NL Industries, Inc., a predecessor of Magcorp, in 1978.
Prior to joining NL Industries, he spent 2 years with Kennecott Copper.
TODD R. OGAARD first served as Manager-Public Compliance after joining
Magcorp in February 1994, and assumed Vice President of Finance responsibilities
effective February, 1995. Mr. Ogaard is a certified public accountant. Prior to
joining Magcorp, he served as a Senior Manager with KPMG Peat Marwick, where he
was employed for 12 years.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
of the Company's Chief Executive Officer and the four most highly compensated
officers of Magcorp and Sabel:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
---------------------------------------
(A) (B) (C) (D) (E)
NAME AND OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(5)
<S> <C> <C> <C> <C>
Ira Leon Rennert(2).................... 1995 $ -- $ -- $ 1,200,000(2)
Chairman and Chief Executive Officer 1994 -- -- 1,200,000(2)
1993 -- -- 1,248,000(2)
Michael H. Legge....................... 1995 120,756 200,000 16,491(3)
President and Chief Executive Officer 1994 120,756 35,000 11,291(3)
of Magcorp 1993 114,645 105,000 10,385(3)
Keith Sabel............................ 1995 124,061 21,000 8,050(4)
President and Chief Executive Office 1994 120,890 14,000 4,466(4)
of Sabel 1993 116,808 7,000 --
Howard I. Kaplan....................... 1995 94,723 100,000 18,678(3)
Vice President of Sales and Marketing 1994 94,723 25,000 8,288(3)
of Magcorp 1993 87,547 80,000 7,400(3)
Ron L. Thayer.......................... 1995 85,550 125,000 6,064(3)
Vice President of Operations of 1994 81,688 20,000 2,647(3)
Magcorp 1993 78,618 30,000 2,347(3)
</TABLE>
- ------------------------------
(1) Value of perquisites per individual did not exceed the lesser of $50,000 or
10% of total salary.
(2) Mr. Rennert receives no cash compensation directly from the Company. He is
Chairman of the Board. All of the Company's issued and outstanding capital
stock is owned by Group, which is 95.8% owned by Mr. Rennert and by trusts
established by him for himself and members of his family (but of which he is
not a trustee). Group receives a management fee from the Company pursuant to
a management agreement. The amount shown is the management fee payable by
the Company to Group for each year. See "Stock Ownership and Certain
Relationships and Transactions."
Since the Company's October 31, 1995 fiscal year end, the Board of
Directors has declared dividends totaling $13.9 million, consisting of $2.5
million of cash dividends on the Company's preferred stock and $11.4
million of cash dividends on the Company's common stock, which was paid to
Group. The payment of and amounts of dividends are restricted by the
Company's debt agreements.
(3) Consists of an employer contribution to a defined contribution pension plan.
(4) Consists of an employer contribution to a noncontributory profit sharing
plan.
(5) See also "-- Net Worth Appreciation Agreements" below.
30
<PAGE> 33
Compensation Committee Interlocks and Insider Participation
The Company had no compensation committee during the fiscal year ended
October 31, 1995. The sole member of the Board of Directors was Ira Leon
Rennert. The compensation for the executive officers is fixed by negotiations
between such executive officers and Mr. Rennert acting on behalf of Group.
Employment Agreements
Mr. Legge is employed by Magcorp pursuant to an employment agreement
effective as of January 1, 1993 which continues until December 31, 1995 and for
additional one-year periods thereafter unless terminated by either party by
written notice given 30 days prior to then current expiration date. Pursuant to
such employment agreement, Mr. Legge will receive a base minimum annual salary
of $120,000 and a bonus of at least $35,000 for each fiscal year in which
Magcorp is profitable.
Dr. Kaplan is employed by Magcorp pursuant to an employment agreement
effective as of June 1, 1994 which continues until October 31, 1999 and for
additional one-year periods thereafter unless terminated by either party by
written notice given 6 months prior to the then current expiration date.
Pursuant to such employment agreement, Mr. Kaplan will receive a base minimum
annual salary of $94,723 and a bonus of at least $25,000 for each fiscal year in
which Magcorp is profitable.
Mr. Thayer is employed by Magcorp pursuant to an employment agreement
effective as of January 1, 1993 which continues until December 31, 1995 and for
additional one-year periods unless terminated by either party by written notice
given 30 days prior to the then current expiration date. Pursuant to such
employment agreement, Mr. Thayer will receive a base minimum annual salary of
$80,000 and a bonus of at least $20,000 for each fiscal year in which Magcorp is
profitable. Mr. Thayer's current base annual salary is $85,500.
Net Worth Appreciation Agreements
Mr. Legge, Mr. Thayer and two other officers of Magcorp are each parties to
Net Worth Appreciation Agreements ("NWAP Agreements") with Magcorp, under which
(as amended upon the sale of the Senior Notes and the payment to such persons of
the amounts referred to under "Use of Proceeds"), he will be entitled to receive
a fixed percentage of the increase in the net worth of Magcorp from August 1,
1996 until the end of the fiscal quarter preceding the date of the termination
of his employment or, if the employee leaves voluntarily following the
expiration of 30 days after his giving notice of resignation. Such amount is
payable without interest in 40 equal quarterly installments commencing on the
employee's termination, or, if later, the earlier of June 11, 2011 or his
attaining the age 62 (or his prior death or disability), and so long as he has
not engaged in any business competitive with that of Magcorp subsequent to
leaving his employment. Dr. Kaplan is party to a similar agreement except that
his base date is January 1, 1993, payments to him would commence immediately
upon his leaving the Company and will not be subject to a non-competition
agreement. The maximum aggregate percentage payable to the five executives is 7%
of such increase in the net worth of Magcorp.
Mr. Sabel and one other officer of Sabel are each parties to NWAP
Agreements with Sabel entitling them upon leaving the employment of Sable to
receive a fixed percentage of the increase in the net worth of Sabel from August
1, 1993 until the end of the fiscal quarter preceding the date of termination,
payable without interest in 40 quarterly installments.
The NWAP Agreements also provide that, if while employed by Magcorp or
Sabel, the respective company pays any cash dividend on its common stock, the
respective company will make a cash payment to the applicable executive officer
equal to the total amount of the cash dividend multiplied by their applicable
fully vested participation percentage. Since the Company's October 31, 1995
fiscal year end, prior to and in conjunction with the Company's dividends to
Group, Magcorp's Board of Directors declared dividends totaling $13.9 million,
which have been paid to the Company. Accordingly, an aggregate of $974,505 have
been paid to the five Magcorp executive officers who are covered by Magcorp's
NWAP Agreements and the discounted value of such payments was removed from the
liability for the NWAP Agreements. Upon
31
<PAGE> 34
consummation of the Transactions, approximately $5.0 million will be paid to
such Magcorp executive officers pursuant to the NWAP Agreements. See "Use of
Proceeds."
STOCK OWNERSHIP AND CERTAIN RELATIONSHIPS AND TRANSACTIONS
The following table sets forth the beneficial ownership of the outstanding
equity securities of the Company as of May 1, 1996:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
<S> <C> <C> <C>
10% preferred stock, $1,000 par value........ Group(1) 8,500 shares, Direct 100%
Common stock, no par value................... Group 1,000 shares, Direct 100%
</TABLE>
- ------------------------------
(1) All of the Company's issued and outstanding capital stock is owned by Group,
which is 95.8% owned by Mr. Rennert and by trusts established by him for
himself and members of his family (but of which he is not a trustee). Mr.
Rennert may be deemed to be the beneficial owner of the Company's capital
stock. Roger L. Fay, Vice President, Finance of the Company, is Vice
President, Finance and a minority stockholder of Group. Justin W. D'Atri,
Secretary of the Company and the Subsidiaries, is Secretary and a director
and a minority stockholder of Group and one of the trustees of the trusts
mentioned in the preceding paragraph. No other executive officer of the
Company or the Subsidiaries has any interest in Group.
The preferred stock of the Company held by Group, which is to be redeemed
as part of the Transactions, accrues cumulative dividends at the rate of 10%
($850,000) per year.
There were no dividends declared on the Company's preferred or common stock
in fiscal year 1995 or 1994. Since the Company's October 31, 1995 fiscal year
end, the Board of Directors has declared dividends totaling $13.9 million,
consisting of a $2.5 million cash dividends on the Company's preferred stock and
$11.4 million cash dividends on the Company's common stock, which was paid to
Group. The payment of and amounts of dividends are restricted by the Company's
debt agreements.
Management Agreement
Group provides management services to the Company under a management
agreement (the "Management Agreement"). Such services include operational
consulting, budget review, income tax consulting and contracting for insurance
under master policies. Pursuant to the Management Agreement, Group provides such
services to the Company for an annual management fee equal to $1.2 million. The
Management Agreement expires on October 31, 2000. The Company paid management
fees to Group of approximately $1.6 million, $1.2 million and $1.2 million for
the fiscal years ended October 31, 1993, 1994 and 1995, respectively.
Insurance Sharing Program
To obtain the advantages of volume, Group purchases certain categories of
property and casualty insurance for a number of its subsidiaries, including the
Company and its subsidiaries, and the actual cost of such insurance, without
markup, is reimbursed by the covered subsidiaries. In fiscal year 1995, the
Company incurred costs of approximately $1.7 million under the Group 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.
Tax Sharing Agreement
Pursuant to a tax sharing agreement between the Company and Group, the
Company pays to Group an amount equal to the amount the Company would have been
required to pay for taxes on a stand-alone basis to the Internal Revenue Service
and the applicable state taxing authority, as the case may be, except that the
Company will not have the benefit of any of its tax loss carryforwards unless
such tax losses were a result of timing differences between the Company's
accounting for tax and financial reporting purposes, which agreement also
provides that transactions between the Company and Group and its other
subsidiaries are accounted for on a cash basis and not on an accrual basis.
32
<PAGE> 35
Transactions with Sabel Family
Sabel leases certain of its facilities from an affiliate of the Sabel
family under a lease running to July 31, 1997, which may be extended for two
additional terms of five years each. Total rent payments during fiscal year 1995
were $0.3 million.
DESCRIPTION OF SENIOR NOTES
The Senior Notes will be issued under an indenture to be dated as of
, 1996 (the "Indenture") among the Company, the Guarantors and Fleet
National Bank, as trustee (the "Trustee"). The following summary of certain
provisions of the Indenture does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"), and to all of the provisions of
the Indenture, including the definitions of certain terms therein and those
terms made a part of the Indenture by reference to the Trust Indenture Act, as
in effect on the date of the Indenture. A copy of the proposed form of Indenture
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The definitions of certain capitalized terms used in the
following summary are set forth below under "Certain Definitions."
GENERAL
The Senior Notes will be issued only in registered form, without coupons,
in denominations of $1,000 and integral multiples of $1,000. Principal of,
premium, if any, and interest on the Senior Notes will be payable, and the
Senior Notes will be transferable, at the corporate trust office or agency of
the Trustee in the City of New York maintained for such purposes at Fleet
National Bank, c/o First Chicago Trust Company, 14 Wall Street, 8th Floor,
Window No. 2, New York, New York 10005. In addition, interest may be paid by
wire transfer or check mailed to the person entitled thereto as shown on the
register for the Senior Notes. No service charge will be made for any
registration of transfer or exchange of the Senior Notes, except for any tax or
other governmental charge that may be imposed in connection therewith.
The Senior Notes will be general unsecured obligations of the Company,
limited to $150,000,000 aggregate principal amount, and will mature on
, 2003. The Senior Notes will be unconditionally guaranteed, jointly
and severally, by each of the Guarantors.
Interest on the Senior Notes will accrue at the rate of % per annum
and will be payable semi-annually on each and ,
commencing , 1996, to the holders of record of Senior Notes at the
close of business on and immediately preceding such
interest payment date. Interest on the Senior Notes will accrue or, if no
interest has been paid, from the original date of issuance (the "Issue Date").
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. Interest on overdue principal and (to the extent permitted by
law) on overdue installments of interest will accrue at a rate equal to %
per annum.
REDEMPTION
Optional Redemption. The Senior Notes will be subject to redemption, in
whole or in part, at the option of the Company, at any time on or after
, 2000, at the redemption prices (expressed as percentages of
principal amount) set forth plus accrued interest to the redemption date, if
redeemed during the 12-month period beginning on of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2000..............................................
2001..............................................
2002.............................................. 100.00%
</TABLE>
Optional Redemption Upon Public Equity Offerings. In addition, at any time
prior to , 1999, the Company may redeem up to 33% of the aggregate
principal amount of the Senior Notes originally issued with the proceeds of one
or more Public Equity Offerings at a redemption price (expressed as a percentage
of
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<PAGE> 36
principal amount) of % plus accrued interest to the redemption date;
provided that at least $100.0 million aggregate principal amount of Senior Notes
remains outstanding immediately after any such redemption. In order to effect
the foregoing redemption with the proceeds of any Public Equity Offering, the
Company shall make such redemption not more than 120 days after the consummation
of any such Public Equity Offering. "Public Equity Offering" means an
underwritten public offering of Capital Stock (other than Disqualified Stock)
pursuant to a registration statement filed with the Commission in accordance
with the Act.
Selection and Notice. In the event that less than all of the Senior Notes
are to be redeemed at any time, selection of Senior Notes for redemption will be
made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Senior Notes are listed or,
if the Senior Notes are not listed on a national securities exchange, on a pro
rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate; provided, however, that no Senior Note of $1,000 or less shall be
redeemed in part; provided, further, that if a redemption is to be made with the
proceeds of a Public Equity Offering pursuant to the immediately preceding
paragraph, selection of the Senior Notes for redemption shall be made by the
Trustee only on a pro rata basis unless such method is otherwise prohibited.
Notice of redemption shall be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each Holder of Senior Notes to
be redeemed at its registered address. If any Senior Note is to be redeemed in
part only, the notice of redemption that relates to such Senior Note shall state
the portion of the principal amount thereof to be redeemed. A new Senior Note in
a principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon cancellation of the original Senior Note. On and
after the redemption date, interest will cease to accrue on Senior Notes or
portions thereof called for redemption.
CHANGE OF CONTROL
In the event of a Change of Control (the date of such occurrence being the
"Change of Control Date"), the Company shall notify the holders of Senior Notes
in writing of such occurrence and shall make an offer to purchase (the "Change
of Control Offer"), on a business day (the "Change of Control Payment Date") not
later than 60 days following the Change of Control Date, all Senior Notes then
outstanding at a purchase price equal to 101% of the principal amount thereof
plus accrued interest to the Change of Control Payment Date.
Notice of a Change of Control Offer shall be mailed by the Company to the
holders of Senior Notes not less than 30 days nor more than 45 days before the
Change of Control Payment Date. The Change of Control Offer is required to
remain open for at least 20 business days and until the close of business on the
business day next preceding the Change of Control Payment Date.
The Company will comply with any tender offer rules under the Securities
Exchange Act of 1934, as amended, which may then be applicable, including but
not limited to Rule 14e-1, in connection with any Change of Control Offer
required to be made by the Company to repurchase the Senior Notes as a result of
a Change of Control.
GUARANTEES
The Company's obligations under the Senior Notes will be unconditionally
and fully guaranteed, jointly and severally, by each of the Guarantors (the
"Guarantees") on a senior basis. Under federal or state fraudulent conveyance
statutes or other legal principles, the Guarantees might be subordinated to
existing or future indebtedness of the Guarantors, or voided or found not to be
enforceable in accordance with their terms. If a court in a lawsuit on behalf of
an unpaid creditor of a Guarantor or a representative of creditors, such as a
trustee in bankruptcy, were to find that the Guarantor issued its Guarantee with
actual intent to hinder, delay or defraud creditors, or received less than a
reasonably equivalent value or fair consideration for such Guarantee and at the
time of such incurrence or issuance (a) was insolvent, (b) was rendered
insolvent by reason of such incurrence or issuance, (c) was engaged or about to
engage in a business or transaction for which its remaining assets constituted
unreasonably small capital to carry on its business or (d) intended to incur, or
believed that it would incur, debts (including contingent obligations) beyond
its ability to pay such debts as they matured, such court might permit such
Guarantee, and prior payments thereon, to be voided by
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<PAGE> 37
such creditor or representative and permit such prior payments to be recovered
from the holders of the Senior Notes.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction which is being applied. Generally, however, a
Guarantor would be considered insolvent if, at the time it issued its Guarantee
either the fair market value (or fair saleable value) of its assets was less
than the amount required to pay its total debts and liabilities (including
contingent liabilities) as they become absolute and matured or it had incurred
debts (including contingent obligations) beyond its ability to repay such debts
as they mature. Among other things, a legal challenge to a Guarantee on
fraudulent conveyance grounds may focus on the benefits, if any, realized by the
Guarantor as a result of the issuance by the Company of the Senior Notes. To the
extent a Guarantee of a Guarantor was voided as a fraudulent conveyance or held
unenforceable for any other reason, the holders of the Senior Notes would cease
to have any claim in respect of such Guarantee and would be solely creditors of
the Company and the other Guarantor, and may be required to return all amounts
received pursuant to such Guarantor's Guarantee. In such event, the claims of
the holders of the Senior Notes would be subject to the prior payment of all
liabilities of the Guarantor. There can be no assurance that, after providing
for all prior claims, there would be sufficient assets to satisfy the claims of
the holders of the Senior Notes.
The Company believes, and each Guarantor believes, that the Guarantees are
being incurred for proper purposes and in good faith, that the Guarantors
received fair consideration for the issuance of the Guarantees, that each
Guarantor is and will be solvent under the foregoing standards and that it had,
has and will have sufficient capital for carrying on its businesses and was, is
and will be able to pay its debts as they mature. There can be no assurance,
however, that a court would reach the same conclusions.
CERTAIN COVENANTS
Set forth below are certain covenants which will be contained in the
Indenture.
Limitation on Additional Indebtedness. The Indenture will provide that the
Company shall not, and shall not permit any of its Subsidiaries to, Incur any
Indebtedness (including Acquired Indebtedness) except for:
(a) Indebtedness of the Company and the Guarantors under the Senior
Notes, the Guarantees and the Indenture;
(b) Indebtedness of the Company and the Guarantors outstanding (plus
interest, premium, fees and other obligations associated therewith)
pursuant to the Credit Facilities (or pursuant to letters of credit) not to
exceed $40.0 million at any one time outstanding, less any Indebtedness
under the Credit Facilities required to be repaid and repaid with the Net
Cash Proceeds of an Asset Sale in accordance with the "Disposition of
Proceeds of an Asset Sale" covenant;
(c) Indebtedness of the Company and Guarantors not otherwise referred
to in this covenant outstanding on the Issue Date, including but not
limited to, the Existing Notes;
(d) Indebtedness of the Company and the Guarantors if, immediately
after giving pro forma effect to the incurrence thereof, the Fixed Charge
Coverage Ratio of the Company would be greater than or equal to 3.0:1;
(e) Indebtedness of the Company and the Guarantors in respect of
Interest Rate Protection Obligations incurred in the ordinary course of
business;
(f) Indebtedness of a Subsidiary issued to and held by the Company or
a Wholly-Owned Subsidiary or Indebtedness of the Company to a Wholly-Owned
Subsidiary in respect of intercompany advances or transactions;
(g) Indebtedness of the Company and the Guarantors Incurred after the
Issue Date in connection with or arising out of Capitalized Lease
Obligations and purchase money Indebtedness not to exceed $5.0 million at
any one time outstanding;
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<PAGE> 38
(h) Indebtedness of the Company and the Guarantors Incurred after the
Issue Date in connection with the acquisition or licensing of technology
and other assets relating to the implementation of new cell technology not
to exceed $6.0 million at any one time outstanding; and
(i) any deferrals, renewals, extensions, replacements, refinancings,
or refundings of, or amendments, modifications or supplements to,
Indebtedness incurred under clauses (b) and (c) above, whether involving
the same or any other lender or creditor or group of lenders or creditors,
provided that any such deferrals, renewals, extensions, replacements,
refinancings, refundings, amendments, modifications or supplements (x)
shall not provide for any mandatory redemption, amortization or sinking
fund requirement in an amount greater than or at a time prior to the
amounts and times specified in the Indebtedness being deferred, renewed,
extended, replaced, refinanced, refunded, amended, modified or
supplemented, (y) shall not exceed the principal amount (plus accrued
interest and prepayment premium, if any) of the Indebtedness being
replaced, renewed, refunded, refinanced or extended and (z) shall be
subordinated to the Senior Notes at least to the extent and in the manner,
if at all, that the Indebtedness being replaced, renewed, refunded,
refinanced or extended is subordinate to the Senior Notes.
The Company shall not, directly or indirectly, Incur any Indebtedness which
by its terms (or by the terms of any agreement governing such Indebtedness) is
subordinated to any other Indebtedness of the Company unless such Indebtedness
is also by its terms (or by the terms of any agreement governing such
Indebtedness) made expressly subordinated to the Senior Notes to the same extent
and in the same manner as such Indebtedness is subordinated to such other
Indebtedness of the Company. The Guarantors shall not, directly or indirectly,
in any event Incur any Indebtedness which by its terms (or by the terms of any
agreement governing such Indebtedness) is subordinated to any other Indebtedness
of such Guarantor unless such Indebtedness is also by its terms (or by the terms
of any agreement governing such Indebtedness) made expressly subordinated to the
Guarantee of the Senior Notes by such Guarantor to the same extent and in the
same manner as such Indebtedness is subordinated to such other Indebtedness of
such Guarantor.
Limitation on Investments, Loans and Advances. The Indenture will provide
that the Company shall not make and shall not permit any of its Subsidiaries to
make any capital contributions, advances or loans to (including any guarantees
of loans to), or investment or purchases of Capital Stock in, any Person
(collectively, "Investments"), except: (i) Investments by the Company in any
Wholly-Owned Subsidiary and Investments in or to the Company or a Subsidiary by
any Subsidiary, (ii) Investments represented by accounts receivable created or
acquired in the ordinary course of business, (iii) advances to employees in the
ordinary course of business not to exceed an aggregate of $250,000 outstanding
at any one time; (iv) Investments under or pursuant to Interest Rate Protection
Obligations, (v) Cash Equivalents, (vi) Investments in joint ventures not to
exceed $10.0 million in the aggregate and (vii) Investments permitted to be made
under the "Limitation on Restricted Payments" covenant described below.
Limitation on Restricted Payments. The Indenture will provide that the
Company shall not make, and shall not permit any of its Subsidiaries to,
directly or indirectly, make, any Restricted Payment, unless:
(a) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such Restricted
Payment; and
(b) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made after the Issue Date
through and including the date of such Restricted Payment (the "Base
Period") does not exceed the sum of (1) 50% of the Company's Consolidated
Net Income (or in the event such Consolidated Net Income shall be a
deficit, minus 100% of such deficit) during the Base Period, and (2) 100%
of the aggregate Net Proceeds and the Fair Market Value of marketable
securities and property received by the Company from the issue or sale,
during the Base Period, of Capital Stock (other than Disqualified Stock) of
the Company or any Indebtedness or other securities of the Company
convertible into or exercisable or exchangeable for Capital Stock (other
than Disqualified Stock) of the Company which has been so converted,
exercised or exchanged, as the case may be. For purposes of determining
under this clause (b) the amount expended for Restricted
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<PAGE> 39
Payments, cash distributed shall be valued at the face amount thereof and
property other than cash shall be valued at its Fair Market Value.
The provisions of this covenant will not prohibit (i) the payment of any
dividend within 60 days after the date of declaration thereof, if at such date
of declaration such payment would comply with the provisions of the Indenture;
(ii) the retirement of any shares of Capital Stock or subordinated Indebtedness
of the Company in exchange for, by conversion into, or out of the Net Proceeds
of the substantially concurrent sale (other than to a Subsidiary of the Company)
of other shares of Capital Stock of the Company (other than Disqualified Stock);
(iii) the redemption or retirement of subordinated Indebtedness of the Company
in exchange for, by conversion into, or out of the Net Proceeds of the
substantially concurrent incurrence of subordinated Indebtedness of the Company
(other than any such subordinated Indebtedness owing to a Subsidiary of the
Company) that is contractually subordinated in right of payment to the Senior
Notes and that is permitted to be incurred in accordance with the covenant
described under "Limitation on Additional Indebtedness" above; (iv) a management
fee payable to Group not to exceed $1.2 million in any one year; (v) the making
of payments by the Company to Group (A) no earlier than ten days prior to the
date on which Group is required to make its payments to the Internal Revenue
Service or the applicable state taxing authority, as the case may be, pursuant
to a tax sharing agreement between the Company and Group (which tax sharing
agreement provides that the payments thereunder shall not exceed the amount the
Company would have been required to pay for taxes on a stand-alone basis, except
that the Company will not have the benefit of any of its tax loss carryforwards
unless such tax losses were a result of timing differences between the Company's
accounting for tax and financial reporting purposes, and which tax sharing
agreement also provides that transactions between the Company and Group and its
other subsidiaries are accounted for on a cash basis and not on an accrual
basis) and (B) to reimburse Group for out of pocket insurance payments made by
Group on behalf of the Company and its Subsidiaries; (vi) the payment of a
dividend to Group on the Issue Date of approximately $ million; and
(vii) the redemption on the Issue Date of the 8,500 outstanding shares of the
Company's 10% Preferred Stock, $1,000 par value per share, held by Group plus
accrued dividends thereon.
In determining the amount of Restricted Payments permissible under
subparagraph (b) above, amounts expended pursuant to clauses (i) and (ii) above
shall be included as Restricted Payments and amounts expended pursuant to
clauses (iii), (iv), (v), (vi) and (vii) above shall not be so included.
Limitation on Liens. The Indenture will provide that the Company shall
not, and shall not permit, cause or suffer any of its Subsidiaries to, create,
incur, assume or suffer to exist any Lien of any kind upon any of its property
or assets now owned or hereafter acquired by it except for:
(a) Liens existing as of the Issue Date;
(b) Permitted Liens;
(c) Liens on the assets or property of a Subsidiary of the Company
existing at the time such Subsidiary became a Subsidiary of the Company and
not incurred as a result (or in connection with or in anticipation of) such
Subsidiary's becoming a Subsidiary of the Company; provided that such Liens
do not extend to or cover any property or assets of the Company or any of
its Subsidiaries (other than the property or assets of the Subsidiary so
acquired);
(d) Liens securing inventory, accounts receivable, contract rights,
documents, instruments and general intangibles in respect of the Credit
Facilities (or letters of credit);
(e) any Lien securing Capitalized Lease Obligations and purchase money
obligations, provided that such Capitalized Lease Obligations and purchase
money obligations are incurred in compliance with the "Limitation on
Additional Indebtedness" covenant and provided that such Liens do not
extend to or cover any property or assets owned by the Company or any of
its Subsidiaries as of the Issue Date or extend to any property or assets
other than the property or assets subject to such Capitalized Lease
Obligations and purchase money obligations;
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(f) Liens pursuant to leases and subleases of real property which do
not interfere with the ordinary conduct of business of the Company or any
of its Subsidiaries and which are made on customary and usual terms
applicable to similar properties;
(g) Liens securing Indebtedness which is incurred to refinance or
replace Indebtedness which has been secured by a Lien permitted under the
Indenture and is permitted to be refinanced or replaced under the
Indenture, provided that such Liens do not extend to or cover any property
or assets of the Company or any of its Subsidiaries not securing the
Indebtedness so refinanced or replaced; and
(h) Liens securing reimbursement obligations under letters of credit
but only in or upon the goods the purchase of which was financed by such
letters of credit.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Indenture will provide that the Company shall not, and shall
not permit any Subsidiary of the Company to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective or enter into any
agreement with any Person that would cause or create any consensual encumbrance
or restriction of any kind on the ability of any Subsidiary of the Company to
(a) pay dividends, in cash or otherwise, or make any other distributions on its
Capital Stock or any other interest or participation in, or measured by, its
profits owned by the Company or a Subsidiary of the Company, (b) make any loans
or advances to, or pay any Indebtedness owed to, the Company or any Subsidiary
of the Company or (c) transfer any of its properties or assets to the Company or
to any Subsidiary of the Company, except, in each case, for such encumbrances or
restrictions existing under or contemplated by or by reason of (i) the Senior
Notes or the Indenture, (ii) any restrictions existing under or contemplated by
agreements in effect on the Issue Date, including, without limitation,
restrictions under the Credit Facilities as in effect on the Issue Date, (iii)
any restrictions with respect to a Subsidiary of the Company that is not a
Subsidiary of the Company on the Issue Date, in existence at the time such
Person becomes a Subsidiary of the Company (but not created in contemplation of
such Person becoming a Subsidiary) or created after the Issue Date, so long as
such restrictions are not materially less favorable to the holders of the Senior
Notes than those under the Credit Facilities as in effect on the Issue Date, and
(iv) any restrictions existing under any agreement that refinances or replaces
an agreement containing a restriction permitted by clause (i), (ii) or (iii)
above, provided that the terms and conditions of any such restrictions are not
materially less favorable in the aggregate to the holders of the Senior Notes
than those under or pursuant to the agreement being replaced or the agreement
evidencing the Indebtedness refinanced or replaced.
Limitation on Sale-Leaseback Transactions. The Indenture will provide that
the Company shall not, and shall not permit any of its Subsidiaries to, enter
into any Sale-Leaseback Transaction. Notwithstanding the foregoing, the Company
and its Subsidiaries may enter into Sale-Leaseback Transactions if (i) after
giving pro forma effect to any such Sale-Leaseback Transaction, the Company
shall be in compliance with the "Limitation on Additional Indebtedness" covenant
described above, (ii) the sale price in such Sale-Leaseback Transaction is at
least equal to the Fair Market Value of such property, and (iii) the Company or
such Subsidiary shall apply the Net Cash Proceeds of the sale as provided under
"Disposition of Proceeds of Asset Sales" below, to the extent required by such
provision.
Disposition of Proceeds of Asset Sales. The Indenture will provide that
the Company shall not, and shall not permit any of its Subsidiaries to, make any
Asset Sale unless (a) such Asset Sale is for Fair Market Value, (b) the net
proceeds therefrom consist of at least 85% cash or Cash Equivalents and (c) the
Company shall commit to apply or to cause its Subsidiaries to apply the Net Cash
Proceeds of such Asset Sale within 180 days of receipt thereof, and shall apply
such Net Cash Proceeds within 270 days of receipt thereof, as follows:
(i) first, to satisfy all mandatory repayment obligations under the
Credit Facilities arising by reason of such Asset Sale to the extent that
such repayment permanently reduces the amount that may be borrowed under
the Credit Facilities;
(ii) second, to repurchase Existing Notes required to be repurchased
pursuant to the Indenture governing the Existing Notes; and
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<PAGE> 41
(iii) third, out of any Net Cash Proceeds remaining after application
of Net Cash Proceeds pursuant to the preceding paragraphs (i) and (ii) (the
"Available Amount"), the Company shall make an offer to purchase (the
"Asset Sale Offer") from all Holders of Senior Notes, up to a maximum
principal amount (expressed as a multiple of $1,000) of Senior Notes equal
to the Available Amount at a purchase price of 100% of the principal amount
thereof plus accrued interest thereon to the date of purchase; provided
that the Company will not be required to apply pursuant to this paragraph
(iii) Net Cash Proceeds received from any Asset Sale if, and only to the
extent that, such Net Cash Proceeds are committed in writing to be applied
to acquire or construct property or assets in lines of business related to
the Company's and its Subsidiaries' businesses within 180 days after the
consummation of such Asset Sale and are so applied within 270 days after
the consummation of such Asset Sale; and provided, further, that the
Company may defer the Asset Sale Offer until there is an aggregate
unutilized Available Amount equal to or in excess of $2.5 million (at which
time the entire unutilized Available Amount and not just the amount in
excess of $2.5 million shall be applied as required pursuant to this
paragraph). The Asset Sale Offer shall remain open for a period of 20
business days or such longer period as may be required by law. To the
extent the Asset Sale Offer is not fully subscribed to by the holders of
the Senior Notes, the Company may retain such unutilized portion of the Net
Cash Proceeds.
Limitation on Preferred Stock Issuances by Subsidiaries. The Indenture
will prohibit the Company from causing or permitting the issuance by any
Subsidiary of any Capital Stock other than common stock or causing or permitting
any Subsidiary to at any time have outstanding any shares of Capital Stock other
than common stock, except issuances of Capital Stock to the Company or a
Wholly-Owned Subsidiary of the Company that is a Guarantor; provided, however,
that the Company or such Wholly-Owned Subsidiary of the Company, as the case may
be, is at all times the sole beneficial and record owner of such Capital Stock.
Additional Subsidiary Guarantors. The Indenture will provide that if the
Company or any of its Subsidiaries shall transfer or cause to be transferred, in
one or a series of related transactions, any assets, businesses, divisions, real
property or equipment having a book value in excess of $100,000 to any
Subsidiary that is not a Guarantor, the Company shall, prior to such transfer,
(1) cause such transferee Subsidiary to become a Guarantor and execute a
Guarantee, and (2) deliver an opinion of counsel in accordance with the terms of
the Indenture.
Special Covenants of the Guarantors. The Indenture will provide that each
Guarantor of the Senior Notes issued under the Indenture will covenant to comply
with each covenant of the Company contained in such Indenture, to the extent
applicable.
Limitation on Transactions with Affiliates. The Indenture will provide
that the Company shall not, and the Company shall not permit, cause, or suffer
any Subsidiary of the Company to, conduct any business or enter into any
transaction or series of transactions with or for the benefit of any Affiliate
of the Company or any of its Subsidiaries or any holder of 10% or more of any
class of Capital Stock of the Company (each an "Affiliate Transaction"), except
in good faith and on terms that are, in the aggregate, no less favorable to the
Company or such Subsidiary, as the case may be, than those that could have been
obtained in a comparable transaction on an arm's-length basis from a Person not
an Affiliate of the Company or such Subsidiary. All Affiliate Transactions (and
each series of related Affiliate Transactions which are similar or part of a
common plan) involving aggregate payments or other market value in excess of
$500,000 shall be approved by the Board of Directors of the Company, such
approval to be evidenced by a Board Resolution stating that such Board of
Directors has, in good faith, determined that such transaction complies with the
foregoing provisions. Notwithstanding the foregoing, the restrictions set forth
in this covenant shall not apply to (i) customary directors' fees, consulting
fees, indemnification and similar arrangements, and employee salaries and
bonuses, (ii) transactions between the Company and any of its Subsidiaries or
among Subsidiaries of the Company, (iii) the payment of a management fee to
Group and (iv) the making of payments by the Company to Renco pursuant to
subsections (v), (vi) and (vii) of clause (b) of the "Limitation on Restricted
Payments" covenant above.
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CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
The Indenture will provide that neither the Company nor any Guarantor shall
consolidate with or merger with or into or sell, assign, convey, lease or
transfer all or substantially all of its properties and assets as an entirety to
any Person or group of affiliated Persons in a single transaction or through a
series of transactions, unless after giving effect thereto: (a) the Company or
such Guarantor, as the case may be, shall be the continuing Person or the
resulting, surviving or transferee Person (the "surviving entity") shall be a
corporation organized and existing under the laws of the United States or any
State thereof or the District of Columbia; (b) the surviving entity shall
expressly assume, by a supplemental indenture executed and delivered to the
Trustee, in form and substance reasonably satisfactory to the Trustee, all of
the obligations of the Company or such Guarantor, as the case may be, under the
Senior Notes, the Guarantees and the Indenture; (c) immediately before and
immediately after giving effect to such transaction or series of transactions
(including, without limitation, any Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction or series of
transactions), no Default or Event of Default shall have occurred and be
continuing; (d) the Company, such Guarantor or the surviving entity, as the case
may be, shall immediately before and immediately after giving effect to such
transaction or series of transactions (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of the transaction or series of transactions) have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company or such
Guarantor immediately prior to such transaction or series of transactions; (e)
immediately after giving effect to such transaction or series of transactions,
the Company, such Guarantor or the surviving entity, as the case may be, could
incur $1.00 of Indebtedness pursuant to clause (d) of the "Limitation on
Additional Indebtedness" covenant above; (f) the Company, such Guarantor or the
surviving entity shall have delivered to the Trustee an Officer's Certificate
stating that such consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such transaction or series
of transactions, such supplemental indenture complies with this covenant and
that all conditions precedent in the Indenture relating to the transaction or
series of transactions have been satisfied; and (g) neither the Company nor any
Subsidiary would thereupon become obligated with respect to any Indebtedness,
nor any of its property become subject to any Lien, unless the Company or such
Subsidiary could incur such Indebtedness or create such Lien under the
Indenture. The foregoing provisions shall not be applicable with respect to a
transaction involving the consolidation or merger of a Guarantor with or into
any Person (other than the Company or an Affiliate of the Company) that results
in such Guarantor being released from its Guarantee as provided under "Release
of a Guarantor" below.
RELEASE OF A GUARANTOR
Upon the sale or disposition of all of the Capital Stock of a Guarantor by
the Company or a Subsidiary of the Company, or upon the consolidation or merger
of a Guarantor with or into any Person (in each case, other than to the Company
or an Affiliate of the Company), such Guarantor will be automatically and
unconditionally released from all obligations under its Guarantee; provided that
(i) immediately before and after giving effect to such transactions, no Default
or Event of Default shall have occurred and be continuing and (ii) the proceeds
received by the Company or any Subsidiary of the Company from such transaction
shall be applied as provided under "Disposition of Proceeds of Asset Sales"
above.
SEC REPORTS AND REPORTS TO HOLDERS
Pursuant to the Indenture, whether or not required by the rules and
regulations of the Commission, so long as any Senior Notes are outstanding, the
Company will file with the Commission and distribute or cause to be distributed
to holders of the Senior Notes copies of the financial information that would
have been contained in such annual reports and quarterly reports that the
Company would have been required to file with the Commission pursuant to Section
13 or 15(d) of the Exchange Act. Such financial information shall include annual
reports containing consolidated financial statements and notes thereto, together
with an opinion thereon expressed by an independent public accounting firm,
management's discussion and analysis of financial condition and results of
operations as well as quarterly reports containing unaudited condensed
consolidated financial statements for the first three quarters of each fiscal
year.
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EVENTS OF DEFAULT
The following are Events of Default under the Indenture:
(i) default in the payment of any interest on the Senior Notes when it
becomes due and payable and continuance of such default for a period of 30
days; or
(ii) default in the payment of the principal of or premium, if any, on
the Senior Notes when due (including by reason of a default in payment upon
an offer to purchase); or
(iii) default in the performance, or breach, of any covenant in the
Indenture (other than defaults specified in clause (i) or (ii) above) and
continuance of such default or breach for a period of 30 days after written
notice thereof has been given to the Company by the Trustee or to the
Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the outstanding Senior Notes; or
(iv) failure by the Company or any of its Subsidiaries to perform any
term, covenant, condition or provision of one or more classes or issues of
other Indebtedness in an aggregate principal amount of $2.0 million or
more, which failure results in an acceleration of the maturity thereof; or
(v) one or more judgments, orders or decrees for the payment of money
in excess of $2.0 million, either individually or in an aggregate amount,
shall be entered against the Company, any of its Subsidiaries or any of
their respective properties and shall not be discharged, and there shall
have been a period of 60 days during which a stay of enforcement of such
judgment or order, by reason of a pending appeal or otherwise, shall not be
in effect; or
(vi) certain events of bankruptcy or insolvency with respect to the
Company or any Subsidiary shall have occurred; or
(viii) any Guarantee shall be found to be unenforceable or invalid by
any final judgment, order or decree of any court.
If an Event of Default occurs and is continuing, then the holders of at
least 25% in principal amount of the outstanding Senior Notes may, by written
notice, and the Trustee upon the request of the holders of not less than 25% in
principal amount of the outstanding Senior Notes shall, declare the principal
of, premium, if any, and accrued interest on all the Senior Notes to be due and
payable immediately. Upon any such declaration such principal, premium, if any,
and accrued interest shall become due and payable immediately. If an Event of
Default specified in (vi) occurs with respect to the Company and is continuing,
then the principal of, premium, if any, and accrued interest on all the Senior
Notes shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holder.
After a declaration of acceleration, the holders of a majority in aggregate
principal amount of outstanding Senior Notes may, by notice to the Trustee,
rescind such declaration of acceleration if all existing Events of Default have
been cured or waived, other than nonpayment of principal of, premium, if any,
and accrued interest on the Senior Notes that has become due solely as a result
of such acceleration, and if the rescission of acceleration would not conflict
with any judgment or decree. The holders of a majority in principal amount of
the outstanding Senior Notes also have the right to waive past defaults under
the Indenture except a default in the payment of the principal of, premium, if
any, or interest on any Senior Note or in respect of a covenant or a provision
which cannot be modified or amended without the consent of all holders.
No holder of any of the Senior Notes has any right to institute any
proceeding with respect to the Indenture or any remedy thereunder unless the
holders of at least 25% in principal amount of the outstanding Senior Notes have
made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding as Trustee, the Trustee has failed to institute such
proceeding within fifteen days after receipt of such notice and the Trustee has
not within such fifteen-day period received directions inconsistent with such
written request from holders of a majority in principal amount of the
outstanding Senior Notes. Such limitations do not apply, however, to a suit
instituted by a holder of a Senior Note for the enforcement of the payment of
the principal of or premium, if any, or accrued interest on such Senior Note on
or after the due date expressed in such Senior Note.
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During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent Person would
exercise under the circumstances in the conduct of such Person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
is not under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders unless such holders
shall have offered the Trustee reasonable security or indemnity. Subject to
certain provisions concerning the rights of the Trustee, the holders of a
majority in principal amount of the outstanding Senior Notes have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee.
TRANSFER
The Senior Notes will be issued in registered form and will be transferable
only upon the surrender of the Senior Notes being transferred for registration
of transfer. The Company may require payment of a sum sufficient to cover any
tax, assessment or other governmental charge payable in connection with certain
transfers and exchanges.
DEFEASANCE
The Company may at any time terminate all of its obligations with respect
to the Senior Notes ("defeasance"), except for certain obligations, including
those regarding any trust established for a defeasance and obligations to
register the transfer or exchange of the Senior Notes, to replace mutilated,
destroyed, lost or stolen Senior Notes and to maintain agencies in respect of
the Senior Notes. The Company may at any time terminate its obligations under
certain covenants set forth in the Indenture, some of which are described under
"Certain Covenants" above, and any omission to comply with such obligations
shall not constitute a Default or an Event of Default with respect to the Senior
Notes issued under the Indenture ("covenant defeasance"). In order to exercise
either defeasance or covenant defeasance, the Company must irrevocably deposit
in trust with the Trustee, for the benefit of the holders of the Senior Notes,
money or U.S. government obligations, or a combination thereof, in such amounts
as will be sufficient to pay the principal of, premium, if any, and interest on
the Senior Notes to redemption or maturity and comply with certain other
conditions, including the delivery of an opinion as to certain tax matters.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of Senior
Notes) as to all outstanding Senior Notes when either (a) all such Senior Notes
theretofore authenticated and delivered (except lost, stolen or destroyed Senior
Notes which have been replaced or paid and Senior Notes for whose payment money
has theretofore been deposited in trust or segregated and held in trust by the
Company and thereafter repaid to the Company or discharged from such trust) have
been delivered to the Trustee for cancellation or (b)(i) all such Senior Notes
not theretofore delivered to the Trustee for cancellation have become due and
payable and the Company has irrevocably deposited or caused to be deposited with
the Trustee as trust funds in the trust for the purpose an amount of money
sufficient to pay and discharge the entire indebtedness on the Senior Notes not
theretofore delivered to the Trustee for cancellation, for principal, premium,
if any, and accrued interest to the date of such deposit; (ii) the Company has
paid all sums payable by it under the Indenture; and (iii) the Company has
delivered irrevocable instructions to the Trustee to apply the deposited money
toward the payment of the Senior Notes at maturity or redemption, as the case
may be. In addition, the Company must deliver an Officers' Certificate and an
Opinion of Counsel stating that all conditions precedent to satisfaction and
discharge have been complied with.
AMENDMENTS AND WAIVERS
From time to time the Company and the Guarantors, when authorized by
resolutions of their respective Boards of Directors, and the Trustee may,
without the consent of the holders of the Senior Notes, amend,
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waive or supplement the Indenture or the Senior Notes for certain specified
purposes, including, among other things, curing ambiguities, defects or
inconsistencies, maintaining the qualification of the Indenture under the Trust
Indenture Act or making any change that does not adversely affect the rights of
any holder. Other amendments and modifications of the Indenture or the Senior
Notes may be made by the Company and the Guarantors and the Trustee with the
consent of the holders of not less than a majority of the aggregate principal
amount of the outstanding Senior Notes; provided, however, that no such
modification or amendment may, without the consent of the holder of each
outstanding Senior Note affected thereby, (i) reduce the principal amount
outstanding, extend the fixed maturity, or alter the redemption provisions of
the Senior Notes, (ii) change the currency in which any Senior Notes or any
premium or accrued interest thereon is payable, (iii) reduce the percentage in
principal amount outstanding of Senior Notes necessary for consent to an
amendment, supplement or waiver or consent to take any action under the
Indenture or the Senior Notes, (iv) impair the right to institute suit for the
enforcement of any payment on or with respect to the Senior Notes, (v) waive a
default in payment with respect to the Senior Notes, (vi) reduce the rate or
extend the time for payment of interest on the Senior Notes, (vii) change the
Company's obligation to purchase Senior Notes upon the occurrence of a Change of
Control (or change the definition thereof) or an Asset Sale in accordance with
the Indenture or waive any default in the performance thereof, (viii) release
any Guarantor from its obligations under its Guarantee except as provided under
"Release of a Guarantor" above, or (ix) affect the ranking of the Senior Notes
or the Guarantees.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Subsidiary of the Company or assumed in connection with an
Asset Acquisition of such Person, including, without limitation, Indebtedness
incurred in connection with, or in anticipation of, such Person's becoming a
Subsidiary of the Company or such acquisition.
"Affiliate" of any specified Person means any other Person which, directly
or indirectly, controls, is controlled by or is under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise, and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) or purchase or
acquisition of Capital Stock by the Company or any of its Subsidiaries to or in
any other Person, in either case as a result of which such Person shall become a
Subsidiary of the Company or any of its Subsidiaries or shall be merged with or
into the Company or any of its Subsidiaries or (ii) any acquisition by the
Company or any of its Subsidiaries of the assets of any Person which constitute
substantially all of an operating unit or business of such Person.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
(including by means of sale-leaseback) or other disposition to any Person other
than the Company or a Subsidiary of the Company, in one transaction or a series
of related transactions, of (i) any Capital Stock of any Subsidiary of the
Company or (ii) any other property or asset of the Company or any Subsidiary of
the Company, in each case other than in the ordinary course of business and
other than isolated transactions which do not exceed $250,000 individually. For
the purposes of this definition, the term "Asset Sale" shall not include sales
of receivables not a part of a sale of the business from which they arose or any
disposition of all or substantially all of the properties and assets of the
Company that is governed under and complies with the "Consolidation, Merger,
Conveyance, Transfer or Lease" covenant described above.
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"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the Board
of Directors of the Company and to be in full force and effect on the date of
such certification and delivered to the Trustee.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in or other equivalents (however designated
and whether voting or non-voting) of such Person's capital stock, whether
outstanding on the Issue Date or issued after the Issue Date, and any and all
rights, warrants or options exchangeable for or convertible into such capital
stock.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed) that is required to be classified and
accounted for as a capital lease obligation under GAAP, and, for the purpose of
the Indenture, the amount of such obligation at any date shall be the
capitalized amount thereof at such date, determined in accordance with GAAP.
"Cash Equivalents" means, at any time, (i) any evidence of Indebtedness
with a maturity of 180 days or less issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (ii) certificates of deposit or acceptances with a
maturity of 180 days or less of any financial institution that is a member of
the Federal Reserve System having combined capital and surplus and undivided
profits of not less than $250.0 million; (iii) commercial paper with a maturity
of 180 days or less issued by a corporation (except an Affiliate of the Company)
organized under the laws of any state of the United States or the District of
Columbia and rated at least A-1 by Standard & Poor's Ratings Group or at least
P-1 by Moody's Investors Service, Inc.; and (iv) repurchase agreements and
reverse repurchase agreements relating to marketable direct obligations issued
or unconditionally guaranteed by the United States of America or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition; provided,
however, that the terms of such agreements comply with the guidelines set forth
in the Federal Financial Agreements of Depository Institutions with Securities
Dealers and Others, as adopted by the Comptroller of the Currency.
"Change of Control" means (i) the direct or indirect sale, lease, exchange
or other transfer of all or substantially all of the assets of the Company or
Group to any Person or entity or group of Persons or entities acting in concert
as a partnership or other group (a "Group of Persons") other than an Affiliate
of the Company, (ii) the merger or consolidation of the Company or Group with or
into another corporation with the effect that the then existing shareholders of
the Company or Group, as the case may be, hold less than 50% of the combined
voting power of the then outstanding securities of the surviving corporation of
such merger or the corporation resulting from such consolidation ordinarily (and
apart from rights arising under special circumstances) having the right to vote
in the election of directors, (iii) the replacement of a majority of the Board
of Directors of Group, over a two-year period, from the directors who
constituted the Board of Directors at the beginning of such period, and such
replacement shall not have been approved by a vote of at least a majority of the
Board of Directors then still in office who either were members of the Board of
Directors at the beginning of such period or whose election as a member of the
Board of Directors was previously so approved, or (iv) a Person or Group of
Persons (other than Group and its Affiliates) shall, as a result of a tender or
exchange offer, open market purchases, privately negotiated purchases or
otherwise, have become the direct or indirect beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of securities of the Company or
Group representing 50% or more of the combined voting power of the then
outstanding securities of the Company or Group ordinarily (and apart from rights
accruing under special circumstances) having the right to vote in the election
of directors.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period increased (to the
extent deducted in determining Consolidated Net Income) by the sum of: (i) all
United States Federal, state and foreign income taxes of such Person paid or
accrued according to GAAP for such period (other than income taxes attributable
to extraordinary, unusual or non-recurring gains or losses); (ii) all interest
expense of such Person paid or accrued in accordance with GAAP (net of any
interest income) for such period (including amortization of original issue
discount and the
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interest portion of deferred payment obligations); (iii) depreciation and
depletion; (iv) amortization including, without limitation, amortization of
capitalized debt issuance costs; and (v) any other non-cash charges to the
extent deducted from Consolidated Net Income (including non-cash expenses
recognized in accordance with Financial Accounting Standards Bulletin Number
106).
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided,
however, that (a) the Net Income of any Person (the "Other Person") in which the
Person in question or one of its Subsidiaries has a joint interest with a third
party (which interest does not allow the net income of such Other Person to be
consolidated into the net income of the Person in question in accordance with
GAAP) shall be included only to the extent of the amount of dividends or
distributions paid to the Person in question or the Subsidiary, (b) the Net
Income of any Subsidiary of the Person in question that is subject to any
contractual restriction or limitation on the payment of dividends or the making
of other distributions shall be excluded to the extent of such restriction or
limitation (provided that this clause (b) shall not apply to any such
restrictions or limitations with respect to the Guarantors contained in the
Credit Facilities as such restrictions or limitations are in effect on the Issue
Date), (c)(i) the Net Income (or loss) of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition and
(ii) any net gain (but not loss) resulting from an Asset Sale by the Person in
question or any of its Subsidiaries other than in the ordinary course of
business shall be excluded and (d) extraordinary gains and losses shall be
excluded.
"Consolidated Net Worth" means, with respect to any Person at any date of
determination, the consolidated stockholders' equity represented by the shares
of such Person's Capital Stock (other than Disqualified Stock) outstanding at
such date, as determined on a consolidated basis in accordance with GAAP.
"Credit Facilities" means (i) the revolving credit facility as in effect as
of the Issue Date between Magcorp and Congress Financial Corporation and (ii)
the revolving credit facility as in effect as of the Issue Date between Sabel
and Congress Financial Corporation, in each case as the same may at any time be
amended, amended and restated, supplemented or otherwise modified, including any
refinancing, refunding, replacement or extension thereof and whether by the same
or any other lender or group of lenders.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is exchangeable for Indebtedness, or is redeemable
at the option of the holder thereof, in whole or in part, in each case on or
prior to the maturity date of the Senior Notes.
"Fair Market Value" or "fair value" means, with respect to any asset or
property, the price which could be negotiated in an arm's-length free market
transaction, for cash, between a willing seller and a willing buyer, neither of
whom is under undue pressure or compulsion to complete the transaction. Fair
Market Value shall be determined by the Board of Directors of the Company acting
in good faith and shall be evidenced by a Board Resolution delivered to the
Trustee.
"Fixed Charge Coverage Ratio" means, with respect to any Person, the ratio
of (i) Consolidated Cash Flow of such Person for the four full fiscal quarters
for which financial statements are available that immediately precede the date
of the transaction or other circumstances giving rise to the need to calculate
the Fixed Charge Coverage Ratio (the "Transaction Date") to (ii) all cash and
non-cash interest expense (including capitalized interest) of such Person and
its Subsidiaries determined in accordance with GAAP (net of any interest income
of such Person and its Subsidiaries and exclusive of deferred financing fees of
such Person and its Subsidiaries) and the aggregate amount of cash dividends or
other distributions declared or paid on Capital Stock (other than Common Stock)
of such Person and its Subsidiaries, in each case for such four full fiscal
quarter period. For purposes of this definition, if the Transaction Date occurs
prior to the date
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on which the Company's consolidated financial statements for the four full
fiscal quarters subsequent to the Issue Date are first available, then
"Consolidated Cash Flow" and the items referred to in the preceding clause (ii)
shall be calculated, in the case of the Company, after giving effect on a pro
forma basis as if the Senior Notes outstanding on the Transaction Date were
issued on the first day of such four full fiscal quarter period. In addition to
and without limitation of the foregoing two sentences, for purposes of this
definition, "Consolidated Cash Flow" and the items referred to in the preceding
clause (ii) shall be calculated after giving effect on a pro forma basis for the
period of such calculation to (i) the Incurrence or repayment of any
Indebtedness of such Person or any of its Subsidiaries (other than Indebtedness
for working capital) at any time during the period (the "Reference Period") (A)
commencing on the first day of the four full fiscal quarter period for which
financial statements are available that precedes the Transaction Date and (B)
ending on and including the Transaction Date, including, without limitation, the
Incurrence or repayment of the Indebtedness giving rise to the need to make such
calculation, as if such Incurrence or repayment occurred on the first day of the
Reference Period; provided that if such Person or any of its Subsidiaries
directly or indirectly guarantees Indebtedness of a third Person, the above
clause shall give effect to the Incurrence of such guaranteed Indebtedness as if
such Person or Subsidiary had directly Incurred such guaranteed Indebtedness and
(ii) any Asset Sales or Asset Acquisitions (including, without limitation, any
Asset Acquisition giving rise to the need to make such calculation as a result
of the Company or any of its Subsidiaries (including any Person who becomes a
Subsidiary as a result of the Asset Acquisition) incurring Acquired
Indebtedness) occurring during the Reference Period and any retirement of
Indebtedness in connection with such Asset Sales, as if such Asset Sale or Asset
Acquisition and/or retirement occurred on the first day of the Reference Period.
Furthermore, in calculating the denominator (but not the numerator) of this
"Fixed Charge Coverage Ratio," (1) subject to clause (3) below, interest on
Indebtedness determined on a fluctuating basis as of the Transaction Date and
which will continue to be so determined thereafter shall be deemed to accrue at
a fixed rate per annum equal to the rate of interest on such Indebtedness in
effect on the Transaction Date; (2) if interest on any Indebtedness actually
incurred on the Transaction Date may optionally be determined at an interest
rate based upon a factor of a prime or a similar rate, a eurocurrency interbank
offered rate, or other rates, then the interest rate based upon a factor of a
prime or similar rate shall be deemed to have been in effect; and (3)
notwithstanding clause (1) above, interest on Indebtedness determined on a
fluctuating basis, to the extent such interest is covered by agreements relating
to Interest Rate Protection Obligations, shall be deemed to accrue at the rate
per annum resulting after giving effect to the operation of such agreements.
"GAAP" means generally accepted accounting principles in effect on the
Issue Date as set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as may be approved by a significant
segment of the accounting profession of the United States.
"Guarantee" means the guarantee of the Senior Notes by each Guarantor.
"Guarantor" means (i) Magcorp and Sabel and (ii) each of the Company's
Subsidiaries which becomes a guarantor of the Senior Notes pursuant to the
"Additional Subsidiary Guarantors" covenant described above.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, guarantee or otherwise become liable for or with respect to the payment
of, contingently or otherwise, such Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person, without duplication, (i)
any liability, contingent or otherwise, of such Person (A) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of such
Person or only to a portion thereof), (B) evidenced by a note, debenture or
similar instrument, letter of credit or draft accepted (including a purchase
money obligation) representing extensions of credit whether or not representing
obligations for borrowed money or (C) for the payment of money relating to a
Capitalized Lease Obligation or other obligation relating to the deferred
purchase price of any
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property or services (other than property or services purchased on ordinary
trade terms therefor) which purchase price is payable over a period in excess of
six months or is evidenced by a note, invoice or similar written instrument with
a maturity in excess of six months; (ii) any liability of others of the kind
described in the preceding clause (i) which the Person has guaranteed or which
is otherwise its legal liability; (iii) any obligation secured by a lien to
which the property or assets of such Person are subject, whether or not the
obligations secured thereby shall have been assumed by or shall otherwise be
such Person's legal liability; and (iv) any and all deferrals, renewals,
extensions, replacements, refinancings, and refundings of, or amendments,
modifications or supplements to, any liability of the kind described in any of
the preceding clauses (i), (ii) or (iii).
"Interest Rate Protection Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such Person
calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements.
"Lien" means any mortgage, lien (statutory or other), pledge, security
interest, encumbrance, hypothecation, assignment for security or other security
agreement of any kind or nature whatsoever. For purposes of the Indenture, a
Person shall be deemed to own subject to a Lien any property which it has
acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
relating to such Person.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents, including payments in respect
of deferred payment obligations when received in the form of cash or Cash
Equivalents (except to the extent that such obligations with respect to
Indebtedness are financed or sold with recourse to the Company or any of its
Subsidiaries) net of (i) brokerage commissions and other reasonable fees and
expenses (including fees and expenses of counsel and investment bankers) related
to such Asset Sale; (ii) provisions for all taxes payable as a result of such
Asset Sale; (iii) payments made to retire Indebtedness secured by the assets
subject to such Asset Sale (including retirements of Indebtedness under the
Credit Facilities) to the extent required pursuant to the terms of such
Indebtedness; and (iv) appropriate amounts to be provided by the Company or any
of its Subsidiaries, as the case may be, as a reserve, in accordance with GAAP,
against any liabilities associated with such Asset Sale and retained by the
Company or any of its Subsidiaries, as the case may be, after such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale.
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"Net Proceeds" means (a) in the case of any sale of Capital Stock (other
than Disqualified Stock) by the Company, the aggregate net proceeds received by
the Company, after payment of expenses, commissions and the like incurred in
connection therewith, whether such proceeds are in cash or in property (valued
at the Fair Market Value thereof, as determined in good faith by the Board of
Directors of the Company, at the time of receipt), (b) in the case of any
exchange, exercise, conversion or surrender of outstanding securities of any
kind of the Company for or into shares of Capital Stock of the Company which is
not Disqualified Stock, the net book value of such outstanding securities on the
date of such exchange, exercise, conversion or surrender (plus any additional
amount required to be paid by the holder to the Company upon such exchange,
exercise, conversion or surrender, less any and all payments made to the
holders, e.g., on account of fractional shares, and less all expenses incurred
by the Company in connection therewith) and (c) in the case of the issuance of
any Indebtedness by the Company, the aggregate net cash proceeds received by the
Company, after payment of expenses, commissions and the like incurred therewith.
"Permitted Liens" means, with respect to any Person, any lien arising by
reason of (a) any attachment, judgment, decree or order of any court, so long as
such lien is being contested in good faith and is either adequately bonded or
execution thereon has been stayed pending appeal or review, and any appropriate
legal
47
<PAGE> 50
proceedings which may have been duly initiated for the review of such
attachment, judgment, decree or order shall not have been finally terminated or
the period within which such proceedings may be initiated shall not have
expired; (b) taxes, assessments or governmental charges not yet delinquent or
which are being contested in good faith; (c) security for payment of workers'
compensation or other insurance; (d) security for the performance of tenders,
bids, leases and contracts (other than contracts for the payment of money); (e)
deposits to secure public or statutory obligations or in lieu of surety or
appeal bonds or to secure permitted contracts for the purchase or sale of any
currency entered into in the ordinary course of business; (f) operation of law
in favor of carriers, warehousemen, landlords, mechanics, materialmen, laborers,
employees or suppliers, incurred in the ordinary course of business for sums
which are not yet delinquent or are being contested in good faith by
negotiations or by appropriate proceedings which suspend the collection thereof;
(g) any interest or title of a lessor under any lease; (h) security for surety
or appeal bonds; and (i) easements, rights-of-way, zoning and similar covenants
and restrictions and other similar encumbrances or title defects which, in the
aggregate, are not substantial in amount and which do not in any case materially
interfere with the ordinary conduct of the business of the Company or any of its
Subsidiaries.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution on Capital Stock of the
Company or any Subsidiary of the Company or any payment made to the direct or
indirect holders (in their capacities as such) of Capital Stock of the Company
or any Subsidiary of the Company (other than (x) dividends or distributions
payable solely in Capital Stock (other than Disqualified Stock) or in options,
warrants or other rights to purchase Capital Stock (other than Disqualified
Stock), and (y) in the case of Subsidiaries of the Company, dividends or
distributions payable to the Company or to a Subsidiary of the Company), (ii)
the purchase, redemption or other acquisition or retirement for value of any
Capital Stock of the Company or any of its Subsidiaries, (iii) the making of any
principal payment on, or the purchase, defeasance, repurchase, redemption or
other acquisition or retirement for value, prior to any scheduled maturity,
scheduled repayment or scheduled sinking fund payment, of, any Indebtedness
which is subordinated in right of payment to the Senior Notes (other than
Indebtedness acquired in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in each case due within one year of the
date of acquisition) and (iv) the making of any Investment in any Person other
than pursuant to clauses (i) through (vii) of the "Limitation on Investments,
Loans and Advances" covenant described above.
"Sale-Leaseback Transaction" means any arrangement with any Person
providing for the leasing by the Company or any Subsidiary of the Company of any
real or tangible personal property, which property has been or is to be sold or
transferred by the Company or such Subsidiary to such Person in contemplation of
such leasing.
"Subsidiary" means, with respect to any Person, (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors shall at the time be owned,
directly or indirectly, by such Person, by a Subsidiary of such Person or by
such Person and a Subsidiary of such Person, or (ii) any other Person (other
than a corporation) of which at least a majority of voting interest is at the
time, directly or indirectly, owned by such Person, by a Subsidiary of such
Person or by such Person and a Subsidiary of such Person.
"Wholly-Owned Subsidiary" means any Subsidiary all of the outstanding
Capital Stock of which (other than directors' qualifying shares) is owned,
directly or indirectly, by the Company.
DESCRIPTION OF REVOLVING CREDIT FACILITIES
Simultaneous with the consummation of the Offering, Magcorp and Sabel will
enter into amendments to the Loan and Security Agreements (the "Revolving Credit
Facilities") with Congress Financial Corporation ("Congress") pursuant to which
Congress will make revolving credit loans in its discretion to Magcorp and
Sabel, up to a maximum of $33.0 million and $7.0 million, respectively, at any
one time outstanding. The
48
<PAGE> 51
following description of the Revolving Credit Facilities does not purport to be
complete, and is subject to, and qualified in its entirety by reference to, all
of the provisions of the Revolving Credit Facilities, which have been filed as
exhibits to the Registration Statement of which this Prospectus is part.
GENERAL
Under the Revolving Credit Facilities, Congress will, in its discretion,
lend on a revolving basis to Magcorp and Sabel not more than the sum of (i) 85%
of the Net Amount of Eligible Accounts (as defined) plus (ii) 60% (30% in the
case of Supplies (as defined)) of the Value of Eligible Inventory (as defined)
of Magcorp and 50% of the Value of Eligible Inventory (as defined) of Sabel up
to the aforementioned limits of $33.0 million and $7.0 million, for each of
Magcorp and Sabel, respectively. Congress may extend up to $5.0 million and $1.5
million of letter of credit accommodations to Magcorp and Sabel, respectively,
within the limits set forth above.
INTEREST
Interest on the Company's loan balance is payable monthly at a rate 1% per
annum in excess of the Prime Rate publicly announced by Philadelphia National
Bank, changing monthly with each change in such prime rate. In the event of a
default by either Magcorp or Sabel under the Revolving Credit Facilities, the
interest rate on its borrowings would be 3% per annum in excess of such prime
rate.
SECURITY
As security for the indebtedness of Magcorp and Sabel to Congress, Magcorp
and Sabel have granted to Congress a first security interest in all of their
inventory (including raw materials, work in process, semi-finished and finished
goods and supplies) and accounts, contract rights, documents, instruments and
general intangibles.
TERM
The Revolving Credit Facilities will continue until August 4, 1999 and from
year to year thereafter, provided that either Magcorp or Sabel, as the case may
be, or Congress may terminate either of the Revolving Credit Facilities as of
August 4, 1999 or any subsequent anniversary date on 60 days advance written
notice.
FEES
The Revolving Credit Facilities will also provide for a monthly unused line
fee and an early termination fee if the agreements are terminated prior to
August 4, 1999.
CERTAIN COVENANTS
In addition to customary covenants, the Revolving Credit Facilities will
require that Magcorp and Sabel be subject to certain covenants including, but
not limited to, a restriction on the incurrence of additional indebtedness, a
restriction on the creation of additional liens, the compliance with certain
financial covenants and certain restrictions on dividends, loans and
investments.
EVENTS OF DEFAULT
The Revolving Credit Facilities will each contain certain events of
default, including, without limitation, the following: (i) the failure of the
applicable borrower or its subsidiaries to pay any of its obligations to the
lenders when due or within three days after the due date; (ii) certain failures
by the applicable borrower or its subsidiaries to pay principal or interest on
any indebtedness or contingent obligation, after any applicable grace period, or
breaches or default by the applicable borrower or its subsidiaries of any term
of any indebtedness or contingent obligation; (iii) any default by the
applicable borrower or its subsidiaries in the performance or observance of the
conditions and covenants of the applicable credit agreement or related
agreements, beyond any applicable cure period; (iv) the falsity in any material
respect of any representation or warranty made by the applicable borrower to the
lenders under the Revolving Credit Facilities; (v) certain judgments against the
applicable borrower or any of its subsidiaries; (vi) certain events of
bankruptcy or insolvency of the applicable borrower; and (vii) the occurrence of
certain change of control events.
49
<PAGE> 52
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") among the Company, the Guarantors and Donaldson,
Lufkin & Jenrette Securities Corporation (the "Underwriter"), the Underwriter
has agreed to purchase from the Company and the Company has agreed to sell to
the Underwriter, $150.0 million aggregate principal amount of Senior Notes.
The Underwriting Agreement provides that the obligations of the Underwriter
thereunder are subject to certain conditions precedent. The Underwriting
Agreement also provides that the Company and the Guarantors will indemnify,
jointly and severally, the Underwriter and its controlling persons against
certain liabilities and expenses, including liabilities under the Securities
Act, or to contribute to payments that the Underwriter may be required to make
in respect thereof. The nature of the Underwriter's obligation is such that it
is required to purchase all of the Senior Notes if any Senior Notes are
purchased by the Underwriter.
The Underwriter has advised the Company that it proposes initially to offer
the Senior Notes directly to the public at the public offering price set forth
on the cover of this Prospectus and to certain dealers at such price less a
concession not in excess of % per Senior Note. The Underwriter may allow,
and such dealers may reallow, a discount not in excess of % per Senior Note
to certain other dealers. After the initial public offering of the Senior Notes,
the offering price and other selling terms may be changed by the Underwriter.
The Senior Notes are a new issue of securities. There is no active public
trading market for the Senior Notes. The Underwriter has advised the Company
that it currently intends to make a market in the Senior Notes, but it is not
obligated to do so and may discontinue such market making at any time. There can
be no assurance as to the liquidity of any market that may develop for the
Senior Notes, the ability of holders to sell their Senior Notes or the price at
which holders would be able to sell their Senior Notes. The Company does not
intend to apply for listing of the Senior Notes on any securities exchange.
The Underwriter has provided investment banking services to a subsidiary of
Group in the past. The Underwriter is acting as a dealer manager for the Tender
Offer and Consent Solicitation. The Company has agreed to pay the expenses of
the Underwriter incurred in connection with the Tender Offer and the Offering.
LEGAL MATTERS
The validity of the Senior Notes being offered hereby and certain other
legal matters relating to the Offering are being passed upon for the Company by
Cadwalader, Wickersham & Taft, New York, New York. Certain legal matters will be
passed upon for the Underwriter by Cahill Gordon & Reindel (a partnership
including a professional corporation), New York, New York.
EXPERTS
The consolidated financial statements and schedule of the Company and
subsidiaries as of October 31, 1994 and 1995 and for each of the years in the
three year period ended October 31, 1995 included herein and elsewhere in the
Registration Statement have been included herein and in the Registration
Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
50
<PAGE> 53
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") under the Securities Act with respect to the Senior Notes offered
hereby. This Prospectus, which forms a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement, certain
parts of which have been omitted in accordance with the rules and regulations of
the Commission. For further information with respect to the Company, and the
Senior Notes offered hereby, reference is made to the Registration Statement.
Statements contained in this Prospectus as to the contents of certain documents
filed as exhibits to the Registration Statement are not necessarily complete,
and, in each instance, reference is made to the copy of the document so filed.
Each such statement is qualified in its entirety by such reference. In addition,
pursuant to the Indenture governing the Existing Notes, the Company files
periodic reports and other information required to be filed pursuant to the
Securities and Exchange Act of 1934, as amended. The Registration Statement and
such periodic reports and other information can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549; and at the Commission's regional offices
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material may
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Registration
Statement can also be reviewed through the Commission's Electronic Data
Gathering, Analysis, and Retrieval System which is publicly available through
the Commission's Web site (http://www.sec.gov).
The Company intends to furnish to each holder of the Senior Notes annual
reports containing audited financial statements and quarterly reports containing
unaudited information for the first three quarters of each fiscal year. The
Company will also furnish to each holder of the Senior Notes such other reports
as may be required by law. The Company has agreed to make periodic filings with
the Commission for so long as the Senior Notes remain outstanding, whether or
not it is required to do so by the rules and regulations of the Commission.
The principal executive offices of the Company are located at 238 North
2200 West, Salt Lake City, Utah 84116 and its telephone number is (801)
532-2043.
51
<PAGE> 54
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Independent Auditors' Report.................................................... F-2
Consolidated Balance Sheets as of October 31, 1994 and 1995 and unaudited as of
April 30, 1996................................................................ F-3
Consolidated Statements of Operations for the years ended October 31, 1993, 1994
and 1995 and unaudited for the six months ended April 30, 1995 and 1996....... F-4
Consolidated Statements of Stockholder's Equity (Deficit) for the years ended
October 31, 1993, 1994 and 1995 and unaudited for the six months ended April
30, 1996...................................................................... F-5
Consolidated Statements of Cash Flows for the years ended October 31, 1993, 1994
and 1995 and unaudited for the six months ended April 30, 1995 and 1996....... F-6
Notes to Consolidated Financial Statements...................................... F-7 to F-21
</TABLE>
F-1
<PAGE> 55
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Renco Metals, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Renco
Metals, Inc. and subsidiaries as of October 31, 1994 and 1995, and the related
consolidated statements of operations, stockholder's equity (deficit), and cash
flows for each of the years in the three-year period ended October 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Renco
Metals, Inc. and subsidiaries as of October 31, 1994 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended October 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in note 2(f) to the consolidated financial statements, the
Company changed its method of accounting for income taxes as of November 1, 1993
to adopt the provisions of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes.
KPMG PEAT MARWICK LLP
Salt Lake City, Utah
December 1, 1995
F-2
<PAGE> 56
RENCO METALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------
1994 1995 APRIL 30,
-----------
1996
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 7,881 30,091 32,007
Accounts receivable, less allowance for doubtful
accounts of $491 and $514 at October 31, 1994 and
1995, respectively, and $570 at April 30, 1996....... 22,757 27,854 27,710
Income tax refund receivable............................ 967 575 432
Inventories, net........................................ 21,851 21,631 24,293
Prepaid expenses........................................ 530 801 945
-------- -------- --------
Total current assets............................ 53,986 80,952 85,387
-------- -------- --------
Property, plant, and equipment, net....................... 30,862 32,014 33,680
Deferred income taxes..................................... 321 -- --
Other assets, net......................................... 3,869 3,585 3,234
-------- -------- --------
$ 89,038 116,551 122,301
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt.................. $ -- 15 15
Accounts payable........................................ 8,057 7,511 6,394
Accrued expenses........................................ 8,697 14,327 14,216
Deferred income taxes payable........................... 321 219 245
-------- -------- --------
Total current liabilities....................... 17,075 22,072 20,870
-------- -------- --------
Long-term debt, excluding current installments............ 78,839 77,997 77,505
Postretirement medical benefits........................... 6,408 6,477 6,545
Deferred income taxes payable............................. -- 1,646 1,844
Other liabilities......................................... 1,720 3,599 3,714
-------- -------- --------
Total liabilities............................... 104,042 111,791 110,478
-------- -------- --------
Stockholder's equity (deficit):
10% preferred stock, $1,000 par value. Authorized,
issued, and outstanding 8,500 shares................. 8,500 8,500 8,500
Common stock, no par value. Authorized, issued, and
outstanding 1,000 shares............................. 1 1 1
Additional paid-in capital.............................. 500 500 500
Retained earnings (deficit)............................. (24,005) (4,028) 3,035
Minimum pension liability adjustment.................... -- (213) (213)
-------- -------- --------
Net stockholder's equity (deficit).............. (15,004) 4,760 11,823
Commitments and contingencies (notes 8, 11 and 12)........
-------- -------- --------
$ 89,038 116,551 122,301
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 57
RENCO METALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED OCTOBER 31, APRIL 30,
---------------------------------- -------------------
1993 1994 1995 1995 1996
(unaudited)
<S> <C> <C> <C> <C> <C>
Sales................................. $131,139 132,950 185,806 87,681 99,110
Costs and expenses:
Cost of sales....................... 95,313 106,364 121,189 58,900 56,238
Depreciation, depletion, and
amortization..................... 7,135 5,604 5,770 2,878 3,369
Selling, general, and administrative
expenses......................... 14,714 16,352 18,470 8,898 8,967
-------- -------- -------- ------- -------
Income from operations........... 13,977 4,630 40,377 17,005 30,536
Interest income....................... 56 186 881 210 830
Interest expense...................... (7,414) (10,208) (10,138) (5,056) (5,034)
-------- -------- -------- ------- -------
Income (loss) before income
taxes, extraordinary item, and
cumulative effect of change in
accounting principle........... 6,619 (5,392) 31,120 12,159 26,332
Income tax expense (benefit).......... 2,503 (1,932) 11,143 5,000 9,447
-------- -------- -------- ------- -------
Income (loss) before
extraordinary item and
cumulative effect of change in
accounting principle........... 4,116 (3,460) 19,977 7,159 16,885
Extraordinary item -- extinguishment
of debt (less applicable income
taxes of $1,595) (note 9)........... 2,930 -- -- -- --
Cumulative effect of change in
accounting for income taxes......... -- 30 -- -- --
-------- -------- -------- ------- -------
Net income (loss)........... $ 7,046 (3,430) 19,977 7,159 16,885
======== ======== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 58
RENCO METALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MINIMUM NET
ADDITIONAL PENSION STOCKHOLDER'S
PREFERRED COMMON PAID-IN ACCUMULATED LIABILITY EQUITY
STOCK STOCK CAPITAL DEFICIT ADJUSTMENT (DEFICIT)
<S> <C> <C> <C> <C> <C> <C>
Balances at October 31, 1992...... $ -- 1 500 (20,020) -- (19,519)
Issuance of preferred stock..... 8,500 -- -- -- -- 8,500
Dividend to Group............... -- -- -- (5,658) -- (5,658)
Distribution to Group........... -- -- -- (1,943) -- (1,943)
Minimum pension liability
adjustment................... -- -- -- -- (426) (426)
Net income...................... -- -- -- 7,046 -- 7,046
--
------ --- ------- ---- -------
Balances at October 31, 1993...... 8,500 1 500 (20,575) (426) (12,000)
Minimum pension liability
adjustment................... -- -- -- -- 426 426
Net loss........................ -- -- -- (3,430) -- (3,430)
--
------ --- ------- ---- -------
Balances at October 31, 1994...... 8,500 1 500 (24,005) -- (15,004)
Minimum pension liability
adjustment................... -- -- -- -- (213) (213)
Net income...................... -- -- -- 19,977 -- 19,977
--
------ --- ------- ---- -------
Balances at October 31, 1995...... 8,500 1 500 (4,028) (213) 4,760
Dividend to Group (unaudited)... -- -- -- (9,822) -- (9,822)
Net income (unaudited).......... -- -- -- 16,885 -- 16,885
--
------ --- ------- ---- -------
Balances at April 30, 1996
(unaudited)..................... $ 8,500 1 500 3,035 (213) 11,823
====== == === ======= ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 59
RENCO METALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED OCTOBER 31, APRIL 30,
---------------------------- -----------------
1993 1994 1995 1995 1996
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................. $ 7,046 $(3,430) $19,977 $ 7,159 $16,885
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation, depletion, and amortization........................ 7,135 5,604 5,770 2,878 3,369
Extraordinary gain on debt restructure, net of income taxes...... (2,930) -- -- -- --
Amortization of financing fees................................... 1,645 772 772 386 386
Cumulative effect of accounting change........................... -- (30) -- -- --
Loss (gain) on sale of equipment................................. 16 (1) 78 2 (13)
Deferred income taxes............................................ 1,018 (430) 1,865 649 224
Provision for bad debts.......................................... 176 93 188 108 56
Postretirement medical benefits.................................. 282 372 90 45 74
Deferred compensation plans...................................... -- 114 1,202 393 846
Decrease (increase) in operating assets:
Accounts receivable............................................ (1,443) (4,083) (5,285) (5,362) 88
Income tax refund receivable................................... (978) (518) 392 1,219 143
Inventories.................................................... (6,040) 1,284 220 (606) (2,662)
Prepaid expenses............................................... (8) 1,184 (271) 100 (144)
Other assets................................................... (24) 31 (20) (37) 15
Increase (decrease) in operating liabilities:
Accounts payable............................................... (506) 662 (546) 1,250 (1,117)
Accrued expenses............................................... 2,106 (1,326) 5,630 1,396 (111)
Other liabilities.............................................. (1,623) 135 (25) -- (737)
-------- ------- ------- ------- -------
Net cash provided by operating activities................... 5,872 433 30,037 9,580 17,302
-------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................... (2,595) (3,227) (7,185) (3,361) (5,042)
Proceeds from sale of equipment.................................... 137 9 185 9 20
-------- ------- ------- ------- -------
Net cash used in investing activities....................... (2,458) (3,218) (7,000) (3,352) (5,022)
-------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving credit agreements...... (20,374) 3,085 (1,317) (1,199) (484)
Repayment of long-term debt........................................ (30,071) (108) (10) (1) (8)
Payment of debt origination and financing fees..................... (5,671) -- -- -- (50)
Borrowings of long-term debt....................................... 75,000 -- 500 500 --
Dividends to Group................................................. (5,658) -- -- -- (9,822)
Distribution to Group.............................................. (1,943) -- -- -- --
Long-term borrowings from Group.................................... 485 -- -- -- --
Repayment of subordinated note payable............................. (7,967) -- -- -- --
-------- ------- ------- ------- -------
Net cash provided by (used in) financing activities......... 3,801 2,977 (827) (700) (10,364)
-------- ------- ------- ------- -------
Increase in cash and cash equivalents................................ 7,215 192 22,210 5,528 1,916
Cash and cash equivalents, beginning of year......................... 474 7,689 7,881 7,881 30,091
-------- ------- ------- ------- -------
Cash and cash equivalents, end of year............................... $ 7,689 $ 7,881 $30,091 $13,409 $32,007
======== ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest............................... $ 3,692 $ 8,986 $ 9,366 $ 4,657 $ 4,648
Cash paid (refunds received) during the year for income taxes........ 2,648 (984) 8,888 3,132 9,346
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Conversion of debt to Group to preferred stock....................... $ 8,500 $ -- $ -- $ -- $ --
Minimum pension liability adjustment to other assets................. 468 (401) 469 -- --
Minimum pension liability adjustment to other liabilities............ (894) 827 (682) -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 60
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1993, 1994, AND 1995
(DOLLARS IN THOUSANDS)
(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
Renco Metals, Inc. (Renco Metals) is a holding company incorporated in the
State of Delaware on July 19, 1993, and is a 100 percent owned subsidiary of The
Renco Group, Inc. (Group). On August 4, 1993, in connection with the sale of
senior notes (the Refinancing), Renco Metals acquired from Group the outstanding
common shares of Renmag, Inc., the holding company which owned Magnesium
Corporation of America (collectively Magcorp) and Sabel Industries, Inc.
(Sabel), which were both indirectly wholly owned by Group. The transaction has
been accounted for as a reorganization of entities under common control.
Accordingly, the accompanying consolidated financial statements have been
presented based on historical amounts in a manner similar to a pooling of
interests. The excess of the amount paid by Renco Metals over the net book value
of Sabel has been deemed to be a dividend to Group.
The proceeds of the Refinancing were used to retire substantially all the
previously outstanding long-term debt of Magcorp and Sabel. In addition, Group
agreed to exchange certain of its receivables from Magcorp for Renco Metals
preferred stock.
The accompanying consolidated financial statements include the accounts of
Renco Metals and both of its subsidiaries, Magcorp and Sabel, each of which is
wholly-owned (collectively the Company). Renco Metals is a holding company that
has no independent operations, and its only assets are cash and its investments
in Magcorp and Sabel. Magcorp owns and operates a magnesium production plant on
the Great Salt Lake at Rowley, Utah that sells pure magnesium and magnesium
alloys to domestic and international customers. Sabel is engaged principally in
the wholesaling and fabrication of steel in Alabama. Its customers consist of
industrial accounts and the general public.
Renco Metal's senior notes are unconditionally and fully guaranteed,
jointly and severally, by both of its subsidiaries, Magcorp and Sabel (the
Guarantors). Separate financial statements of the Guarantors are not presented
because, in management's opinion, such financial statements would not be
material to investors because Renco Metals has no independent operations and its
only assets are cash and its investment in Magcorp and Sabel. Summarized
financial information on the combined Guarantors is presented below:
SUMMARIZED COMBINED GUARANTOR FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED OCTOBER 31, APRIL 30,
-------------------------------- ------------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Combined Guarantor statement of operations
data:
Net sales............................... $131,139 $132,950 $185,806 $87,681 $99,110
Cost of sales........................... 95,313 106,364 121,189 58,900 56,328
Income (loss) before extraordinary items
and accounting change................ 4,073 (3,597) 19,787 7,053 16,817
Net income (loss)....................... 7,003 (3,567) 19,787 7,053 16,817
</TABLE>
F-7
<PAGE> 61
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION -- (CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1994 1995 APRIL 30,
------------
1996
(UNAUDITED)
<S> <C> <C> <C>
Combined Guarantor balance sheet data:
Current assets............................................ $48,387 $75,163 $ 79,529
Noncurrent assets......................................... 35,052 35,599 36,914
Current liabilities....................................... 14,274 19,434 18,232
Noncurrent liabilities.................................... 11,967 14,719 14,608
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all highly
liquid financial instruments purchased with a maturity of three months or less
to be cash equivalents. Cash equivalents consist of the following:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Money market funds......................................... $5,461 $5,132
Certificates of deposit.................................... 134 140
------ ------
$5,595 $5,272
====== ======
</TABLE>
(b) Inventories
Inventories are stated at the lower of cost or market, using either
weighted averaging last-in, first-out (LIFO) or first-in, first-out (FIFO).
(c) Property, Plant, and Equipment
Property, plant, and equipment are carried at cost. Maintenance and repairs
are charged to expense. Expenditures for major improvements are capitalized.
Depreciation is computed primarily on the straight-line method over the
estimated useful lives (ranging from 5 to 31 years) of the related assets.
(d) Other Assets
Other assets include financing costs associated with the long-term debt.
The costs are being amortized using the straight-line method over the period of
the related long-term debt. Other assets consist of the following:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Loan origination and financing fees........................ $4,738 $4,738
Unrecognized pension prior service cost.................... 68 536
Deposits and other......................................... 28 48
------ -----
4,834 5,322
Less accumulated amortization.............................. 965 1,737
------ -----
$3,869 $3,585
====== =====
</TABLE>
F-8
<PAGE> 62
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(e) Other Liabilities
Postretirement Health Care Benefits
Magcorp provides postretirement health care benefits to substantially all
of its salaried employees. The liability is accrued over the employee's
estimated period of employment based on actuarially determined amounts in
accordance with Statement of Financial Accounting Standard No. 106. Benefits are
funded as costs are actually incurred.
Environmental Compliance Costs
Industrial companies such as Magcorp and Sabel have in recent years become
subject to increasingly demanding environmental standards imposed by federal,
state, and local environmental laws and regulations. It is the policy of the
Company to endeavor to comply with applicable environmental laws and
regulations. The Company considers current information, environmental laws and
regulations, and adjusts its related accruals as considered necessary.
(f) Income Taxes
The Company and Group file a consolidated federal income tax return and
have a tax sharing agreement which requires that the operating companies provide
for federal and state income taxes as if they were filing separate income tax
returns except that generally, no carryforward of net operating losses is
permitted, unless such losses are generated by net tax timing differences. Under
the terms of the agreement, each subsidiary is required to remit to Group the
amount of federal income taxes provided.
Effective November 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (Statement 109). The
cumulative effect of this change in accounting for income taxes of $30 is
reported separately in the consolidated statement of operations for 1994.
Statement 109 requires the recognition of deferred tax liabilities and assets
for the temporary differences between the financial reporting bases and tax
bases of the Company's assets and liabilities at enacted rates expected to be in
effect when such amounts are realized or settled. Prior years' consolidated
financial statements have not been restated to apply the provisions of Statement
109.
Pursuant to the deferred method under APB Opinion 11, which was applied in
1993 and prior years, deferred income taxes are recognized for income and
expense items that are reported in different years for financial reporting
purposes and income tax purposes using the tax rate applicable in the year of
the calculation. Under the deferred method, deferred taxes are not adjusted for
subsequent changes in tax rates.
(g) Deferred Compensation
The Company has deferred compensation agreements with certain key employees
in the form of net worth appreciation participation agreements. The deferred
compensation is based on the performance of the Company over the period of the
employee's employment. The aforementioned agreements have been accounted for as
deferred compensation in the accompanying consolidated financial statements.
(h) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial
F-9
<PAGE> 63
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(i) Unaudited Interim Financial Statements
In the opinion of management, the interim consolidated financial statements
contain all adjustments, consisting of normal recurring accruals, necessary to
present fairly the consolidated financial position and results of operations for
the periods presented herein. Interim periods are not necessarily indicative of
results to be expected for the year.
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------- APRIL 30,
1994 1995 1996
(unaudited)
<S> <C> <C> <C>
Finished goods.......................... $16,162 $12,600 $14,800
Brine in ponds.......................... 1,349 2,677 2,126
Spare parts and supplies................ 5,182 5,897 6,759
Raw materials and work-in-process....... 760 798 908
------- ------- -------
23,453 21,972 24,593
Less LIFO reserve....................... 1,602 341 300
------- ------- -------
$21,851 $21,631 $24,293
======= ======= =======
</TABLE>
LIFO inventory was reduced in 1994 and 1995. This reduction resulted in
charging lower inventory costs prevailing in previous years to cost of sales,
thus reducing cost of sales by approximately $1,337 and $570, below the amount
that would have resulted from replacing the liquidated inventory at October 31,
1994 and 1995 prices, respectively.
(4) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are summarized as follows:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Land................................................... $ 317 $ 390
Buildings.............................................. 4,693 4,986
Equipment.............................................. 49,464 54,187
Leasehold improvements................................. 614 755
Construction-in-process................................ 1,038 2,400
------- -------
56,126 62,718
Less accumulated depreciation and amortization......... 25,264 30,704
------- -------
$30,862 $32,014
======= =======
</TABLE>
F-10
<PAGE> 64
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(5) LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
For Renco Metals:
12% senior notes (a)................................. $75,000 $75,000
For Magcorp:
Revolving credit facility (b)........................ 1,214 --
For Sabel:
Revolving credit facility (b)........................ 2,625 2,522
9.7% mortgage note................................... -- 490
------- -------
Total long-term debt......................... 78,839 78,012
Less current installments.............................. -- 15
------- -------
Long-term debt, excluding current
installments............................... $78,839 $77,997
======= =======
</TABLE>
The aggregate maturities of long-term debt for each of the twelve-month
periods subsequent to October 31, 1995 are as follows: 1996, $15; 1997, $18;
1998, $2,542; 1999, $22; and 2000, $75,415.
(a) Senior Notes
In August 1993, Renco Metals issued $75,000 aggregate principal amount of
12 percent Senior Notes (the Notes) due July 15, 2000. The Notes were registered
under the Securities Act of 1933, as amended, effective December 3, 1993. The
Notes are general unsecured obligations of Renco Metals, but are unconditionally
and fully guaranteed, jointly and severally, by the Guarantors. Secured
indebtedness of Renco Metals and the Guarantors, including borrowings under the
Revolving Credit Facilities described below, is senior in right of payments to
the Notes with respect to the assets securing such indebtedness. Interest on the
Notes is payable semiannually on January 15 and July 15 of each year, at the
rate of 12 percent per annum. The notes are redeemable, in whole or in part, at
the option of Renco Metals, on or after July 15, 1998, at the following
redemption prices (expressed as percentages of the principal amount), together
with accrued interest to the redemption date, if redeemed during the 12-month
period beginning on July 15 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
<S> <C>
1998.............................................. 104%
1999 and thereafter............................... 100%
</TABLE>
In addition, prior to July 15, 1998, upon a change in control of Renco
Metals, as defined in the indenture governing the Notes, the Notes are
redeemable, in whole but not in part, at the option of Renco Metals, at the
principal amount thereof plus accrued interest plus an applicable premium. Upon
the occurrence of a change in control, Renco Metals is obligated to make offers
to purchase all outstanding Notes at a purchase price in cash equal to 101
percent of the principal amount plus accrued interest.
The indenture governing the Notes contains certain covenants that, among
others, limit the type and amount of additional indebtedness that may be
incurred by Renco Metals and impose limitations on investments, loans, advances,
the payment of dividends and the making of certain other payments, the creation
of liens, certain transactions with affiliates, and certain mergers. At October
31, 1995, Renco Metals was in compliance with all applicable covenants.
F-11
<PAGE> 65
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(5) LONG-TERM DEBT -- (CONTINUED)
(b) Revolving Credit Facilities
In connection with the Refinancing, Magcorp and Sabel have each entered
into revolving credit facility agreements. The agreements provide for advances
by the lender based on specified percentages of eligible accounts receivable,
supplies inventories, and finished goods inventory to a maximum of $20,000 for
Magcorp and $3,000 for Sabel. Advances bear interest at the prime rate plus 1.75
percent, payable monthly, and are secured primarily by all receivables and
inventories of the borrower. In addition, the lender may extend up to $3,000 and
$1,500 of letter of credit accommodations to Magcorp and Sabel, respectively,
within the limits set forth above. Outstanding letters of credit under the
agreements at October 31, 1995 total $1,600 for Magcorp and $300 for Sabel.
Based on these criteria as of October 31, 1995, the unused amounts available to
Magcorp and Sabel were approximately $18,400 and $478, respectively. The
revolving credit facilities will continue until August 1998 and from year to
year thereafter, provided that either Magcorp or Sabel, as the case may be, or
the lender may terminate either of the facilities as of August 31, 1998, or any
subsequent anniversary date on 60 days advance written notice.
The revolving credit facilities contain various covenants and restrictions
including financial covenants that specify Magcorp and Sabel maintain specified
ratios or minimum financial amounts with regard to net worth and working
capital, as well as restrictions regarding additional indebtedness, liens,
loans, dividends, and transactions with affiliates. At October 31, 1995, Magcorp
and Sabel were in compliance with all applicable covenants.
(6) PREFERRED STOCK
The Company has authorized 8,500 shares of preferred stock, which were
issued August 4, 1993 in connection with the Refinancing in exchange for debt
previously owed to Group by Magcorp. Holders of preferred stock are entitled to
receive cumulative, preferential quarterly cash dividends at a rate of ten
percent per annum, if and when declared by the Board of Directors. The shares
have no voting rights on any matter, except as specifically required by law.
The preferred shares are redeemable by Renco Metals at its option, subject
to compliance with long-term debt covenants, at any time after January 1, 1994
at the par value thereof plus any accrued and unpaid dividends. Preferred shares
have preference in liquidation or dissolution of Renco Metals over common shares
to the extent of the par value of the preferred shares plus any accrued and
unpaid dividends thereon.
F-12
<PAGE> 66
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(7) INCOME TAXES
Components of income tax expense (benefit) follow, allocated to income from
continuing operations:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
<S> <C> <C> <C>
1993:
Federal.............................................. $ 1,560 $ 825 $ 2,385
State................................................ 77 41 118
------- ------ -------
$ 1,637 $ 866 $ 2,503
======= ====== =======
1994:
Federal.............................................. $(1,578) $ (392) $(1,970)
State................................................ 76 (38) 38
------- ------ -------
$(1,502) $ (430) $(1,932)
======= ====== =======
1995:
Federal.............................................. $ 8,988 $ 530 $ 9,518
State................................................ 290 1,335 1,625
------- ------ -------
$ 9,278 $1,865 $11,143
======= ====== =======
</TABLE>
The statutory federal income tax rate is reconciled to the effective income
tax rate as follows:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Computed "expected" tax expense (benefit).............. $2,250 $(1,893) $10,892
State and local tax, net of federal benefit............ 48 64 1,400
Depletion.............................................. -- (792) (1,505)
Change in deferred tax asset valuation allowance....... -- 543 350
Other.................................................. 205 146 6
------ ------- -------
Income tax provision (benefit)............... $2,503 $(1,932) $11,143
====== ======= =======
</TABLE>
For the year ended October 31, 1993 deferred income tax expense of $866
resulted from timing differences in the recognition of income and expense for
income tax and financial reporting purposes in accordance with APB Opinion 11
which was in effect for that year. The sources and tax effects of those timing
difference are presented below:
<TABLE>
<CAPTION>
1993
<S> <C>
Depreciation.......................................................... $281
Inventories -- uniform capitalization................................. (46)
Success fee to former term lender..................................... 622
Other, net............................................................ 9
----
Deferred income tax expense................................. $866
====
</TABLE>
F-13
<PAGE> 67
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(7) INCOME TAXES -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at October 31,
1994 and 1995, presented in accordance with Statement 109, follow:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Deferred tax assets:
Bad debt reserves.............................................. $ 186 $ 194
Inventories-uniform capitalization............................. 280 239
Vacation accruals.............................................. 86 80
Payable to Group............................................... 122 122
Deferred compensation.......................................... 51 511
Miscellaneous accruals......................................... 42 95
Net operating loss carryforwards............................... 4,209 2,685
Alternative minimum tax credit carryforward.................... 340 --
Postretirement medical benefit................................. 966 993
Environmental reserve.......................................... 459 459
------- -------
Total gross deferred tax assets........................ 6,741 5,378
Less valuation allowance............................... 543 893
------- -------
Net deferred tax assets................................ 6,198 4,485
------- -------
Deferred tax liabilities:
Inventory basis difference..................................... (962) (827)
Accumulated depreciation....................................... (5,236) (5,523)
------- -------
Total gross deferred tax liabilities................... (6,198) (6,350)
------- -------
Net deferred tax liability............................. $ -- $(1,865)
======= =======
Deferred income taxes -- current................................. $ (321) $ (219)
Deferred income taxes -- noncurrent.............................. 321 (1,646)
------- -------
Net deferred tax liability............................. $ -- $(1,865)
======= =======
</TABLE>
The valuation allowance for deferred tax assets as of November 1, 1993 was
$-0-. The net change in the total valuation allowance for the years ended
October 31, 1994 and 1995 was an increase of $543 and $350, respectively.
Management believes that existing taxable temporary differences, net of the
established valuation allowance, will more likely than not reverse within the
applicable carryforward periods to allow future realization of existing deferred
tax assets.
(8) RELATED PARTY TRANSACTIONS
Magcorp has $318 payable to Group at October 31, 1994 and 1995, that is
noninterest bearing. The payable is included in other liabilities in the
accompanying consolidated balance sheet and is subordinated to the liabilities
described in note 5.
Effective August 1993, Renco Metals has a management agreement with Group
to receive management services through October 31, 2000. In exchange for such
services, the Company is committed to pay $1,200 per year or ten percent of a
defined earnings amount, whichever is greater. Payment of the fees for
consulting services is subject to compliance with covenants with its lending
institutions. For the years ended October 31,
F-14
<PAGE> 68
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(8) RELATED PARTY TRANSACTIONS -- (CONTINUED)
1993, 1994, and 1995, Renco Metals expensed $300, $1,200, and $1,200,
respectively, for such management services provided by Group. Prior to the
Refinancing in 1993, Magcorp and Sabel expensed $888 and $60, respectively,
under similar management agreements.
During 1993, Renco Metals paid to Group a dividend in the amount of $5,658
and paid a distribution equal to the net book value of Sabel at the date of the
Refinancing.
To obtain the advantages of volume, Group purchases certain categories of
property and casualty insurance for a number of its subsidiaries, including the
Company, and the actual cost of such insurance, without markup, is reimbursed by
the covered subsidiaries. For the years ended October 31, 1993, 1994, and 1995,
the Company incurred costs of approximately $2,000, $2,000, and $1,700,
respectively, under the Group 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.
(9) TRANSACTIONS WITH THE PREVIOUS OWNER OF MAGCORP
At the time of its acquisition by Group, August 31, 1989, Magcorp entered
into a technical service agreement (retainer) with the previous owner. The
retainer was in effect through the date of the Refinancing, when a settlement
and release agreement was entered into whereby the seller agreed to cancel all
obligations owed by Magcorp under the retainer and a subordinated note payable
in exchange for a discounted cash settlement. The resultant gain on
extinguishment of debt is reflected as an extraordinary item in the accompanying
1993 consolidated statement of operations.
(10) EMPLOYEE BENEFIT PLANS
(a) PENSION AND PROFIT SHARING PLANS
Magcorp
Magcorp has a defined benefit plan for hourly employees, a defined
contribution plan for salaried employees, and thrift plans for all employees.
All of Magcorp's plans have fiscal year-ends of December 31.
Pension benefits for Magcorp's defined benefit plan are generally based on
a flat dollar amount times years of credited service, including years of
employment with the previous owner. Magcorp's funding policy is to contribute
amounts sufficient to satisfy regulatory funding standards, based upon
independent actuarial
F-15
<PAGE> 69
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(10) EMPLOYEE BENEFIT PLANS -- (CONTINUED)
valuations. Net pension cost for the defined benefit plan for the years ended
October 31, 1993, 1994, and 1995, includes the following components:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 168 $184 $ 143
Interest cost on projected benefit obligations.............. 201 235 232
Return on assets............................................ (347) (64) (381)
Net amortization and deferral............................... 236 (99) 182
----- ---- -----
Net pension cost.................................. $ 258 $256 $ 176
===== ==== =====
</TABLE>
The plan's funded status at each October 31, was as follows:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits...................................... $ 2,909 $2,449 $ 3,562
Nonvested benefits................................... 472 387 471
------- ------- -------
Accumulated benefit obligations.............. $ 3,381 $2,836 $ 4,033
======= ======= =======
Plan's assets at fair value, principally listed
securities........................................... $ 2,501 $2,720 $ 3,169
Actuarial present value of projected benefit
obligations.......................................... (3,381) (2,836) (4,033)
------- ------- -------
Projected benefit obligations in excess of
plan assets................................ (880) (116) (864)
Unrecognized prior service cost........................ 426 397 536
Unrecognized net loss (gain) from past experience and
effects of changes in assumptions.................... 468 (329) 213
------- ------- -------
Net prepaid (accrued) pension cost prior to
adjustment for minimum liability........... 14 (48) (115)
Adjustment for additional minimum liability............ (894) (68) (749)
------- ------- -------
Net accrued minimum liability..................... $ (880) $ (116) $ (864)
======= ======= =======
</TABLE>
Assumptions used above for Magcorp's defined benefit plan as of October 31,
1993, 1994, and 1995 include:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Discount rates for determining estimated obligations
and interest cost.................................... 7.00% 8.25% 7.25%
Expected aggregate average long-term change in
compensation......................................... n/a n/a n/a
Expected long-term return on assets.................... 7.75% 8.25% 8.25%
</TABLE>
Contributions for Magcorp's defined contribution plan are based upon age,
years of service, and gross compensation for each salaried employee, and totaled
approximately $501, $585, and $612, for the years ended October 31, 1993, 1994,
and 1995, respectively.
Magcorp has a salaried thrift plan and an hourly thrift plan that qualify
under the Internal Revenue Code Section 401(k). The plans are available to
substantially all employees. Magcorp may make discretionary matching
contributions of 50 percent of each hourly employee's contribution, and 75
percent of each salaried employee's contribution up to the first six percent of
each employee's compensation. Matching contributions for 1993 and 1995 were $323
and $310, respectively. There were no matching contributions during fiscal year
1994.
F-16
<PAGE> 70
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(10) EMPLOYEE BENEFIT PLANS -- (CONTINUED)
Sabel
Under an agreement with the United Steelworkers' Union, which covers
certain production employees, Sabel contributes to a pension plan based on a set
amount per hour worked for covered employees. The contributions to the plan were
$61, $59, and $78 for 1993, 1994, and 1995, respectively.
Sabel has a noncontributory profit sharing plan for management and
administrative employees. The amount of the annual contribution, if any, is at
the discretion of Sabel and is not to exceed 15 percent of the compensation of
the eligible employees. The contributions for 1994 and 1995 were $98 and $191,
respectively. Sabel did not make a profit sharing plan contribution for 1993.
(b) Postretirement Medical Benefit Plan
Magcorp sponsors a self-insured, fee-for-service health care plan that
provides postretirement medical benefits to salaried retirees who retire from
active employment status on or after age 55 with ten or more years of service.
Qualified retirees will receive lifetime benefits for themselves and their
spouses. Employees who retire on or after age 55 with less than ten years but at
least five years or more of service, will receive benefits paid by Magcorp only
after age 65.
The following table presents the plan's funded status reconciled with
amounts recognized in the Company's consolidated balance sheets at October 31,
1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................... $ 425 $ 425
Fully eligible active plan participants................ 711 900
Other active plan participants......................... 1,263 1,636
------ ------
2,399 2,961
Plan assets at fair value................................ -- --
------ ------
Accumulated postretirement benefit obligation in
excess of plan assets............................. 2,399 2,961
Unrecognized net gain.................................... 4,009 3,516
------ ------
Accrued postretirement benefit obligation........... $6,408 $6,477
====== ======
</TABLE>
The unrecognized net gain is being amortized over a period of approximately
fifteen years, which represents the average future working lifetime of the plan
participants. The amortization of the gain is offset against actual service cost
and interest cost over the period of amortization.
Net period postretirement benefit cost for 1993, 1994, and 1995 includes
the following components:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Service cost....................................... $ 189 $ 232 $ 137
Interest cost...................................... 246 264 196
Amortization of gain............................... (153) (124) (243)
----- ----- -----
Net periodic postretirement benefit cost...... $ 282 $ 372 $ 90
===== ===== =====
</TABLE>
For measurement purposes, an 7.8 percent annual rate of increase in the per
capita cost of covered benefits (i.e., health care cost trend rate) was assumed
for 1995; the rate was assumed to decrease gradually to
F-17
<PAGE> 71
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(10) EMPLOYEE BENEFIT PLANS -- (CONTINUED)
5.5 percent by the year 2017 and remain at that level thereafter. The health
care cost trend rate assumption has a significant effect on the amounts
reported. For example, increasing the assumed health care cost trend rates by
one percentage point in each year would increase the accumulated postretirement
benefit obligation as of October 31, 1995 by $271 and the aggregate of the
service and interest cost components of net periodic postretirement benefit cost
for the year ended October 31, 1995 by $33.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25 percent at October 31, 1995.
(11) LEASES
The Company has several noncancelable operating leases, primarily for
office and warehouse space, and machinery and equipment. These leases generally
contain renewal options. Future minimum lease payments under noncancelable
operating leases (with initial or remaining lease terms in excess of one year)
as of October 31, 1995 are listed below:
<TABLE>
<S> <C>
Year ending October 31:
1996.............................................. $2,124
1997.............................................. 1,644
1998.............................................. 1,106
1999.............................................. 915
2000.............................................. 433
Thereafter........................................ 322
------
Total minimum lease payments................... $6,544
======
</TABLE>
Rent expense aggregated, $3,083, $3,126, and $2,867 for 1993, 1994, and
1995, respectively. Included in rental expense was contingent rental expense of
approximately $148, $106, and $122 for 1993, 1994, and 1995, respectively.
Additionally, included in rental expense are leases of certain office and
warehouse space from entities in which the president of Sabel holds an indirect
material interest. Rent expense for such leases aggregated approximately $300,
$342, and $339 for 1993, 1994, and 1995, respectively.
(12) COMMITMENTS AND CONTINGENCIES
(a) Litigation
The Company and its subsidiaries are involved in litigation arising in the
normal course of business. It is not possible to state the ultimate liability,
if any, in these matters. In the opinion of management, based upon the advice of
outside counsel, such litigation will not have any material effect on the
Company.
(b) Other Agreements
Magcorp assumed from its previous owner certain agreements with unrelated
corporations (Nominal Lessor) under which tax benefits were transferred to the
unrelated corporations as allowed under a provision of the Economic Recovery Tax
Act of 1981. Included in the terms of the agreements are various covenants,
including a promise not to dispose of the property covered by the agreements,
and also indemnification of the Nominal Lessor against any losses which might
result from a breach of Magcorp's warranties and covenants. The seller also
holds a $1,000 irrevocable letter of credit as collateral for performance by
Magcorp on the Nominal Lessor agreements.
F-18
<PAGE> 72
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(12) COMMITMENTS AND CONTINGENCIES -- (CONTINUED
Magcorp and Sabel both have net worth appreciation participation agreements
with certain executives wherein these individuals are entitled to receive a
specified percentage of cumulative net income, less any common stock dividends,
of their respective companies commencing at specified dates in the agreements,
through the date of the individual's termination based on a specified vesting
schedule. Payment will be made in 40 equal quarterly installments, without
interest, commencing three months after termination of employment. If while
employed by Magcorp or Sabel, the respective company pays any cash dividend on
its common stock, the respective company will make a cash payment to the
applicable executives equal to the total amount of the cash dividend multiplied
by their applicable fully-vested participation percentage. Amounts are accrued
as earned.
(c) Environmental Matters
The Company and its operations are subject to an increasing number of
federal, state, and local environmental laws and regulations governing, among
other things, air emissions, waste water discharge, and solid and hazardous
waste disposal. It is expected that Magcorp will be required to make substantial
reductions in chlorine and hydrogen chloride emissions to meet regulations
expected to be promulgated by the year 2000. Magcorp is exploring several
options at this time to reduce such emissions, including the development of new
electrolytic cell technology to reduce chlorine emissions and the use of
scrubbers for hydrogen chloride emissions. Depending on the final form of the
standard and the outcome of the cell technology development programs, Magcorp
plans to spend approximately $40,000 of its capital budget by the year 2000
directly or indirectly to meet environmental regulatory requirements, and for
estimates of other future requirements. Magcorp believes that these expenditures
required to comply with environmental standards are substantial and to that
degree will affect its earnings.
In August 1994, the Utah Solid and Hazardous Waste Control Board presented
a proposed Stipulation and Consent Order to Magcorp for resolution of a Notice
of Violation and Compliance Order (the "NOVCO") issued in August 1992 concerning
certain alleged violations of the Utah Solid and Hazardous Waste Act and the
Utah Administrative Code. Magcorp has contested the NOVCO and has requested a
hearing on the alleged violations. Among the issues to be resolved is whether
the wastes being sent to the Rowley facility's industrial wastewater pond are
subject to regulation by the State of Utah, and if so, whether a waste
management plan, groundwater management plan and closure plan for the pond must
be developed and implemented. In addition, an issue exists as to whether piles
of material (so-called "smut") generated in the electrolytic process, which
cover an extensive land area at the Rowley facility, can be classified as a
hazardous or solid waste, and if so, what measures might be required to
investigate and address these piles. If these wastes are ultimately deemed
subject to State regulation and corrective action is required, the costs of
compliance could be material.
F-19
<PAGE> 73
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(13) ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Salaries, bonuses, vacation, and other related accruals........... $1,309 $ 5,494
Utilities......................................................... 1,685 3,069
Interest.......................................................... 2,638 2,638
Taxes, other than income.......................................... 673 481
Other............................................................. 2,392 2,645
------ -------
$8,697 $14,327
====== =======
</TABLE>
(14) SEGMENT INFORMATION
The Company classifies its operations into two business segments: magnesium
production and steel fabrication and wholesaling. There are no intersegment
sales. Summarized financial information by business segment is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Net sales:
Magnesium........................................ $ 97,099 $ 90,745 $136,348
Steel............................................ 34,040 42,205 49,458
-------- -------- --------
$131,139 $132,950 $185,806
======== ======== ========
Income from operations:
Magnesium........................................ $ 13,002 $ 2,723 $ 37,993
Steel............................................ 975 1,979 2,467
Corporate........................................ -- (72) (83)
-------- -------- --------
$ 13,977 $ 4,630 $ 40,377
======== ======== ========
Identifiable assets:
Magnesium........................................ $ 71,275 $ 67,904 $ 94,849
Steel............................................ 13,552 15,535 15,913
Corporate........................................ 5,688 5,599 5,789
-------- -------- --------
$ 90,515 $ 89,038 $116,551
======== ======== ========
Capital expenditures:
Magnesium........................................ $ 2,300 $ 2,574 $ 6,051
Steel............................................ 295 653 1,134
-------- -------- --------
$ 2,595 $ 3,227 $ 7,185
======== ======== ========
Depreciation, depletion, and amortization:
Magnesium........................................ $ 6,814 $ 5,263 $ 5,397
Steel............................................ 321 341 373
-------- -------- --------
$ 7,135 $ 5,604 $ 5,770
======== ======== ========
</TABLE>
F-20
<PAGE> 74
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(15) SIGNIFICANT CUSTOMERS AND EXPORT SALES
During fiscal 1994 and 1995, sales to any single customer did not exceed
ten percent of total consolidated revenues. During 1993, sales to Alumax, a
division of AMAX, approximated ten percent of total revenues. Sales to Alumax in
1994 and 1995, were less than ten percent of total consolidated revenues, but
Alumax continues to be a significant account for Magcorp. The following table
summarizes export sales to various geographic areas:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1993 1994 1995
<S> <C> <C> <C>
Net export sales:
Europe................................................ $4,909 $5,804 $ 8,357
Japan................................................. 3,300 2,826 5,988
Canada................................................ 463 545 1,050
Other................................................. 235 104 798
------ ------ -------
$8,907 $9,279 $16,193
====== ====== =======
</TABLE>
(16) SUBSEQUENT EVENT (PER SHARE FIGURES NOT IN THOUSANDS)
On December 1, 1995, the Board of Directors declared dividends totaling
$6,122, consisting of a $241.67 per share cumulative cash dividend on each share
of preferred stock, and a $4,067.33 per share cash dividend on each share of
common stock, which is payable to Group December 8, 1995 on all outstanding
shares.
F-21
<PAGE> 75
------------------------------------------------------
------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE GUARANTORS OR BY THE
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SENIOR NOTES OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 11
Capitalization........................ 12
Selected Consolidated Financial
Data................................ 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 14
Business.............................. 18
Management............................ 29
Stock Ownership and Certain
Relationships and Transactions...... 32
Description of Senior Notes........... 33
Description of Revolving Credit
Facilities.......................... 48
Underwriting.......................... 50
Legal Matters......................... 50
Experts............................... 50
Available Information................. 51
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
UNTIL , 1996 (FORTY DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SENIOR NOTES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
$150,000,000
RENCO METALS, INC.
% SENIOR NOTES DUE 2003
-----------------------
PROSPECTUS
-----------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the Senior Notes, other than underwriting
discounts and commissions:
<TABLE>
<S> <C>
SEC Registration Fee............................................... $51,724
NASD Fee........................................................... 15,500
Blue Sky Fees and Expenses......................................... *
Printing and Engraving Fees........................................ *
Legal Fees and Expenses............................................ *
Accounting Fees and Expenses....................................... *
Trustee Fees and Expenses.......................................... *
Rating Agency Fees................................................. *
Miscellaneous...................................................... *
=======
Total.................................................... *
=======
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Underwriting Agreement filed as an exhibit to this Registration
Statement, the Underwriter is obligated under certain circumstances to indemnify
certain controlling persons of the Company against certain liabilities,
including liabilities under the Securities Act of 1933.
The Company's By-laws and Certificate of Incorporation provide for
indemnification of directors and officers of the Company to the full extent
permitted by Delaware law and the power to purchase and maintain insurance on
behalf of directors and officers against any liability asserted against them and
incurred by them in such capacities. The Certificate of Incorporation further
provides that no director of the Company shall be personally liable to the
Company or to its stockholders for monetary damages for any breach of such
director's fiduciary duty as a director of the Company, provided that such
limitation on a director's liability shall not eliminate or limit the liability
of a director (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit.
Section 145 of the Delaware General Corporation Law provides, in substance,
that Delaware corporations shall have the power, under specified circumstances,
to indemnify their directors, officers, employees and agents in connection with
actions, suits or proceedings brought against them by a third party or in the
right of the corporation, by reason of the fact that they are or were such
directors, officers, employees or agents, against expenses incurred in any such
action, suit or proceeding.
The Indenture provides that no director, officer, employee, stockholder or
beneficiary of the Company is liable for any obligations of the Company under
the Indenture.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On August 4, 1993, the Company issued and sold $75,000,000 aggregate
principal amount of 12% Senior Notes due 2000. The placement agent was Citicorp
Securities, Inc. The aggregate offering price was $75,000,000 and the placement
agent's fee was $4,500,000. The 12% Senior Notes were sold to various qualified
institutional buyers in a transaction satisfying the requirements of Rule 144A
of the Securities Act of 1933, as amended.
II-1
<PAGE> 77
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBITS
<S> <C> <C>
1.1 -- Form of Underwriting Agreement(1)
3.1 -- Certificate of Incorporation of Renco Metals, Inc.(2)
3.2 -- Certificate of Incorporation of Magnesium Corporation of America(2)
3.3 -- Certificate of Incorporation of Sabel Industries, Inc.(2)
3.4 -- By-laws of Renco Metals, Inc.(2)
3.5 -- By-laws of Magnesium Corporation of America(2)
3.6 -- By-laws of Sabel Industries, Inc.(2)
4.1 -- Form of Indenture for the % Senior Notes due 2003(1)
4.2 -- Specimen Note (included in Exhibit 4.1)(1)
4.3 -- Indenture dated as of August 1, 1993 among Renco Metals, Inc., Issuer, Magnesium
Corporation of America and Sabel Industries, Inc., Guarantors, and Shawmut Bank
Connecticut National Association (k/k/a Fleet National Bank), Trustee, relating to
12% Senior Notes Due 2000 (with form of Note annexed)(2)
5.1 -- Opinion of Cadwalader, Wickersham & Taft(1)
</TABLE>
<TABLE>
<S> <C> <C>
10.1 -- Employment Agreements between Magnesium Corporation of America and:
a) Michael H. Legge, dated September 24, 1992 effective January 1, 1993(2)
b) Ron L. Thayer effective June 1, 1994(3)
c) Howard I. Kaplan dated June 10, 1994(3)
d) Lee R. Brown, dated September 1, 1989(2)
e) Todd R. Ogaard, dated December 1, 1994(3)
10.2 -- Net Worth Appreciation Agreements between Magnesium Corporation of America and:
a) Michael H. Legge, dated September 24, 1992(2)
b) Ron L. Thayer, dated September 24, 1992(2)
c) Thomas J. Frazer, dated July 30, 1993(2)
d) Lee R. Brown, dated July 30, 1993(2)
e) Howard I. Kaplan, dated June 10, 1994(3)
f) Todd R. Ogaard, dated May 19, 1995(4)
10.3 -- Amendments to Net Worth Appreciation Agreements between Magnesium Corporation of
America and:
a) Michael H. Legge(1)
b) Ron L. Thayer(1)
c) Thomas J. Frazer(1)
d) Lee R. Brown(1)
e) Howard I. Kaplan(1)
f) Todd R. Ogaard(1)
10.4 -- Management Consultant Agreement dated August 4, 1993 between The Renco Group, Inc.
and Renco Metals, Inc.(2)
10.5 -- Amendment No. 1 to Management Consultant Agreement dated May 17, 1996 between The
Renco Group, Inc. and Renco Metals, Inc.(5)
10.6 -- Amended and Restated Loan and Security Agreement between Congress Financial
Corporation and Magnesium Corporation of America dated August 4, 1993(2)
10.7 -- Amendment No. 1 dated January 31, 1996 to Amended and Restated Loan and Security
Agreement dated as of August 4, 1993, between Congress Financial Corporation and
Magnesium Corporation of America, extending the term thereof to August 4, 1998(6)
</TABLE>
II-2
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBITS
<S> <C> <C>
10.8 -- Amendment No. 2 to Amended and Restated Loan and Security Agreement dated as of
August 4, 1993, between Congress Financial Corporation and Magnesium Corporation of
America
10.9 -- Loan and Security Agreement between Congress Financial Corporation and Sabel
Industries, Inc. dated August 4, 1993(2)
10.10 -- Amendment No. 1 dated January 31, 1996 to Loan and Security Agreement dated as of
August 4, 1993, between Congress Financial Corporation and Sabel Industries, Inc.,
extending the term thereof to August 4, 1998(6)
10.11 -- Amendment No. 2 to Loan and Security Agreement dated as of August 4, 1993, between
Congress Financial Corporation and Sabel Industries, Inc.
10.12 -- Agreement dated July 31, 1969 between the State of Utah, acting by and through the
State Land Board, and National Lead Company, as amended by Addendum dated March 7,
1970, Second Addendum dated March 7, 1972 and Assignment to Amax Magnesium
Corporation dated October 31, 1980 (ML 18779)(2)
10.13 -- Special Use Lease Agreement 711 dated July 14, 1987 between the State of Utah,
Division of State Lands and Forestry and Amax Magnesium Corporation(2)
10.14 -- Amended Rights of Way No. U-54897, dated June 21, 1993 issued by the United States
Department of the Interior Bureau of Land Management, Salt Lake District Office to
Magnesium Corporation of America(2)
10.15 -- Lease dated May 13, 1991 between Sabel Industries, Inc. as tenant and Janis Sabel,
the Estate of Mark Sabel, Marcelle Sabel Moers a/k/a Marcel Sabel Moers, Dorothy
Anne Bell and Lee Altheimer as successors to the Estate of Dorothy Altheimer with
respect to premises known as Theodore Highway 90, County of Mobile, Alabama(2)
10.16 -- Lease dated July 1, 1977 between Dewey Emfinger and his wife, Bea Emfinger, to
Sabel Steel Service Incorporated with respect to premises known at 599 Ross Clark
Circle, Dothan, Alabama and the sublease thereof to Sabel Industries, Inc. then
known as Ren Alabama Inc. dated July 30, 1987(2)
10.17 -- Lease dated July 30, 1987 between Mark Sabel, Janis Sabel, Marcel Moers and Dorothy
Altheimer, owner of an undivided 50% interest and Ted Cohen, owner of an undivided
50% interest, all as tenants in common, to Sabel Industries, Inc. (name
subsequently changed to JiMark Investment Company, Inc.) with respect to premises
known as 2811 Day Street, Montgomery, Alabama and the sublease thereof to Sabel
Industries, Inc., then known as Ren Alabama Inc., dated July 30, 1987. Note: Sabel
Industries, Inc. subsequently purchased the undivided 50% interest of Mr. Cohen(2)
10.18 -- Master Lease Indenture dated July 30, 1987 between Sabel Land Company, a tenancy in
common, comprised of Mark Sabel, Janis Sabel, Marcel Moers and Dorothy Altheimer
and Sabel Industries, Inc. then known as Ten Alabama Inc. covering premises known
as Railroad Street, West Lafayette Street, East Lafayette Street, 749 North Court
Street and 589 North Court Street, all in Montgomery, Alabama (other premises
covered by this original lease are no longer used by Sabel Industries, Inc.)(2)
10.19 -- Brine Supply Agreement dated August 3, 1993 between AZKO Salt Inc. and Magnesium
Corporation of America(2)
10.20 -- Net Worth Appreciation Agreements between Sabel Industries, Inc. and:
a) Keith Sabel, dated January 24, 1994(3)
b) Phillip Brown, dated January 24, 1994(3)
10.21 -- Waiver of "Additional Fees" through October 31, 1995 dated January 11, 1996 between
The Renco Group, Inc. and Renco Metals, Inc.(4)
12.1 -- Computation of Ratios of Earnings to Fixed Charges(5)
</TABLE>
II-3
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBITS
<S> <C> <C>
21.1 -- Subsidiaries of Renco Metals, Inc.(2)
23.1 -- Consent of Cadwalader, Wickersham & Taft (included in Exhibit
5.1)(1)
23.2 -- Consent of Independent Auditors
25.1 -- Statement of Eligibility of Trustee on Form T-1(1)
</TABLE>
- ---------------
(1) To be filed by amendment.
(2) Previously filed and incorporated herein by reference from the Registrants'
Registration Statement on Form S-4 (file no. 33-68230) as declared effective
by the Securities and Exchange Commission on December 3, 1993.
(3) Previously filed and incorporated herein by reference from Renco Metals,
Inc.'s Form 10-K for the fiscal year ended October 31, 1994 (File No.
33-68230).
(4) Previously filed and incorporated herein by reference from Renco Metals,
Inc.'s Form 10-K for the fiscal year ended October 31, 1995 (File No.
33-68230).
(5) Previously filed.
(6) Previously filed and incorporated herein by reference from Renco Metals,
Inc.'s Form 10-Q for the quarterly period ended January 31, 1996 (File No.
33-68230).
(b) Financial Statement Schedules.
Schedule II -- Valuation of Qualifying Accounts
ITEM 17. UNDERTAKINGS
A. Undertaking in Respect of Indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
B. Undertaking with Respect to Rule 430A.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
undersigned Registrants has duly caused this Pre-Effective Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York on the
13th day of June 1996.
RENCO METALS, INC.
By: /s/ IRA LEON RENNERT
------------------------------------
IRA LEON RENNERT
Chairman of the Board
MAGNESIUM CORPORATION OF AMERICA
By: /s/ IRA LEON RENNERT
------------------------------------
IRA LEON RENNERT
Chairman of the Board
SABEL INDUSTRIES, INC.
By: /s/ IRA LEON RENNERT
------------------------------------
IRA LEON RENNERT
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Registration Statement has been signed by
the following persons in the capacities indicated on the 13th day of June 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<C> <S>
RENCO METALS, INC.
/s/ IRA LEON RENNERT Chairman, Director and Chief Executive
- ----------------------------------------------- Officer (Principal Executive Officer)
IRA LEON RENNERT
/s/ ROGER L. FAY Vice President (Principal Financial and
- ----------------------------------------------- Accounting Officer)
ROGER L. FAY
MAGNESIUM CORPORATION OF AMERICA
/s/ MICHAEL H. LEGGE President and Chief Executive Officer
- ----------------------------------------------- (Principal Executive Officer)
MICHAEL H. LEGGE
/s/ TODD R. OGAARD Chief Financial Officer (Principal Financial
- ----------------------------------------------- and Accounting Officer)
TODD R. OGAARD
/s/ IRA LEON RENNERT Chairman of the Board of Directors
- -----------------------------------------------
IRA LEON RENNERT
</TABLE>
II-5
<PAGE> 81
<TABLE>
<CAPTION>
SIGNATURE TITLE
<C> <S>
SABEL INDUSTRIES, INC.
/s/ KEITH SABEL Director, President and Chief Executive
- ----------------------------------------------- Officer (Principal Executive Officer)
KEITH SABEL
/s/ PHILLIP BROWN Vice President--Finance (Principal Financial
- ----------------------------------------------- and Accounting Officer)
PHILLIP BROWN
/s/ IRA LEON RENNERT Director
- -----------------------------------------------
IRA LEON RENNERT
/s/ JUSTIN W. D'ATRI Director
- -----------------------------------------------
JUSTIN W. D'ATRI
</TABLE>
II-6
<PAGE> 82
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Renco Metals, Inc. and Subsidiaries:
Under date of December 1, 1995, we reported on the consolidated balance
sheets of Renco Metals, Inc. and subsidiaries as of October 31, 1994 and 1995,
and the related consolidated statements of operations, stockholder's equity
(deficit), and cash flows for each of the years in the three-year period ended
October 31, 1995, which are included in the registration statement. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule (Schedule II -- Valuation and Qualifying Accounts) included in the
registration statement. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Salt Lake City, Utah
December 1, 1995
S-1
<PAGE> 83
SCHEDULE II
RENCO METALS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED OCTOBER 31, 1993, 1994, AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS-
BALANCE AT CHARGED WRITE-OFFS BALANCE
BEGINNING TO COSTS AND AGAINST AT END
OF YEAR EXPENSES ALLOWANCE OF YEAR
<S> <C> <C> <C> <C>
Year ended October 31, 1993:
Applied against asset accounts:
Allowance for doubtful accounts........... $ 945 $176 $(165) $ 956
Allowance for inventory obsolescence...... 1,660 -- (896) 764
Year ended October 31, 1994:
Applied against asset accounts:
Allowance for doubtful accounts........... $ 956 $ 93 $(558) $ 491
Allowance for inventory obsolescence...... 764 -- (86) 678
Year ended October 31, 1995:
Applied against asset accounts:
Allowance for doubtful accounts........... $ 491 $188 $(165) $ 514
Allowance for inventory obsolescence...... 678 -- (114) 564
</TABLE>
S-2
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NUMBERED
NUMBER IDENTIFICATION OF EXHIBITS PAGES
- ------ ----------------------------------------------------------------------------- ----------
<C> <S> <C>
23.2 -- Consent of Independent Auditors
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Renco Metals, Inc.
We consent to the use of our report dated December 1, 1995 on the
financial statements of Renco Metals, Inc. included in the Registration
Statement on Form S-1 and to the reference to our firm under the heading
"Experts" in the Prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Salt Lake City, Utah
June 12, 1996
