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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended OCTOBER 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
COMMISSION FILE NUMBERS 33-68230, 333-4513
RENCO METALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3724916
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
238 NORTH 2200 WEST
SALT LAKE CITY, UTAH 84116
(Address of principal executive offices) (Zip Code)
(801) 532-2043
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the proceeding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
[X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to ITEM
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Number of shares outstanding of each of the registrant's classes of common
stock, as of January 27, 1996: COMMON STOCK, NO PAR VALUE: 1,000 SHARES.
Aggregate market value of the voting stock held by non-affiliates of the
registrant: $0; all shares of the voting stock of the registrant are owned
by its parent, The Renco Group, Inc.
Documents incorporated by reference: NONE
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FORM 10-K
RENCO METALS, INC.
FISCAL YEAR ENDED OCTOBER 31, 1996
TABLE OF CONTENTS
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PAGE NO.
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TABLE OF CONTENTS 2
PART I
ITEM 1 - Business 3
ITEM 2 - Properties 9
ITEM 3 - Legal Proceedings 10
ITEM 4 - Submission of Matters to a Vote of Security Holders 11
PART II
ITEM 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 12
ITEM 6 - Selected Financial Data 12
ITEM 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
ITEM 8 - Financial Statements and Supplementary Data 15
ITEM 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 37
PART III
ITEM 10 - Directors and Executive Officers of the Registrant 37
ITEM 11 - Executive Compensation 38
ITEM 12 - Security Ownership of Certain Beneficial
Owners and Management 40
ITEM 13 - Certain Relationships and Related Transactions 40
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 41
SIGNATURES 45
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PART I
ITEM 1. BUSINESS.
Renco Metals, Inc. ("Renco Metals" or the "Company") is a holding company
with two wholly-owned operating companies, Magnesium Corporation of America
("Magcorp") and Sabel Industries, Inc. ("Sabel"). Through Magcorp, the
Company is engaged in the production and sale of magnesium and magnesium
alloys for customers throughout the world. Sabel is a diversified company in
the southeast United States primarily involved in the steel service center,
scrap metal and rebar businesses. Magcorp and Sabel collectively are
sometimes herein referred to as the "Subsidiaries" or "Guarantors."
All of the Company's issued and outstanding capital stock is owned by The
Renco Group, Inc. ("Group") which is 95.9 percent owned by Mr. Ira Leon
Rennert, the Chairman and Chief Executive Officer of the Company and Group,
and by trusts established by him for himself and members of his family (but
of which he is not a trustee). As a result of such ownership, Mr. Rennert
controls the Company and its Subsidiaries. Group acquired Magcorp in 1989
and Sabel in 1987.
The Company was incorporated in Delaware in 1993 and its executive
offices are located at c/o Magcorp, 238 North 2200 West, Salt Lake City, Utah
84116, (801) 532-2043.
The Company classifies its operations into two business segments:
Magcorp's operations comprise the magnesium production segment, and Sabel's
operations comprise the steel fabrication and wholesaling segment. Reference
is hereby made to Note 13 to the Financial Statements, "Segment Information,"
included in ITEM 8, Part II of this Form 10-K.
The Company's fiscal year ends October 31. Neither Subsidiary's business
is a) seasonal; b) requires unusual working capital; c) involves significant
sales order backlog; d) requires extensive research and development
expenditures or; e) involves federal government contracting. Neither
Subsidiary has foreign operations. Substantially all export sales are
attributable to Magcorp. Reference is hereby made to Note 14 to the Financial
Statements, "Significant Customers and Export Sales," included in ITEM 8,
Part II of this Form 10-K.
MAGCORP
OVERVIEW
In 1996, Magcorp was the third largest producer of pure magnesium and
magnesium alloys outside the former Commonwealth of Independent States
("CIS") and People's Republic of China ("PRC"). The term "western world"
hereinafter refers to areas of the world excluding the CIS and PRC. The
production facilities are located in Rowley, Utah and have a nominal annual
production capacity of almost 41,000 metric tons, which is approximately 16
percent of the western world production capacity, according to International
Magnesium Association ("IMA") information and Magcorp management estimates.
Magcorp participates in the world magnesium markets which represented demand
of 296,000 metric tons in 1996 according to IMA information (based on nine
month figures annualized). The quality of magnesium produced and the variety
of products produced enables Magcorp to participate in the full range of key
magnesium end-use markets.
COMPETITIVE CONDITIONS
Magcorp management estimates, from IMA and public information, that four
major producers, Magcorp, Dow Chemical, Norsk Hydro, and Northwest Alloys,
together account for 87 percent of available western world production
capacity. 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 percent 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 die casting,
electro-chemical and metal reduction markets. In mid-1996, as a result of
weakness in can production by their parent company, Northwest Alloys reduced
their workforce by about one-third and also reduced their production. A
Norsk Hydro plant in Canada (one of their two production facilities) has
limited its participation in the U.S. market mainly to the die casting
segment in part due to high antidumping and countervailing duties on their
pure magnesium imports to the U.S. See "ITEM 3. Legal Proceedings--Pending
Trade Issues." Magnesium imports also affect competition, and are more fully
discussed under "--Recent Industry Developments" below.
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The seven primary magnesium producers outside the CIS and PRC shipped
about 228,000 metric tons of magnesium in calendar year 1996 according to the
IMA, based on annualized nine month statistics. In addition, 68,000 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 generated revenues of approximately $1.1-1.2 billion.
According to the IMA (based on nine month figures annualized), North
American markets account for the majority of western world consumption of
magnesium, 56 percent in calendar 1996, whereas Western Europe and Asia
account for 23 percent and 14 percent, respectively. All other western world
areas combined account for the remaining seven percent. North American
consumption by end-use market is generally indicative of western world
consumption as a whole. The following table compiled from IMA data presents
magnesium consumption in North America, by customer category, with the end
uses of each category for calendar years 1992 through 1996:
NORTH AMERICAN CONSUMPTION OF PRIMARY MAGNESIUM
<TABLE>
CUSTOMER CATEGORY 1992 1993 1994 1995 1996(*) END USES
- ----------------- ---- ---- ---- ---- ------ --------
(in thousands of metric tons)
<S> <C> <C> <C> <C> <C> <C>
Aluminum Alloying... 66.2 64.7 73.0 77.6 66.1 Beverage cans, truck panels, home
siding,aircraft and marine alloys.
Desulfurization..... 24.6 29.3 26.2 22.2 26.6 Steel production from iron.
Die Casting......... 21.2 22.7 30.6 42.7 47.9 Automotive, electronics and hand tools.
Ductile Iron........ 6.2 7.4 6.9 6.5 6.4 Pipe production, automotive components
and heavy-earth moving equipment.
Metal Reduction..... 5.5 3.9 2.4 2.6 3.6 Production of titanium, zirconium,
beryllium and uranium. Uses include
aerospace, chemical processing and
nuclear products.
Electro-Chemical.... 6.2 6.3 6.4 6.8 6.7 Cast anodes for cathodic protection
of underground steel pipelines.
Others.............. 9.6 8.8 7.2 7.0 8.8 Sheet and plate and extrusion
----- ----- ----- ----- ----- stock, gravity castings for
aerospace applications, powder for
flares, chemicals and exotic
pharmaceuticals and perfumes.
Total........... 139.5 143.1 152.7 165.4 166.1 (*) Based on 9 month IMA figures,
----- ----- ----- ----- ----- annualized
----- ----- ----- ----- -----
</TABLE>
Key competitive issues in all end-use markets are pricing, long-term
supply agreements with customers, assurance of a reliable supply, flexibility
of deliveries, and shape, size, and quality of product.
As is evident in the North American consumption table above, consumption
of magnesium has grown 19 percent from 1992 to 1996, or at a cumulative
annual growth rate of 4.5 percent. 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. These metallurgical properties have helped die casting to
be the fastest growing segment of the domestic magnesium industry, where
automobile manufacturers are turning to more magnesium parts to help lighten
their vehicles. In 1996, combined consumption in all end use markets
excluding aluminum alloying increased 13.9 percent over 1995 levels. This
increase was offset by a decline in the aluminum alloying market, where
greater competition from plastics affected consumption of aluminum cans.
MAGNESIUM SUPPLY. In early 1994, one of the largest domestic producers
significantly reduced its capacity, and that capacity has not been replaced.
The magnesium manufacturing process is highly technical and proprietary to
each producer. 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 sometime in 1997. Cost
overruns of at least $80 million have been publicized. 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. At least one-third of
the output from the Israeli plant is committed to Volkswagen, reportedly for
new automotive applications, which will reduce the total amount of material
the Israeli producer will have to offer for sale in worldwide markets.
Management estimates that the current capacity of plants outside the CIS and
PRC is about 255,000 metric tons, excluding the Israeli facility. In the
third quarter of calendar 1996, management estimates that North American
producers, including Magcorp, ran at about 93 percent of capacity.
In January 1997, a consortium of companies announced a timetable for a
pilot magnesium production plant, feasibility study, and construction of a
full-scale 90,000 metric ton annual capacity facility intended to be in
service in 2004 in Australia. In addition to the Israeli and Australian
facilities, two other potential manufacturers have announced their intent to
build a facility in Canada and Iceland, respectively. Pilot and feasibility
studies have not been completed for any of these facilities.
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RECENT INDUSTRY DEVELOPMENTS
Magnesium prices are sensitive to supply and demand conditions in all of the
end user markets served by the magnesium industry. 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, increasing from
$1.43 per pound in 1991 to $1.93 per pound in mid-1995, and remained at that
price through calendar 1996. In mid-December 1996, Magcorp announced a list
price decrease for primary pure magnesium to $1.80 per pound to be effective
January 1, 1997, reflecting current competition and slightly higher producer
inventories. No changes were made to list prices for die casting alloys. This
list price decrease was matched by Dow Chemical effective on the same date and
by Norsk Hydro on January 15, 1997. Norsk Hydro also lowered their European
list price by an additional 13 percent below their North American price, citing
the strong penetration of lower priced CIS and PRC shipments into Europe.
Magnesium generally sells for prices somewhat lower than the list price for pure
magnesium, with price dependent on market segment, chemistry, contract terms,
including negotiated discounts, and quality.
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 which produce lower
quality magnesium. Estimated annual capacity in the PRC is estimated to have
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. Furthermore, recent price trends for PRC magnesium may encourage the
shutdown of some of the smaller, higher cost facilities. In 1996, limited PRC
pure magnesium was shipped into the U.S. due to the antidumping duties in place.
See "ITEM 3. Legal Proceedings--Pending Trade Issues."
Production in the CIS has been relatively unchanged in 1996. However, more
CIS magnesium reached the U.S. in 1996 than in 1995, due to the lack of duties
against certain Russian traders. Magcorp is continuing its appeals in the
effort to secure dumping duties against all Russian imports, but there is no
guarantee of success. See "ITEM 3. Legal Proceedings--Pending Trade Issues."
In Norway, Norsk Hydro announced that they will bring an additional 8,000 metric
tons of capacity on line by the end of 1997, and that they have now started
their scrap recycling plant for die casting alloys. Industry publications have
also speculated about possible incremental small expansions at Dow Chemical and
in Brazil.
As of September 30, 1996, the latest available date of IMA statistics,
magnesium producer inventories outside the PRC and CIS were 38,400 metric tons,
which represents approximately six and one-half 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 lower demand, coupled with increased availability of magnesium produced
in the CIS and PRC.
Magnesium pricing and volume are dependent on the overall market supply and
demand, and there is no certainty that current trends will continue. Management
expects continued strong growth in die casting, and with a recovery in aluminum
can usage and higher use of rolled aluminum sheet in automobiles, it is likely
that overall demand will continue to grow, and that the western magnesium
producers will continue to operate at relatively high capacity utilization
rates.
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 a continual
aggressive cost management program and is now pursuing a $46 million program of
production technology changes in the form of new electrolytic cell technology
and a new 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 new 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.
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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 by the
end of fiscal year 1999.
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 casting. 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, Japan, and Australia are
handled through agency arrangements.
Approximately 90 percent of Magcorp's annual volume is sold pursuant to
contracts with select customers. During 1995 and 1994, sales to any single
customer did not exceed ten percent of total consolidated revenues. During
1996, sales to Rossborough Manufacturing Co. LP approximated 12 percent of total
revenues. Reference is hereby made to Note 14 to the Financial Statements,
"Significant Customers and Export Sales," included in ITEM 8, Part II of this
Form 10-K.
RAW MATERIALS
Magcorp's source of raw material for magnesium production is brine from the
Great Salt Lake. The Great Salt Lake brine is concentrated through solar
evaporation and selective precipitation of undesirable salts until a high grade
magnesium chloride brine is produced for plant feedstock. The magnesium
chloride brine is further purified, spray dried to powder using gas turbines,
and melted to produce feed for electrolytic cells, which use direct electrical
current to separate the magnesium metal and chlorine. The magnesium metal from
the electrolytic cells is then refined and cast into the wide variety of pure
magnesium and magnesium alloy products produced by Magcorp.
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 rates. Additionally, Magcorp is
able to produce on average 25 percent of its electrical power needs through the
gas turbines located at the Rowley facility. The utility and Magcorp are
currently in negotiations for a new contract; the utility had requested a
reopening of the existing contract and Magcorp had challenged the utility's
billing practices under the existing contract.
A variety of chloride based by-products which are produced during the
production of magnesium metal are sold into commercial markets or are
neutralized and disposed of in compliance with environmental regulations.
Aggregate sales of all by-products accounted for two percent or less of
consolidated revenues in 1994, 1995 and 1996.
Other raw materials critical to plant operations include graphite anodes,
special refractory brick, and sulfuric acid. Magcorp maintains alternative
sources of these raw materials to ensure a secure supply at competitive prices.
EMPLOYEES
As of October 31, 1996, Magcorp had 560 employees, 147 of whom were salaried
and 413 of whom were hourly workers. Approximately 74 percent 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.
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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 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
expenditures 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 1992, a Notice of Violation and Compliance Order ("NOVCO") was
issued to Magcorp concerning certain alleged violations of the Utah Solid and
Hazardous Waste Act and the Utah Administrative Code. Magcorp contested the
NOVCO and requested a hearing on the alleged violations. In August 1994, the
Utah Solid and Hazardous Waste Control Board ("Control Board") presented a
proposed stipulation and consent order to Magcorp for resolution of the NOVCO.
Magcorp objected to much of the 1994 stipulation and consent order. In December
1996, the Control Board submitted a proposed stipulation and consent order that
was acceptable to Magcorp and full settlement of the original alleged violations
is essentially complete. The Control Board has also, at this time, vacated
their position that the wastes being sent to the Rowley facility's industrial
wastewater pond are subject to regulation by the State of Utah. 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.
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 for 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 from 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.
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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 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 facilitates 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
1996, SSC accounted for 68 percent 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 percent 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 percent of the division's
total sales.
The sales and marketing team at SSC consists 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 1996, the scrap metal division accounted for 18 percent 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 percent for all scrap sold to customers.
REBAR FABRICATION DIVISION. Sabel's rebar fabrication division ("RFD"), also
located in Montgomery, purchases stock 60 foot 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 1996, RFD contributed 11 percent 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 3 percent of Sabel's fiscal year
1996 revenues.
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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. Nevertheless,
Sabel believes that no other company in its trading area offers the same range
of services.
EMPLOYEES
As of October 31, 1996, Sabel had 249 employees, 74 of whom were salaried and
175 of whom were hourly workers. Of the hourly employees, 32 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.
ITEM 2. PROPERTIES.
MAGCORP
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. In late
1996, the State of Utah approved Magcorp's request to increase the operating
permit to allow annual production of up to 43,545 metric tons.
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.
SABEL
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.
-9-
<PAGE>
ITEM 3. 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 percent, 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.
In March 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. In
May 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:
PURE
Russian Federation.......... 0-100%
Ukraine..................... 80-104%
PRC......................... 108%
No antidumping duties were assessed against magnesium alloys. These rates
are subject to revision in future administrative reviews, which can be requested
annually. The first such review could have been requested in May 1996, but none
was. The next review request can be made in May 1997.
In June 1995, one of the traders of Ukrainian magnesium appealed to the U.S.
Court of International Trade ("CIT") 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 percent antidumping duty determination
could be lifted against Ukrainian imports of pure magnesium. In August 1996, the
CIT rejected the appeal by the Ukrainian trader and affirmed the ITC's
determination. The Ukrainian trader has appealed the CIT's decision to the U.S.
Court of Appeals for the Federal Circuit.
In June 1995, Magcorp appealed to the CIT for review of the DOC's
determination that certain producers and traders of Russian Federation magnesium
had not sold at less than fair value. On December 23, 1996, the CIT affirmed the
DOC's determination, with a required recalculation of the selling, general, and
administrative expenses. Magcorp intends to appeal the CIT's decision to the
U.S. Court of Appeals for the Federal Circuit. 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 on
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:
Countervailing duties on pure and alloy magnesium imports....... 7.6%
Antidumping duties on pure magnesium imports.................... 21.0%
Administrative reviews were initiated by the DOC regarding both the
antidumping order and the countervailing duty ("CVD") orders. With respect to
both the first and second antidumping review periods, which covered the period
from February 20, 1992 through July 31, 1994, the DOC made final determinations
that there had been no sales of pure magnesium by Norsk Hydro Canada Inc.
("NHCI" or "the Canadian producer") to the United States and, thus, no
antidumping duty was collectable. With respect to the third review period from
August 1, 1994 through July 31, 1995, the DOC made a final determination that
NHCI sales to the United States were made at prices that were not below fair
value and, therefore, no antidumping duty was assessed on these imports and the
antidumping duty deposit rate for imports from NHCI in the subsequent period was
set at zero percent. The fourth antidumping administrative review, covering the
August 1, 1995 through July 31, 1996 period, has been initiated by the DOC,
which is scheduled to release its final determination in this review by
September 2, 1997.
-10-
<PAGE>
The DOC's determination of no sales at less than fair value in the third
antidumping administrative review could constitute the first year of the three-
year period of findings of no dumping which is a prerequisite for the Canadian
producer to demonstrate that it qualifies for revocation. In connection with a
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 DOC is conducting administrative reviews of the CVD orders on imports of
pure and alloy magnesium from Canada. The CVD deposit rate after the final
determination and appeal proceedings was 7.6 percent. With respect to the first
CVD administrative review, which covers the period from December 6, 1991 through
December 31, 1992, the DOC has preliminarily determined that the applicable CVD
duty is 9.9 percent. The final determination in the first reviews is scheduled
for release in January 1997. In the second CVD administrative review, which
covers calendar year 1993, the DOC's preliminary determination is scheduled for
release in early 1997. In the third CVD administrative review, which covers
calendar 1994, the DOC has preliminarily determined that the applicable CVD duty
is 4.0 percent. The final determination in the third review is scheduled for
March 1997. The DOC has initiated the fourth CVD administrative review, which
covers calendar 1995, and has scheduled the release of the final determination
for that review for September 2, 1997. Until a final determination is made in
one of the CVD administrative reviews, the CVD deposit rate applied to subject
imports continues to be 7.6 percent.
OTHER LEGAL PROCEEDINGS
With the exception of the trade cases discussed above, neither the Company
nor its Subsidiaries is a party to any material legal proceeding other than
ordinary routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of fiscal 1996 to a vote
of security holders.
-11-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the Company's issued and outstanding common equity, 1,000 shares of
common stock, no par value, are owned by a single stockholder, Group. There is
no established public trading market for these shares.
There were no dividends declared on the Company's common stock in fiscal
1995. In fiscal 1996, the Company paid to Group dividends totaling $88.95
million, including $75.03 million paid in conjunction with the issuance of 11.5%
Senior Notes described more fully in Note 5 to the Company's consolidated
financial statements, appearing elsewhere herein. The payment of and amounts of
dividends are restricted by the Company's long-term debt agreements, which
generally allow dividends of up to 50 percent of consolidated net income. 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 long-term debt agreements. See also Note 5 to the
Financial Statements, "Long-term debt," included in ITEM 8, Part II of this Form
10-K.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial and operating data relating
to the consolidated results of the Company as of and for each of the five fiscal
years in the period ended October 31, 1996. Such selected information is
qualified by and should be read in conjunction with the detailed information and
consolidated financial statements and the notes thereto appearing elsewhere
herein.
<TABLE>
Year ended October 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $196,974 $185,806 $132,950 $131,139 $117,262
Cost of sales 116,808 121,189 106,364 95,313 95,501
Depreciation, depletion, and amortization 6,509 5,770 5,604 7,135 10,698
Selling, general, and administrative expenses 22,704 18,470 16,352 14,714 14,499
Operating income (loss) 50,953 40,377 4,630 13,977 (3,436)
Interest income 1,353 881 186 56 11
Interest expense 13,045 10,138 10,208 7,414 7,614
Income tax expense (benefit) 13,534 11,143 (1,932) 2,503 (331)
Income (loss) from continuing operations 25,727 19,977 (3,460) 4,116 (10,708)
Extraordinary item (7,284) - - 2,930 -
Cumulative effect of accounting change - - 30 - -
Net income (loss) 18,443 19,977 (3,430) 7,046 (10,708)
</TABLE>
<TABLE>
October 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (in thousands)
Working capital $ 47,677 $ 58,880 $ 36,911 $ 35,186 $ 16,818
Property, plant, and equipment, net 36,613 32,014 30,862 32,845 35,341
Total assets 118,658 116,551 89,038 90,515 78,700
Total debt 154,150 78,012 78,839 75,862 62,274
Stockholder's equity (deficit) (74,034) 4,760 (15,004) (12,000) (19,519)
</TABLE>
-12-
<PAGE>
ITEM 7. 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 herein.
RESULTS OF OPERATIONS
<TABLE>
Year ended October 31,
-------------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Sales by business segment:
Magcorp $152,941 $136,348 $ 90,745
Sabel 44,033 49,458 42,205
-------- -------- --------
Total sales 196,974 185,806 132,950
Cost of sales 116,808 121,189 106,364
Depreciation, depletion, and amortization 6,509 5,770 5,604
Selling, general, and administrative expenses 22,704 18,470 16,352
-------- -------- --------
Total operating income 50,953 40,377 4,630
Interest income 1,353 881 186
Interest expense (13,045) (10,138) (10,208)
-------- -------- --------
Earnings (loss) before income taxes 39,261 31,120 (5,392)
Income tax expense (benefit) 13,534 11,143 (1,932)
-------- -------- --------
Net income (loss) before extraordinary items and accounting change 25,727 19,977 (3,460)
Extraordinary item - extinguishment of debt, net of taxes (7,284) - -
Cumulative effect of accounting change-income taxes - - 30
-------- -------- --------
Net income (loss) $ 18,443 $ 19,977 $ (3,430)
-------- -------- --------
-------- -------- --------
</TABLE>
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
SALES for fiscal year 1996 increased 6.0 percent over fiscal year 1995. The
increase was attributable to a 12.2 percent increase in Magcorp's revenues,
which was offset by a 11.0 percent decrease in Sabel's revenues. Magcorp's
average selling price for magnesium increased 15.3 percent while magnesium
shipments decreased 3.6 percent. Selling prices were favorably impacted by an
increased percentage of contract sales versus spot sales and by higher 1996 U.S.
list prices, upon which most contract pricing is based. Volumes were down due
to reduced spot sales due to competition from primarily Russian and Chinese
producers. According to IMA statistics, estimated worldwide market shipments
through the 1996 third calendar quarter were down 2.6 percent over the
comparable period in 1995. Effective January 1, 1997, Magcorp's list price was
reduced by 6.7 percent which will reduce future sales revenues. Magnesium
pricing and volume are dependent on the overall market supply and demand, and
there is no assurance that current 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 fiscal year 1996 decreased 3.6 percent from fiscal year
1995. Magcorp's cost of sales did not change significantly. Cost of sales at
Sabel decreased 14.5 percent, which percentage is higher than the sales decrease
discussed above due to lower cost of goods purchased for resale in the current
period.
-13-
<PAGE>
DEPRECIATION, DEPLETION, AND AMORTIZATION for fiscal year 1996 increased 12.8
percent from fiscal year 1995 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 1996 increased
22.9 percent, primarily due to one time charges totaling $3.85 million related
to contractual compensation payments made to certain executives of Magcorp in
connection with the dividend paid to Group in conjunction with the issuance of
11.5% Senior Notes described more fully in Note 5 to the Company's consolidated
financial statements, appearing elsewhere herein. ($1.4 million of the $5.25
million paid was previously accrued as a result of profitable operations.)
Excluding the $3.85 million charge, selling, general, and administrative
expenses for the year did not change significantly from the corresponding prior
year.
INTEREST INCOME for fiscal year 1996 increased $0.5 million from fiscal year
1995 due to cash and cash equivalent balances on hand that increased to a month-
end average of approximately $26 million in the current year from a month-end
average of approximately $17 million in the corresponding prior year.
INTEREST EXPENSE for 1996 increased $2.9 million primarily as a result of the
issuance of the 11.5% Senior Notes in July, 1996, which increased long-term debt
by $76.5 million.
INCOME TAXES are estimated at statutory rates, including estimates of
available credits, for both years presented.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
SALES for fiscal year 1995 increased 39.8 percent. Magcorp's sales increased
by 50.3 percent. 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 percent increase in sales volume
and a 17.4 percent increase in selling price. According to IMA statistics, total
worldwide market shipments in 1995 calendar year increased 5.8 percent over the
comparable period in 1994. Sales at Sabel increased 17.2 percent, primarily as a
result of a 16 percent 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 percent from fiscal year
1994. Magcorp's cost of sales increased by 11.9 percent. 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 percent, 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 percent 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 percent. 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. 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.
INCOME TAX EXPENSE (BENEFIT) was estimated at statutory rates. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise from working capital requirements,
capital expenditures, 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 $40.0 million in Revolving
Credit Facilities that provide for advances by the lender to a maximum of $33.0
million for Magcorp and $7.0 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 October 31, 1996, the
unused amounts available to Magcorp and Sabel were approximately $22.1 million
and $4.8 million, respectively.
-14-
<PAGE>
Cash provided by operating activities was $39.2 million for 1996, of which
$11.2 million was used in capital expenditures.
In July 1996, Renco Metals issued $150 million aggregate principal amount of
11 1/2% Senior Notes (the Notes) due July 1, 2003. Proceeds from the issuance of
the Notes together with available cash were used to: (i) retire $73.5 million of
the existing $75 million 12% Senior Notes due 2000 (Old Notes) at a rate of
112.75 percent of the principal amount outstanding plus accrued interest
pursuant to a tender offer and consent solicitation, (ii) redeem all of the
existing 10% preferred stock, held by Group, with a par value of $8.5 million,
(iii) pay a dividend to Group in the amount of $75.03 million, (iv) pay certain
contractual compensation payments related to the dividend totaling $5.25 million
to certain Magcorp executives, and (v) pay related fees and expenses. An
extraordinary charge of $7.28 million (net of income tax benefit of $4.56
million) was incurred as a result of the early extinguishment of Old Notes. As
a result of the items discussed above, together with additional dividends to
Group of $13.92 million and net repayments of debt, net cash used in financing
activities was $37.4 million for 1996, resulting in a net decrease in cash for
the year of $9.3 million.
As of October 31, 1996, the Company has budgeted approximately $12 million,
$26 million and $24 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 percent of
consolidated net income. 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, and
availability under its Revolving Credit Facilities will be sufficient to finance
the Company's liquidity needs for the foreseeable future.
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 "ITEM 1.
Business -- Environmental Matters."
ITEM 8. FINANCIAL STATEMENTS
Financial statements follow immediately and are listed in ITEM 14 of Part IV
of this report.
-15-
<PAGE>
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, 1996 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, 1996. In
conjunction with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
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 3, 1996
-16-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS 1996 1995
-------- --------
Current assets:
Cash and cash equivalents $ 20,779 $ 30,091
Accounts receivable, less allowance for
doubtful accounts of $514 in 1996 and 1995 24,864 27,854
Income tax refund receivable 1,467 575
Inventories, net 26,447 21,631
Prepaid expenses 1,663 801
-------- --------
Total current assets 75,220 80,952
Property, plant, and equipment, net 36,613 32,014
Other assets, net 6,825 3,585
-------- --------
$118,658 116,551
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current installments of long-term debt $ 18 $ 15
Accounts payable 7,794 7,511
Accrued expenses 19,486 14,327
Deferred income taxes 245 219
-------- --------
Total current liabilities 27,543 22,072
Long-term debt, excluding current installments 154,132 77,997
Postretirement medical benefits 6,605 6,477
Deferred income taxes 2,180 1,646
Other liabilities 2,232 3,599
-------- --------
Total liabilities 192,692 111,791
-------- --------
Stockholder's equity (deficit):
10% preferred stock, $1,000 par value. Authorized,
issued, and outstanding 8,500 shares in 1995 - 8,500
Common stock, no par value. Authorized, issued,
and outstanding 1,000 shares 1 1
Additional paid-in capital 500 500
Accumulated deficit (74,535) (4,028)
Minimum pension liability adjustment - (213)
-------- --------
Net stockholder's equity (deficit) (74,034) 4,760
Commitments and contingencies - -
-------- --------
$118,658 $116,551
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
-17-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1996, 1995, AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Sales $196,974 $185,806 $132,950
Costs and expenses:
Cost of sales 116,808 121,189 106,364
Depreciation, depletion, and amortization 6,509 5,770 5,604
Selling, general, and administrative expenses 22,704 18,470 16,352
-------- -------- --------
Income from operations 50,953 40,377 4,630
Interest income 1,353 881 186
Interest expense (13,045) (10,138) (10,208)
-------- -------- --------
Income (loss) before income taxes,
extraordinary item, and cumulative effect
of change in accounting principle 39,261 31,120 (5,392)
Income tax expense (benefit) 13,534 11,143 (1,932)
-------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle 25,727 19,977 (3,460)
Extraordinary item - extinguishment of debt (less
applicable income tax benefit of $4,559) (note 5) (7,284) - -
Cumulative effect of change in accounting for
income taxes - - 30
-------- -------- --------
Net income (loss) $ 18,443 $ 19,977 $ (3,430)
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
-18-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
YEARS ENDED OCTOBER 31, 1996, 1995, AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
Net
Minimum stock-
Additional Accum- pension holder's
Preferred Common paid-in ulated liability equity
stock stock capital deficit adjustment (deficit)
--------- ------ ------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
Retirement of preferred stock (8,500) - - - - (8,500)
Dividends - - - (88,950) - (88,950)
Minimum pension liability adjustment - - - - 213 213
Net income - - - 18,443 - 18,443
------- --- --- ------- ---- -------
Balances at October 31, 1996 $ - 1 500 (74,535) - (74,034)
------- --- --- ------- ---- -------
------- --- --- ------- ---- -------
</TABLE>
See accompanying notes to consolidated financial statements.
-19-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1996, 1995, AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
1996 1995 1994
-------- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 18,443 19,977 (3,430)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion, and amortization 6,509 5,770 5,604
Extraordinary item- extinguishment of debt 11,843 - -
Amortization of financing fees 853 772 772
Cumulative effect of accounting change - - (30)
Loss (gain) on sale of equipment 76 78 (1)
Deferred income taxes 561 1,865 (430)
Provision for bad debts 152 188 93
Postretirement and deferred compensation plans 5,314 1,292 486
Decrease (increase) in operating assets:
Accounts receivable 2,838 (5,285) (4,083)
Income tax refund receivable (891) 392 (518)
Inventories (4,583) 220 1,284
Prepaid expenses (1,095) (271) 1,184
Other assets 28 (20) 31
Increase (decrease) in operating liabilities:
Accounts payable 282 (546) 662
Accrued expenses 5,159 5,630 (1,326)
Other liabilities (6,254) (25) 135
-------- ------ ------
Net cash provided by operating activities 39,235 30,037 433
-------- ------ ------
Cash flows from investing activities:
Capital expenditures (11,223) (7,185) (3,227)
Proceeds from sale of equipment 40 185 9
-------- ------ ------
Net cash used in investing activities (11,183) (7,000) (3,218)
-------- ------ ------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreements (347) (1,317) 3,085
Repayment of long-term debt (73,516) (10) (108)
Financing fees and tender offer premiums paid (16,051) - -
Borrowings of long-term debt 150,000 500 -
Dividends to Group (88,950) - -
Retirement of preferred stock (8,500) - -
-------- ------ ------
Net cash provided by (used in) financing activities (37,364) (827) 2,977
-------- ------ ------
Increase (decrease) in cash and cash equivalents (9,312) 22,210 192
Cash and cash equivalents, beginning of year 30,091 7,881 7,689
-------- ------ ------
Cash and cash equivalents, end of year $ 20,779 30,091 7,881
-------- ------ ------
-------- ------ ------
</TABLE>
-20-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED OCTOBER 31, 1996, 1995, AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
1996 1995 1994
------ ----- -----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $9,014 9,366 8,986
Cash paid (refunds received) during the year for income taxes 9,363 8,888 (984)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Minimum pension liability adjustment to other assets $ (87) 469 (401)
Minimum pension liability adjustment to other liabilities 300 (682) 827
</TABLE>
See accompanying notes to consolidated financial statements.
-21-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996, 1995, AND 1994
(DOLLARS IN THOUSANDS)
(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
Renco Metals, Inc. (Renco Metals) is a holding company incorporated in
Delaware in July, 1993, and is a 100 percent owned subsidiary of The Renco
Group, Inc. (Group).
The accompanying consolidated financial statements include the accounts of
Renco Metals and its subsidiaries, Magnesium Corporation of America
(Magcorp) and Sabel Industries, Inc. (Sabel) (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, and sells pure magnesium and magnesium alloys to domestic and
international customers. Sabel is a diversified company in the southeast
United States primarily involved in the steel service center, scrap metal
and rebar businesses.
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. Summarized financial information on the
combined Guarantors is presented below:
SUMMARIZED COMBINED GUARANTOR FINANCIAL INFORMATION
<TABLE>
Years ended October 31,
----------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Combined Guarantor statement of operations data:
Net sales $196,974 185,806 132,950
Cost of sales 116,808 121,189 106,364
Income (loss) before extraordinary items and
accounting change 25,603 19,787 (3,597)
Net income (loss) 18,319 19,787 (3,567)
October 31,
------------------
1996 1995
-------- -------
Combined Guarantor balance sheet data:
Current assets $ 71,982 75,163
Noncurrent assets 43,438 35,599
Current liabilities 20,907 19,434
Noncurrent liabilities 13,649 14,719
</TABLE>
-22-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(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:
1996 1995
------ -----
Money market funds $8,045 5,132
Certificates of deposit 150 140
------ -----
$8,195 5,272
------ -----
------ -----
(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. Depreciation is
computed primarily on the straight-line method over the estimated
useful lives of the related assets. Expenditures for normal repairs
and maintenance are charged to expense as incurred.
(d) OTHER ASSETS
Other assets include financing costs associated with 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:
1996 1995
------ -----
Loan origination and financing fees $6,680 4,738
Unrecognized pension prior service cost 449 536
Deposits and other 20 48
------ -----
7,149 5,322
Less accumulated amortization 324 1,737
------ -----
$6,825 3,585
------ -----
------ -----
(e) 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.
-23-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(f) 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. 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.
(g) 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 temporary 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.
(h) RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994
consolidated financial statements to conform to the 1996 presentation.
(i) USE OF ESTIMATES IN PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
-24-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(j) FINANCIAL INSTRUMENTS
The carrying value of accounts receivable, accounts payable, and
accrued expenses approximates their estimated value due to the
relative short maturity of these instruments. The carrying value of
long-term debt approximates its estimated fair value due to recent
issuance of the debt.
(3) INVENTORIES
Inventories consist of the following:
1996 1995
------- ------
Finished goods $17,293 12,600
Brine in ponds 1,942 2,677
Spare parts and supplies 6,937 5,897
Raw materials and work-in-process 855 798
------- ------
27,027 21,972
Less LIFO reserve 580 341
------- ------
$26,447 21,631
------- ------
------- ------
LIFO inventory was reduced in 1995. This reduction resulted in charging
lower inventory costs prevailing in previous years to cost of sales, thus
reducing cost of sales by approximately $570 below the amount that would
have resulted from replacing the liquidated inventory at October 31, 1995
prices.
(4) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are summarized as follows:
1996 1995
------- ------
Land $ 390 390
Buildings 5,036 4,986
Equipment 62,962 54,187
Leasehold improvements 862 755
Construction-in-process 4,215 2,400
------- ------
73,465 62,718
Less accumulated depreciation and amortization 36,852 30,704
------- ------
$36,613 32,014
------- ------
------- ------
-25-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(5) LONG-TERM DEBT
Long-term debt is summarized as follows:
1996 1995
-------- -------
For Renco Metals:
11.5% senior notes (a) $150,000 -
12% senior notes (b) 1,500 75,000
For Magcorp:
Revolving credit facility (c) - -
For Sabel:
Revolving credit facility (c) 2,175 2,522
9.7% mortgage note 475 490
-------- -------
Total long-term debt 154,150 78,012
Less current installments 18 15
-------- -------
Long-term debt, excluding current
installments $154,132 77,997
-------- -------
-------- -------
The aggregate maturities of long-term debt for each of the twelve-
month periods subsequent to October 31, 1996 are as follows: 1997,
$18; 1998, $20; 1999, $2,197; 2000, $1,915; 2001, $-0-, and
thereafter, $150,000.
(a) 11.5% SENIOR NOTES
In July 1996, Renco Metals issued $150,000 aggregate principal amount
of 11.5 percent senior notes (the Notes) due July 1, 2003. The Notes
were registered under the Securities Act of 1933, as amended,
effective June 27, 1996. Proceeds from the issuance of the Notes
together with available cash were used to: (i) retire $73,500 of the
existing $75,000 12 percent senior notes due 2000 (Old Notes) at a
rate of 112.75 percent of the principal amount outstanding plus
accrued interest pursuant to a tender offer and consent solicitation,
(ii) redeem all of the existing 10 percent preferred stock, held by
Group, with a par value of $8,500, (iii) pay a dividend to Group in
the amount of $75,028, (iv) pay certain contractual compensation
payments related to the dividend totaling $5,252 to certain executives
of Magcorp, and (v) pay related fees and expenses. An extraordinary
charge of $7,284 (net of income tax benefits of $4,559) was incurred
as a result of the early extinguishment of Old Notes.
The Notes are general unsecured obligations of Renco Metals, and are
unconditionally and fully guaranteed, jointly and severally, by the
Guarantors. Secured indebtedness of 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 1 and July 1 of each year, commencing January
1, 1997.
-26-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(a) 11.5% SENIOR NOTES (continued)
Except under certain circumstances defined in the indenture governing
the Notes, the Notes are not redeemable prior to July 1, 2000.
Thereafter, the Notes are redeemable in whole or part, at the option
of Renco Metals, at redemption prices ranging from 105.75 percent to
100 percent of the principal amount, depending on the date of
redemption. 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 making of certain other payments, the creation of liens, certain
transactions with affiliates, and certain mergers. At October 31,
1996, Renco Metals was in compliance with all applicable covenants.
(b) 12% SENIOR NOTES (OLD NOTES)
Concurrent with the issuance of the 11.5 percent Notes described
above, Renco Metals purchased $73,500 of the $75,000 aggregate
principal amount of Old Notes through a tender offer and consent
solicitation, and amendments to the indenture governing the Old Notes
were executed, leaving $1,500 of Old Notes remaining outstanding. The
amendments to the indenture involved deletion of a number of covenants
to facilitate issuance of the new 11.5 percent Notes. Renco Metals
was in compliance with all remaining applicable covenants on the Old
Notes at October 31, 1996. The Old Notes are due July 15, 2000, are
general unsecured obligations of Renco Metals, are unconditionally and
fully guaranteed, jointly and severally, by the Guarantors, and have
the same rank in right of payment with other senior indebtedness of
Renco Metals. Interest is payable semiannually on January 15 of each
year. On or after July 15, 1998, Renco Metals may, subject to certain
conditions, redeem any or all of the remaining $1,500 of Old Notes at
104 percent of the principal amount thereof, declining to 100 percent
for redemptions on or after July 15, 1999 (in each case, together with
accrued and unpaid interest to the redemption date).
(c) REVOLVING CREDIT FACILITIES
Magcorp and Sabel each have revolving credit facility agreements that
provide for advances by the lender based on specified percentages of
eligible accounts receivable, supplies inventories, and finished goods
inventories to a maximum of $33,000 for Magcorp and $7,000 for Sabel.
Advances bear interest at the prime rate plus one percent, payable
monthly, and are secured primarily by all receivables and inventories
of the borrower. In addition, the lender may extend up to $5,000 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, 1996 total $2,955 for
Magcorp and $-0- for Sabel. Based on these criteria as of October 31,
1996, the unused amounts available to Magcorp and Sabel were
approximately $22,100 and $4,800, respectively. The revolving credit
facilities will continue until August 1999 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,
1999, 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, 1996, Magcorp and Sabel
were in compliance with all applicable covenants.
-27-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(6) PREFERRED STOCK
The Company has authorized 8,500 shares of preferred stock, which were
redeemed in July 1996 in conjunction with the issuance of the 11.5
percent Notes discussed above.
(7) INCOME TAXES
Components of income tax expense (benefit) follow, allocated to income
from continuing operations:
Current Deferred Total
-------- -------- ------
1996:
Federal $ 11,036 204 11,240
State 1,937 357 2,294
-------- ------ ------
$ 12,973 561 13,534
-------- ------ ------
-------- ------ ------
1995:
Federal $ 8,988 530 9,518
State 290 1,335 1,625
-------- ------ ------
$ 9,278 1,865 11,143
-------- ------ ------
-------- ------ ------
1994:
Federal $ (1,578) (392) (1,970)
State 76 (38) 38
-------- ------ ------
$ (1,502) (430) (1,932)
-------- ------ ------
-------- ------ ------
In addition to the above income taxes, the Company recognized a
current income tax benefit of $4,559 in 1996 related to extraordinary
losses on the early retirement of debt (see note 5).
The statutory federal income tax rate is reconciled to the effective
income tax rate as follows:
1996 1995 1994
------- ------ ------
Computed "expected" tax expense (benefit) $13,742 10,892 (1,893)
State and local tax, net of
federal benefit 1,381 1,400 64
Depletion (1,553) (1,505) (792)
Change in deferred tax asset
valuation allowance - 350 543
Other (36) 6 146
------- ------ ------
Income tax provision (benefit) $13,534 11,143 (1,932)
------- ------ ------
------- ------ ------
-28-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 1996 and 1995, are as follows:
1996 1995
------- ------
Deferred tax assets:
Bad debt reserves $ 194 194
Inventories-uniform capitalization 272 239
Vacation accruals 59 80
Payable to Group 122 122
Deferred compensation 101 511
Miscellaneous accruals 71 95
Net operating loss carryforwards 2,366 2,685
Postretirement medical benefit 1,042 993
Environmental reserve 459 459
------- ------
Total gross deferred tax assets 4,686 5,378
Less valuation allowance 893 893
------- ------
Net deferred tax assets 3,793 4,485
------- ------
Deferred tax liabilities:
Inventory basis difference (827) (827)
Accumulated depreciation (5,391) (5,523)
------- ------
Total gross deferred tax liabilities (6,218) (6,350)
------- ------
Net deferred tax liability $(2,425) (1,865)
------- ------
------- ------
Deferred income taxes - current $ (245) (219)
Deferred income taxes - noncurrent (2,180) (1,646)
------- ------
Net deferred tax liability $(2,425) (1,865)
------- ------
------- ------
The net change in the total valuation allowance for 1996 and 1995 was
an increase of $-0- 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 net deferred tax assets.
-29-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(8) RELATED PARTY TRANSACTIONS
Magcorp has $318 payable to Group at October 31, 1996 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.
Group provides management services to the Company under a management
agreement. Such services include operational consulting, budget
review, income tax consulting and contracting for insurance under
master policies. Pursuant to the agreement, which expires on October
31, 2000, Group provides such services to the Company for an annual
management fee of $1,200. The Company paid management fees to the
Group of $1,200 for each of the years ended in the three-year period
ended October 31, 1996.
During 1996, the Company paid to Group dividends totaling $88,950,
including $75,028 paid in conjunction with the issuance of the 11.5
percent Notes discussed in note 5.
(9) 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
valuations. Net pension cost for the defined benefit plan for
1996, 1995, and 1994, includes the following components:
<TABLE>
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 192 143 184
Interest cost on projected benefit obligations 291 232 235
Return on assets (423) (381) (64)
Net amortization and deferral 197 182 (99)
----- ---- ---
Net pension cost $ 257 176 256
----- ---- ---
----- ---- ---
</TABLE>
-30-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(9) EMPLOYEE BENEFIT PLANS (continued)
The plan's funded status at each October 31, was as follows:
<TABLE>
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 3,854 3,562 2,449
Nonvested benefits 512 471 387
------- ------ ------
Accumulated benefit obligations $ 4,366 4,033 2,836
------- ------ ------
------- ------ ------
Plan's assets at fair value, principally listed securities $ 3,683 3,169 2,720
Actuarial present value of projected benefit obligations (4,366) (4,033) (2,836)
------- ------ ------
Projected benefit obligations in excess of plan assets (683) (864) (116)
Unrecognized prior service cost 498 536 397
Unrecognized net loss (gain) from past experience and
effects of changes in assumptions (48) 213 (329)
------- ------ ------
Net prepaid (accrued) pension cost prior to
adjustment for minimum liability (233) (115) (48)
Adjustment for additional minimum liability (449) (749) (68)
------- ------ ------
Net accrued minimum liability $ (682) (864) (116)
------- ------ ------
------- ------ ------
</TABLE>
Assumptions used above for Magcorp's defined benefit plan as of
October 31, 1996, 1995, and 1994 include:
<TABLE>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Discount rates for determining estimated obligations
and interest cost 7.25% 7.25% 8.25%
Expected aggregate average long-term change in
compensation n/a n/a n/a
Expected long-term return on assets 8.25% 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 $709, $612, and
$585, for 1996, 1995, and 1994, 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 were $432 and
$310, for 1996 and 1995, respectively. There were no matching
contributions during fiscal year 1994.
-31-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(9) 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 $40, $78, and $59
for 1996, 1995, and 1994, 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 were $99, $191 and $98, for 1996, 1995, and
1994 respectively.
(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, 1996 and 1995:
<TABLE>
1996 1995
------ -----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 475 425
Fully eligible active plan participants 1,006 900
Other active plan participants 1,827 1,636
------ -----
3,308 2,961
Plan assets at fair value - -
------ -----
Accumulated postretirement benefit obligation in
excess of plan assets 3,308 2,961
Unrecognized net gain 3,297 3,516
------ -----
Accrued postretirement benefit obligation $6,605 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.
-32-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(9) EMPLOYEE BENEFIT PLANS (continued)
Net period postretirement benefit cost includes the following
components:
1996 1995 1994
------ ---- ----
Service cost $ 155 137 232
Interest cost 213 196 264
Amortization of gain (219) (243) (124)
------ ---- ----
Net periodic postretirement benefit cost $ 149 90 372
------ ---- ----
------ ---- ----
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 1996; the rate was assumed to decrease gradually
to 5.5 percent by the year 2018 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,
1996 by $303 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the year
ended October 31, 1996 by $36.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25 percent at October 31, 1996
and 1995.
(10) 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, 1996 are listed below:
Year ending October 31:
1997 $1,914
1998 1,410
1999 1,192
2000 1,021
2001 313
Thereafter 408
------
Total minimum lease payments $6,258
------
------
Rent expense aggregated $2,393, $2,867, and $3,126 for 1996, 1995, and
1994, respectively. Included in rental expense was contingent rental
expense of approximately $80, $122, and $106 for 1996, 1995, and 1994,
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 $331, $339, and $342 for
1996, 1995, and 1994, respectively.
-33-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(11) 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.
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
Magcorp or Sabel pays any cash dividend on its common stock during the
term of the employment of the applicable executives, the respective
company will make a cash payment to such executives equal to the total
amount of the cash dividend multiplied by their applicable fully-
vested participation percentage. Amounts are accrued as earned.
(12) ACCRUED EXPENSES
Accrued expenses consist of:
1996 1995
------- ------
Salaries, bonuses, vacation, and other
related accruals $ 6,473 5,569
Utilities 3,147 3,069
Interest 5,803 2,638
Taxes, other than income 535 481
Other 3,528 2,570
------- ------
$19,486 14,327
------- ------
------- ------
-34-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(13) 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:
1996 1995 1994
-------- ------- -------
Net sales:
Magnesium $152,941 136,348 90,745
Steel 44,033 49,458 42,205
-------- ------- -------
$196,974 185,806 132,950
-------- ------- -------
-------- ------- -------
Income from operations:
Magnesium $ 49,119 37,993 2,723
Steel 1,938 2,467 1,979
Corporate (104) (83) (72)
-------- ------- -------
$ 50,953 40,377 4,630
-------- ------- -------
-------- ------- -------
Identifiable assets:
Magnesium $ 99,796 94,849 67,904
Steel 15,624 15,913 15,535
Corporate 3,238 5,789 5,599
-------- ------- -------
$118,658 116,551 89,038
-------- ------- -------
-------- ------- -------
Capital expenditures:
Magnesium $ 10,564 6,051 2,574
Steel 659 1,134 653
-------- ------- -------
$ 11,223 7,185 3,227
-------- ------- -------
-------- ------- -------
Depreciation, depletion,
and amortization:
Magnesium $ 6,106 5,397 5,263
Steel 403 373 341
-------- ------- -------
$ 6,509 5,770 5,604
-------- ------- -------
-------- ------- -------
-35-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(14) SIGNIFICANT CUSTOMERS AND EXPORT SALES
During 1995 and 1994, sales to any single customer did not exceed
ten percent of total consolidated revenues. During 1996, sales to
Rossborough Manufacturing Co. LP approximated 12 percent of total
revenues. The following table summarizes export sales to various
geographic areas:
1996 1995 1994
------- ------ -----
Net export sales:
Europe $ 8,524 8,357 5,804
Japan 3,718 5,988 2,826
Canada 1,262 1,050 545
Other 1,670 798 104
------- ------ -----
$15,174 16,193 9,279
------- ------ -----
------- ------ -----
-36-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information regarding the directors
and executive officers of the Company, Magcorp and Sabel:
NAME AGE POSITION
---- --- --------
Ira Leon Rennert 62 Chairman, Director, and Chief Executive
Officer of the Company
Roger L. Fay...... 51 Vice President, Finance of the Company
Michael H. Legge.. 50 President and Chief Executive Officer of
Magcorp
Keith Sabel....... 46 Director, President and Chief Executive
Officer of Sabel
Justin W. D'Atri.. 69 Director of Sabel
Howard I. Kaplan.. 52 Vice President of Sales and Marketing of
Magcorp
Ron L. Thayer..... 37 Vice President of Operations of Magcorp
Lee R. Brown...... 50 Vice President of Human Resources and
Public and Governmental Affairs of
Magcorp
Todd R. Ogaard.... 41 Vice President of Finance and
Administration of Magcorp
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 22 years.
JUSTIN W. D'ATRI, a practicing attorney in New York, New York from 1952
until his retirement in June 1996, has been Secretary and a director of, and
legal counsel for, Group since its inception and is now a consultant to Group,
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, a
predecessor 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.
-37-
<PAGE>
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 joining AMAX Magnesium, a
predecessor 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 joined 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 was a Senior Manager with the
accounting and consulting firm of KPMG Peat Marwick LLP, and had been with that
firm in various capacities from September 1981 through January 1994.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain information concerning compensation
of the named executive officers by the Company for services rendered to it in
all capacities during fiscal 1996, 1995 and 1994:
SUMMARY COMPENSATION TABLE
<TABLE>
Long-term
Compen-
sation
Name and Annual Compensation(1) ------------ All Other
Principal ---------------------- LTIP Compen-
Position Year Salary Bonus Payouts (3) sation
- ------------------------------------------------ ---- --------- --------- ------------ --------------
<S> <C> <C> <C> C> <C>
Ira Leon Rennert (2) 1996 $ - $ - $ - $90,149,675(2)
Chairman and Chief Executive Officer 1995 - - - 1,200,000(2)
1994 - - - 1,200,000(2)
Michael H. Legge 1996 120,756 275,000 2,668,490 17,850(4)
President and Chief Executive Officer of Magcorp 1995 120,756 200,000 - 16,491(4)
1994 120,756 35,000 - 11,291(4)
Keith Sabel 1996 128,797 141,000 - 5,625(5)
President and Chief Executive Officer of Sabel 1995 124,061 21,000 - 8,050(5)
1994 120,890 14,000 - 4,466(5)
Howard I. Kaplan 1996 94,723 180,000 889,497 21,989(4)
Vice President of Sales and Marketing of Magcorp 1995 94,723 100,000 - 18,678(4)
1994 94,723 25,000 - 8,288(4)
Ron L. Thayer 1996 85,550 130,000 889,497 5,700(4)
Vice President of Operations of Magcorp 1995 85,550 125,000 6,064(4)
1994 81,688 25,000 2,647(4)
</TABLE>
- ------------------------
(1) Value of perquisites per individual did not exceed the lesser of $50,000 or
10 percent of total salary and bonus per named executive officer.
(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 95.9 percent 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 includes the
$1.2 million annual management fee paid by the Company to Group for each
fiscal year. See "ITEM 13. Certain Relationships and Related
Transactions." In 1996, the Company paid Group dividends totaling $88.95
million, including $75.03 million paid in conjunction with the issuance of
11.5% Senior Notes described more fully in Note 5 to the Company's
consolidated financial statements, appearing elsewhere herein.
(3) The amounts shown as "LTIP Payouts" in the table for each named executive
officer represent contractual payments under such officer's Net Worth
Appreciation Agreement. See "--Net Worth Appreciation Agreements" below.
(4) The other compensation shown consists of employer contributions to a
defined contribution pension plan, and matching contributions under
Magcorp's 401(k) savings plan.
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<PAGE>
(5) Consists of employer contributions to a noncontributory profit sharing
plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company had no compensation committee during fiscal 1996. 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.
During fiscal 1996, no executive officer of the Company served (a) as a
member of the compensation committee (or other board committee performing
equivalent functions or, in the absence of any such committee, the entire board
of directors) of another entity, one of whose executive officers served on the
Company's board of directors, (b) as a director of another entity, one of whose
executive officers served on the Company's board of directors or (c) as a member
of the compensation committee (or other board committee performing equivalent
functions or, in the absence of any such committee, the entire board of
directors) of another entity, one of whose executive officers served as a
Director of the Company.
EMPLOYMENT AGREEMENTS
Mr. Legge is employed by Magcorp pursuant to an employment agreement
effective as of January 1, 1993 which continues until December 31, 1997 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, 1997 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
$85,500 and a bonus of at least $20,000 for each fiscal year in which Magcorp is
profitable.
NET WORTH APPRECIATION AGREEMENTS
Mr. Legge, Dr. Kaplan, Mr. Thayer and two other officers of Magcorp are
each parties to Net Worth Appreciation Agreements ("NWAP Agreements") with
Magcorp, under which 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. The
maximum aggregate percentage payable to the five executives is 7 percent 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.
Assuming all of the Company's executive officers had retired at October 31,
1996, and their respective maximum percentages had vested, an aggregate of
$290,000 would have been payable to such executive officers pursuant to the NWAP
Agreements.
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
-39-
<PAGE>
equal to the total amount of the cash dividend multiplied by their applicable
fully vested participation percentage. During 1996, in conjunction with the
Company's dividends to Group, Magcorp's Board of Directors declared and paid to
the Company dividends totaling $88.95 million. Accordingly, an aggregate of
$6.23 million was paid to the five Magcorp executive officers who are covered by
Magcorp's NWAP Agreements.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of the outstanding
equity securities of the Company as of January 27, 1997:
<TABLE>
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..... (1) (1) (1)
Common stock, no par value................ Group(2) 1,000 shares, Direct 100%
</TABLE>
- ------------------------
(1) The preferred stock of the Company was redeemed in July 1996 in conjunction
with the issuance of 11.5% Senior Notes described more fully in Note 5 to
the Company's consolidated financial statements, appearing elsewhere
herein.
(2) All of the Company's issued and outstanding capital stock is owned by
Group, which is 95.9 percent 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 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. By virtue of
Group's ownership of all the outstanding shares of capital stock of the
Company, and Mr. Rennert's ownership of a majority of the capital stock of
Group, Mr. Rennert is in a position to control actions that require the
consent of a majority of the holders of the Company's outstanding shares of
capital stock, including the election of the board of directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 $1.2 million for each of the fiscal years ended October 31,
1996, 1995 and 1994, respectively.
INSURANCE SHARING PROGRAM
To obtain the advantages of volume, Group purchases certain insurance
coverage for its subsidiaries, including the Company, and the actual cost of
such insurance, without markup, is reimbursed by the covered subsidiaries. The
major areas of the Company's insurance coverage obtained under the Group
programs are property, business interruption, general, product and auto
liability and workers' compensation. The premiums for director and officer,
fidelity, fiduciary, property, business interruption, auto liability and
casualty umbrella are allocated by Group substantially as indicated in the
underlying policies. General and product liability and workers' compensation
coverages are loss sensitive programs with both fixed and variable premium
components. The fixed premium component for this coverage is allocated to each
insured Group subsidiary based on factors that include historical guaranteed
cost premium, the overall growth of each subsidiary and an assessment of risk
based on loss experience. The fixed component is subject to revision resulting
from the insurance carrier's audit of actual premium factors. As claims (the
variable component) are paid, each insured within the loss sensitive program is
charged for its claims up to a maximum amount and subject to an overall maximum
for all insured subsidiaries. Each insured Group subsidiary has been assigned
an individual maximum cost based on historical guaranteed cost premiums. The
overall and individual subsidiary maximums are subject to revision based on
audit of actual premium factors. If an insured Group subsidiary reaches its
individual maximum cost, the other insured subsidiaries are required to share
proportionately in the excess cost of the subsidiary which has reached its
individual maximum. In fiscal 1996, the Company incurred costs of approximately
$1.3 million under the Group insurance program.
-40-
<PAGE>
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.
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 1996 were $0.3
million.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
A. Documents filed as part of this Form 10-K:
<TABLE>
<S> <C>
1. FINANCIAL STATEMENTS (included in Part II, ITEM 8):
Independent Auditors' Report 16
Consolidated Balance Sheets - October 31, 1996 and 1995 17
Consolidated Statements of Operations - Years ended October 31, 1996,
1995, and 1994 18
Consolidated Statements of Stockholder's Equity (Deficit) -
Years ended October 31, 1996, 1995, and 1994 19
Consolidated Statements of Cash Flows - Years ended October 31,
1996, 1995, and 1994 20
Notes to Consolidated Financial Statements 22
2. FINANCIAL STATEMENT SCHEDULES (included in Part IV):
Schedule II Valuation and Qualifying Accounts 44
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is included in
the consolidated financial statements or notes thereto.
-41-
<PAGE>
3. EXHIBITS
EXHIBIT
NO. IDENTIFICATION OF EXHIBITS
------- --------------------------
3.1 ---- Certificate of Incorporation of Renco Metals, Inc. (1)
3.2 ---- Certificate of Incorporation of Magnesium
Corporation of America (1)
3.3 ---- Certificate of Incorporation of Sabel Industries, Inc. (1)
3.4 ---- By-laws of Renco Metals, Inc. (1)
3.5 ---- By-laws of Magnesium Corporation of America (1)
3.6 ---- By-laws of Sabel Industries, Inc. (1)
4.1 ---- Indenture dated as of July 1, 1996 among Renco (6)
Metals, Inc., Issuer, Magnesium Corporation of
America and Sabel Industries, Inc., Guarantors, and
Fleet National Bank, Trustee, relating to 11-1/2%
Senior Notes Due 2003 (with form of Note and form of
guarantee annexed)
4.4 ---- Indenture dated as of August 1, 1993 among Renco (1)
Metals, Inc., Issuer, Magnesium Corporation of
America and Sabel Industries, Inc., Guarantors, and
Shawmut Bank Connecticut National Association (a/k/a
Fleet National Bank), Trustee, relating to 12% Senior
Notes Due 2000 (with form of Note annexed)
4.5 ---- First Supplemental Indenture dated as of July 1, 1996 (7)
supplementing Indenture dated as of August 1, 1993
among Renco Metals, Inc., as Issuer, Magnesium
Corporation of America and Sabel Industries, Inc., as
Guarantors, and Fleet National Bank, as Trustee,
relating to 12% Senior Notes Due 2000
10.1 ---- Employment Agreements between Magnesium Corporation
of America and:
a) Michael H. Legge, dated September 24, 1992
effective January 1, 1993 (1)
b) Ron L. Thayer effective June 1, 1994 (2)
c) Howard I. Kaplan dated June 10, 1994 (2)
d) Lee R. Brown, dated September 1, 1989 (1)
e) Todd R. Ogaard, dated December 1, 1994 (2)
10.2 ---- Net Worth Appreciation Agreements between Magnesium
Corporation of America and:
a) Michael H. Legge, dated September 24, 1992 (1)
b) Ron L. Thayer, dated September 24, 1992 (1)
c) Lee R. Brown, dated July 30, 1993 (1)
d) Howard I. Kaplan, dated June 10, 1994 (2)
e) Todd R. Ogaard, dated May 19, 1995 (3)
10.3 ---- Amendments to Net Worth Appreciation Agreements between
Magnesium Corporation of America and:
a) Michael H. Legge (8)
b) Ron L. Thayer (8)
c) Lee R. Brown (8)
d) Todd R. Ogaard (8)
e) Howard I. Kaplan (8)
10.4 ---- Management Consultant Agreement dated August 4, 1993 (1)
between The Renco Group, Inc. and Renco Metals, Inc.
10.5 ---- Amendment No. 1 to Management Consultant Agreement (5)
dated May 17, 1996 between The Renco Group, Inc.
and Renco Metals, Inc.
10.6 ---- Amended and Restated Loan and Security Agreement (1)
between Congress Financial Corporation and Magnesium
Corporation of America dated August 4, 1993
10.7 ---- Amendment No. 1 dated January 31, 1996 to Amended and (4)
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
10.8 ---- Amendment No. 2 dated July 3, 1996 to Amended and (8)
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 (1)
Corporation and Sabel Industries, Inc. dated August
4, 1993
10.10 ---- Amendment No. 1 dated January 31, 1996 to Loan and (4)
Security Agreement dated as of August 4, 1993,
between Congress Financial Corporation and Sabel
Industries, Inc., extending the term thereof to
August 4, 1998
10.11 ---- Amendment No. 2 dated July 3, 1996 to Loan and Security (8)
Agreement dated as of August 4, 1993, between Congress
Financial Corporation and Sabel Industries, Inc.
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<PAGE>
EXHIBIT
NO. IDENTIFICATION OF EXHIBITS
------- --------------------------
10.12 ---- Agreement dated July 31, 1969 between the State of (1)
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)
10.13 ---- Special Use Lease Agreement 711 dated July 14, 1987 (1)
between the State of Utah, Division of State Lands
and Forestry and Amax Magnesium Corporation
10.14 ---- Amended Rights of Way No. U-54897, dated June 21, 1993 (1)
issued by the United States Department of the Interior
Bureau of Land Management, Salt Lake District Office
to Magnesium Corporation of America
10.15 ---- Lease dated May 13, 1991 between Sabel Industries, (1)
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
10.16 ---- Lease dated July 1, 1977 between Dewey Emfinger and (1)
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
10.17 ---- Lease dated July 30, 1987 between Mark Sabel, Janis (1)
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
10.18 ---- Master Lease Indenture dated July 30, 1987 between (1)
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.)
10.19 ---- Brine Supply Agreement dated August 3, 1993 between (1)
AZKO Salt Inc. and Magnesium Corporation of America
10.20 ---- Net Worth Appreciation Agreements between Sabel
Industries, Inc. and:
a) Keith Sabel, dated January 24, 1994 (2)
b) Phillip Brown, dated January 24, 1994 (2)
10.21 ---- Waiver of "Additional Fees" through October 31, 1995 (3)
dated January 11, 1996 between The Renco Group, Inc.
and Renco Metals, Inc.
21.1 ---- Subsidiaries of Renco Metals, Inc. (1)
27 ---- Financial Statement Schedules (8)
_______________
(1) 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.
(2) 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).
(3) 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).
(4) 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).
(5) Previously filed and incorporated herein by reference from the
Registrants' Registration Statement on Form S-1 (File no. 333-4513) as
declared effective by the Securities and Exchange Commission on June 27,
1996.
(6) Previously filed and incorporated herein by reference from Renco Metals,
Inc.'s Form 8-K, filed July 17, 1996 (File No. 333-4513).
(7) Previously filed and incorporated herein by reference from Renco Metals,
Inc.'s Form 10-Q for the quarterly period ended July 31, 1996 (Files No.
33-68230 and 333-4513).
(8) Filed herewith electronically
B. No reports on Form 8-K were issued subsequent to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended July 31, 1996.
-43-
<PAGE>
SCHEDULE II
RENCO METALS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended October 31, 1996, 1995, and 1994
(dollars in thousands)
<TABLE>
Additions Deductions -
Balance at charged to write-offs Balance
beginning costs and against at end
of year expenses allowance of year
---------- ---------- ------------ -------
<S> <C> <C> <C> <C>
Year ended October 31, 1996:
Applied against asset accounts:
Allowance for doubtful accounts $ 514 152 (152) 514
Allowance for inventory obsolescence 564 - (122) 442
Year ended October 31, 1995:
Applied against asset accounts:
Allowance for doubtful accounts $ 491 188 (165) 514
Allowance for inventory obsolescence 678 - (114) 564
Year ended October 31, 1994:
Applied against asset accounts:
Allowance for doubtful accounts $ 956 93 (558) 491
Allowance for inventory obsolescence 764 - (86) 678
</TABLE>
-44-
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RENCO METALS, INC.
(Registrant)
Date: January 27, 1997 By /s/ Ira Leon Rennert
- ----------------------------- ----------------------------------
Ira Leon Rennert
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: January 27, 1997 /s/ Ira Leon Rennert
- ----------------------------- ----------------------------------
Ira Leon Rennert
Chairman of the Board, sole
Director, and Chief Executive
Officer (Principal Executive
Officer)
Date: January 27, 1997 /s/ Roger L. Fay
- ----------------------------- ----------------------------------
Roger L. Fay
Vice President, Finance
(Principal Financial and
Accounting Officer)
SUPPLEMENTAL INFORMATION OF BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT
REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report to security holders covering the registrant's last
fiscal year and no proxy statement, form of proxy or other proxy soliciting
material with respect to any annual or other meeting of security holders has
been nor will be sent to security holders.
-45-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. IDENTIFICATION OF EXHIBITS
- --- ------------------------------------------------------------------
10.3------Amendments dated June 11, 1997 to Net Worth Appreciation Agreements
between Magnesium Corporation of America and:-
(a) Michael H. Legge-
(b) Ron L. Thayer-
(c) Lee R. Brown-
(d) Todd R. Ogaard-
(e) Howard I. Kaplan-
10.8------Amendment No. 2 dated July 3, 1996 to Amended and Restated Loan and
Security Agreement dated as of August 4, 1993, between Congress
Financial Corporation and Magnesium Corporation of America-
10.11-----Amendment No. 2 dated July 3, 1996 to Loan and Security Agreement
dated as of August 4, 1993, between Congress Financial Corporation
and Sabel Industries, Inc.-
<PAGE>
EXHIBIT 10.3(a)
MAGNESIUM CORPORATION OF AMERICA
238 NORTH 2200 WEST
SALT LAKE CITY, UTAH 84116
June 11, 1996
Mr. Michael H. Legge
c/o Magnesium Corporation of America
238 North 2200 West
Salt Lake City, Utah 84116
Dear Sir:
Reference is made to your net worth appreciation participation
agreement with this Corporation (the "Agreement").
This will confirm our agreement with you as follows:
1. As you know, our parent company, Renco Metals, Inc. ("Renco
Metals") is contemplating a refinancing under which it will issue
$150,000,000 of Senior Notes due 2003 ("New Notes") and retire its
presently outstanding $75,000,000 of Senior Notes due 2000 (the
"Existing Notes"). On the issuance of the New Notes this company will
pay a dividend to Renco Metals. Concurrently with the payment of such
dividend this company will make a payment to you on account of the
dividend and the Agreement and you will accept same in full settlement
of all of your rights arising from the payment of the dividend. In
consideration of such payment and your agreement to the amendments to
the Agreement as outlined in paragraph 2 below, the Company agrees that
although after paying the above mentioned payment "Cumulative Net
Income" under the Agreement would be approximately negative
$50,000,000, nevertheless, your Cumulative Net Income will be deemed to
be zero as of July 31, 1996. Your Cumulative Net Income participation
shall be calculated on the company's Cumulative Net Income accruing
after that date.
2. Notwithstanding anything in the Agreement in the contrary,
you agree, effective upon your receipt of the payment referred to in
paragraph 1 of this letter, as follows:
(a) Should you voluntarily leave the employ of this
company before the earlier of the 15th anniversary of this
agreement or your attainment of age 62, then the payment of
the Payment (as defined in the "Agreement") to you shall not
commence until such anniversary or your attaining age 62.
<PAGE>
Notwithstanding the foregoing, payments shall
commence immediately upon your death or upon your continuing
disability making it impossible for you to continue to
perform your normal business duties.
(b) You agree that, so long as you are entitled to
any part of the Payment, you will not, directly or indirectly,
whether as employee, consultant, proprietor, partner,
stockholder or other capacity, engage in any aspect of the
magnesium business (production, marketing, sales, use) in any
part of the world. In this respect, you and we acknowledge
that the primary magnesium industry is a worldwide industry,
that the participants therein compete against each other in
all parts of the world, and that therefore this restriction is
reasonable.
Should you engage in any activity proscribed by
the preceding paragraph then the company's obligation to you
to make the Payment (or any unpaid part thereof) shall
automatically and permanently cease, and you shall be deemed
to have irrevocably released you right to same.
(c) Should you voluntarily leave the company, you
shall give 30 days advance written notice, and the amount of
your Payment will be calculated as to the close of the fiscal
quarter in which such 30 day notice period ends.
3. The parties hereby reaffirm the Agreement as amended
hereby.
Please confirm your agreement to the foregoing by signing and
returning the enclosed copy.
Very truly yours,
MAGNESIUM CORPORATION
OF AMERICA
By /s/ Ira Leon Rennert
-----------------------
CONFIRMED AND AGREED TO:
/s/ Michael H. Legge
- -------------------------
Michael H. Legge
<PAGE>
EXHIBIT 10.3(b)
MAGNESIUM CORPORATION OF AMERICA
238 NORTH 2200 WEST
SALT LAKE CITY, UTAH 84116
June 11, 1996
Mr. Ron L. Thayer
c/o Magnesium Corporation of America
238 North 2200 West
Salt Lake City, Utah 84116
Dear Sir:
Reference is made to your net worth appreciation participation
agreement with this Corporation (the "Agreement").
This will confirm our agreement with you as follows:
1. As you know, our parent company, Renco Metals, Inc. ("Renco
Metals") is contemplating a refinancing under which it will issue
$150,000,000 of Senior Notes due 2003 ("New Notes") and retire its
presently outstanding $75,000,000 of Senior Notes due 2000 (the
"Existing Notes"). On the issuance of the New Notes this company will
pay a dividend to Renco Metals. Concurrently with the payment of such
dividend this company will make a payment to you on account of the
dividend and the Agreement and you will accept same in full settlement
of all of your rights arising from the payment of the dividend. In
consideration of such payment and your agreement to the amendments to
the Agreement as outlined in paragraph 2 below, the Company agrees that
although after paying the above mentioned payment "Cumulative Net
Income" under the Agreement would be approximately negative
$50,000,000, nevertheless, your Cumulative Net Income will be deemed to
be zero as of July 31, 1996. Your Cumulative Net Income participation
shall be calculated on the company's Cumulative Net Income accruing
after that date.
2. Notwithstanding anything in the Agreement in the contrary,
you agree, effective upon your receipt of the payment referred to in
paragraph 1 of this letter, as follows:
(a) Should you voluntarily leave the employ of this
company before the earlier of the 15th anniversary of this
agreement or your attainment of age 62, then the payment of
the Payment (as defined in the "Agreement") to you shall not
commence until such anniversary or your attaining age 62.
<PAGE>
Notwithstanding the foregoing, payments shall
commence immediately upon your death or upon your continuing
disability making it impossible for you to continue to perform
your normal business duties.
(b) You agree that, so long as you are entitled to
any part of the Payment, you will not, directly or indirectly,
whether as employee, consultant, proprietor, partner,
stockholder or other capacity, engage in any aspect of the
magnesium business (production, marketing, sales, use) in any
part of the world. In this respect, you and we acknowledge
that the primary magnesium industry is a worldwide industry,
that the participants therein compete against each other in
all parts of the world, and that therefore this restriction is
reasonable.
Should you engage in any activity proscribed by
the preceding paragraph then the company's obligation to you
to make the Payment (or any unpaid part thereof) shall
automatically and permanently cease, and you shall be deemed
to have irrevocably released you right to same.
(c) Should you voluntarily leave the company, you
shall give 30 days advance written notice, and the amount of
your Payment will be calculated as to the close of the fiscal
quarter in which such 30 day notice period ends.
3. The parties hereby reaffirm the Agreement as amended
hereby.
Please confirm your agreement to the foregoing by signing and
returning the enclosed copy.
Very truly yours,
MAGNESIUM CORPORATION
OF AMERICA
By /s/ Michael H. Legge
-----------------------
CONFIRMED AND AGREED TO:
/s/ Ron L. Thayer
- -------------------------
Ron L. Thayer
<PAGE>
EXHIBIT 10.3(c)
MAGNESIUM CORPORATION OF AMERICA
238 NORTH 2200 WEST
SALT LAKE CITY, UTAH 84116
June 11, 1996
Mr. Lee R. Brown
c/o Magnesium Corporation of America
238 North 2200 West
Salt Lake City, Utah 84116
Dear Sir:
Reference is made to your net worth appreciation
participation agreement with this Corporation (the "Agreement").
This will confirm our agreement with you as follows:
1. As you know, our parent company, Renco Metals,
Inc. ("Renco Metals") is contemplating a refinancing under which it
will issue $150,000,000 of Senior Notes due 2003 ("New Notes") and
retire its presently outstanding $75,000,000 of Senior Notes due
2000 (the "Existing Notes"). On the issuance of the New Notes this
company will pay a dividend to Renco Metals. Concurrently with the
payment of such dividend this company will make a payment to you on
account of the dividend and the Agreement and you will accept same
in full settlement of all of your rights arising from the payment
of the dividend. In consideration of such payment and your
agreement to the amendments to the Agreement as outlined in
paragraph 2 below, the Company agrees that although after paying
the above mentioned payment "Cumulative Net Income" under the
Agreement would be approximately negative $50,000,000,
nevertheless, your Cumulative Net Income will be deemed to be zero
as of July 31, 1996. Your Cumulative Net Income participation shall
be calculated on the company's Cumulative Net Income accruing after
that date.
2. Notwithstanding anything in the Agreement in
the contrary, you agree, effective upon your receipt of the
payment referred to in paragraph 1 of this letter, as follows:
(a) Should you voluntarily leave the employ of
this company before the earlier of the 15th anniversary of this
agreement or your attainment of age 62, then the payment of
the Payment (as defined in the "Agreement") to you shall not
commence until such anniversary or your attaining age 62.
<PAGE>
Notwithstanding the foregoing,
payments shall commence immediately upon your death or upon your
continuing disability making it impossible for you to continue to
perform your normal business duties.
(b) You agree that, so long as you are
entitled to any part of the Payment, you will not, directly or
indirectly, whether as employee, consultant, proprietor, partner,
stockholder or other capacity, engage in any aspect of the
magnesium business (production, marketing, sales, use) in any part
of the world. In this respect, you and we acknowledge that the
primary magnesium industry is a worldwide industry, that the
participants therein compete against each other in all parts of the
world, and that therefore this restriction is reasonable.
Should you engage in any activity
proscribed by the preceding paragraph then the company's obligation
to you to make the Payment (or any unpaid part thereof) shall
automatically and permanently cease, and you shall be deemed to
have irrevocably released you right to same.
(c) Should you voluntarily leave the company, you
shall give 30 days advance written notice, and the amount of your
Payment will be calculated as to the close of the fiscal quarter in
which such 30 day notice period ends.
4. The parties hereby reaffirm the Agreement as amended
hereby.
Please confirm your agreement to the foregoing by
signing and returning the enclosed copy.
Very truly yours,
MAGNESIUM CORPORATION
OF AMERICA
By /s/ Michael H. Legge
-----------------------
CONFIRMED AND AGREED TO:
/s/ Lee R. Brown
- --------------------------
Lee R. Brown
<PAGE>
EXHIBIT 10.3(d)
MAGNESIUM CORPORATION OF AMERICA
238 NORTH 2200 WEST
SALT LAKE CITY, UTAH 84116
June 11, 1996
Mr. Todd R. Ogaard
c/o Magnesium Corporation of America
238 North 2200 West
Salt Lake City, Utah 84116
Dear Sir:
Reference is made to your net worth appreciation
participation agreement with this Corporation (the "Agreement").
This will confirm our agreement with you as follows:
1. As you know, our parent company, Renco Metals, Inc.
("Renco Metals") is contemplating a refinancing under which it
will issue $150,000,000 of Senior Notes due 2003 ("New Notes") and
retire its presently outstanding $75,000,000 of Senior Notes due
2000 (the "Existing Notes"). On the issuance of the New Notes this
company will pay a dividend to Renco Metals. Concurrently with the
payment of such dividend this company will make a payment to you on
account of the dividend and the Agreement and you will accept same
in full settlement of all of your rights arising from the payment
of the dividend. In consideration of such payment and your
agreement to the amendments to the Agreement as outlined in
paragraph 2 below, the Company agrees that although after paying
the above mentioned payment "Cumulative Net Income" under the
Agreement would be approximately negative $50,000,000,
nevertheless, your Cumulative Net Income will be deemed to be zero
as of July 31, 1996. Your Cumulative Net Income participation shall
be calculated on the company's Cumulative Net Income accruing after
that date.
2. Notwithstanding anything in the Agreement in
the contrary, you agree, effective upon your receipt of the payment
referred to in paragraph 1 of this letter, as follows:
(a) Should you voluntarily leave the employ of
this company before the earlier of the 15th anniversary
of this agreement or your attainment of age 62, then the
payment of the Payment (as defined in the "Agreement") to
you shall not commence until such anniversary or your
attaining age 62.
<PAGE>
Notwithstanding the foregoing, payments shall
commence immediately upon your death or upon your continuing
disability making it impossible for you to continue to perform your
normal business duties.
(b) You agree that, so long as you are entitled
to any part of the Payment, you will not, directly or indirectly,
whether as employee, consultant, proprietor, partner, stockholder
or other capacity, engage in any aspect of the magnesium business
(production, marketing, sales, use) in any part of the world. In
this respect, you and we acknowledge that the primary magnesium
industry is a worldwide industry, that the participants therein
compete against each other in all parts of the world, and that
therefore this restriction is reasonable.
Should you engage in any activity proscribed
by the preceding paragraph then the company's obligation to you to
make the Payment (or any unpaid part thereof) shall automatically
and permanently cease, and you shall be deemed to have irrevocably
released you right to same.
(c) Should you voluntarily leave the company, you
shall give 30 days advance written notice, and the amount of your
Payment will be calculated as to the close of the fiscal quarter in
which such 30 day notice period ends.
3. The parties hereby reaffirm the Agreement as amended
hereby.
Please confirm your agreement to the foregoing by
signing and returning the enclosed copy.
Very truly yours,
MAGNESIUM CORPORATION
OF AMERICA
By /s/ Michael H. Legge
------------------------------
CONFIRMED AND AGREED TO:
/s/ Todd R. Ogaard
- ------------------------------
Todd R. Ogaard
<PAGE>
EXHIBIT 10.3(e)
MAGNESIUM CORPORATION OF AMERICA
238 NORTH 2200 WEST
SALT LAKE CITY, UTAH 84116
June 11, 1996
Dr. Howard I. Kaplan
c/o Magnesium Corporation of America
238 North 2200 West
Salt Lake City, Utah 84116
Dear Sir:
Reference is made to your net worth appreciation participation
agreement with this Corporation (the "Agreement").
This will confirm our agreement with you as follows:
1. As you know, our parent company, Renco Metals, Inc. ("Renco
Metals") is contemplating a refinancing under which it will issue
$150,000,000 of Senior Notes due 2003 ("New Notes") and retire its
presently outstanding $75,000,000 of Senior Notes due 2000 (the
"Existing Notes"). On the issuance of the New Notes this company will
pay a dividend to Renco Metals. Concurrently with the payment of such
dividend this company will make a payment to you on account of the
dividend and the Agreement and you will accept same in full settlement
of all of your rights arising from the payment of the dividend. In
consideration of such payment and your agreement to the amendments to
the Agreement as outlined in paragraph 2 below, the Company agrees that
although after paying the above mentioned payment "Cumulative Net
Income" under the Agreement would be approximately negative
$50,000,000, nevertheless, your Cumulative Net Income will be deemed to
be zero as of July 31, 1996. Your Cumulative Net Income participation
shall be calculated on the company's Cumulative Net Income accruing
after that date.
2. Notwithstanding anything in the Agreement in the contrary,
you agree, effective upon your receipt of the payment referred to in
paragraph 1 of this letter, as follows:
(a) Should you voluntarily leave the employ of this
company before the earlier of the 15th anniversary of this
agreement or your attainment of age 62, then the payment of
the Payment (as defined in the "Agreement") to you shall not
commence until such anniversary or your attaining age 62.
<PAGE>
Notwithstanding the foregoing, payments
shall commence immediately upon your death or upon your
continuing disability making it impossible for you to continue
to perform your normal business duties.
(b) You agree that, so long as you are entitled to
any part of the Payment, you will not, directly or indirectly,
whether as employee, consultant, proprietor, partner,
stockholder or other capacity, engage in any aspect of the
magnesium business (production, marketing, sales, use) in any
part of the world. In this respect, you and we acknowledge
that the primary magnesium industry is a worldwide industry,
that the participants therein compete against each other in
all parts of the world, and that therefore this restriction is
reasonable.
Should you engage in any activity proscribed
by the preceding paragraph then the company's obligation to
you to make the Payment (or any unpaid part thereof) shall
automatically and permanently cease, and you shall be deemed
to have irrevocably released you right to same.
(c) Should you voluntarily leave the company, you
shall give 30 days advance written notice, and the amount of
your Payment will be calculated as to the close of the fiscal
quarter in which such 30 day notice period ends.
3. The parties hereby reaffirm the Agreement as amended
hereby.
Please confirm your agreement to the foregoing by signing and
returning the enclosed copy.
Very truly yours,
MAGNESIUM CORPORATION
OF AMERICA
By /s/ Michael H. Legge
-----------------------
CONFIRMED AND AGREED TO:
/s/ Howard I Kaplan
- -------------------------
Howard I. Kaplan
<PAGE>
EXHIBIT 10.8
AMENDMENT NO. 2 TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
MAGNESIUM CORPORATION OF AMERICA
238 North 2200 West
Salt Lake City, Utah 84116
July 3, 1996
Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Congress Financial Corporation ("Lender") and Magnesium Corporation of
America ("Borrower") have entered into certain financing arrangements
pursuant to the Amended and Restated Loan and Security Agreement, dated as of
August 4, 1993, between Lender and Borrower, as previously amended pursuant
to the Amendment No. 1 to Amended and Restated Loan and Security Agreement,
dated January 31, 1996 (the "Amendment No. 1"), between Lender and Borrower
(as amended hereby and as the same may be further amended, modified,
supplemented, extended, renewed, restated or replaced, the "Loan Agreement",
and together with all agreements, documents and instruments at any time
executed and/or delivered in connection therewith or related thereto,
collectively, the "Financing Agreements"). All capitalized terms used herein
shall have the meaning assigned thereto in the other Financing Agreements,
unless otherwise defined herein.
Renco Metals, Inc., owner of all of the issued and outstanding shares of
common stock of Borrower ("Renco Metals"), is purchasing up to all of the
Existing Senior Notes (as defined below) pursuant to the Tender Offer (as
defined below) as described in the Tender Offer Agreements (as defined
below);
Renco Metals is also issuing $150,000,000 of the New RMI Notes (as
defined below), which will be guaranteed by Borrower and Sabel Industries,
Inc., a wholly owned subsidiary of Renco Metals ("Sabel"), and some of the
proceeds of such notes are to be used by Renco Metals to repurchase up to all
of the Existing Senior Notes pursuant to the Tender Offer;
Borrower has requested that Lender, among other things, (a) consent to
the purchase by Renco Metals of the Existing Senior Notes tendered for such
purchase pursuant to the Tender Offer, (b) permit Borrower to execute and
deliver the unsecured guarantee by Borrower of the indebtedness of Renco
Metals evidenced by the New RMI Notes, (c) agree to amend certain
<PAGE>
provisions of the Loan Agreement to permit the foregoing transactions and (d)
agree to extend the term of the Financing Agreements and further amend the
Loan Agreement, and Lender is willing to consent to such purchase of the
Existing Senior Notes, permit such unsecured guarantee, and agree to such an
extension to the Financing Agreements and to such amendments to the Loan
Agreement, subject to the terms and conditions contained herein. By this
Amendment, Lender and Borrower desire and intend to evidence such amendments.
In consideration of the foregoing, and other good and valuable
consideration, and the respective agreements and covenants contained herein,
the parties hereto agree as follows:
1. DEFINITIONS.
(a) ADDITIONAL DEFINITIONS. As used herein, the following terms
shall have the respective meanings given to them below and the Loan Agreement
shall be deemed and is hereby amended to include, in addition and not in
limitation, each of the following definitions:
(i) "EXCESS AVAILABILITY" shall mean the amount, as
determined by Lender, calculated at any time, equal to: (a) the lesser of (i)
the amount of Loans available to Borrower as of such time based on the
applicable Lending Formulas multiplied by the Net Amount of Eligible Accounts
and the Value of Eligible Inventory, as determined by Lender, and subject to
the sublimits and reserves from time to time established by Lender hereunder
and (ii) the Maximum Credit, MINUS (b) the sum of: (i) the amount of all then
outstanding and unpaid Obligations, plus (ii) the aggregate amount of all
trade payables of Borrower which are more than thirty (30) days past due as
of such time.
(ii) "NEW RMI INDENTURE" shall mean the Indenture, dated as of
July 1, 1996, by and among Renco Metals, as obligor, Borrower and Sabel
Industries, Inc. as guarantors, and Fleet National Bank, as Indenture Trustee
with respect to the New RMI Notes, as the same now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced.
(iii) "NEW RMI NOTES" shall mean the 11.5% Senior Notes due
2003 issued by Renco Metals pursuant to the New RMI Indenture in the
aggregate principal amount of $150,000,000, as the same now exists or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
- 2 -
<PAGE>
(iv) "TENDER OFFER" shall mean the offer by Renco Metals to
purchase for cash up to all of the Existing Senior Notes at a price of
112.75% of the aggregate principal amount thereof, plus accrued and unpaid
interest, pursuant to the Tender Offer Agreements.
(v) "TENDER OFFER AGREEMENTS" shall mean, individually and
collectively, the Offer to Purchase and Consent Solicitation Statement, dated
May 24, 1996, as amended on June 18, 1996, with respect to the repurchase by
Renco Metals of the Existing Senior Notes, and all other agreements,
documents and instruments related thereto, as the same now exists or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
(vi) "EXISTING SENIOR NOTES" shall mean the 12% Senior Notes
due 2000, issued by Renco Metals, dated as of August 4, 1993, pursuant to the
Existing Indenture payable to the order of the holders thereof in the
original principal amount of $75,000,000, on the terms and conditions set
forth in Exhibit A to the Loan Agreement, as the same now exists or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
(vii) "EXISTING INDENTURE" shall mean the Indenture, dated as
of August 1, 1993, by and among Renco Metals, as obligor, Borrower and Sabel
Industries, Inc., as guarantors, and Fleet National Bank, as indenture
trustee with respect to the Existing Senior Notes, and the Supplemental
Indenture, dated July 1, 1996 (the "Supplemental Indenture"), as the same now
exist or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced.
(b) AMENDMENTS TO DEFINITIONS.
(i) All references to the term "Senior Notes" in the Loan
Agreement and in any of the other Financing Agreements shall be deemed and
each such reference is hereby amended to mean the "Existing Senior Notes" as
such term is defined herein.
(ii) All references to the term "Indenture" in the Loan
Agreement and in any of the other Financing Agreements shall be deemed and
each such reference is hereby amended to mean the "Existing Indenture" as
such term is defined herein.
(iii) Sections 1.32 and 1.57 of the Loan Agreement, are hereby
deleted in their entirety and the following substituted therefor:
"[Intentionally omitted]".
- 3 -
<PAGE>
(c) INTERPRETATION. For purposes of this Amendment, unless
otherwise defined herein, all terms used herein, including, but not limited
to, those terms used and/or defined in the recitals hereto, shall have the
respective meanings assigned thereto in the Loan Agreement.
2. CONSENTS. Subject to the terms and conditions contained herein,
Lender hereby consents to: (a) the purchase by Renco Metals of up to all of
the Existing Senior Notes pursuant to the Tender Offer and (b) the amendment
to the Existing Indenture as set forth in the Supplemental Indenture.
3. INTEREST RATE. All references in Section 1.33 of the Loan
Agreement to "one and three-quarter percent (1 3/4%) per annum" and "three
and three-quarter (3-3/4%) percent per annum" are each hereby deleted and the
following substituted therefor: "one (1%) percent per annum" and "three (3%)
percent per annum", respectively.
4. MAXIMUM CREDIT. Section 1.41 of the Loan Agreement is hereby
deleted in its entirety and the following substituted therefor:
"1.41 "Maximum Credit" shall mean $33,000,000."
5. INVENTORY ADVANCE RATE. Section 3.1(a)(iii) of the Loan Agreement
is hereby deleted in its entirety and the following substituted therefor:
"(iii) thirty (30%) percent of the Value of Eligible Inventory
consisting of Supplies (or such greater or lesser percentage
thereof as Lender may determine from time to time).
6. INVENTORY SUBLIMIT. Section 3.1(b) of the Loan Agreement is hereby
deleted in its entirety and the following substituted therefor:
"(b) Notwithstanding anything to the contrary contained herein or
in any of the other Financing Agreements, except in Lender's
discretion, the aggregate unpaid principal amount of the Loans
outstanding at any time based on Eligible Inventory, regardless
of the amounts of such Eligible Inventory, shall not exceed
$12,000,000 and the aggregate unpaid principal amount of the Loans
outstanding at any time based on Eligible Inventory consisting of
Supplies, regardless of the amounts of such Eligible Inventory,
shall not exceed $3,000,000."
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<PAGE>
7. LETTER OF CREDIT ACCOMMODATIONS.
(a) The reference in Section 3.2(e) of the Loan Agreement to
"three (3%) percent per annum" is hereby deleted and the following
substituted therefor: "one and one-half (1 1/2%) percent per annum".
(b) The reference in Section 3.2(f) of the Loan Agreement to
"$3,000,000" is hereby deleted and the following substituted therefor:
"$5,000,000".
8. UNUSED LINE FEE. The reference in Section 3.5(c) of the Loan
Agreement to "$15,000,000" is hereby deleted and the following substituted
therefor: "$25,000,000".
9. NET WORTH COVENANTS. Section 7.19 of the Loan Agreement is hereby
deleted in its entirety and the following substituted therefor:
"7.19 CONSOLIDATED NET WORTH. Borrower and its subsidiaries shall,
at all times, maintain a Consolidated Net Worth of not less than
negative $112,000,000."
10. INDEBTEDNESS. Section 7.3 of the Loan Agreement is hereby amended
by adding the following new Section (l) immediately after Section 7.3(k)
thereof:
"(l) Indebtedness of Borrower to Renco Metals, outstanding as of
the date hereof in the amount of $62,227,168.45, which
Indebtedness is, in all respects, subject and subordinate in
right of payment to the right of Lender to receive the prior
indefeasible payment in full of all of the Obligations; PROVIDED,
THAT, Borrower shall not make any payments in respect of such
Indebtedness except to the extent permitted under Section 7.6."
11. GUARANTEES.
(a) Section 7.5(c) of the Loan Agreement is hereby deleted in its
entirety and the following substituted therefore:
"(c) the unsecured guarantee by Borrower of the Indebtedness
of Renco Metals evidenced by the Existing Senior Notes (as in
effect on the date hereof) in an aggregate principal amount
equal to the sum of $75,000,000 minus the aggregate principal
amount of Existing Senior Notes purchased by Renco Metals in
the Tender Offer pursuant to the terms of the
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<PAGE>
Tender Offer Agreements; PROVIDED, THAT: (i) Borrower shall not,
directly or indirectly, (a) amend, modify, alter or change the
terms of such guarantee or consent to any of the same as to the
Existing Senior Notes or any agreements, documents or
instruments executed and/or delivered in connection therewith,
including, but not limited to, the Existing Indenture, or
(b) except as permitted under Section 7.6(i), redeem, retire,
defease, purchase or otherwise acquire such indebtedness
prior to its maturity date, or set aside or otherwise deposit
or invest any sums for such purpose, and (ii) Borrower
shall furnish to Lender all notices, demands or other
material either received from any of the holders of the
Existing Senior Notes or any representative of the holders
(including, but not limited to, the trustee), promptly
after receipt thereof, or sent by Borrower, or on its behalf,
to any of the holders or the Existing Senior Notes, or any
representative of the holders (including, but not limited to,
the trustee) concurrently with the sending thereof, as the
case may be;"
(b) Section 7.5 of the Loan Agreement is hereby amended by adding
the following new Section (h) immediately after Section 7.5(g) thereof:
"(h) the unsecured guarantee by Borrower of the Indebtedness
of Renco Metals evidenced by the New RMI Notes (as in effect
on the date hereof); PROVIDED, THAT: (i) Borrower shall not,
directly or indirectly, (a) amend, modify, alter or change
the terms of such guarantee or consent to any of the same as
to the New RMI Notes or any agreements, documents or
instruments executed and/or delivered in connection
therewith, including, but not limited to, the New RMI
Indenture, or (b) execept as permitted under Section 7.6(i),
redeem, retire, defease, purchase or otherwise acquire such
indebtedness prior to its maturity date, or set aside or
otherwise deposit or invest any sums for such purpose, and
(ii) Borrower shall furnish to Lender all notices, demands or
other material either received from any of the holders of the
New RMI Notes or any representative of such
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<PAGE>
holders, including, but not limited to, the
trustee), promptly after receipt thereof, or
sent by Borrower, or on its behalf, to any of
the holders of the New RMI Notes, or any
representative of such holders (including,
but not limited to, the trustee) concurrently
with the sending thereof, as the case may
be;"
12. TRANSACTIONS WITH AFFILIATES.
(a) Section 7.6(g) of the Loan Agreement is hereby deleted in its
entirety and the following substituted therefor:
"(g) Borrower may make payments to or on behalf of Renco
Metals, on or about January 15 and July 15 of each year;
PROVIDED, THAT, (i) all proceeds of each such payment by
Borrower to or on behalf of Renco Metals shall be used to pay
the regularly scheduled interest due and payable on or about
the date of such payment under the terms of the Existing
Senior Notes (as in effect on the date hereof), (ii) the
amount of each such payment by Borrower to or on behalf of
Renco Metals shall not exceed an amount equal to: (A) the
amount of the regularly scheduled payments of interest under
the Existing Senior Notes (as in effect on the date hereof)
due and payable on or about the date of such payment by
Borrower to or on behalf of Renco Metals MINUS (B) any
amounts paid by Sabel to or on behalf of Renco Metals in
respect of such interest then due, and (iii) no Event of
Default, or act, condition or event which with notice or
passage of time or both would constitute an Event of Default
shall have occurred and be continuing at the time of or after
giving effect to the payment of any such amounts;".
(b) Section 7.6 of the Loan Agreement is hereby amended by adding
the following new Sections (h) and (i) immediately after Section 7.6(g) thereof:
"(h) Borrower may make payments to or on behalf of Renco
Metals, on or about January 1 and July 1 of each year;
PROVIDED, THAT, (i) all proceeds of each such payment by
Borrower to or on behalf of Renco Metals shall be used to pay
the regularly scheduled interest due and payable on or about
the date of such payment under the terms of the New RMI Notes
(as in effect on the date hereof), (ii) the amount of each
such payment by Borrower to or
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<PAGE>
on behalf of Renco Metals shall not exceed an amount equal
to: (A) the amount of the regularly scheduled payments of
interest under the New RMI Notes (as in effect on the date
hereof) due and payable on or about the date of such payment
by Borrower to or on behalf of Renco Metals MINUS (B) any
amounts paid by Sabel to or on behalf of Renco Metals in
respect of such interest then due, and (iii) no Event of
Default, or act, condition or event which with notice or
passage of time or both would constitute an Event of Default
shall have occurred and be continuing at the time of or after
giving effect to the payment of any such amounts; and
(i) Borrower may make certain payments to or
on behalf of Renco Metals; PROVIDED, THAT, (i) all proceeds
of each such payment by Borrower to or on behalf of Renco
Metals shall be used to pay any mandatory redemptions of the
Existing Senior Notes and the New RMI Notes (as each is in
effect on the date hereof) required by the Existing Indenture
and the New RMI Indenture (as each is in effect on the date
hereof) in the event of (A) certain Asset Sales (as defined
in the Existing Indenture and the New RMI Indenture as each
is in effect on the date hereof) of Borrower other than the
Collateral, and (B) a Change of Control (as defined in the
Existing Indenture and the New RMI Indenture as each is in
effect on the date hereof), (ii) the amount of each such
payment by Borrower to or on behalf of Renco Metals shall not
exceed an amount equal to: (A) the amount of the mandatory
redemptions of the Existing Senior Notes and the New RMI
Notes required to be paid by Renco Metals MINUS (B) any
amounts paid by Sabel to or on behalf of Renco Metals in
respect of such payments, and (iii) no Event of Default, or
act, condition or event which with notice or passage of time
or both would constitute an Event of Default shall have
occurred and be continuing at the time of or after giving
effect to the payment of any such amounts".
(c) Notwithstanding anything to the contrary contained in Section
7.6 or 7.7 of the Loan Agreement, but subject to the terms and conditions
contained herein, Borrower may (i) declare and pay, out of legally available
funds therefor, a one (1) time dividend as of the date hereof to Renco Metals
or to Renco Group on behalf of Renco Metals in an amount not to exceed an
amount equal to: (A) $75,028,175.21 MINUS (B) any amounts paid by Sabel
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<PAGE>
to Renco Metals or to Renco Group on behalf of Renco Metals in respect of
such a dividend payment as of the date hereof and (ii) pay to certain
officers of Borrower an amount up to $5,251,972.27 pursuant to existing net
worth appreciation agreements between such officers and Borrower.
13. RENEWAL DATE. The reference in Section 10.1(a) of the Loan
Agreement (as previously amended) to "five (5) years from the date hereof"
shall be deleted in its entirety and the following substituted therefor: "six
(6) years from the date hereof".
14. EARLY TERMINATION FEE. Notwithstanding anything to the contrary
contained in Section 10.1(e) of the Loan Agreement or any of the other
Financing Agreements (including Amendment No. 1), if Lender terminates the
Loan Agreement or the other Financing Agreements upon the occurrence of an
Event of Default or at the request of Borrower prior to the Renewal Date (as
amended herein), Borrower hereby agrees to pay to Lender for the account of
Lender, upon the effective date of such termination, an early termination fee
in an amount equal to:
(i) $660,000, if such termination is effective prior to the fourth
anniversary of the Loan Agreement; or
(ii) $330,000, if such termination is effective after the fourth
anniversary of the Loan Agreement but prior to the Renewal Date or
the anniversary of the Renewal Date in any subsequent year
thereafter.
15. AUDIT FEE LIMIT. Notwithstanding anything to the contrary
contained in Section 10.2(a)(vi) of the Loan Agreement, so long as no Event
of Default, or act, condition or event which with notice or passage of time
or both would constitute an Event of Default shall exist or have occurred,
Borrower shall not be required to reimburse Lender with respect to costs
(exclusive of out-of-pocket expenses) incurred by Lender for field
examinations of the Collateral and Borrower's operations in excess of $10,000
per calendar year. The foregoing shall not be construed to limit any other
provisions of the Financing Agreements regarding costs and expenses to be
paid by Borrower to Lender.
16. NOTICE. Notwithstanding anything to the contrary contained in
Section 10.5 of the Loan Agreement, all notices, requests and demands to or
upon Borrower are to be given to the following address:
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<PAGE>
Magnesium Corporation of America
238 North 2200 West
Salt Lake City, Utah 84116
Attention: Mr. Michael H. Legge
with copies to:
The Renco Group, Inc.
30 Rockefeller Plaza
New York, New York 10112
Attention: Mr. Ira Leon Rennert
17. REPORTING REQUIREMENTS. In addition to, and not in limitation of,
all such financial and other information as Lender shall reasonably request
relating to the Collateral and the assets, businesses and operations of
Borrower, Borrower shall provide Lender a borrowing base certificate, in form
and substance satisfactory to Lender, setting forth Borrower's calculation of
the Loans and Letter of Credit Accommodations available to Borrower pursuant
to the terms and conditions contained in the Loan Agreement as of the
previous day each such certificate is due, based on the following schedule:
(a) on a semi-monthly basis, if (i) the Obligations are at all
times during such period less than $10,000,000, (ii) Borrower has Excess
Availability, as determined by Lender, at any time during such period, in an
amount equal to or greater than $15,000,000 and (iii) no Event of Default, or
act, condition or event which with notice or passage of time or both would
constitute an Event of Default, shall have occurred and be continuing during
such period;
(b) on a weekly basis, if (i) the Obligations are at all times
during such period equal to or greater than $10,000,000 but less than
$20,000,000, (ii) Borrower shall have Excess Availability, as determined by
Lender, at any time during such period, in an amount greater than $7,500,000
but less than $15,000,000; (iii) no Event of Default, or act, condition or
event which with notice or passage of time or both would constitute an Event
of Default, shall have occurred and be continuing during such period; and
(c) on a daily basis, at all other times.
18. FACILITY INCREASE FEE. Borrower hereby agrees to pay Lender a
Facility Increase Fee in the amount of $130,000, simultaneously with the
execution of this Amendment, which fee is fully earned as of the date hereof.
Such fee may, at Congress' option, be charged directly to any account of
Borrower maintained by Lender.
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<PAGE>
19. REPRESENTATIONS, WARRANTIES AND COVENANTS. In addition to the
continuing representations, warranties and covenants heretofore or hereafter
made by Borrower to Lender pursuant to the other Financing Agreements,
Borrower hereby represents, warrants and covenants with and to Lenders as
follows (which representations, warranties and covenants are continuing and
shall survive the execution and delivery hereof and shall be incorporated
into and made a part of the Financing Agreements):
(a) TENDER OFFER AND CANCELLATION OF EXISTING SENIOR NOTES.
(i) The Tender Offer Agreements and the transactions
contemplated thereunder have been duly executed, delivered and performed in
accordance with their terms by the respective parties thereto in all
respects, including the fulfillment (not merely the waiver, except as may be
disclosed to Agent and consented to in writing by Agent) of all conditions
precedent set forth therein and giving effect to the terms of the Tender
Offer Agreements, the portion of the Existing Senior Notes tendered by the
holders of the Existing Senior Notes and accepted by Renco Metals have been
purchased by Renco Metals and all obligations, liabilities and indebtedness
of Renco Metals evidenced by or arising under such tendered Existing Senior
Notes have been satisfied.
(ii) All actions and proceedings required by the Tender Offer
Agreements, applicable law and regulation have been taken and the
transactions required thereunder had been duly and validly taken and
consummated.
(iii) No court of competent jurisdiction has issued any
injunction, restraining order or other order which prohibits consummation of
the transactions described in the Tender Offer Agreements and no governmental
action or proceeding has been threatened or commenced seeking any injunction,
restraining order or other order which seeks to void or otherwise modify the
transactions described in the Tender Offer Agreements.
(iv) Borrower has delivered, or caused to be delivered, to
Lender, true, correct and complete copies of the Tender Offer Agreements.
(b) NEW RMI NOTES.
(i) The New RMI Notes have been duly authorized, issued and
delivered by Renco Metals and all agreements, documents and instruments
related thereto, including, but not limited to, the New RMI Indenture, have
been duly authorized, executed and delivered and the transactions
contemplated thereunder performed in accordance with their terms by the
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<PAGE>
respective parties thereto in all respects, including the fulfillment (not
merely the waiver) of all conditions precedent set forth herein. All actions
and proceedings required by the New RMI Notes and the agreements, documents
and instruments related thereto, applicable law or regulation have been taken
and the transactions required thereunder have been duly and validly taken and
consummated. Neither the execution and deliver of New RMI Notes or any of
the instruments and documents to be delivered pursuant thereto, nor the
consummation of the transactions therein contemplated, nor compliance with
the provisions thereof, has violated or will violate any law or regulation or
any order or decree of any court or governmental instrumentality in any
respect or does or will conflict with or result in the breach of, or
constitute a default in any respect under, any indenture, mortgage, deed of
trust, agreement or instrument to which either Borrower or Renco Metals is or
was a party or may be bound, or result in the creation or imposition of any
lien, charge, or encumbrance upon any of the property of Borrower or Renco
Metals or violate any provision of the Certificate of Incorporation or
By-Laws of Borrower or Renco Metals.
(ii) No court of competent jurisdiction has issued any
injunction, restraining order or other order which prohibits consummation of
the issuance of the New RMI Notes and the transactions described therein and
no governmental or other action or proceeding has been threatened or
commenced, seeking any injunction, restraining order or other order which
seeks to void or otherwise modify the issuance of the New RMI Notes.
(iii) Borrower has delivered, or caused to be delivered, to
Lender, a true, correct and complete specimen of the New RMI Notes and copies
of all other agreements, documents and instruments existing as of the date
relating thereto.
(c) NO DEFAULT. No Event of Default exists on the date of this
Amendment (after giving effect to the amendments to the Loan Agreement made
by this Amendment).
(d) CORPORATE POWER AND AUTHORITY. This Amendment has been duly
executed and delivered by Borrower and is in full force and effect as of the
date hereof, and the agreements and obligations of Borrower contained herein
constitute legal, valid and binding obligations of Borrower enforceable
against Borrower in accordance with their respective terms.
20. CONDITIONS PRECEDENT. The effectiveness of the consents and other
terms and conditions contained herein shall be subject to the receipt by
Lender of each of the following, in form and substance satisfactory to Lender:
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<PAGE>
(a) evidence that: (i) the New RMI Notes and all agreements,
documents and instruments relating thereto have been duly authorized,
executed and delivered by the parties thereto in accordance with their terms
and (ii) Renco Metals has received from or on behalf of the initial holder of
the New RMI Notes cash or other immediately available funds in the aggregate
amount of $150,000,000, minus any underwriting discount with respect thereto,
constituting the net proceeds from the issuance of the New RMI Notes;
(b) evidence that the proceeds received by Renco Metals from or on
behalf of the holders of the New RMI Notes have been applied as set forth in
the Form S-1 Registration Statement filed by Renco Metals with the Securities
and Exchange Commission on May 24, 1996, as amended, including that some of
the proceeds have been applied to repurchase all of the Existing Senior Notes
tendered by such holders pursuant to the Tender Offer; and
(c) an original of this Amendment, duly authorized, executed and
delivered by Borrower.
21. ADDITIONAL EVENTS OF DEFAULT. The parties hereto acknowledge,
confirm and agree that the failure of Borrower to comply with the covenants,
conditions and agreements contained herein or in the New RMI Indenture shall
constitute an Event of Default under the Financing Agreements (subject to the
applicable cure period, if any, with respect thereto provided for in the
Loan Agreement as in effect on the date hereof).
22. EFFECT OF THIS AGREEMENT. Except as modified pursuant hereto, no
other changes or modifications in the Loan Agreement or the other Financing
Agreements are intended or implied and the Financing Agreements are hereby
specifically ratified, restated and confirmed by all parties hereto as of the
affective date hereof. To the extent of conflict between the terms of this
Amendment and the other Financing Agreements, the terms of this Amendment
shall control.
23. GOVERNING LAW. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in
accordance with the laws of the State of New York.
24. BINDING EFFECT. This Amendment shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors and
assigns.
25. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one
and the same agreement. In making proof of this Amendment, it shall not be
necessary to produce or
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<PAGE>
account for more than one counterpart thereof signed by each of the parties
hereto.
26. FURTHER ASSURANCES. The parties hereto shall execute and deliver
such additional documents and take such additional action as may be necessary
or desirable to effectuate the provisions and purposes of this Agreement.
Please sign the enclosed counterpart of this Amendment in the space
provided below, whereupon this Amendment, as so accepted by Lender, shall
become a binding agreement between Borrower and Lender.
Very truly yours,
MAGNESIUM CORPORATION OF AMERICA
By: /s/ Roger L. Fay
------------------------------
Title: Vice President
---------------------------
AGREED:
CONGRESS FINANCIAL CORPORATION
By: /s/ Janet S. Last
--------------------------
Title: Vice President
-----------------------
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<PAGE>
AMENDMENT NO. 2 TO
LOAN AND SECURITY AGREEMENT
SABEL INDUSTRIES, INC.
749 North Court Street
Montgomery, Alabama 36102
July 3, 1996
Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Congress Financial Corporation ("Lender") and Magnesium Corporation of
America ("Borrower") have entered into certain financing arrangements
pursuant to the Loan and Security Agreement, dated as of August 4, 1993,
between Lender and Borrower, as previously amended pursuant to Amendment No.
1 to Loan and Security Agreement, dated January 31, 1996 (the "Amendment No.
1"), between Lender and Borrower (as amended hereby and as the same may be
further amended, modified, supplemented, extended, renewed, restated or
replaced, the "Loan Agreement", and together with all agreements, documents
and instruments at any time executed and/or delivered in connection therewith
or related thereto, collectively, the "Financing Agreements"). All
capitalized terms used herein shall have the meaning assigned thereto in the
other Financing Agreements, unless otherwise defined herein.
Renco Metals, Inc., owner of all of the issued and outstanding shares of
common stock of Borrower ("Renco Metals"), is purchasing up to all of the
Existing Senior Notes (as defined below) pursuant to the Tender Offer (as
defined below) as described in the Tender Offer Agreements (as defined
below);
Renco Metals is also issuing $150,000,000 of the New RMI Notes (as
defined below), which will be guaranteed by Borrower and Magnesium
Corporation of America, a wholly owned subsidiary of Renco Metals
("Magcorp"), and some of the proceeds of such notes are to be used by Renco
Metals to repurchase up to all of the Existing Senior Notes pursuant to the
Tender Offer;
Borrower has requested that Lender, among other things, (a) consent to
the purchase by Renco Metals of the Existing Senior Notes tendered for such
purchase pursuant to the Tender Offer, (b) permit Borrower to execute and
deliver the unsecured guarantee by Borrower of the indebtedness of Renco
Metals evidenced by the New RMI Notes, (c) agree to amend certain
<PAGE>
provisions of the Loan Agreement to permit the foregoing transactions and (d)
agree to extend the term of the Financing Agreements and further amend the
Loan Agreement, and Lender is willing to consent to such purchase of the
Existing Senior Notes, permit such unsecured guarantee, and agree to such an
extension to the Financing Agreements and to such amendments to the Loan
Agreement, subject to the terms and conditions contained herein. By this
Amendment, Lender and Borrower desire and intend to evidence such amendments.
In consideration of the foregoing, and other good and valuable
consideration, and the respective agreements and covenants contained herein,
the parties hereto agree as follows:
1. DEFINITIONS.
(a) ADDITIONAL DEFINITIONS. As used herein, the following terms
shall have the respective meanings given to them below and the Loan Agreement
shall be deemed and is hereby amended to include, in addition and not in
limitation, each of the following definitions:
(i) "NEW RMI INDENTURE" shall mean the Indenture, dated as of
July 1, 1996, by and among Renco Metals, as obligor, Borrower and Magcorp, as
guarantors, and Fleet National Bank, as Indenture Trustee with respect to the
New RMI Notes, as the same now exists or may hereafter be amended, modified,
supplemented, extended, renewed, restated or replaced.
(ii) "NEW RMI NOTES" shall mean the 11.5% Senior Notes due
2003 issued by Renco Metals pursuant to the New RMI Indenture in the
aggregate principal amount of $150,000,000, as the same now exists or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
(iii) "TENDER OFFER" shall mean the offer by Renco Metals to
purchase for cash up to all of the Existing Senior Notes at a price of
112.75% of the aggregate principal amount thereof, plus accrued and unpaid
interest, pursuant to the Tender Offer Agreements.
(iv) "TENDER OFFER AGREEMENTS" shall mean, individually and
collectively, the Offer to Purchase and Consent Solicitation Statement, dated
May 24, 1996, as amended on June 18, 1996, with respect to the repurchase by
Renco Metals of the Existing Senior Notes, and all other agreements,
documents and instruments related thereto, as the same now exists or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
(v) "EXISTING SENIOR NOTES" shall mean the 12% Senior Notes
due 2000, issued by Renco Metals, dated as of
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<PAGE>
August 4, 1993, pursuant to the Existing Indenture payable to the order of
the holders thereof in the original principal amount of $75,000,000, on the
terms and conditions set forth in Exhibit A to the Loan Agreement, as the
same now exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
(vi) "EXISTING INDENTURE" shall mean the Indenture, dated as
of August 1, 1993, by and among Renco Metals, as obligor, Borrower and
Magnesium Corporation of America, as guarantors, and Shawmut Bank Connecticut
National Association, as indenture trustee with respect to the Existing
Senior Notes, and the Supplemental Indenture, dated July 1, 1996 (the
"Supplemental Indenture"), as the same now exist or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.
(b) AMENDMENTS TO DEFINITIONS.
(i) All references to the term "Senior Notes" in the Loan
Agreement and in any of the other Financing Agreements shall be deemed and
each such reference is hereby amended to mean the "Existing Senior Notes" as
such term is defined herein.
(ii) All references to the term "Indenture" in the Loan
Agreement and in any of the other Financing Agreements shall be deemed and
each such reference is hereby amended to mean the "Existing Indenture" as
such term is defined herein.
(iii) Sections 1.22 and 1.43 of the Loan Agreement, are hereby
deleted in their entirety and the following substituted therefor:
"[Intentionally omitted]".
(c) INTERPRETATION. For purposes of this Amendment, unless
otherwise defined herein, all terms used herein, including, but not limited
to, those terms used and/or defined in the recitals hereto, shall have the
respective meanings assigned thereto in the Loan Agreement.
2. CONSENTS. Subject to the terms and conditions contained herein,
Lender hereby consents to: (a) the purchase by Renco Metals of up to all of
the Existing Senior Notes pursuant to the Tender Offer and (b) the amendment
to the Existing Indenture as set forth in the Supplemental Indenture.
3. INTEREST RATE. All references in Section 1.23 of the Loan
Agreement to "one and three-quarter percent (1 3/4%) per annum" and "three
and three-quarter (3-3/4%) percent per annum" are each hereby deleted and the
following substituted therefor: "one (1%) percent per annum" and "three (3%)
percent per annum", respectively.
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<PAGE>
4. MAXIMUM CREDIT. Section 1.32 of the Loan Agreement is hereby
deleted in its entirety and the following substituted therefor:
"1.32 "Maximum Credit" shall mean $7,000,000."
5. INVENTORY ADVANCE RATE. Section 2.1(a)(ii) of the Loan Agreement is
hereby deleted in its entirety and the following substituted therefor:
"(ii) fifty (50%) percent of the Value of Eligible Inventory (or
such greater or lesser percentage thereof as Lender may determine
from time to time).
6. INVENTORY SUBLIMIT. Section 2.1(b) of the Loan Agreement is hereby
deleted in its entirety and the following substituted therefor:
"(b) Notwithstanding anything to the contrary contained herein or
in any of the other Financing Agreements, except in Lender's
discretion, the aggregate unpaid principal amount of the Loans
outstanding at any time based on Eligible Inventory, regardless of
the amounts of such Eligible Inventory, shall not exceed $3,500,000."
7. Letter of Credit Accommodations.
(a) Section 2.2(b)(i) of the Loan Agreement is hereby deleted in
its entirety and the following substituted therefor:
"(i) additional Loans pursuant to the Lending Formulas, lending
sublimits set forth in Sections 2.1(b) and 2.1(f) and the Maximum
Credit, shall be available to Borrower on the date of, and after
giving effect to, the proposed issuance of the Letter of Credit
Accommodation as follows: (A) if the proposed Letter of Credit
Accommodation is for the purpose of purchasing Eligible Inventory,
then in an amount equal to (1) fifty (50%) percent multiplied by
the Value of such Eligible Inventory, plus (2) the freight, duty
and other amounts which Lender estimates, in its discretion, must
be paid for or in connection with such Inventory upon arrival or
for delivery to Borrower and (B) if the proposed Letter of Credit
Accommodation is for any other purpose, then one hundred (100%)
percent of the amount thereof;"
(b) Section 2.2(d) of the Loan Agreement is hereby deleted in its
entirety and the following substituted therefor:
- 4 -
<PAGE>
"(d) Except in Lender's discretion, the aggregate maximum amount
of Loans which might otherwise be made available to Borrower by
Lender pursuant to the Lending Formulas, the lending sublimits
set forth in Sections 2.1(b) and 2.1(f) and the Maximum Credit,
shall be reduced from time to time as follows: (i) as to Letter
of Credit Accommodations for the purpose of purchasing Eligible
Inventory, by an amount equal to: (A) fifty (50%) percent
multiplied by the Value of Eligible Inventory to be purchased
with such Letter of Credit Accommodation, plus (B) the freight,
duty and other amounts which Lender estimates, in its discretion,
must be paid for or in connection with such Inventory upon
arrival or for delivery to Borrower and (ii) as to Letter of
Credit Accommodations for any other purpose, one hundred (100%)
percent of the then outstanding aggregate amount thereof and all
other commitments and obligations made or incurred by Lender with
respect thereto."
(c) The reference in Section 2.2(e) of the Loan Agreement to
"three (3%) percent per annum" is hereby deleted and the following
substituted therefor: "one and one-half (1 1/2%) percent per annum".
8. UNUSED LINE FEE. The reference in Section 2.5(a) of the Loan
Agreement to the "Maximum Credit" is hereby deleted and the following
substituted therefor: "$5,000,000".
9. Section 6.3(f) of the Loan Agreement is hereby deleted in its
entirety and the following substituted therefor:
"(f) Indebtedness of Borrower in respect of Capitalized
Lease Obligations incurred in the ordinary course of
business;"
10. GUARANTEES.
(a) Section 6.5(c) of the Loan Agreement is hereby deleted in its
entirety and the following substituted therefore:
"(c) the unsecured guarantee by Borrower of the Indebtedness
of Renco Metals evidenced by the Existing Senior Notes (as
in effect on the date hereof) in an aggregate principal
amount equal to the sum of $75,000,000 minus the aggregate
principal amount of Existing Senior Notes purchased by Renco
Metals in the Tender Offer pursuant to the terms of the
Tender Offer Agreements; PROVIDED, THAT: (i) Borrower shall
not, directly or indirectly, (a) amend, modify, alter or
change the terms
- 5 -
<PAGE>
of such guarantee or consent to any of the same as to
the Existing Senior Notes or any agreements, documents
or instruments executed and/or delivered in connection
therewith, including, but not limited to, the
Existing Indenture, or (b) except as permitted under
Section 6.6(h), redeem, retire, defease, purchase or
otherwise acquire such indebtedness prior to its stated
maturity, or set aside or otherwise deposit or invest any
sums for such purpose, and (ii) Borrower shall furnish to
Lender all notices, demands or other material either received
from any of the holders of the Existing Senior Notes or
any representative of the holders (including, but not limited
to, the trustee), promptly after receipt thereof, or sent by
Borrower, or on its behalf, to any of the holders or
the Existing Senior Notes, or any representative of the
holders (including, but not limited to, the trustee)
concurrently with the sending thereof, as the case may
be;"
(b) Section 6.5 of the Loan Agreement is hereby amended by adding
the following new Section (h) immediately after Section 6.5(g) thereof:
"(h) the unsecured guarantee by Borrower of the Indebtedness
of Renco Metals evidenced by the New RMI Notes (as in effect
on the date hereof); PROVIDED, THAT: (i) Borrower shall
not, directly or indirectly, (a) amend, modify, alter or
change the terms of such guarantee or consent to any of
the same as to the New RMI Notes or any agreements,
documents or instruments executed and/or delivered in
connection therewith, including, but not limited to, the
New RMI Indenture, or (b) except as permitted under
Section 6.6(h), redeem, retire, defease, purchase or
otherwise acquire such indebtedness prior to its stated
maturity, or set aside or otherwise deposit or invest any
sums for such purpose, and (ii) Borrower shall furnish to
Lender all notices, demands or other material either
received from any of the holders of the New RMI Notes or
any representative of such holders, including, but not
limited to, the trustee), promptly after receipt thereof,
or sent by Borrower, or on its behalf, to any of the holders
of the New RMI Notes, or any
- 6 -
<PAGE>
representative of such holders (including, but not limited to,
the trustee) concurrently with the sending thereof, as the case
may be;"
11. TRANSACTIONS WITH AFFILIATES.
(a) Section 6.6(f) of the Loan Agreement is hereby deleted in its
entirety and the following substituted therefor:
"(f) Borrower may make payments to or on behalf of
Renco Metals; PROVIDED, THAT, (i) all proceeds of each
such payment by Borrower to or on behalf of Renco Metals
shall be used to pay the regularly scheduled interest due
and payable within six (6) months of the date of such
payment under the terms of the Existing Senior Notes (as
in effect on the date hereof), (ii) the amount of each
such payment by Borrower to or on behalf of Renco Metals
shall not exceed an amount equal to: (A) the amount of
the regularly scheduled payments of interest under the
Existing Senior Notes (as in effect on the date hereof)
due and payable within six (6) months of the date of such
payment by Borrower to or on behalf of Renco Metals MINUS
(B) any amounts paid by Magcorp to or on behalf of Renco
Metals in respect of such interest then due, and (iii) no
Event of Default, or act, condition or event which with
notice or passage of time or both would constitute an
Event of Default shall have occurred and be continuing at
the time of or after giving effect to the payment of any
such amounts".
(b) Section 6.6 of the Loan Agreement is hereby amended by adding
the following new Sections (g) and (h) immediately after Section 6.6(f)
thereof:
"(g) Borrower may make payments to or on behalf of
Renco Metals; PROVIDED, THAT, (i) all proceeds of each
such payment by Borrower to or on behalf of Renco Metals
shall be used to pay the regularly scheduled interest due
and payable within six (6) months of the date of such
payment under the terms of the New RMI Notes (as in
effect on the date hereof), (ii) the amount of each such
payment by Borrower to or on behalf of Renco Metals shall
not exceed an amount equal to: (A) the amount of the
regularly scheduled payments of interest under the New
RMI Notes (as in effect on the date hereof) due and
payable within six (6) months of the date of such payment
by Borrower to or on behalf of Renco Metals MINUS (B) any
amounts paid by Magcorp
- 7 -
<PAGE>
to or on behalf of Renco Metals in respect of such
interest then due, and (iii) no Event of Default,
or act, condition or event which with notice or
passage of time or both would constitute an Event
of Default shall have occurred and be continuing
at the time of or after giving effect to the
payment of any such amounts; and
(h) Borrower may make certain payments to or on
behalf of Renco Metals; PROVIDED, THAT, (i) all
proceeds of each such payment by Borrower to or on
behalf of Renco Metals shall be used to pay any
mandatory redemptions of the Existing Senior Notes
and the New RMI Notes (as each is in effect on the
date hereof) required by the Existing Indenture
and the New RMI Indenture (as each is in effect on
the date hereof) in the event of (A) certain Asset
Sales (as defined in the Existing Indenture and
the New RMI Indenture as each is in effect on the
date hereof) of Borrower other than the
Collateral, and (B) a Change of Control (as
defined in the Existing Indenture and the New RMI
Indenture as each is in effect on the date
hereof), (ii) the amount of each such payment by
Borrower to or on behalf of Renco Metals shall not
exceed an amount equal to: (A) the amount of the
mandatory redemptions of the Existing Senior Notes
and the New RMI Notes required to be paid by Renco
Metals MINUS (B) any amounts paid by Magcorp to or
on behalf of Renco Metals in respect of such
payments, and (iii) no Event of Default, or act,
condition or event which with notice or passage of
time or both would constitute an Event of Default
shall have occurred and be continuing at the time
of or after giving effect to the payment of any
such amounts".
(c) Notwithstanding anything to the contrary contained in Sections
6.6 or 6.7 of the Loan Agreement, but subject to the terms and conditions
contained herein, Borrower may declare and pay, out of legally available
funds therefor, a one (1) time dividend as of the date hereof to Renco Metals
or to Renco Group on behalf of Renco Metals in an amount not to exceed an
amount equal to: (A) $75,028,175.21 MINUS (B) any amounts paid by Magcorp to
Renco Metals or to Renco Group on behalf of Renco Metals in respect of such a
dividend payment as of the date hereof.
12. RENEWAL DATE. The reference in Section 9.1(a) of the Loan
Agreement (as previously amended) to "five (5) years from the date hereof"
shall be deleted in its entirety and the following substituted therefor: "six
(6) years from the date hereof".
- 8 -
<PAGE>
13. EARLY TERMINATION FEE. Notwithstanding anything to the contrary
contained in Section 9.1(e) of the Loan Agreement or any of the other
Financing Agreements (including Amendment No. 1), if Lender terminates the
Loan Agreement or the other Financing Agreements upon the occurrence of an
Event of Default or at the request of Borrower prior to the Renewal Date (as
amended herein), Borrower hereby agrees to pay to Lender for the account of
Lender, upon the effective date of such termination, an early termination fee
in an amount equal to:
(i) $140,000, if such termination is effective prior to the fourth
anniversary of the Loan Agreement; or
(ii) $70,000, if such termination is effective after the fourth
anniversary of the Loan Agreement but prior to the Renewal Date
or the anniversary of the Renewal Date in any subsequent year
thereafter.
14. NOTICE. Notwithstanding anything to the contrary contained in
Section 9.5 of the Loan Agreement, copies of all notices, requests and
demands to or upon Borrower are to be given to the following address:
The Renco Group, Inc.
30 Rockefeller Plaza
New York, New York 10112
Attention: Mr. Ira Leon Rennert
15. FACILITY INCREASE FEE. Borrower hereby agrees to pay
Lender a Facility Increase Fee in the amount of $20,000,
simultaneously with the execution of this Amendment, which fee is
fully earned as of the date hereof. Such fee may, at Congress'
option, be charged directly to any account of Borrower maintained
by Lender.
16. REPRESENTATIONS, WARRANTIES AND COVENANTS. In addition
to the continuing representations, warranties and covenants
heretofore or hereafter made by Borrower to Lender pursuant to
the other Financing Agreements, Borrower hereby represents,
warrants and covenants with and to Lenders as follows (which
representations, warranties and covenants are continuing and
shall survive the execution and delivery hereof and shall be
incorporated into and made a part of the Financing Agreements):
(a) TENDER OFFER AND CANCELLATION OF EXISTING SENIOR
NOTES.
(i) The Tender Offer Agreements and the transactions
contemplated thereunder have been duly executed, delivered and performed in
accordance with their terms by the respective parties thereto in all
respects, including the fulfillment (not merely the waiver, except as may be
disclosed to
- 9 -
<PAGE>
Agent and consented to in writing by Agent) of all conditions precedent set
forth therein and giving effect to the terms of the Tender Offer Agreements,
the portion of all of the Existing Senior Notes tendered by the holders of
Existing Senior Notes and accepted by Renco Metals have been purchased by
Renco Metals and obligations, liabilities and indebtedness of Renco Metals
evidenced by or arising under such tendered Existing Senior Notes have been
satisfied.
(ii) All actions and proceedings required by the Tender Offer
Agreements, applicable law and regulation have been taken and the
transactions required thereunder had been duly and validly taken and
consummated.
(iii) No court of competent jurisdiction has issued any
injunction, restraining order or other order which prohibits consummation of
the transactions described in the Tender Offer Agreements and no governmental
action or proceeding has been threatened or commenced seeking any injunction,
restraining order or other order which seeks to void or otherwise modify the
transactions described in the Tender Offer Agreements.
(iv) Borrower has delivered, or caused to be delivered, to
Lender, true, correct and complete copies of the Tender Offer Agreements.
(b) NEW RMI NOTES.
(i) The New RMI Notes have been duly authorized, issued and
delivered by Renco Metals and all agreements, documents and instruments
related thereto, including, but not limited to, the New RMI Indenture, have
been duly authorized, executed and delivered and the transactions
contemplated thereunder performed in accordance with their terms by the
respective parties thereto in all respects, including the fulfillment (not
merely the waiver) of all conditions precedent set forth herein. All actions
and proceedings required by the New RMI Notes and the agreements, documents
and instruments related thereto, applicable law or regulation have been taken
and the transactions required thereunder have been duly and validly taken and
consummated. Neither the execution and deliver of New RMI Notes or any of
the instruments and documents to be delivered pursuant thereto, nor the
consummation of the transactions therein contemplated, nor compliance with
the provisions thereof, has violated or will violate any law or regulation or
any order or decree of any court or governmental instrumentality in any
respect or does or will conflict with or result in the breach of, or
constitute a default in any respect under, any indenture, mortgage, deed of
trust, agreement or instrument to which either Borrower or Renco Metals is or
was a party or may be bound, or result in the creation or imposition of any
lien, charge, or encumbrance upon any of the property of Borrower or Renco
Metals
- 10 -
<PAGE>
or violate any provision of the Certificate of Incorporation or By-Laws of
Borrower or Renco Metals.
(ii) No court of competent jurisdiction has issued any
injunction, restraining order or other order which prohibits consummation of
the issuance of the New RMI Notes and the transactions described therein and
no governmental or other action or proceeding has been threatened or
commenced, seeking any injunction, restraining order or other order which
seeks to void or otherwise modify the issuance of the New RMI Notes.
(iii) Borrower has delivered, or caused to be delivered, to
Lender, a true, correct and complete specimen of the New RMI Notes and copies
of all other agreements, documents and instruments existing as of the date
relating thereto.
(c) NO DEFAULT. No Event of Default exists on the date of this
Amendment (after giving effect to the amendments to the Loan Agreement made
by this Amendment).
(d) CORPORATE POWER AND AUTHORITY. This Amendment has been duly
executed and delivered by Borrower and is in full force and effect as of the
date hereof, and the agreements and obligations of Borrower contained herein
constitute legal, valid and binding obligations of Borrower enforceable
against Borrower in accordance with their respective terms.
17. CONDITIONS PRECEDENT. The effectiveness of the consents and other
terms and conditions contained herein shall be subject to the receipt by
Lender of each of the following, in form and substance satisfactory to Lender:
(a) evidence that: (i) the New RMI Notes and all agreements,
documents and instruments relating thereto have been duly authorized,
executed and delivered by the parties thereto in accordance with their terms
and (ii) Renco Metals has received from or on behalf of the initial holder of
the New RMI Notes cash or other immediately available funds in the aggregate
amount of $150,000,000 minus any underwriting discount with respect thereto,
constituting the net proceeds from the issuance of the New RMI Notes;
(b) evidence that the proceeds received by Renco Metals from or on
behalf of the holders of the New RMI Notes have been applied as set forth in
the Form S-1 Registration Statement filed by Renco Metals with the
Securities and Exchange Commission on May 24, 1996, as amended, including
that some of the proceeds have been applied to repurchase all of the Existing
Senior Notes tendered by such holders pursuant to the Tender Offer; and
(c) an original of this Amendment, duly authorized, executed and
delivered by Borrower.
- 11 -
<PAGE>
18. ADDITIONAL EVENTS OF DEFAULT. The parties hereto acknowledge,
confirm and agree that the failure of Borrower to comply with the covenants,
conditions and agreements contained herein or in the New RMI Indenture shall
constitute an Event of Default under the Financing Agreements (subject to the
applicable cure period, if any, with respect thereto provided for in the Loan
Agreement as in effect on the date hereof).
19. EFFECT OF THIS AGREEMENT. Except as modified pursuant hereto, no
other changes or modifications in the Loan Agreement or the other Financing
Agreements are intended or implied and the Financing Agreements are hereby
specifically ratified, restated and confirmed by all parties hereto as of the
affective date hereof. To the extent of conflict between the terms of this
Amendment and the other Financing Agreements, the terms of this Amendment
shall control.
20. GOVERNING LAW. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in
accordance with the laws of the State of New York.
21. BINDING EFFECT. This Amendment shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors and
assigns.
22. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one
and the same agreement. In making proof of this Amendment, it shall not be
necessary to produce or account for more than one counterpart thereof signed
by each of the parties hereto.
23. FURTHER ASSURANCES. The parties hereto shall execute and deliver
such additional documents and take such additional action as may be necessary
or desirable to effectuate the provisions and purposes of this Agreement.
- 12 -
<PAGE>
Please sign the enclosed counterpart of this Amendment in the space
provided below, whereupon this Amendment, as so accepted by Lender, shall
become a binding agreement between Borrower and Lender.
Very truly yours,
SABEL INDUSTRIES, INC.
By: /s/ Roger L. Fay
--------------------------
Title: Vice President
-----------------------
AGREED:
CONGRESS FINANCIAL CORPORATION
By: /s/ Janet S. Last
--------------------------
Title: Vice President
-----------------------
- 13 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 20,779
<SECURITIES> 0
<RECEIVABLES> 25,378
<ALLOWANCES> 514
<INVENTORY> 26,447
<CURRENT-ASSETS> 75,220
<PP&E> 73,465
<DEPRECIATION> 36,852
<TOTAL-ASSETS> 118,658
<CURRENT-LIABILITIES> 27,543
<BONDS> 154,132
0
0
<COMMON> 1
<OTHER-SE> (74,035)
<TOTAL-LIABILITY-AND-EQUITY> 118,658
<SALES> 196,974
<TOTAL-REVENUES> 196,974
<CGS> 116,808
<TOTAL-COSTS> 146,021
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 152
<INTEREST-EXPENSE> 13,045
<INCOME-PRETAX> 39,261
<INCOME-TAX> 13,534
<INCOME-CONTINUING> 25,727
<DISCONTINUED> 0
<EXTRAORDINARY> (7,284)
<CHANGES> 0
<NET-INCOME> 18,443
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
