<PAGE>
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, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
COMMISSION FILE NUMBER 333-4513
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 26, 1998: 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, 1997
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 16
ITEM 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 38
PART III
ITEM 10 - Directors and Executive Officers of the
Registrant 38
ITEM 11 - Executive Compensation 39
ITEM 12 - Security Ownership of Certain Beneficial
Owners and Management 41
ITEM 13 - Certain Relationships and Related
Transactions 41
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 42
SIGNATURES 46
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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 97.9 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. Magcorp and
Sabel became subsidiaries of Renco Metals upon its establishment.
The Company was incorporated in Delaware in 1993, and its executive offices
are located at c/o Magnesium Corporation of America, 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 1997, 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.
Magcorp's production facilities are located in Rowley, Utah and have a
nominal annual production capacity of nearly 41,000 metric tons. This
capacity is approximately 15 percent of current western world production
capacity, according to International Magnesium Association ("IMA")
information and Magcorp management estimates, excluding an Israeli facility
that started up in 1997, but through the third calendar quarter of 1997 had
not yet officially reported production statistics to the IMA. (see
"-Magnesium Supply") Magcorp participates in the world magnesium markets
which represented demand of 330,000 metric tons in 1997 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 88 percent of available western world production
capacity, excluding the Israeli facility. 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 indirectly 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. 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 United States. See "ITEM 3. Legal Proceedings--Pending Trade
Issues." Magnesium imports from non-western world producers also affect
competition and are more fully discussed under "--Recent Industry
Developments" below.
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The seven primary western world magnesium producers shipped approximately
248,000 metric tons of magnesium in calendar year 1997 according to the IMA,
based on annualized nine month statistics. In addition, 82,000 metric tons of
magnesium produced in the CIS and PRC were consumed in western world markets.
The Company estimates that these combined shipments generated revenues of
approximately $1.1 billion. The 1997 shipments by western and non-western
producers represented an 8.6 percent and 23.0 percent increase over 1996 levels,
respectively, demonstrating both the increase in overall demand for magnesium
and the increased presence of non-western producers in the markets.
According to the IMA (based on nine month figures annualized), North
American markets account for the majority of western world consumption of
magnesium, 59 percent in calendar 1997, whereas Western Europe and Asia account
for 24 percent and 13 percent, respectively. All other western world areas
combined account for the remaining four 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 1993 through 1997:
NORTH AMERICAN CONSUMPTION OF PRIMARY MAGNESIUM
<TABLE>
<CAPTION>
CUSTOMER CATEGORY 1993 1994 1995 1996 1997(*) END USES
- ----------------- ---- ---- ---- ---- ------- --------
(in thousands of metric tons)
<S> <C> <C> <C> <C> <C> <C>
Aluminum Alloying 64.7 73.0 77.6 66.0 72.5 Beverage cans, truck panels, home siding,
aircraft and marine alloys.
Desulfurization 29.3 26.2 22.2 26.4 30.4 Steel production from iron.
Die Casting 22.7 30.6 42.7 50.6 67.1 Automotive, electronics and hand tools.
Ductile Iron 7.4 6.9 6.5 6.5 6.7 Pipe production, automotive components and
heavy-earth moving equipment.
Metal Reduction 3.9 2.4 2.6 3.4 3.7 Production of titanium, zirconium, beryllium
and uranium. Uses include aerospace, chemical
processing and nuclear products.
Electro-Chemical 6.3 6.4 6.8 6.1 5.1 Cast anodes for cathodic protection of
underground steel pipelines.
Others 8.8 7.2 7.0 8.6 9.9 Sheet and plate and extrusion stock, gravity
----- ----- ----- ----- -----
castings for aerospace applications, powder
for flares, chemicals and exotic
pharmaceuticals and perfumes.
Total 143.1 152.7 165.4 167.6 195.4
----- ----- ----- ----- -----
----- ----- ----- ----- -----
(*) 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 36.5 percent from 1993 to 1997, or at an average annual
growth rate of 8.2 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 1997,
combined consumption in all North American end use markets increased 16.6
percent over 1996 levels.
MAGNESIUM SUPPLY. 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, Dead Sea Magnesium, located in Israel
with an estimated annual capacity of 27,500 metric tons, began production in
1997. It has been reported that over $460 million has already been invested in
the Dead Sea Magnesium plant and an additional $50 million capital spending
request has been publicized as submitted to Dead Sea Magnesium's parent company
to "debottleneck" the new plant. Startup difficulties that constrained 1997
production to a reported 8,000 metric tons have been publicized. The capacity
of the Israeli facility may also be increased, subject to startup 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 according to published
reports. In addition, it has been reported that 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 western world producers is about 275,000
metric tons, excluding the Israeli facility, which through the third calendar
quarter of 1997 had not yet officially reported production statistics to the
IMA. In the third quarter of calendar 1997, management estimates that North
American producers, including Magcorp, operated at about 87 percent of capacity.
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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 November 1997, Noranda, Inc. publicly announced
approval of a project to construct a 58,000 metric ton annual capacity magnesium
plant in Quebec. The plant is estimated to cost $720 million (Canadian) and
startup is scheduled for 2000. In addition to the proposed Australian and
Canadian facilities, three other potential manufacturers have announced their
interest in building plants in Iceland, Africa, and Manitoba, Canada,
respectively. Pilot and feasibility studies have not been completed for any of
these facilities. Norsk Hydro announced plans in June 1997 to increase its
production capacity by 43,000 metric tons in two phases; 25,000 of which is
planned to start up in 2000, with construction of the second phase to follow
once the first is operational. Norsk Hydro has not publicized any final
approval of this expansion project.
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. Magcorp announced a list price decrease for
primary pure magnesium to $1.80 per pound effective January 1, 1997, reflecting
then 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. There has been no change in North American list price since that
date. 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 are 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, although the recently formed Chinese
Magnesium Association has indicated a total annual capacity of 200,000 metric
tons. Magcorp believes that increased capacity may continue to result in
increased 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 1997, limited PRC pure magnesium was shipped into
the United States due to the antidumping duties in place. See "ITEM 3. Legal
Proceedings--Pending Trade Issues."
Production in the CIS was relatively unchanged in 1997. However, more CIS
magnesium reached the United States in 1997 than in 1996, due to the lack of
duties against certain Russian traders. Further, some U.S. users have
solidified long-term arrangements as evidenced by General Motors and Ford
entering into agreements for alloy supplied by Solikamsk, one of the key Russian
producers. Magcorp is continuing its appeals in the effort to secure dumping
duties against all Russian imports, but there can be no assurance of success.
See "ITEM 3. Legal Proceedings--Pending Trade Issues."
As of September 30, 1997, the latest available date of IMA statistics,
western world magnesium producer inventories were 33,500 metric tons, which
represents approximately five and one-half weeks of supply, compared with normal
levels of approximately eight weeks, and down from September 30, 1996 levels of
38,400 metric tons. The recent slight decrease in inventories resulted from
higher demand, partially offset by 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 continued increase in
aluminum can usage and higher usage of rolled aluminum sheet in automobiles, it
is likely that overall demand will continue to grow, and that the western world
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.
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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 Magcorp to produce some of the various
sizes, shapes and weights of magnesium ingots at lower cost.
The electrolytic cell conversion program commenced in 1997 with the
installation of a prototype cell. Assuming the successful completion of
prototype work by the end of fiscal year 1998 or early in fiscal year 1999, the
conversion of the remaining cells is expected to be completed over a period of
approximately two years. As a result, the associated cost reductions and
related manufacturing efficiencies are expected to be realized in the Company's
operating results beginning by the end of fiscal year 2000 or early in fiscal
year 2001. 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 chlorine emissions, thereby
addressing anticipated regulations to be 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 sales volume is sold pursuant
to contracts with select customers. During 1997 and 1995, sales to any single
customer did not exceed ten percent of total consolidated revenues. During
1996, sales to Rossborough Manufacturing Co. LP was approximately 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. 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 amended the existing contract in 1997 to simplify the
utility's billing practices under the existing contract. The amendment was
approved by applicable governmental oversight boards in January 1998.
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 1995, 1996 and 1997.
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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, 1997, Magcorp had 561 employees, 149 of whom were
salaried and 412 of whom were hourly workers. Approximately 75 percent of the
hourly employees are represented by the United Steelworkers of America and
employed under a four year collective bargaining contract that expires August
31, 2001 and automatically renews for additional one-year periods (unless
written notice of termination by either party is given). Magcorp believes that
its relations with employees are satisfactory.
ENVIRONMENTAL MATTERS
Magcorp's most significant long-term environmental issue is compliance with
the Clean Air Act. Title III of the Clean Air Act will establish, on a published
schedule, new emission standards for previously unregulated air toxins. These
national emission standards for hazardous air pollutants ("NESHAPS") will be
technology based and will be designed to achieve the maximum control as
determined by a comparison of installations at similar facilities in specific
industry categories. Representatives from the Environmental Protection Agency
have visited Magcorp's facility in preparation for the process of establishing
NESHAPS for control of chlorine and hydrochloric acid emissions.
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 was installed and operated in 1997 and, assuming successful
completion of prototype operations in 1998, the conversion of the remaining
cells is expected to be completed in approximately two years. With respect to
hydrogen chloride, Magcorp has installed scrubbers to reduce emissions that are
considered to use maximum available control technology on the pertinent sources
of emissions.
Magcorp plans to spend approximately $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.
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 classified, 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.
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BUSINESS STRATEGY
Sabel's business strategy is to focus on niche products and services and
emphasize long-term customer and supplier relationships within its served
markets.
DIVERSE BUSINESSES. Sabel management believes that Sabel operates at a
competitive advantage by maintaining a presence in the scrap metal, rebar and
service center markets. Specifically, Sabel's diverse operations provide it
access to timely information across its served markets prior to its competitors
which generally operate in only one market. This information enables Sabel to
manage its inventory and price changes in a manner which benefits Sabel's
financial performance.
NICHE MARKETS. Sabel also focuses on small volume, high-margin sales to
customers whose order sizes are not efficiently handled by larger steel service
centers and scrap metal companies. Management believes that Sabel's flexibility
to service these customers, enhanced by its ability to provide one-day
turnaround service on most commonly used steel products at competitive prices,
is a unique facet of Sabel's strategy. Sabel's relationship with larger
customers enables Sabel to maintain a specific inventory of steel products. As 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")
includes five facilities located in Montgomery, Dothan, Mobile and Tuscaloosa,
Alabama, and Newnan, Georgia. 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 1997, SSC accounted for 72 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 128 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 1997, 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 1997, RFD contributed 8 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.
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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. These other operations represented 2 percent of
Sabel's fiscal year 1997 revenues.
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, 1997, Sabel had 239 employees, 72 of whom were salaried
and 167 of whom were hourly workers. Of the hourly employees, 62 are represented
by the United Steelworkers of America. The current three year bargaining
contract expires June 30, 2000. 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, and
has a current capacity rating of nearly 41,000 metric tons per year. The
Company's operating permit with the State of Utah Department of Environmental
Quality allows annual production of up to 43,545 metric tons.
Magcorp owns the buildings and land comprising 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 nine facilities covering
approximately 343,000 square feet across the Southeast region which include five
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. Such reviews could have been requested in May 1996 and 1997, but none
were. The next review request can be made in May 1998.
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 Ukraine had injured domestic magnesium producers. In
August 1996, the CIT rejected the appeal by the Ukrainian trader and affirmed
the ITC's determination. The Ukrainian trader appealed the CIT's decision to
the U.S. Court of Appeals for the Federal Circuit ("CAFC"). In December 1997,
the CAFC decided that the CIT applied an improper legal test and failed to
consider certain evidence properly, vacated the CIT's decision and remanded the
case to the CIT for further proceedings consistent with the CAFC decision. If
the Ukrainian trader prevails in the further proceedings before the CIT and
CAFC, the 80-104 percent antidumping duties on imports of Ukrainian pure
magnesium would be lifted.
In June 1995, Magcorp appealed to the CIT the DOC's determination that
certain producers and traders of Russian 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 appealed the CIT's decision to the CAFC. Magcorp's appeal to the CAFC
has been briefed and argued. 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.
In November 1996, a PRC exporter requested a review of its U.S. export
sales of pure magnesium on the basis that it is a new shipper of magnesium from
the PRC. In January 1998, the DOC determined that the new shipper qualified for
a reduction in antidumping duty from 108 percent to 69.53 percent.
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. By
November, 1993, final duty rates on magnesium imported into the United States
from Canada (except magnesium from Timminco) were established 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%
-10-
<PAGE>
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 and fourth review
periods from August 1, 1994 through July 31, 1996, 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 fifth antidumping administrative
review, covering the August 1, 1996 through July 31, 1997 period, has been
initiated by the DOC, which is scheduled to release its final determination in
this review by September 1998.
The DOC's determination of no sales at less than fair value in the third
and fourth antidumping administrative review could constitute the first two
years 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 of the
antidumping order. 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 the antidumping order
could have a material adverse impact on magnesium prices, depending upon market
conditions.
The DOC has finalized administrative reviews of the CVD orders on imports
of pure and alloy magnesium from Canada for the first four review periods as
listed in the table below. The DOC has initiated the fifth CVD administrative
review, which covers calendar 1996, and has scheduled the release of the final
determination for that review for September 1998.
Description Period Rate
----------- ------ ----
Original Determination Calendar 1991 7.61%
1st Review 12/6/91 - 12/31/92 9.86%
2nd Review Calendar 1993 7.34%
3rd Review Calendar 1994 4.48%
4th Review Calendar 1995 3.18%
5th Review Calendar 1996 Initiated
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 year 1997 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.
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. In fiscal 1997, the Company
paid to Group dividends totaling $6.6 million. In January, 1998, subsequent to
the Company's fiscal year end, the Company paid to Group dividends totaling $2.0
million. 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, 1997. 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>
<CAPTION>
Year ended October 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (in thousands)
Net sales $ 191,614 $ 196,974 $ 185,806 $ 132,950 $ 131,139
Cost of sales 129,093 116,808 121,189 106,364 95,313
Depreciation, depletion, and amortization 7,451 6,509 5,770 5,604 7,135
Selling, general, and administrative expenses 20,784 22,704 18,470 16,352 14,714
Operating income (loss) 34,286 50,953 40,377 4,630 13,977
Interest income 1,142 1,353 881 186 56
Interest expense 18,697 13,045 10,138 10,208 7,414
Income tax expense (benefit) 4,963 13,534 11,143 (1,932) 2,503
Income (loss) from continuing operations 11,768 25,727 19,977 (3,460) 4,116
Extraordinary item - (7,284) - - 2,930
Cumulative effect of accounting change - - - 30 -
Net income (loss) 11,768 18,443 19,977 (3,430) 7,046
October 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA: (in thousands)
Working capital $ 54,079 $ 47,677 $ 58,880 $ 36,911 $ 35,186
Property, plant, and equipment, net 37,715 36,613 32,014 30,862 32,845
Total assets 126,387 118,658 116,551 89,038 90,515
Total debt 155,183 154,150 78,012 78,839 75,862
Stockholder's equity (deficit) (68,866) (74,034) 4,760 (15,004) (12,000)
</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>
<CAPTION>
Year ended October 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Sales by business segment:
Magcorp $ 147,113 $ 152,941 $ 136,348
Sabel 44,501 44,033 49,458
----------- ----------- -----------
Total sales 191,614 196,974 185,806
Cost of sales 129,093 116,808 121,189
Depreciation, depletion, and amortization 7,451 6,509 5,770
Selling, general, and administrative expenses 20,784 22,704 18,470
----------- ----------- -----------
Total operating income 34,286 50,953 40,377
Interest income 1,142 1,353 881
Interest expense (18,697) (13,045) (10,138)
----------- ----------- -----------
Earnings before income taxes 16,731 39,261 31,120
Income tax expense 4,963 13,534 11,143
----------- ----------- -----------
Net income before extraordinary items 11,768 25,727 19,977
Extraordinary item - extinguishment of debt, net of taxes - (7,284) -
----------- ----------- -----------
Net income $ 11,768 $ 18,443 $ 19,977
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
SALES for fiscal year 1997 decreased 2.7 percent over fiscal year 1996.
The decrease was attributable to a 3.8 percent decrease in Magcorp's revenues,
which was offset by a 1.1 percent increase in Sabel's revenues. Magcorp's
average selling price for magnesium decreased 8.8 percent while magnesium
shipments increased 5.9 percent. Effective January 1, 1997, Magcorp reduced its
list price 6.7 percent, and other manufacturers announced similar reductions.
Competition from primarily PRC and Russian producers continues to put pressure
on prices. Magnesium volumes improved due to stronger demand across most market
segments. According to IMA statistics, estimated market shipments to western
world customers for the first nine months of calendar 1997 were up 11.6 percent
over the comparable period in 1996. 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 increase was primarily due to higher prices
in the steel service center markets, together with slightly higher volumes.
COST OF SALES for fiscal year 1997 increased 10.5 percent on a consolidated
basis. Magcorp's cost of sales increased 13.5 percent due primarily to
increases in acquired energy costs when compared to the corresponding period in
1996. Unit costs of electricity rose 23.6 percent and unit costs of natural gas
rose 15.0 percent over 1996 levels. Magcorp's cost of sales is highly sensitive
to acquired energy costs and levels of production. The cost of sales at Sabel
increased 2.0 percent, reflecting increasing prices and volumes in primarily the
steel service center markets during the year.
DEPRECIATION, DEPLETION, AND AMORTIZATION for fiscal year 1997 increased
14.5 percent from fiscal year 1996 primarily due to increased depreciation of
property, plant and equipment as a result of recent capital equipment additions.
-13-
<PAGE>
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES for fiscal year 1997
decreased 8.5 percent primarily due to decreased compensation expense, offset by
increased development and legal costs when compared to the corresponding period
in 1996. As discussed below, a $3.85 million one-time compensation expense
charge was incurred in 1996 in conjunction with the issuance of $150 million of
11.5% Senior Notes. Development costs increased $1.8 million in 1997 due to
magnesium process enhancement piloting at Magcorp.
INTEREST INCOME for fiscal year 1997 decreased $0.2 million from fiscal
year 1996 due to a decrease in cash and cash equivalent balances on hand to a
month-end average of approximately $23 million in the current year from a
month-end average of approximately $26 million in the corresponding prior year.
Additionally, lower-yield tax-free municipal bond funds also made up part of the
1997 balances.
INTEREST EXPENSE for 1997 increased $5.6 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 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
because of reduced spot sales due to competition from primarily Russian and PRC
producers. According to IMA statistics, worldwide market shipments in calendar
1996 were down 2.8 percent over the comparable period in 1995. 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise from working capital requirements,
capital investments, and interest payment obligations. The Company's primary
available source of liquidity is from cash provided by operating activities.
The Company's liquidity was reduced and its debt service requirements increased
as a result of the issuance of the 11.5% Senior Notes in July 1996, which
increased long-term debt by $76.5 million. The Company's liquidity has also
been reduced by average selling prices for magnesium that are down notably from
record 1996 levels, reducing gross profit, net income, and cash provided by
operating activities. Magnesium pricing and volume are dependent on the overall
market supply and demand, and there is no assurance that current trends will not
continue. Reduced cash flow from operations at Sabel also reduced the Company's
liquidity in 1997.
-14-
<PAGE>
The Company also has available $40.0 million in revolving credit facilities
that provide for advances by the lender based on specified percentages of
eligible accounts receivable and inventories to a maximum of $33.0 million for
Magcorp and $7.0 million for Sabel, net of outstanding letters of credit. As of
October 31, 1997, the unused amounts available to Magcorp and Sabel were
approximately $24.9 million and $3.8 million, respectively. During fiscal year
1997, Sabel had net borrowings of $1.1 million under its revolving credit
facility to fund working capital requirements. Magcorp has not borrowed cash
under its revolving credit facility since November 1994.
Cash provided by operating activities was $19.9 million for fiscal year
1997 compared to $39.2 million for the corresponding 1996 period. The decrease
in operating cash flow in 1997 compared to 1996 resulted from primarily
decreases in net income and the effects of extraordinary loss on extinguishment
of debt, increases in accounts receivable and prepaid expenses, offset primarily
by decreases in inventories and income tax refund receivable.
Capital expenditures were $8.6 million during fiscal year 1997. Capital
expenditures are budgeted at approximately $15 million for 1998, $24 million for
1999, and $17 million for 2000. An estimated $40 million of estimated capital
expenditures for 1998, 1999, and 2000 is related to new electrolytic cell
technology that is expected to improve manufacturing efficiencies and improve
environmental compliance. The timing of capital expenditures for the new
electrolytic cell technology and the related expected manufacturing cost
reductions are dependent on successful completion of prototype work, initiation
of cell conversion, and the schedule for completion of the conversion.
During fiscal year 1997, dividends totaling $6.6 million were paid on all
outstanding shares to the Company's sole stockholder, Group. In January 1998,
subsequent to the Company's fiscal year end, the Company paid to Group dividends
totaling $2.0 million. The declaration and payment of dividends by the Company
are restricted by the Company's long-term debt agreements, which generally allow
dividends on a cumulative basis up to 50 percent of consolidated net income
earned since the issuance of the 11.5% Senior Notes. 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. Management anticipates that existing cash balances
and cash generated from operations and available revolving credit facilities
will be sufficient to finance the Company's liquidity needs for the foreseeable
future.
The Company's long-term debt agreements contain numerous covenants and
prohibitions that limit the financial activities of the Company, including
requirements that the Company satisfy certain financial ratios and limitations
on additional indebtedness. The ability of the Company to meet its debt service
requirements and to comply with such covenants will be dependent upon future
operating performance and financial results of the Company, which will be
subject to financial, economic, political, competitive, and other factors
affecting the Company, many of which are beyond its control.
YEAR 2000 BUSINESS MATTERS
Many information and process control systems used in the current business
environment were designed to use only two digits in the date field and thus may
not function properly in the year 2000. Over the past few years, the Company has
been assessing and modifying its business systems to be year 2000 compliant. The
Company has initiated a plan to achieve year 2000 compliance with respect to its
business and process control systems, including systems and user testing
scheduled to commence in 1998. The Company does not currently expect year 2000
issues related to its business and process control systems to have any material
effect on the Company's costs or to cause any significant disruption in
operations.
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."
-15-
<PAGE>
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements," within the meaning of
the Private Securities Litigation Reform Act of 1995, which involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions;
industry capacity; demand; industry trends; competition; currency fluctuations;
the loss of any significant customers; availability of qualified personnel;
successful completion of planned installation of new technology, and major
equipment failures.
ITEM 8. FINANCIAL STATEMENTS
Financial statements follow immediately and are listed in ITEM 14 of Part
IV of this report.
-16-
<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, 1997 and 1996, and the related
consolidated statements of income, stockholder's equity (deficit), and cash
flows for each of the years in the three-year period ended October 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 31, 1997, 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.
KPMG Peat Marwick LLP
Salt Lake City, Utah
January 5, 1998
-17-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
October 31, 1997 and 1996
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ -------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 26,607 20,779
Accounts receivable, less allowance for doubtful accounts of $514
in 1997 and 1996 27,480 24,864
Income tax refund receivable 131 1,467
Inventories, net 24,744 26,447
Prepaid expenses 3,078 1,663
-------- --------
Total current assets 82,040 75,220
Property, plant, and equipment, net 37,715 36,613
Other assets, net 6,632 6,825
-------- --------
$ 126,387 118,658
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Current installments of long-term debt $ 18 18
Accounts payable 8,262 7,794
Accrued expenses 19,451 19,486
Deferred income taxes 230 245
-------- --------
Total current liabilities 27,961 27,543
Long-term debt, excluding current installments 155,165 154,132
Postretirement medical benefits 6,794 6,605
Deferred income taxes 2,008 2,180
Other liabilities 3,325 2,232
-------- --------
Total liabilities 195,253 192,692
-------- --------
Stockholder's equity (deficit):
10% preferred stock, $1,000 par value. Authorized, 8,500
shares; issued and outstanding no shares - -
Common stock, no par value. Authorized, issued, and
outstanding 1,000 shares 1 1
Additional paid-in capital 500 500
Accumulated deficit (69,367) (74,535)
-------- --------
Net stockholder's equity (deficit) (68,866) (74,034)
Commitments and contingencies
-------- --------
$ 126,387 118,658
-------- --------
-------- --------
See accompanying notes to consolidated financial statements.
</TABLE>
-18-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended October 31, 1997, 1996, and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Sales $ 191,614 196,974 185,806
Costs and expenses:
Cost of sales 129,093 116,808 121,189
Depreciation, depletion, and amortization 7,451 6,509 5,770
Selling, general, and administrative expenses 20,784 22,704 18,470
-------- -------- --------
Income from operations 34,286 50,953 40,377
Interest income 1,142 1,353 881
Interest expense (18,697) (13,045) (10,138)
-------- -------- --------
Income before income taxes and extraordinary item 16,731 39,261 31,120
Income tax expense 4,963 13,534 11,143
-------- -------- --------
Income before extraordinary item 11,768 25,727 19,977
Extraordinary item - extinguishment of debt
(less applicable income tax benefit of $4,559) (note 5) - (7,284) -
-------- -------- --------
Net income $ 11,768 18,443 19,977
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
-19-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity (Deficit)
Years ended October 31, 1997, 1996, and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
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, 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)
Dividends - - - (6,600) - (6,600)
Net income - - - 11,768 - 11,768
--------- --------- --------- --------- --------- ---------
Balances at October 31, 1997 $ - 1 500 (69,367) - (68,866)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
-20-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended October 31, 1997, 1996, and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 11,768 18,443 19,977
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion, and amortization 7,451 6,509 5,770
Extraordinary item- extinguishment of debt - 11,843 -
Amortization of financing fees 989 853 772
Loss on disposal of equipment 29 76 78
Deferred income taxes (187) 561 1,865
Provision for bad debts 163 152 188
Postretirement and deferred compensation plans 476 (940) 1,267
Decrease (increase) in operating assets:
Accounts receivable (2,779) 2,838 (5,285)
Income tax refund receivable 1,336 (891) 392
Inventories 1,703 (4,583) 220
Prepaid expenses (1,415) (1,095) (271)
Other assets 10 28 (20)
Increase (decrease) in operating liabilities:
Accounts payable 468 282 (546)
Accrued expenses (35) 5,159 5,630
-------- -------- --------
Net cash provided by operating activities 19,977 39,235 30,037
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (8,604) (11,223) (7,185)
Proceeds from sale of equipment 22 40 185
-------- -------- --------
Net cash used in investing activities (8,582) (11,183) (7,000)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreements 1,052 (347) (1,317)
Repayment of long-term debt (19) (73,516) (10)
Financing fees and tender offer premiums paid - (16,051) -
Borrowings of long-term debt - 150,000 500
Dividends to Group (6,600) (88,950) -
Retirement of preferred stock - (8,500) -
-------- -------- --------
Net cash used in financing activities (5,567) (37,364) (827)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 5,828 (9,312) 22,210
Cash and cash equivalents, beginning of year 20,779 30,091 7,881
-------- -------- --------
Cash and cash equivalents, end of year $ 26,607 20,779 30,091
-------- -------- --------
-------- -------- --------
</TABLE>
-21-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Years ended October 31, 1997, 1996, and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 17,708 9,014 9,366
Cash paid during the year for income taxes $ 3,815 9,363 8,888
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Minimum pension liability adjustment to other assets $ 806 (87) 469
Minimum pension liability adjustment to other liabilities $ 806 300 (682)
</TABLE>
See accompanying notes to consolidated financial statements.
-22-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1997, 1996, and 1995
(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>
<CAPTION>
Years ended October 31,
--------------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Combined Guarantor statement of operations data:
Net sales $ 191,614 196,974 185,806
Cost of sales 129,093 116,808 121,189
Income before extraordinary items 11,748 25,603 19,787
Net income 11,748 18,319 19,787
October 31,
------------------------
1997 1996
-------- --------
Combined Guarantor balance sheet data:
Current assets $ 78,793 71,982
Noncurrent assets 44,347 43,438
Current liabilities 21,336 20,907
Noncurrent liabilities 15,792 13,649
</TABLE>
-23-
<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:
1997 1996
------- ------
Money market funds $ 8,408 8,045
Certificates of deposit 200 150
------- ------
$ 8,608 8,195
------- ------
------- ------
(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:
1997 1996
------- ------
Loan origination and financing fees $ 6,680 6,680
Unrecognized pension prior service cost 1,255 449
Deposits and other 10 20
------- ------
7,945 7,149
Less accumulated amortization 1,313 324
------- ------
$ 6,632 6,825
------- ------
------- ------
(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.
-24-
<PAGE>
(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.
(h) 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.
(i) 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.
(j) RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995
consolidated financial statements to conform to the 1997 presentation.
-25-
<PAGE>
(3) INVENTORIES
Inventories consist of the following:
1997 1996
------- -------
Finished goods $ 16,264 17,293
Brine in ponds 1,400 1,942
Spare parts and supplies 7,683 6,937
Raw materials and work-in-process 760 855
------- -------
26,107 27,027
Less LIFO reserve 1,363 580
------- -------
$ 24,744 26,447
------- -------
LIFO inventory was reduced in 1997 and 1995. This reduction resulted in
charging lower inventory costs prevailing in previous years to cost of
sales, thus reducing cost of sales by approximately $410 and $570 below the
amount that would have resulted from replacing the liquidated inventory at
October 31, 1997 and 1995, prices, respectively.
(4) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are summarized as follows:
1997 1996
------- -------
Land $ 519 390
Buildings 5,722 5,036
Equipment 69,155 62,962
Leasehold improvements 859 862
Construction-in-process 5,565 4,215
------- -------
81,820 73,465
Less accumulated depreciation and amortization 44,105 36,852
------- -------
$ 37,715 36,613
------- -------
------- -------
-26-
<PAGE>
(5) LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
For Renco Metals:
11.5% senior notes (a) $ 150,000 150,000
12% senior notes (b) 1,500 1,500
For Magcorp:
Revolving credit facility (c) - -
For Sabel:
Revolving credit facility (c) 3,227 2,175
9.7% mortgage note 456 475
-------- --------
Total long-term debt 155,183 154,150
Less current installments 18 18
-------- --------
Long-term debt, excluding current installments $ 155,165 154,132
-------- --------
-------- --------
</TABLE>
The aggregate maturities of long-term debt for each of the twelve-month
periods subsequent to October 31, 1997 are as follows: 1998, $18; 1999,
$3,247; 2000, $1,522; 2001, $396, 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.
-27-
<PAGE>
(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,
1997, 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, 1997. 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 and July
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 and 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, 1997 total $2,370 for Magcorp and none for Sabel.
Based on these criteria as of October 31, 1996, the unused amounts
available to Magcorp and Sabel were approximately $24,900 and $3,800,
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.
-28-
<PAGE>
(c) REVOLVING CREDIT FACILITIES (continued)
The revolving credit facilities contain various covenants and
restrictions including financial covenants which specify that 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, 1997, Magcorp and Sabel
were in compliance with all applicable covenants.
(6) PREFERRED STOCK
The Company has authorized 8,500 shares of preferred stock, which were
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 follow, allocated to income from
continuing operations:
Current Deferred Total
------- ------- -------
1997:
Federal $ 4,317 (64) 4,253
State 833 (123) 710
------- ------- -------
$ 5,150 (187) 4,963
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
------- ------- -------
------- ------- -------
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).
-29-
<PAGE>
(7) INCOME TAXES (continued)
The statutory federal income tax rate is reconciled to the effective income
tax rate as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Computed expected tax expense $ 5,856 13,742 10,892
State and local tax, net of federal benefit 523 1,381 1,400
Depletion (1,374) (1,553) (1,505)
Change in deferred tax asset valuation allowance - - 350
Other (42) (36) 6
------ ------ ------
Income tax expense $ 4,963 13,534 11,143
------ ------ ------
------ ------ ------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at October
31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Bad debt reserves $ 194 194
Inventories-uniform capitalization 247 272
Payroll related accruals 191 59
Deferred compensation 211 101
Miscellaneous accruals 124 193
Net operating loss carryforwards 1,613 2,366
Postretirement medical benefit 1,114 1,042
Environmental reserve 459 459
------- -------
Total gross deferred tax assets 4,153 4,686
Less valuation allowance 893 893
------- -------
Net deferred tax assets 3,260 3,793
------- -------
Deferred tax liabilities:
Inventory basis difference (827) (827)
Accumulated depreciation (4,671) (5,391)
------- -------
Total gross deferred tax liabilities (5,498) (6,218)
------- -------
Net deferred tax liability $ (2,238) (2,425)
------- -------
Deferred income taxes - current $ (230) (245)
Deferred income taxes - noncurrent (2,008) (2,180)
------- -------
Net deferred tax liability $ (2,238) (2,425)
------- -------
------- -------
</TABLE>
No change was made in the total valuation allowance for 1997 or 1996.
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.
-30-
<PAGE>
(8) RELATED PARTY TRANSACTIONS
Magcorp has $318 payable to Group at October 31, 1997 and 1996, 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, 1997.
During 1997, the Company paid to Group dividends totaling $6,600. 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>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 201 192 143
Interest cost on projected benefit obligations 315 291 232
Return on assets (546) (423) (381)
Net amortization and deferral 278 197 182
----- ----- -----
Net pension cost $ 248 257 176
----- ----- -----
----- ----- -----
</TABLE>
-31-
<PAGE>
(9) EMPLOYEE BENEFIT PLANS (continued)
The plan's funded status at each October 31, was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 4,208 3,854 3,562
Nonvested benefits 1,711 512 471
------- ------- -------
Accumulated benefit obligations $ 5,919 4,366 4,033
------- ------- -------
------- ------- -------
Plan's assets at fair value, principally listed securities $ 4,555 3,683 3,169
Actuarial present value of projected benefit obligations (5,919) (4,366) (4,033)
------- ------- -------
Projected benefit obligations in excess of plan assets (1,364) (683) (864)
Unrecognized prior service cost 1,639 498 536
Unrecognized net loss (gain) from past experience and
effects of changes in assumptions (384) (48) 213
------- ------- -------
Net prepaid (accrued) pension cost prior to adjustment
for minimum liability (109) (233) (115)
Adjustment for additional minimum liability (1,255) (449) (749)
------- ------- -------
Net accrued minimum liability $ (1,364) (682) (864)
------- ------- -------
------- ------- -------
</TABLE>
Assumptions used above for Magcorp's defined benefit plan as of
October 31, 1997, 1996, and 1995 include:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Discount rates for determining estimated obligations
and interest cost 7.25% 7.25% 7.25%
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 $557, $709, and $612, for 1997,
1996, and 1995, respectively.
Magcorp has a salaried thrift plan and an hourly thrift plan that
qualify under the Internal Revenue Code Section 401(k). The plans are
available to substantially all employees. Magcorp may make
discretionary matching contributions of 50 percent of each hourly
employee's contribution, and 75 percent of each salaried employee's
contribution, up to the first six percent of the employee's
compensation. Matching contributions were $442, $432, and $310 for
1997, 1996, and 1995, respectively.
-32-
<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 $82, $40, and $78 for 1997, 1996, and
1995, respectively.
Sabel has a noncontributory profit sharing plan for management and
administrative employees. The amount of the annual contribution, if
any, is at the discretion of Sabel and is not to exceed 15 percent of
the compensation of the eligible employees. The contributions were
$99 and $191 for 1996 and 1995, respectively. No contributions were
made during 1997.
(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. The retiree's spouse also receives coverage
that continues for one year after the retiree's death. 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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 586 475
Fully eligible active plan participants 658 1,006
Other active plan participants 1,319 1,827
------ ------
2,563 3,308
Plan assets at fair value - -
------ ------
Accumulated postretirement benefit obligation in
excess of plan assets 2,563 3,308
Unrecognized net gain 4,231 3,297
------ ------
Accrued postretirement benefit obligation $ 6,794 6,605
------ ------
------ ------
</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.
-33-
<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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Service cost $ 166 155 137
Interest cost 239 213 196
Amortization of gain (202) (219) (243)
---- ---- ----
Net periodic postretirement benefit cost $ 203 149 90
---- ---- ----
---- ---- ----
</TABLE>
For measurement purposes, an 7.5 percent annual rate of increase in
the per capita cost of covered benefits (i.e., health care cost trend
rate) was assumed for 1997; the rate was assumed to decrease gradually
to 4.5 percent by the year 2007 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,
1997 by $274 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the year
ended October 31, 1997 by $47.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25 percent at October 31, 1997
and 1996.
(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, 1997 are listed below:
Year ending October 31:
1998 $ 1,828
1999 1,567
2000 1,360
2001 647
2002 443
Thereafter 261
-------
Total minimum lease payments $ 6,106
-------
-------
Rent expense aggregated $2,412, $,2,393, and $2,867 for 1997, 1996, and
1995, respectively. Included in rental expense was contingent rental
expense of approximately $73, $80, and $122 for 1997, 1996, 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 $336, $331, and $339 for 1997, 1996, and 1995,
respectively.
-34-
<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:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Utilities $ 5,845 3,147
Salaries, bonuses, vacation, and other related accruals 3,756 6,473
Interest 5,803 5,803
Taxes, other than income 579 535
Other 3,468 3,528
------- -------
$ 19,451 19,486
------- -------
------- -------
</TABLE>
-35-
<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:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C> <C>
Net sales:
Magnesium $147,113 152,941 136,348
Steel 44,501 44,033 49,458
------- ------- -------
$191,614 196,974 185,806
------- ------- -------
------- ------- -------
Income from operations:
Magnesium $ 32,889 49,119 37,993
Steel 1,444 1,938 2,467
Corporate (47) (104) (83)
------- ------- -------
$ 34,286 50,953 40,377
------- ------- -------
------- ------- -------
Identifiable assets:
Magnesium $107,016 99,796 94,849
Steel 16,124 15,624 15,913
Corporate 3,247 3,238 5,789
------- ------- -------
$126,387 118,658 116,551
------- ------- -------
------- ------- -------
Capital expenditures:
Magnesium $ 7,492 10,564 6,051
Steel 1,112 659 1,134
------- ------- -------
$ 8,604 11,223 7,185
------- ------- -------
------- ------- -------
Depreciation, depletion, and amortization:
Magnesium $ 7,054 6,106 5,397
Steel 397 403 373
------- ------- -------
$ 7,451 6,509 5,770
------- ------- -------
------- ------- -------
</TABLE>
-36-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
(14) SIGNIFICANT CUSTOMERS AND EXPORT SALES
During 1997 and 1995, 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:
1997 1996 1995
------ ------ ------
Net export sales:
Europe $ 6,276 8,524 8,357
Japan 2,132 3,718 5,988
Canada 1,165 1,262 1,050
Other 194 1,670 798
------ ------ ------
$ 9,767 15,174 16,193
------ ------ ------
------ ------ ------
(15) SUBSEQUENT EVENT (PER SHARE FIGURES NOT IN THOUSANDS)
On January 5, 1998, the Board of Directors declared dividends totaling
$2,000, consisting of $2,000 per share cash dividend on each share of
common stock, payable to Group January 7, 1998 on all outstanding shares.
-37-
<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:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C> <C>
Ira Leon Rennert. . . . . . . . .63 Chairman, Director, and Chief Executive
Officer of the Company
Roger L. Fay. . . . . . . . . . .52 Vice President, Finance of the Company
Michael H. Legge. . . . . . . . .51 President and Chief Executive Officer of
Magcorp
Keith Sabel . . . . . . . . . . .47 Director, President and Chief Executive
Officer of Sabel
Justin W. D'Atri. . . . . . . . .70 Director of Sabel
Howard I. Kaplan. . . . . . . . .53 Vice President of Sales and Marketing of
Magcorp
Ron L. Thayer . . . . . . . . . .38 Vice President of Operations of Magcorp
Lee R. Brown. . . . . . . . . . .51 Vice President of Human Resources and Public
and Governmental Affairs of Magcorp
Todd R. Ogaard. . . . . . . . . .42 Vice President of Finance and Administration
of Magcorp
</TABLE>
IRA LEON RENNERT has been the Chairman, Chief Executive Officer and sole
member of the Board of Directors of the Company since its inception and has been
the Chairman, CEO and principal shareholder of Group since its first acquisition
in 1975. In addition, Mr. Rennert is the Chairman of the Board of all of Group's
subsidiaries including WCI Steel, Inc. and AM General Corporation.
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 previously 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.
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.
RON L. THAYER has served in his present position since January 1, 1993. He was
previously 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.
-38-
<PAGE>
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 1997, 1996 and 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
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) 1997 $ - $ - $ - $ 1,200,000 (2)
Chairman and Chief Executive Officer 1996 - - - 1,200,000 (2)
1995 - - - 1,200,000 (2)
Michael H. Legge 1997 120,756 250,000 198,000 24,139 (4)
President and Chief Executive Officer of Magcorp 1996 120,756 275,000 2,668,490 17,850 (4)
1995 120,756 200,000 - 16,491 (4)
Keith Sabel 1997 131,915 50,000 - - (5)
President and Chief Executive Officer of Sabel 1996 128,797 141,000 - 5,625 (5)
1995 124,061 21,000 - 8,050 (5)
Howard I. Kaplan 1997 94,723 100,000 66,000 22,026 (4)
Vice President of Sales and Marketing of Magcorp 1996 94,723 180,000 889,497 21,989 (4)
1995 94,723 100,000 - 18,678 (4)
Ron L.Thayer 1997 85,550 100,000 66,000 5,850 (4)
Vice President of Operations of Magcorp 1996 85,550 130,000 889,497 5,700 (4)
1995 85,550 125,000 - 6,064 (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 97.9 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."
(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.
(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 1997. 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 1997, 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
-39-
<PAGE>
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, 1998 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, 1998 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,
1997, an aggregate of $539,500 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
equal to the total amount of the cash dividend multiplied by their applicable
fully vested participation percentage. In conjunction with the Company's
dividends to Group, Magcorp's Board of Directors declared and paid to the
Company dividends totaling $6.6 million in 1997 and $88.95 million in 1996.
Accordingly, an aggregate of $462,000 in 1997 and $6.23 million in 1996 was paid
to the five Magcorp executive officers who are covered by Magcorp's NWAP
Agreements.
-40-
<PAGE>
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 26, 1998:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
-------------- ---------------- -------------------- --------
<S> <C> <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 97.9 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 of $1.2 million to Group for each of the fiscal years in the three year
period ended October 31, 1997.
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, casualty umbrella, fidelity, fiduciary and workers' compensation.
The premiums for 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 1997, the Company
incurred costs of approximately $1.1 million under the Group insurance program.
The Company believes that its insurance costs under this program were less than
it would have incurred if it had obtained its insurance directly.
-41-
<PAGE>
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, 2002, which may be extended for an
additional term of five years. Total rent payments during fiscal year 1997 were
$0.3 million.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
<S> <C>
A. Documents filed as part of this Form 10-K:
1. FINANCIAL STATEMENTS (included in Part II, ITEM 8):
Independent Auditors' Report 17
Consolidated Balance Sheets - October 31, 1997 and 1996 18
Consolidated Statements of Income - Years ended October 31, 1997, 1996, and 1995 19
Consolidated Statements of Stockholder's Equity (Deficit) - Years ended October 31, 1997, 1996,
and 1995 20
Consolidated Statements of Cash Flows - Years ended October 31, 1997, 1996, and 1995 21
Notes to Consolidated Financial Statements 23
2. FINANCIAL STATEMENT SCHEDULES (included in Part IV):
Schedule II Valuation and Qualifying Accounts 45
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.
</TABLE>
-42-
<PAGE>
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. IDENTIFICATION OF EXHIBITS
--- --------------------------
<S> <C> <C> <C> <C>
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 Metals, Inc., Issuer, Magnesium (6)
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 Metals, Inc., Issuer, Magnesium (1)
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 supplementing Indenture dated as of (7)
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 between The Renco Group, Inc. (1)
and Renco Metals, Inc.
10.5 ---- Amendment No. 1 to Management Consultant Agreement dated May 17, 1996 between The (5)
Renco Group, Inc. and Renco Metals, Inc.
10.6 ---- Amended and Restated Loan and Security Agreement between Congress Financial (1)
Corporation and Magnesium Corporation of America dated August 4, 1993
10.7 ---- Amendment No. 1 dated January 31, 1996 to Amended and Restated Loan and Security (4)
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 Restated Loan and Security (8)
Agreement dated as of August 4, 1993, between Congress Financial Corporation
and Magnesium Corporation of America
10.8.1 ---- Amendment No. 3 dated August 28, 1997 to Amended and Restated Loan and Security (9)
Agreement dated as of August 4, 1993, between Congress Financial Corporation
and Magnesium Corporation of America
10.9 ---- Loan and Security Agreement between Congress Financial Corporation and Sabel (1)
Industries, Inc. dated August 4, 1993
10.10 ---- Amendment No. 1 dated January 31, 1996 to Loan and Security Agreement dated as of (4)
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 Agreement dated as of August 4, (8)
1993, between Congress Financial Corporation and Sabel Industries, Inc.
10.11.1 ---- Amendment No. 3 dated August 28, 1997 to Loan and Security Agreement dated as of August 4, (9)
1993, between Congress Financial Corporation and Sabel Industries, Inc.
</TABLE>
-43-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. IDENTIFICATION OF EXHIBITS
----------- --------------------------
<S> <C> <C> <C>
10.12 ---- Agreement dated July 31, 1969 between the State of Utah, acting by and through the (1)
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 between the State of Utah, (1)
Division of State Lands and Forestry and Amax Magnesium Corporation
10.14 ---- Amended Rights of Way No. U-54897, dated June 21, 1993 issued by the United States (1)
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, Inc. as tenant and Janis Sabel, (1)
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 his wife, Bea Emfinger, to (1)
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 Sabel, Marcel Moers and Dorothy (1)
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 Sabel Land Company, a tenancy in (1)
common, comprised of Mark Sabel, Janis Sabel, Marcel Moers and Dorothy Altheimer
and Sabel Industries, Inc. then known as Ren 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 AZKO Salt Inc. and Magnesium (1)
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 dated January 11, 1996 between (3)
The Renco Group, Inc. and Renco Metals, Inc.
21.1 ---- Subsidiaries of Renco Metals, Inc. (1)
27 ---- Financial Data Schedule (9)
</TABLE>
--------------------------------------------------------------
(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) Previously filed and incorporated herein by reference from
Renco Metals, Inc.'s Form 10-K for the fiscal year ended
October 31, 1996 (Files No. 33-68230 and 333-4513).
(9) 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, 1997.
-44-
<PAGE>
SCHEDULE II
RENCO METALS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended October 31, 1997, 1996, and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Balance Additions Deductions -
at begin- charged to write-offs Balance
ning of costs and against at end of
year expenses allowance year
---------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Year ended October 31, 1997:
Applied against asset accounts:
Allowance for doubtful accounts $ 514 163 (163) 514
Allowance for inventory obsolescence 442 - - 442
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
</TABLE>
-45-
<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 26, 1998 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 26, 1998 /s/ Ira Leon Rennert
- --------------------------------- ---------------------------------------
Ira Leon Rennert
Chairman of the Board, sole
Director, and Chief Executive
Officer (Principal Executive
Officer)
Date: January 26, 1998 /s/ Roger L. Fay
- --------------------------------- ---------------------------------------
Roger L. Fay
Vice President, Finance
(Principal Financial and
Accounting Officer)
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT
REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report to security holders covering the registrant's last fiscal
year and no proxy statement, form of proxy or other proxy soliciting material
with respect to any annual or other meeting of security holders has been nor
will be sent to security holders.
-46-
<PAGE>
AMENDMENT NO. 3 TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
MAGNESIUM CORPORATION OF AMERICA
238 North 2200 West
Salt Lake City, Utah 84116
August 28, 1997
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 Agreement and Security Agreement,
dated as of August 4, 1993, between Lender and Borrower, as amended pursuant
to Amendment No. 1 to Amended and Restated Loan and Security Agreement,
dated January 31, 1996 and Amendment No. 2 to Amended and Restated Loan and
Security Agreement, dated July 3, 1996 (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").
Borrower has requested that Lender agree to certain amendments to the
Loan Agreement and Lender is willing to agree 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. For purpose 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. INDEBTEDNESS. Section 7.3 of the Loan Agreement is hereby amended
by deleting Section 7.3 (1) thereof in its entirety and substituting the
following therefor:
<PAGE>
"(1) Indebtedness of Borrower to Renco Metals, outstanding as of the
date hereof in the amount of $71,598,418.45, 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"
3. TRANSACTIONS WITH AFFILIATES. The proviso to Section 7.6(b) of the
Loan Agreement is hereby amended by deleting the reference to "April 30,
1993" contained therein and substituting the following therefore: "July 3,
1996."
4. 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 Lender 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) 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).
(b) 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.
5. CONDITIONS PRECEDENT. The effectiveness of the other terms and
conditions contained herein shall be subject to the receipt by Lender of an
original of this Amendment, duly authorized, executed and delivered by
Borrower.
6. EFFECT OF THIS AMENDMENT. Except as modified pursuant hereto, no
other changes or modifications to 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
effective 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.
7. GOVERNING LAW. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted
-2-
<PAGE>
and determined in accordance with the laws of the State of New York.
8. 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.
9. 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.
10. 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 Amendment.
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/ Josephine Norris
-------------------------------
Title: 1st Vice President
-----------------------------
-3-
<PAGE>
AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT
SABEL INDUSTRIES, INC.
745 North Court Street
Montgomery, Alabama 36102
August 28, 1997
Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Congress Financial Corporation ("Lender") and Sabel Industries, Inc.
("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 amended pursuant to Amendment No. 1 to Loan and Security
Agreement, dated January 31, 1996 and Amendment No. 2 to Loan and Security
Agreement, dated July 3, 1996 (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").
Borrower has requested that Lender agree to certain amendments to the
Loan Agreement and Lender is willing to agree 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. For purpose 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. TRANSACTIONS WITH AFFILIATES. The proviso to Section 6.6(b) of the
Loan Agreement is hereby amended by deleting the reference to "April 30,
1993" contained therein and substituting the following therefore: "July 3,
1996."
<PAGE>
3. 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 Lender 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) 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).
(b) 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.
4. CONDITIONS PRECEDENT. The effectiveness of the other terms and
conditions contained herein shall be subject to the receipt by Lender of an
original of this Amendment, duly authorized, executed and delivered by
Borrower.
5. EFFECT OF THIS AMENDMENT. Except as modified pursuant hereto, no
other changes or modifications to 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
effective 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.
6. 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.
7. 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.
8. 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.
9. FURTHER ASSURANCES. The parties hereto shall execute and deliver
such additional documents and take such additional
-2-
<PAGE>
action as may be necessary or desirable to effectuate the provisions and
purposes of this Amendment.
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, IN.
By: /s/ Roger L. Fay
----------------------------
Title: Vice President
-------------------------
AGREED:
CONGRESS FINANCIAL CORPORATION
By: /s/ Josephine Norris
---------------------------------
Title: 1st Vice President
-----------------------------
-3-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 26,607
<SECURITIES> 0
<RECEIVABLES> 27,994
<ALLOWANCES> 514
<INVENTORY> 24,744
<CURRENT-ASSETS> 82,040
<PP&E> 81,820
<DEPRECIATION> 44,105
<TOTAL-ASSETS> 126,387
<CURRENT-LIABILITIES> 27,961
<BONDS> 155,165
0
0
<COMMON> 1
<OTHER-SE> (68,867)
<TOTAL-LIABILITY-AND-EQUITY> 126,387
<SALES> 191,614
<TOTAL-REVENUES> 191,614
<CGS> 129,093
<TOTAL-COSTS> 157,328
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 163
<INTEREST-EXPENSE> 18,697
<INCOME-PRETAX> 16,731
<INCOME-TAX> 4,963
<INCOME-CONTINUING> 11,768
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,768
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
