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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended OCTOBER 31, 1998
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 27, 1999: 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, 1998
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 10
ITEM 3 - Legal Proceedings 11
ITEM 4 - Submission of Matters to a Vote of Security Holders 13
PART II
ITEM 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 14
ITEM 6 - Selected Financial Data 14
ITEM 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
ITEM 8 - Financial Statements and Supplementary Data 19
ITEM 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 42
PART III
ITEM 10 - Directors and Executive Officers of the Registrant 42
ITEM 11 - Executive Compensation 43
ITEM 12 - Security Ownership of Certain Beneficial Owners and
Management 45
ITEM 13 - Certain Relationships and Related Transactions 45
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 46
SIGNATURES 50
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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 % owned by Mr. Ira Leon Rennert, the
Chairman and Chief Executive Officer of the Company and Group, through trusts
established by him for himself and members of his family. 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.
Unless otherwise indicated, references to a year are to the Company's
fiscal year ended October 31. Neither Subsidiary's business is a) seasonal; b)
requires unusual working capital; c) involves significant sales order backlog;
or d) involves federal government contracting. Neither Subsidiary has foreign
operations, and 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
By the end of calendar year 1998, Magcorp was the second largest producer
of pure magnesium and magnesium alloys outside the former Commonwealth of
Independent States ("CIS") and People's Republic of China ("PRC"). The terms
"CIS," "PRC," and "western world," which hereinafter refers to areas of the
world excluding the CIS and PRC, are used by the magnesium industry's trade
association, the International Magnesium Association ("IMA"), to delineate
shipments and production of magnesium. Magcorp's Utah production facilities
currently comprise approximately 18% of western world production capacity,
according to IMA information and Magcorp management estimates. Magcorp
participates in world magnesium markets that represented estimated demand of
353,000 metric tons in calendar year 1998, according to IMA information (based
on nine-month statistical figures annualized), a 5.9% increase over the prior
year. Competitive conditions changed significantly in 1998, including the entry
of a new western world producer into commercial markets, continued foreign
import competition and the permanent shutdown of a key producer.
COMPETITIVE CONDITIONS
The magnesium industry has relatively few participants and is highly
competitive. Two significant events occurred with regard to western world
magnesium producers in recent months. First, the Dead Sea Magnesium plant
located in Israel began production on a commercial scale and their products
began competing in several facets of the end-user markets. Second, Dow Chemical
Company ("Dow") announced November 20, 1998 that it was exiting the magnesium
business and shutting down its Freeport, Texas magnesium plant, once the largest
in the world. Dow's announcement stated the decision was made after a careful
evaluation process that considered complex production problems resulting from
severe weather damage as well as Dow's strategic direction and the global
marketplace. As a result, Magcorp management now estimates, from IMA and public
information, that four
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major producers, Magcorp, Norsk Hydro, Northwest Alloys and Dead Sea
Magnesium together account for 88% of available western world production
capacity. Magnesium imports from non-western world producers also continue to
affect competition and are more fully discussed under "--Recent Industry
Developments" below.
Annualizing IMA nine-month statistical figures, calendar 1998 magnesium
shipments can be estimated. The eight (now seven, after Dow's closure) primary
western world magnesium producers shipped an estimated 260,000 metric tons of
magnesium in calendar year 1998. In addition, an estimated 93,000 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. Calendar year 1998 shipments by western and
non-western world producers represented a 4.8% and 16.6% increase over prior
year levels, respectively, demonstrating both the increase in overall demand for
magnesium and the increased presence of non-western producers in the markets.
Not all producers serve all end-user markets. Magcorp and Norsk Hydro
market magnesium products to all the key end-user markets, whereas Northwest
Alloys supplies an estimated 75% of its production capacity to its parent,
Alcoa. Historically, Northwest Alloys has participated primarily in the aluminum
alloying and desulfurization markets, but recently announced their intention to
participate in the die casting market. Norsk Hydro's Canadian plant (one of
their two production facilities) has limited its participation in the U.S.
market mainly to the die casting market, which utilizes magnesium alloys, in
part due to the threat of high antidumping and countervailing duties on their
pure magnesium imports to the U.S. See "ITEM 3. Legal Proceedings--Pending Trade
Issues." Dead Sea Magnesium has publicized its commitment of one-third of their
output to Volkswagen, and Magcorp management estimates that Dead Sea Magnesium
currently produces a limited number of shapes and alloys.
According to the IMA (based on nine month figures annualized), North
American markets account for the majority of western world consumption of
magnesium, 58% in calendar year 1998, whereas Western Europe and Asia account
for 27% and 12%, respectively. All other western world areas combined account
for the remaining 3%. 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 1994
through 1998:
NORTH AMERICAN CONSUMPTION OF PRIMARY MAGNESIUM
<TABLE>
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CUSTOMER CATEGORY 1998(*) 1997 1996 1995 1994 END USES
----------------- ------- ---- ---- ---- ---- --------
(in thousands of metric tons)
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Aluminum Alloying.. 78.1 72.8 66.0 77.6 73.0 Beverage cans, truck panels, home
siding, aircraft and marine alloys.
Die Casting........ 65.6 68.6 50.6 42.7 30.6 Automotive, electronics and hand
tools.
Desulfurization.... 33.7 31.1 26.4 22.2 26.2 Steel production from iron.
Ductile Iron....... 6.0 6.5 6.5 6.5 6.9 Pipe production, automotive components and
heavy-earth moving equipment.
Metal Reduction.... 4.0 3.8 3.4 2.6 2.4 Production of titanium, zirconium,
beryllium and uranium. Uses include aerospace,
chemical processing and nuclear products.
Electro-Chemical... 6.7 5.4 6.1 6.8 6.4 Cast anodes for cathodic protection
of underground steel pipelines.
Others............. 9.8 9.5 8.6 7.0 7.2 Sheet and plate and extrusion stock,
gravity castings for aerospace applications,
powder for flares, chemicals and exotic
pharmaceuticals and perfumes.
Total.......... 203.9 197.7 167.6 165.4 152.7
===== ===== ===== ===== =====
(*) Based on 9 month IMA figures, annualized
</TABLE>
The 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 33.5% from calendar year 1994 to 1998, or at an average
annual growth rate of 6.7%. 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
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magnesium parts to help lighten their vehicles. In calendar year 1998,
combined consumption in all North American end use markets increased 3.1%
over prior year levels.
General Motors' strike in mid-1998 caused a drop in North American die
casting consumption in 1998 compared to 1997. This was offset by continued
strong growth in European automotive die casting; thus overall, die casting
growth continues to be the major driving force for continuing increases in
magnesium demand worldwide.
POTENTIAL 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. It
is reported that over $500 million has already been invested in the new Dead Sea
Magnesium plant discussed above and an additional $65 million capital spending
request has been publicized as submitted to Dead Sea Magnesium's parent company
to "debottleneck" the new plant. The capacity of the Dead Sea Magnesium facility
may also be increased sometime in the future, subject to startup success,
viability and market conditions, from 35,500 to 55,000 metric tons, according to
published reports. Production in 1998 was reported to be about 25,000 metric
tons. In addition, it is reported that at least one-third of the output from the
Dead Sea Magnesium plant is committed to Volkswagen for new automotive
applications, which will reduce the total amount of material Dead Sea Magnesium
will have to offer for sale in worldwide markets. Management estimates that
North American producers, including Magcorp, operated at an overall level of
about 77% of capacity for the first nine months of calendar year 1998. This
capacity utilization figure is lower than the comparable prior year's estimated
87% due to Dow's production difficulties prior to shutdown.
Numerous possible new magnesium plants have been publicized and/or
announced in 1998, including plants in Canada, Australia, Tasmania, the Congo,
Netherlands and Iceland. Of these, the only plant currently under construction
is Noranda, Inc.'s 63,000 metric ton annual capacity Magnola Project in Asbestos
City, Quebec. The plant, which will use asbestos tailings as raw material feed
stock, is estimated to cost $720 million (Canadian) and startup is scheduled for
2000. The Australian project in Queensland announced in 1997 is reportedly in an
early pilot plant stage. Pending the outcome of the operation of the pilot
plant, a 90,000 metric ton facility is being considered with initial
manufacturing intended to come on-line in the 2002 to 2004 time range. Ford
Motor Company ("Ford") has contributed financing for the Queensland pilot plant
and has a long-term contract option for metal purchases. Norsk Hydro has not yet
publicized any final approval of the 1997 announcement of their intent to
increase production capacity at their Canadian plant by 43,000 metric tons in
two phases. All other potential manufacturers have yet to complete feasibility
and/or pilot or technical studies and the likelihood of their future existence
is not known at this point.
RECENT INDUSTRY DEVELOPMENTS
Magnesium prices are sensitive to supply and demand conditions in all of
the end user markets served by the magnesium industry. 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. No changes occurred in 1998 in North American list
prices, but increased imports adversely affected the supply-demand balance and
resulted in lower realized prices.
Manufacturers in the PRC are significant exporters of magnesium. The
Chinese Magnesium Association has indicated total annual capacity in the PRC is
200,000 metric tons, although management estimates that calendar year 1998
production was somewhat less than 100,000 metric tons. Magcorp believes that
imports from the PRC to the western world may continue to increase, 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 smaller, higher cost facilities, some of which
have already reportedly shut down due to low pricing. In 1998, limited amounts
of PRC magnesium ingots were imported into the U.S. due to the antidumping
duties in place. See "ITEM 3. Legal Proceedings--Pending Trade Issues." In 1998,
duties were also established against imports of PRC pure magnesium into Europe.
PRC magnesium producers and magnesium grinders in other countries such as
Canada grind imported PRC magnesium ingots into chips and powders that are not
subject to the U.S. dumping duties. Imports of magnesium powders are estimated
to be about 14,000 metric tons in calendar 1998, an increase of 26% over the
prior year,
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based on U.S. Department of Commerce ("DOC") statistics for ten months
annualized. PRC magnesium powder imports had a strong negative effect in 1998
on prices in the desulfurization market, where the powders are primarily used.
Production in the CIS was relatively unchanged in 1998. However, 24%
more CIS magnesium reached the U.S. in calendar year 1998 than in calendar
year 1997, due to the lack of duties against certain Russian traders. Imports
of Russian pure magnesium reached about 13,500 metric tons in calendar year
1998, based on DOC statistics for ten months annualized. Further, some
domestic users have solidified long-term arrangements to obtain Russian
imports, as evidenced by General Motors and Ford entering into magnesium
alloy supply agreements with Solikamsk, one of the major Russian producers.
Magcorp is continuing its efforts to secure dumping duties against certain
CIS and PRC imports, but there can be no assurance of success. See "ITEM 3.
Legal Proceedings--Pending Trade Issues."
As of September 30, 1998, the latest available date of IMA statistics,
western world magnesium producer inventories on hand were 41,600 metric tons, as
compared to 33,500 metric tons as of September 30, 1997. Magnesium inventory
levels, pricing and volume are dependent on the overall market supply and
demand, and there is no certainty that current trends will not 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. Management
estimates that 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.
In furtherance of its business strategy with respect to costs, management
is pursuing a projected $48 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. The new magnesium
caster is expected to improve product quality, reduce labor requirements and
permit Magcorp to produce certain customer-specified sizes, shapes and weights
of magnesium ingots at lower cost. Total Magcorp development costs, including
electrolytic cell and caster-related development expenditures, totaled $2.6
million, $2.2 million and $510,000 for 1998, 1997, and 1996, respectively.
As of January 1999, work on the caster is approximately one-quarter
complete. Management estimates that the caster will be in service by the end of
1999. Prototype work continues on the electrolytic cell conversion program.
Assuming the successful completion of prototype work by mid-1999, the conversion
of the remaining cells is expected to take place over a period of two to three
years. As a result, the associated cost reductions and related manufacturing
efficiencies are not expected to be realized in the Company's operating results
until the end of 2000 or early in 2001.
With respect to 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."
In 1998, Magcorp increased its participation in die cast markets, which
also requires handling and recycling of die cast customer scrap. Accordingly,
the increase in Magcorp's inventory levels at October 31, 1998 is partially
attributable to increased volumes on hand of recycled die cast magnesium to be
processed by third parties or already processed by third parties. Magcorp is
also increasing inventory levels in 1998 and 1999 to accommodate decreases in
production that are planned to take place during the period of conversion to new
electrolytic cell technology discussed above.
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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.
Magcorp's staff of three direct salespersons and four field representatives who
receive technical assistance from plant personnel handles all established and
prospective new domestic accounts. Accounts in Europe, Japan and Australia are
handled through agency arrangements.
Approximately 90% of Magcorp's annual sales volume is sold pursuant to
contracts with select customers. During 1998 and 1997, sales to any single
customer did not exceed 10% of total consolidated revenues. During 1996, sales
to one Magcorp customer were approximately 12% of total revenues. Management
does not expect the Euro conversion to be material to the business or financial
condition. 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% of its electrical
power needs through the gas turbines located at the Rowley facility. The utility
and Magcorp amended the contract effective January 1998 to simplify the
utility's billing practices under the existing contract.
A variety of chloride based by-products which are produced during the
production of magnesium metal are sold into commercial markets or are
neutralized and disposed of in compliance with environmental regulations.
Aggregate sales of all by-products accounted for 2% or less of consolidated
revenues in 1998, 1997 and 1996.
Other raw materials critical to plant operations include graphite anodes,
special refractory brick, and sulfuric acid. Magcorp maintains alternative
sources of these raw materials to ensure a secure supply at competitive prices.
EMPLOYEES
As of October 31, 1998, Magcorp had 532 employees, 149 of whom were
salaried and 383 of whom were hourly workers. Approximately 79% 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
Title III of the Clean Air Act will establish, on a published schedule, new
national emission standards for hazardous air pollutants ("NESHAPS"). NESHAPS
are to be based on maximum achievable control technology 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 chlorine and hydrogen chloride emissions, which have been previously
unregulated. It is expected that Magcorp will be required to make substantial
reductions in chlorine emissions to meet NESHAPS for primary
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magnesium refineries that will be promulgated by November 2000, with an
expected three to five year timetable for compliance following promulgation
of the new standards.
In anticipation of the new standards, Magcorp has embarked on a program to
install new electrolytic cell technology that will reduce chlorine emissions at
the source. The new cells are also expected to significantly reduce costs
because they have much higher throughput and are more energy efficient. Assuming
the successful completion of prototype work by mid-1999, the conversion of the
remaining cells is expected to take place over a period of two to three years.
With respect to hydrogen chloride, Magcorp has recently installed and is
successfully operating scrubbers to reduce pertinent sources of emissions.
Magcorp does not expect that it will be required to spend significant additional
amounts to meet the new standards for hydrogen chloride. Magcorp plans to spend
a minimum of $40 million of its capital expenditure budget for 1999, 2000 and
2001, directly or indirectly to meet environmental regulatory requirements,
primarily for NESHAPS, and for anticipated other future requirements. Prototype
cell-related project development expenses to date total $4.6 million. There can
be no assurance that Magcorp's cell conversion program will be successful, and
to the extent it is not successful, it could have a material adverse effect on
the Company's financial condition and results of operations.
Representatives of the Utah State Division of Environmental Quality
("UDEQ") Division of Solid and Hazardous Waste visited Magcorp in 1994 regarding
the issue of whether piles of material generated in the electrolytic process,
which cover an extensive land area at Magcorp's 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. No similar material
has been classified by the State as hazardous or solid waste. The State accepted
Magcorp's written storage plan, which does not consider the piles hazardous and
under which no remediation or action by the Company is necessary. If the piles
were at some point in the future to be classified as hazardous waste, thereby
becoming subject to State regulation, corrective action could be required. The
costs of such compliance, if any, could be material; however, such costs cannot
be assessed at this time.
Sampling conducted by MagCorp and by the UDEQ in 1998 indicated a low but
measurable accumulation of chlorinated hydrocarbons in the form of dioxin/furan
compounds in soil and sediment samples from a contained and permitted process
wastewater collection and retention system used at the Magcorp plant site for
over 25 years. While MagCorp does not consider and believes that the UDEQ does
not consider a health hazard to be associated with these preliminary sampling
results, Magcorp intends to conduct additional sampling to verify that there are
limited accumulations of these compounds in the wastewater area. An air
emissions test is being planned to verify the suspected insignificance of any
dioxins in air emissions from the facility. Management does not expect magnesium
refineries to become subject to new regulations regarding these compounds in the
near future. If these compounds do become subject to government regulation, the
costs of such compliance, if any, could have a material adverse effect on the
Company's financial condition and results of operations; however, such costs
cannot be assessed at this time.
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 that
sells a variety of tools and plumbing, sprinkler, building and general supplies.
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
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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. Sabel utilizes primarily its own fleet of trucks to
distribute its products, except for its scrap business, where common carriers
and rail service are also used. 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 1998, SSC accounted for 74% of Sabel's revenues.
SSC specializes in stocking, reprocessing and delivering hot rolled and
cold rolled carbon steel in a variety of sizes and shapes. Purchases of new
steel for reprocessing are spread across approximately 15 steel mills including
both integrated mills and mini-mills, thereby ensuring favorable prices and
availability of product. SSC processes more than 60% of the steel it sells. SSC
has an extensive customer list comprised of approximately 3,000 customers
ranging from large industrial companies to small welding shops. As a result, no
single customer represents in excess of 5% of the division's total sales.
The sales and marketing team at SSC 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 129 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 1998, the scrap metal division accounted for 14% of Sabel's revenues.
All scrap processed in the scrap metal division is inspected prior to
shipment to ensure quality and compliance with customer specifications. As a
result, management believes Sabel enjoys a high quality reputation and has an
acceptance rate in excess of 99% for all scrap sold to customers.
REBAR FABRICATION DIVISION. Sabel's rebar fabrication division ("RFD"),
also located in Montgomery, purchases stock 60 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 1998, RFD contributed 10% 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.
-9-
<PAGE>
OTHER OPERATIONS. Other businesses operated by Sabel consist of a wholesale
center that sells a variety of tools and plumbing, sprinkler, building and
general supplies. These other operations represented 2% of Sabel's 1998
revenues.
COMPETITION
Each of the principal fields in which Sabel is engaged -- steel service
centers, scrap metal and rebar fabrication -- is highly competitive. In each
business field, Sabel competes with between five and eight other concerns, some
of which are much larger. Sabel believes that no other company in its trading
area offers the same range of services. In 1998 Sabel was unfavorably impacted
by falling steel industry prices generally attributable to a surge in foreign
steel import competition.
EMPLOYEES
As of October 31, 1998, Sabel had 225 employees, 71 of whom were salaried
and 154 of whom were hourly workers. Of the hourly employees, 77 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.
Costs of compliance to date have not been material, and it is expected that
costs associated with this program in the future will not have a material
adverse effect on the Company's financial position or on results of operations.
Environmental laws and regulations have changed rapidly in recent years, and
Sabel may be subject to more stringent environmental laws and regulations in the
future. Management cannot currently assess the impact of more stringent
standards on the Company's results of operations or financial condition.
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 43,000 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 System
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 royalties 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.
-10-
<PAGE>
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.
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%, reflecting the level of dumping and impact on
domestic producers. Two unions representing workers at Magcorp and Dow were
co-petitioners in the filing. Dow 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:
<TABLE>
<CAPTION>
PURE
<S> <C>
Russian Federation....... 0-100%
Ukraine.................. 80-104%
PRC...................... 108%
</TABLE>
No antidumping duties were imposed against magnesium alloys. These rates
are subject to revision in administrative reviews, which can be requested
annually. Such reviews could have been requested in May 1996, 1997 and 1998, but
none were. The next review request can be made in May 1999.
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 were a cause of injury to domestic magnesium
producers. In August 1996, the CIT 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. In April 1998, the CIT remanded
the case to the ITC for reconsideration of its determination in light of the
CAFC decision. In June 1998, the ITC issued a remand determination in which it
decided that the domestic industry was not injured by reason of the imports of
pure magnesium from Ukraine, and in October 1998, the CIT affirmed that remand
determination. In December 1998, Magcorp appealed the decision of the CIT to the
CAFC. If Magcorp does not prevail in its appeal to the CAFC, the 80-104%
antidumping duties on imports of Ukrainian pure magnesium will 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. In December 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. In January 1999, the CAFC
affirmed the decision of the CIT. As a result, certain producers and traders of
Russian magnesium will continue to be excluded from the scope of the antidumping
order on pure magnesium from the Russian Federation.
-11-
<PAGE>
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
an antidumping duty rate of 69.53%. In February 1998 the PRC exporter appealed
the DOC's determination to the CIT. The outcome of that appeal, in which Magcorp
has intervened, will determine the rate of duty to be applied to imports of pure
magnesium from the PRC exported by the new shipper.
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:
<TABLE>
<CAPTION>
<S> <C>
Countervailing duties on pure and alloy magnesium imports........ 7.6%
Antidumping duties on pure magnesium imports....................... 21.0%
</TABLE>
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 0%. In the fifth antidumping administrative review,
covering the August 1, 1996 through July 31, 1997 period, the DOC made a
preliminary determination that NHCI sales to the U.S. were made at prices that
were not below normal value. If that finding is confirmed in the DOC's final
determination, no antidumping duty would be assessed on imports during the fifth
review period and the antidumping duty deposit rate for NHCI imports in the
subsequent period would be set at 0%.
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
final determination that NHCI has not sold below normal value, NHCI could seek
revocation of the antidumping order. In the fifth review, NHCI has requested
that the antidumping order be revoked. However, the DOC has preliminarily
determined that the order will not be revoked. The DOC's final determination in
the fifth administrative review is scheduled for March 1999. In the meantime,
the sixth administrative review covering the April 1, 1997 through July 31, 1998
period has been intitiated by the DOC with the DOC's final determination in the
sixth review scheduled for September 1999. 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 five review periods as
listed in the table below. The DOC has initiated the sixth CVD administrative
review, which covers calendar 1997, and has scheduled the release of the final
determination for that review for September 1999.
<TABLE>
<CAPTION>
DESCRIPTION PERIOD RATE
<S> <C> <C>
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 2.78%
6th Review Calendar 1997 Initiated
</TABLE>
-12-
<PAGE>
OTHER LEGAL PROCEEDINGS
In April 1998, the United States filed a complaint against the Magcorp
in the U.S. District Court for the District of Utah, alleging both statutory
and common law claims. The United States alleges that Magcorp, in operating
its Knolls Pond System, has taken magnesium out of mineral-laden ground water
belonging to the United States without a mineral lease or payment of
royalties. The United States makes these allegations even though prior to
initiating its operations, Magcorp asked for, and received, assurance that
the minerals were owned by the State of Utah. In a disclosure statement dated
November 25, 1998, in accordance with Federal Rule of Civil Procedure
26(1)(C), requiring the disclosure of computation of damages, the United
States claims that it has been damaged in the amount of $90 million.
Management strongly believes this claim is based on the erroneous assumption
that the magnesium produced from Knolls Pond brine came from groundwater
belonging to the United States. The United States also claims that it is
entitled to treble damages. Magcorp strongly disputes the United States'
claims, and believes that the source of the minerals processed in the Knolls
Pond System is the water pumped from the Great Salt Lake to the West Desert
by the State of Utah - not groundwater - and that the Company properly
purchased those minerals pursuant to an agreement with the State of Utah. The
United States has to date not produced any evidence to support its claims or
its alleged damages. Magcorp believes that the United States' claims and its
computation of damages are without merit and is vigorously defending against
them. Magcorp believes it should prevail on its defenses to the United
States' claims. If the United States were to prevail, it could have a
material adverse effect on the financial condition or results of the Company,
the extent of which are not estimable at this time.
With the exception of the trade cases and claim 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 1998 to
a vote of security holders.
-13-
<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.
The Company paid to Group dividends totaling $7.2 million in fiscal 1998
and $6.6 million in fiscal 1997. 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 due 2003 described more fully in Note 5
to the Company's consolidated financial statements, appearing elsewhere herein.
The payment of and amounts of dividends are restricted by the Company's
long-term debt agreements, which generally allow dividends of up to 50% 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
years in the five year period ended October 31, 1998. 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,
--------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- ---------- --------- ----------
STATEMENT OF OPERATIONS DATA: (in thousands)
<S> <C> <C> <C> <C> <C>
Net sales $ 189,699 $ 191,614 $ 196,974 $ 185,806 $ 132,950
Cost of sales 125,823 129,093 116,808 121,189 106,364
Depreciation, depletion, and amortization 8,289 7,451 6,509 5,770 5,604
Selling, general, and administrative expenses 23,082 20,784 22,704 18,470 16,352
Operating income 32,505 34,286 50,953 40,377 4,630
Interest income 1,163 1,142 1,353 881 186
Interest expense 18,871 18,697 13,045 10,138 10,208
Income tax expense (benefit) 4,342 4,963 13,534 11,143 (1,932)
Income (loss) from continuing operations 10,455 11,768 25,727 19,977 (3,460)
Extraordinary item -- -- (7,284) -- --
Cumulative effect of accounting change -- -- -- -- 30
Net income (loss) 10,455 11,768 18,443 19,977 (3,430)
October 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- ---------- --------- ----------
BALANCE SHEET DATA: (in thousands)
Working capital $ 62,512 $ 54,079 $ 47,677 $ 58,880 $ 36,911
Property, plant, and equipment, net 35,385 37,715 36,613 32,014 30,862
Total assets 125,974 126,387 118,658 116,551 89,038
Total debt 154,977 155,183 154,150 78,012 78,839
Stockholder's equity (deficit) (65,611) (68,866) (74,034) 4,760 (15,004)
</TABLE>
-14-
<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 that 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. Unless otherwise indicated, references to
a year are to the Company's fiscal year ended October 31.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------
1998 1997 1996
-------- --------- --------
(in thousands)
<S> <C> <C> <C>
Sales by business segment:
Magcorp $ 141,333 $ 147,113 $ 152,941
Sabel 48,366 44,501 44,033
---------- ---------- ---------
Total sales 189,699 191,614 196,974
Cost of sales 125,823 129,093 116,808
Depreciation, depletion, and amortization 8,289 7,451 6,509
Selling, general, and administrative expenses 23,082 20,784 22,704
---------- ---------- ---------
Total operating income 32,505 34,286 50,953
Interest income 1,163 1,142 1,353
Interest expense (18,871) (18,697) (13,045)
---------- ---------- ---------
Earnings before income taxes 14,797 16,731 39,261
Income tax expense 4,342 4,963 13,534
---------- ---------- ---------
Net income before extraordinary items 10,455 11,768 25,727
Extraordinary item - extinguishment of debt, net of taxes -- -- (7,284)
---------- ---------- ---------
Net income $ 10,455 $ 11,768 $ 18,443
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
1998 COMPARED TO 1997
SALES for 1998 decreased 1.0% over 1997. The decrease was attributable to a
3.9% decrease in Magcorp's revenues, which was offset by an 8.7% increase in
Sabel's revenues. Magcorp's average selling price for magnesium decreased 1.8%
and magnesium shipments decreased 3.5%. Foreign import competition continues to
put pressure on magnesium volumes and pricing, particularly in the steel
desulfurization segment of the magnesium business. Magnesium pricing and volume
are dependent on overall market supply and demand, and there is no certainty
that current trends will not continue. Sabel's sales increase was primarily due
to the opening of a new steel service center in Newnan, Georgia in November
1997, offset by decreases in steel industry pricing in general. Sabel sales
volume and prices were adversely affected by imports during the final quarter.
COST OF SALES for 1998 decreased 2.5% from 1997 on a consolidated basis.
Magcorp's cost of sales decreased 6.2% due primarily to decreases in acquired
energy costs when compared to the corresponding period in 1997. Unit costs of
electricity decreased 32% over 1997 levels, which reflects the amended utility
contract that became effective January 1998. Magcorp's cost of sales is highly
sensitive to acquired energy costs and levels of production. The cost of sales
at Sabel increased 9.4%, which is primarily due to the opening of a new steel
service center in Newnan, Georgia in November 1997.
-15-
<PAGE>
DEPRECIATION, DEPLETION AND AMORTIZATION for 1998 increased 11.2% from 1997
primarily due to increased depreciation of property, plant and equipment as a
result of recent capital equipment additions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for 1998 increased 11.1% from
1997 due to in large part to increased costs associated with the new steel
service center at Sabel and increased development costs and computer software
consulting costs at Magcorp. Development costs increased 14.8% in 1998 due to
magnesium process enhancement piloting at Magcorp.
INTEREST INCOME for 1998 increased $21,000 from 1997 due to cash and cash
equivalent balances on hand that increased to a month-end average of $25.7
million in the current period from a month-end average of $23.5 million in the
corresponding prior period.
INTEREST EXPENSE for 1998 increased $174,000 due primarily to higher
revolving credit borrowings at Sabel in 1998. This increase was offset by a
decrease in interest expense attributable to the redemption on July 15, 1998 of
the remaining $1.5 million of 12% Senior Notes due 2000.
INCOME TAXES are estimated at statutory rates, including estimates of
available credits, for both years presented.
1997 COMPARED TO 1996
SALES for 1997 decreased 2.7% over 1996. The decrease was attributable to a
3.8% decrease in Magcorp's revenues, which was offset by a 1.1% increase in
Sabel's revenues. Magcorp's average selling price for magnesium decreased 8.8%
while magnesium shipments increased 5.9%. Effective January 1, 1997, Magcorp
reduced its list price 6.7%, and other manufacturers announced similar
reductions. Competition from primarily PRC and Russian producers reduced 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% over the
comparable period in 1996. 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 1997 increased 10.5% from 1996 on a consolidated basis.
Magcorp's cost of sales increased 13.5% due primarily to increases in acquired
energy costs when compared to the corresponding period in 1996. Unit costs of
electricity rose 23.6% and unit costs of natural gas rose 15.0% 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%, reflecting
increasing prices and volumes in primarily the steel service center markets
during the year.
DEPRECIATION, DEPLETION AND AMORTIZATION for 1997 increased 14.5% from 1996
primarily due to increased depreciation of property, plant and equipment as a
result of recent capital equipment additions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for 1997 decreased 8.5%
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 1997 decreased $0.2 million from 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.
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 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
-16-
<PAGE>
$33.0 million for Magcorp and $7.0 million for Sabel, net of outstanding
letters of credit. As of October 31, 1998, the unused amounts available to
Magcorp and Sabel were approximately $28.1 million and $2.5 million,
respectively. During 1998, Sabel had net borrowings of $1.3 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 $8.6 million for 1998 compared to
$19.9 million for the corresponding 1997 period. The decrease in operating cash
flow in 1998 compared to 1997 resulted primarily from increases in inventories
and decreases in accrued expenses, offset primarily by decreases in accounts
receivable. Magcorp is increasing inventory levels in 1998 and 1999 to
accommodate decreases in production that are planned to take place during the
period of conversion to new electrolytic cell technology discussed below. The
increase in inventories is also attributable to increased volumes on hand of
recycled die cast magnesium to be processed by third parties or already
processed by third parties.
Capital expenditures were $6.0 million for 1998. Capital expenditures are
budgeted at approximately $24 million for 1999 and $24 million for 2000. An
estimated $40 million of estimated capital expenditures for 1999, 2000 and 2001
are related to new electrolytic cell technology that is expected to improve
manufacturing efficiencies and ensure compliance with future environmental
standards. Prototype work continues on the electrolytic cell conversion program.
Assuming the successful completion of prototype work by mid-1999, the conversion
of the remaining cells is expected to take place over a period of two to three
years. As a result, the associated cost reductions and related manufacturing
efficiencies are not expected to be realized in the Company's operating results
until the end of 2000 or early in 2001.
On July 15, 1998, as provided by the terms of the indenture governing the
Company's 12% Senior Notes due 2000, the Company redeemed all of the remaining
$1.5 million of the Notes at 104% of the principal amount together with accrued
and unpaid interest to that date.
During 1998, dividends totaling $7.2 million were paid on all outstanding
shares to the Company's sole stockholder, Group. 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% 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.
On January 15, 1999, Group filed an election with the consent of its
shareholders with the Internal Revenue Service to change its taxable status
from that of a C corporation to that of an S corporation, effective November
1, 1998. At the same time, Group designated the Company as a qualified
Subchapter S subsidiary. As a result of such designation, generally, no
provision for income taxes will be included in the Company's consolidated
statements of income for periods beginning after October 31, 1998. See Note 17
to the Financial Statements, "Subsequent Event," included in ITEM 8, Part II
and "-Tax Sharing Agreement," included in ITEM 13, Part III of this Form 10-K.
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 technology (IT) 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 and after. This
-17-
<PAGE>
could result in system failures or in miscalculations causing disruption of
operations, including, but not limited to, an inability to process
transactions, to send and receive electronic data, or to engage in routine
business activities and operations. Management has initiated projects to
prepare the Company's IT and process control systems to be Year 2000
compliant. The projects consist of four phases: evaluation, renovation,
testing, and implementation. The Company expects to both replace some systems
and upgrade others. Project funds to cover remaining remediation costs as
incurred are expected to come from operations.
For IT systems, the evaluation phase is complete. IT projects since 1994
have been planned with Year 2000 compliance in mind, and no other IT projects
have been deferred to accommodate Year 2000 costs. Replacement of
mainframe-based IT systems began in 1994 and as a result, the renovation phase
is approximately 95% complete. The Company anticipates completion of renovation,
testing and implementation of its IT systems by July 1999. Since Year
2000-related replacements began in 1994, the Company has expensed approximately
$1 million in IT maintenance or modification costs and capitalized approximately
$700,000. Remaining IT modification costs and capital costs are each estimated
to be less than $100,000, which is about one-quarter of the IT budget.
The Company's IT and non-IT systems are not materially interdependent.
Process control and other non-IT systems are being evaluated individually and
may require replacement software, reprogramming or other corrective actions.
Completion status of non-IT systems is estimated to be as follows: evaluation;
90%, renovation; 60%, testing; 50%, and implementation; 40%. Because the
evaluation phase of process control systems is not complete, management is
unable at this time to estimate the timetable for completion of remaining
phases. However, total remaining costs for all non-IT phases combined are
preliminarily estimated not to exceed $75,000.
The Year 2000 issue is a potentially significant issue for most companies,
with implications that cannot be anticipated or predicted with any degree of
certainty. The Company is communicating with third parties material to the
Company's operations, including electric and natural gas utility companies, to
determine the extent of the Company's vulnerability to the failure of third
parties to remediate their own Year 2000 issues. The Company will use
information learned from this process in developing its contingency plans to
mitigate the effect of suppliers that will not be Year 2000 ready on a timely
basis. The Company is presently dependent on a single source for certain of its
energy and raw materials needs. If certain vendors are unable to supply the
energy or raw materials on a timely basis in 2000, it could result in the
Company being unable to operate or require the Company to operate at a reduced
level. In addition, the lack of accurate and timely Year 2000 information from
suppliers of automation and process control systems and components or suppliers'
inability to provide Year 2000 ready replacement components could result in the
Company being unable to operate, or require the Company to operate at a reduced
level, in 2000. There can be no assurance that third parties material to the
Company's operations will be Year 2000 compliant, or that their failure to be
compliant will not have an adverse effect on the Company's operations.
The Company intends to make the modifications necessary to mitigate the
risk of disruption to its operations. The remaining costs of this project and
its timely completion are dependent upon numerous assumptions about future
events, including availability of certain resources, third party remediation
plans, and other factors, many of which are beyond the Company's control.
Contingency plans are being developed as part of the project, but a timetable
for completion has not been established.
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."
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,
-18-
<PAGE>
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.
-19-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
Renco Metals, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Renco Metals,
Inc. and subsidiaries as of October 31, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 31, 1998, 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 LLP
Salt Lake City, Utah
December 9, 1998, except as to
note 17, which is as of
January 15, 1999
-20-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
October 31, 1998 and 1997
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Assets 1998 1997
------
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,690 26,607
Accounts receivable, less allowance for doubtful accounts of
$514 in 1998 and 1997 25,749 27,480
Income tax refund receivable 230 131
Inventories, net 34,500 24,744
Prepaid expenses 2,794 3,078
--------- ---------
Total current assets 84,963 82,040
Property, plant, and equipment, net 35,385 37,715
Other assets, net 5,626 6,632
--------- ---------
$ 125,974 126,387
--------- ---------
--------- ---------
Liabilities and Stockholder's Deficit
-------------------------------------
Current liabilities:
Current installments of long-term debt $ 23 18
Accounts payable 7,279 8,262
Accrued expenses 15,052 19,451
Deferred income taxes 97 230
--------- ---------
Total current liabilities 22,451 27,961
Long-term debt, excluding current installments 154,954 155,165
Postretirement medical benefits 6,773 6,794
Deferred income taxes 1,966 2,008
Other liabilities 5,441 3,325
--------- ---------
Total liabilities 191,585 195,253
--------- ---------
Stockholder's 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 (66,112) (69,367)
--------- ---------
Net stockholder's deficit (65,611) (68,866)
Commitments and contingencies
--------- ---------
$ 125,974 126,387
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
-21-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended October 31, 1998, 1997, and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Sales $ 189,699 191,614 196,974
Costs and expenses:
Cost of sales 125,823 129,093 116,808
Depreciation, depletion, and amortization 8,289 7,451 6,509
Selling, general, and administrative expenses 23,082 20,784 22,704
--------- ---------- ----------
Income from operations 32,505 34,286 50,953
Interest income 1,163 1,142 1,353
Interest expense (18,871) (18,697) (13,045)
--------- ---------- ----------
Income before income taxes and extraordinary item 14,797 16,731 39,261
Income tax expense 4,342 4,963 13,534
--------- ---------- ----------
Income before extraordinary item 10,455 11,768 25,727
Extraordinary item - extinguishment of debt (less applicable
income tax benefit of $4,559) - - (7,284)
--------- ---------- ----------
Net income $ 10,455 11,768 18,443
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
-22-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity (Deficit)
Years ended October 31, 1998, 1997, and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
MINIMUM NET
PENSION STOCK-
ADDITIONAL ACCUM- LIABILITY HOLDER'S
PREFERRED PAID-IN ULATED ADJUST- EQUITY
STOCK COMMON STOCK CAPITAL DEFICIT MENT (DEFICIT)
------------- ------------ ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
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)
Dividends - - - (7,200) - (7,200)
Net income - - - 10,455 - 10,455
------------- ------------ ------------- ----------- ------------- -----------
Balances at October 31, 1998 $ - 1 500 (66,112) - (65,611)
------------- ------------ ------------- ----------- ------------- -----------
------------- ------------ ------------- ----------- ------------- -----------
See accompanying notes to consolidated financial statements.
</TABLE>
-23-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended October 31, 1998, 1997, and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,455 11,768 18,443
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion, and amortization 8,289 7,451 6,509
Extraordinary item - extinguishment of debt - - 11,843
Amortization of financing fees 989 989 853
Loss on disposal of equipment 43 29 76
Deferred income taxes (175) (187) 561
Provision for bad debts 37 163 152
Postretirement and deferred compensation plans 118 476 (940)
Debt retirement premium 60 - -
Decrease (increase) in operating assets:
Accounts receivable 1,694 (2,779) 2,838
Income tax refund receivable (99) 1,336 (891)
Inventories (9,756) 1,703 (4,583)
Prepaid expenses 284 (1,415) (1,095)
Other assets (6) 10 28
Increase (decrease) in operating liabilities:
Accounts payable (983) 468 282
Accrued expenses (4,399) (35) 5,159
Other liabilities 2,000 - -
--------- --------- ---------
Net cash provided by operating activities 8,551 19,977 39,235
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (6,014) (8,604) (11,223)
Proceeds from sale of equipment 12 22 40
--------- --------- ---------
Net cash used in investing activities (6,002) (8,582) (11,183)
--------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreements 1,311 1,052 (347)
Repayment of long-term debt (1,517) (19) (73,516)
Financing fees and tender offer premiums paid (60) - (16,051)
Borrowings of long-term debt - - 150,000
Dividends to Group (7,200) (6,600) (88,950)
Retirement of preferred stock - - (8,500)
--------- --------- ---------
Net cash used in financing activities (7,466) (5,567) (37,364)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (4,917) 5,828 (9,312)
Cash and cash equivalents, beginning of year 26,607 20,779 30,091
--------- --------- ---------
Cash and cash equivalents, end of year $ 21,690 26,607 20,779
--------- --------- ---------
--------- --------- ---------
</TABLE>
-24-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Years ended October 31, 1998, 1997, and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 17,934 17,708 9,014
Cash paid during the year for income taxes 4,617 3,815 9,363
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Minimum pension liability adjustment to other assets $ 23 806 (87)
Minimum pension liability adjustment to other liabilities 23 806 300
</TABLE>
See accompanying notes to consolidated financial statements.
-25-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1998, 1997, and 1996
(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,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Combined Guarantor statement of operations data:
Net sales $ 189,699 191,614 196,974
Cost of sales 125,823 129,093 116,808
Income before extraordinary items 10,452 11,748 25,603
Net income 10,452 11,748 18,319
October 31,
-------------------
1998 1997
--------- --------
Combined Guarantor balance sheet data:
Current assets $ 83,687 78,793
Noncurrent assets 41,011 44,347
Current liabilities 16,300 21,336
Noncurrent liabilities 19,134 15,792
</TABLE>
-26-
<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:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Money market funds $10,787 8,408
Certificates of deposit 203 200
-------- --------
$10,990 8,608
-------- --------
-------- --------
</TABLE>
(b) INVENTORIES
Inventories are stated at the lower of cost or market, using either
weighted averaging last-in, first-out (LIFO) or first-in, first-out
(FIFO).
(c) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are carried at cost. 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:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Loan origination and financing fees $ 6,680 6,680
Unrecognized pension prior service cost 1,232 1,255
Deposits and other 16 10
------- -------
7,928 7,945
Less accumulated amortization 2,302 1,313
------- -------
$ 5,626 6,632
------- -------
------- -------
</TABLE>
-27-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
(e) DEFERRED COMPENSATION
Magcorp and Sabel each have deferred compensation agreements with
certain key employees in the form of net worth appreciation
participation agreements. The deferred compensation is based on the
increase in net worth of the respective company from a specified
date. The aforementioned agreements have been accounted for as
deferred compensation in the accompanying consolidated financial
statements.
(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 current federal income taxes provided. (See
note 17.)
(h) USE OF ESTIMATES IN PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of the consolidated 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) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and totaled
$2,599, $2,263 and $510 for 1998, 1997, and 1996, respectively.
-28-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
(j) FINANCIAL INSTRUMENTS
The carrying value of accounts receivable, accounts payable, and
accrued expenses approximates their estimated value due to the
relative short maturity of these instruments.
(k) RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996
consolidated financial statements to conform to the 1998
presentation.
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Finished goods $ 24,451 16,264
Brine in ponds 1,100 1,400
Spare parts and supplies 8,740 7,683
Raw materials and work-in-process 743 760
-------- --------
35,034 26,107
Less LIFO reserve 534 1,363
-------- --------
$ 34,500 24,744
-------- --------
-------- --------
</TABLE>
LIFO inventory was reduced in 1997. This reduction resulted in charging
lower inventory costs prevailing in previous years to cost of sales, thus
reducing cost of sales by approximately $410 below the amount that would
have resulted from replacing the liquidated inventory at October 31, 1997
prices.
(4) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are summarized as follows:
<TABLE>
<CAPTION>
Depreciable
lives 1998 1997
-------------- -------- --------
<S> <C> <C> <C>
Land - $ 519 519
Buildings 30 6,232 5,722
Equipment 7-15 73,935 69,155
Leasehold improvements 3-5 859 859
Construction-in-process - 5,828 5,565
-------- --------
87,373 81,820
Less accumulated depreciation and amortization 51,988 44,105
-------- --------
$ 35,385 37,715
-------- --------
-------- --------
</TABLE>
-29-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
(5) LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
For Renco Metals:
11.5% senior notes (a) $ 150,000 150,000
12% senior notes (b) - 1,500
For Magcorp:
Revolving credit facility (c) - -
For Sabel:
Revolving credit facility (c) 4,538 3,227
9.7% mortgage note 439 456
--------- ---------
--------- ---------
Total long-term debt 154,977 155,183
Less current installments 23 18
--------- ---------
Long-term debt,
excluding current installments $ 154,954 155,165
--------- ---------
--------- ---------
</TABLE>
The aggregate maturities of long-term debt for each of the twelve-month
periods subsequent to October 31, 1998 are as follows: 1999, $23; 2000,
$25; 2001, $28; 2002, $4,568; 2003, $150,333, and thereafter, none.
As of October 31, 1998, the fair value of the 11.5 percent senior notes
was $142,500 based on the quoted market price. The carrying values of the
revolving credit facility and mortgage note are not materially different
from the estimated fair value.
(a) 11.5% SENIOR NOTES
In July of 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.
-30-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
(a) 11.5% SENIOR NOTES (continued)
Except under certain circumstances defined in the indenture
governing the Notes, the Notes are not redeemable prior to July 1,
2000. Thereafter, the Notes are redeemable in whole or part, at the
option of Renco Metals, at redemption prices ranging from 105.75
percent to 100 percent of the principal amount, depending on the
date of redemption. The indenture governing the Notes contains
certain covenants, that, among others, limit the type and amount of
additional indebtedness that may be incurred by Renco Metals and
impose limitations on investments, loans, advances, the payment of
dividends and making of certain other payments, the creation of
liens, certain transactions with affiliates, and certain mergers. At
October 31, 1998, 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. On July 15, 1998, Renco Metals redeemed all of the
remaining $1,500 of Old Notes at 104 percent of the principal amount
thereof, together with accrued and unpaid interest.
(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 three quarters of 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,
1998 total $2,370 for Magcorp and none for Sabel. Based on these
criteria as of October 31, 1998, the unused amounts available to
Magcorp and Sabel were approximately $28,100 and $2,500,
respectively. The revolving credit facilities will continue until
August 2002 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, 2002, or any subsequent
anniversary date on 60 days advance written notice.
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, 1998,
Magcorp and Sabel were in compliance with all applicable covenants.
-31-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
(6) PREFERRED STOCK
The Company has authorized 8,500 shares of preferred stock, which were
redeemed in July 1996 in conjunction with the issuance of the 11.5
percent Notes discussed above.
(7) INCOME TAXES
Components of income tax expense follow, allocated to income from
continuing operations:
<TABLE>
<CAPTION>
Current Deferred Total
--------- ---------- --------
<S> <C> <C> <C>
1998:
Federal $ 3,715 10 3,725
State 802 (185) 617
--------- ---------- --------
$ 4,517 (175) 4,342
--------- ---------- --------
--------- ---------- --------
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
--------- ---------- --------
--------- ---------- --------
</TABLE>
In addition to the above income taxes, the Company recognized a current
income tax benefit of $4,559 in 1996 related to extraordinary losses on
the early retirement of debt (see note 5).
The statutory federal income tax rate is reconciled to the effective
income tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense $ 5,179 5,856 13,742
State and local tax, net of federal benefit 402 523 1,381
Depletion (1,060) (1,374) (1,553)
Change in deferred tax asset valuation allowance (66) - -
Other (113) (42) (36)
--------- --------- ---------
Income tax provision $ 4,342 4,963 13,534
--------- --------- ---------
--------- --------- ---------
</TABLE>
-32-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
October 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Bad debt reserves $ 194 194
Inventories-uniform capitalization 194 247
Payroll related accruals 238 191
Deferred compensation 258 211
Miscellaneous accruals 374 124
Net operating loss carryforwards 294 1,613
Postretirement medical benefit 1,106 1,114
Environmental reserve 459 459
-------- -------
Total gross deferred tax assets 3,117 4,153
Less valuation allowance 827 893
-------- -------
Net deferred tax assets 2,290 3,260
-------- -------
Deferred tax liabilities:
Inventory basis difference (827) (827)
Accumulated depreciation (3,526) (4,671)
-------- -------
Total gross deferred tax liabilities (4,353) (5,498)
-------- -------
Net deferred tax liability $(2,063) (2,238)
-------- -------
-------- -------
Deferred income taxes - current $ (97) (230)
Deferred income taxes - noncurrent (1,966) (2,008)
-------- -------
Net deferred tax liability $(2,063) (2,238)
-------- -------
-------- -------
</TABLE>
The total valuation allowance was reduced by $66 in 1998 due to
utilization of net operating loss carryforwards. No change was made in
the total valuation allowance for 1997. 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.
(8) RELATED PARTY TRANSACTIONS
Magcorp has $318 payable to Group at October 31, 1998 and 1997, that is
noninterest bearing. The payable is included in other liabilities in the
accompanying consolidated balance sheets 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, 1998.
-33-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
(8) RELATED PARTY TRANSACTIONS (continued)
During 1998 and 1997, the Company paid to Group dividends totaling $7,200
and $6,600, respectively. 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
MAGCORP
HOURLY DEFINED BENEFIT PENSION PLAN AND SALARIED POSTRETIREMENT
MEDICAL PLAN
Pension benefits for Magcorp's defined benefit plan for hourly employees
are generally based on a flat dollar amount times years of credited
service. Magcorp's funding policy is to contribute amounts sufficient to
satisfy regulatory funding standards, based upon independent actuarial
valuations.
Magcorp's self-insured, fee-for-service postretirement medical benefit
plan provides health care benefits to salaried retirees who retire from
active employment status on or after age 65 with ten or more years of
service. Qualified retirees 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 receive
benefits only after age 65.
-34-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
The following provides a reconciliation of benefit obligations, plan
assets, and funded assets of the plans:
<TABLE>
<CAPTION>
Other
Pension postretirement
benefits benefits
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- ---------
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Beginning of year $ 5,919 4,366 2,563 3,308
Service cost 292 202 106 166
Interest cost 427 314 185 239
Amendments - 1,180 - -
Actuarial (gain) loss 214 (96) 112 (1,135)
Benefits paid (87) (47) (41) (15)
------- ------- ------- -------
End of year 6,765 5,919 2,925 2,563
Change in plan assets:
Fair value at beginning of year 4,555 3,683
Actual return on plan assets 514 546
Employer contributions 530 373
Benefits paid (88) (47)
------- -------
Fair value at end of year 5,511 4,555
Reconciliation of funded status:
Funded status (1,254) (1,364) (2,925) (2,563)
Unrecognized actuarial gain (300) (384) (3,848) (4,231)
Unrecognized prior service cost 1,532 1,639 - -
------- ------- ------- -------
Net amount recognized (22) (109) (6,773) (6,794)
------- -------
------- -------
Amounts recognized in the consolidated balance sheets:
Accrued benefit liability (1,254) (1,364)
Intangible asset 1,232 1,255
------- -------
Net amount recognized $ (22) (109)
------- -------
------- -------
Assumptions (weighted average):
Discount rate 7.00% 7.25% 7.00% 7.25%
Expected return on plan assets 8.25% 8.25%
</TABLE>
For measurement purposes, a 7.2 percent annual rate of increase in the
per capita cost of covered health care benefits was assumed for 1999. The
rate was assumed to decrease gradually to 4.5 percent by 2007 and remain
at that level.
-35-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change
in assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-percentage-point 1-percentage-point
increase decrease
------------------ ------------------
<S> <C> <C>
Effect on total of service and interest cost components $ 34 (30)
Effect on postretirement benefit obligation $ 313 (283)
</TABLE>
Net periodic pension and other postretirement benefit costs include the
following components:
<TABLE>
<CAPTION>
Other
Pension postretirement
benefits benefits
--------------------------- ----------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 292 202 192 106 166 155
Interest cost 427 314 290 185 239 212
Expected return on assets (384) (306) (263) - - -
Amortization of unrecognized net gain - - - (270) (202) (219)
Amortization of prior year service cost 108 38 38 - - -
------ ----- ----- ----- ---- ----
Net periodic benefit cost $ 443 248 257 21 203 148
------ ----- ----- ----- ---- ----
------ ----- ----- ----- ---- ----
</TABLE>
The unrecognized net gain in the postretirement medical plan is being
amortized over a period of approximately fifteen years, which represents
the average future working lifetime of the plan participants.
THRIFT PLANS AND SALARY DEFINED CONTRIBUTION PLAN
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 $447,
$442, and $432 for 1998, 1997, and 1996, respectively.
Contributions for Magcorp's defined contribution plan are based upon age,
years of service, and gross compensation for each salaried employee, and
totaled approximately $735, $557, and $709, for 1998, 1997, and 1996,
respectively.
-36-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
SABEL
Under an agreement with the United Steelworker's 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 $90, $82, and $40 for 1998, 1997, and 1996,
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. No contributions were made in
1998 or 1997. Contributions were $99 for 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, 1998 are listed below:
<TABLE>
<CAPTION>
Year ending October 31:
<S> <C>
1999 $ 1,941
2000 1,394
2001 1,073
2002 954
2003 168
Thereafter 196
---------
Total minimum lease payments $ 5,726
---------
---------
</TABLE>
Rent expense aggregated $4,101, $2,412, and $2,393 for 1998, 1997, and
1996, respectively. Included in rental expense was contingent rental
expense of approximately $118, $73, and $80 for 1998, 1997, and 1996,
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 $ 383, $336, and $331 for 1998, 1997, and
1996, respectively.
-37-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
(11) COMMITMENTS AND CONTINGENCIES
(a) LITIGATION
In April 1998, the United States filed a complaint against Magcorp
in the U.S. District Court for the District of Utah, seeking
damages, including treble damages, in alleging that Magcorp has
taken magnesium out of mineral-laden ground water belonging to the
United States without a mineral lease or payment of royalties.
Management strongly believes this claim is based on the erroneous
assumption that the disputed minerals came from groundwater
belonging to the United States. Management strongly disputes the
United States' claims, and believes that the source of the disputed
minerals is the water pumped from the Great Salt Lake to the West
Desert by the State of Utah - not groundwater - and that the Company
properly purchased those minerals pursuant to an agreement with the
State of Utah. The United States has to date not produced any
evidence to support its claims. Management is vigorously defending
against the claims and in the opinion of management, after
consulting with legal counsel, the ultimate resolution of this
uncertainty will not result in a future loss that would be material
to the Company's financial condition, results of operations or
liquidity.
The Company and its subsidiaries are involved in other 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 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.
(c) ENVIRONMENTAL MATTERS
The Company is and will continue to be subject to numerous federal
and state environmental laws and regulations governing, among other
things, air emissions, waste water discharge, and solid and
hazardous waste disposal. The Company believes that it has made and
intends to continue to make the necessary expenditures for
compliance with environmental laws and regulations. Environmental
laws and regulations have changed rapidly in recent years, and the
Company may be subject to more stringent environmental laws and
regulations in the future. The Company cannot currently assess the
impact of more stringent standards on its results of operations or
financial condition. Magcorp plans to spend a minimum of $40,000 of
its capital expenditure budget for 1999, 2000, and 2001, in an
electrolytic cell conversion program designed to meet environmental
regulatory requirements, and for anticipated other future
requirements. There can be no assurance that Magcorp's program will
be successful, and to the extent it is not successful, it could
have a material adverse effect on the Company's financial condition
and results of operations.
-38-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
(12) ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Utilities $ 1,854 5,845
Salaries, bonuses, vacation, and other related accruals 3,131 3,756
Interest 5,750 5,803
Taxes, other than income 581 579
Other 3,736 3,468
-------- ------
$ 15,052 19,451
-------- ------
-------- ------
</TABLE>
(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>
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Net sales:
Magnesium $ 141,333 147,113 152,941
Steel 48,366 44,501 44,033
--------- --------- --------
$ 189,699 191,614 196,974
--------- --------- --------
--------- --------- --------
Income from operations:
Magnesium $ 30,970 32,889 49,119
Steel 1,640 1,444 1,938
Corporate (105) (47) (104)
--------- --------- --------
$ 32,505 34,286 50,953
--------- --------- --------
--------- --------- --------
Identifiable assets:
Magnesium $ 107,359 107,016 99,796
Steel 16,926 16,124 15,624
Corporate 1,689 3,247 3,238
--------- --------- --------
$ 125,974 126,387 118,658
--------- --------- --------
--------- --------- --------
Capital expenditures:
Magnesium $ 5,827 7,492 10,564
Steel 187 1,112 659
--------- --------- --------
$ 6,014 8,604 11,223
--------- --------- --------
--------- --------- --------
Depreciation, depletion,
and amortization:
Magnesium $ 7,838 7,054 6,106
Steel 451 397 403
--------- --------- --------
$ 8,289 7,451 6,509
--------- --------- --------
--------- --------- --------
</TABLE>
-39-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
(14) SIGNIFICANT CUSTOMERS AND EXPORT SALES
During 1998 and 1997, sales to any single customer did not
exceed ten percent of total consolidated revenues. During 1996,
sales to one Magcorp customer approximated 12 percent of total
revenues. The following table summarizes export sales to various
geographic areas:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Net export sales:
Europe $ 5,951 6,276 8,524
Japan 1,442 2,132 3,718
Canada 1,389 1,165 1,262
Other 136 194 1,670
------- ------- -------
$ 8,918 9,767 15,174
------- ------- -------
------- ------- -------
</TABLE>
(15) YEAR 2000
Many information technology 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 and after.
This could result in system failures or in miscalculations causing
disruption of operations including, but not limited to, an ability to
process transactions, to send and receive electronic data, or to engage
in routing business activities and operations.
The Company intends to make the necessary modifications necessary to
mitigate the risk of disruption to its operations. The costs of this
project and its timely completion are dependent upon numerous assumptions
about future events, including availability of certain resources, third
party remediation plans, and other factors, many of which are beyond the
Company's control. If such modifications are not completed timely, or if
any of the Company's suppliers do not successfully deal with the Year
2000 issue, the Year 2000 issue could have a material adverse impact on
the operations of the Company.
(16) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME, and
Statement of Financial Accounting Standards No. 131, DISCLOSURES OF
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. These statements,
which are effective for periods beginning after December 15, 1997, expand
or modify disclosures and, accordingly, will have no impact on the
Company's reported financial position, results of operation, or cash
flows.
-40-
<PAGE>
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(dollars in thousands)
(17) SUBSEQUENT EVENT
On January 15, 1999 Group filed an election with the consent of its
shareholders with the Internal Revenue Service to change its taxable
status from that of a C corporation to that of an S corporation,
effective November 1, 1998. At the same time, Group elected for the
Company to be treated as a qualified Subchapter S subsidiary (QSSS).
Most states in which the Company operates will follow similar tax
treatment. QSSS status requires the ultimate shareholders to include
their pro rata share of the Company's income or loss in their individual
tax returns. The Company will continue to provide for state and local
income taxes for the taxing jurisdictions that do not recognize QSSS
status, however management believes this will be immaterial to the
Company. As a result of this change in tax status, the elimination of
deferred tax assets and liabilities for income tax purposes will be
recorded as part of income tax benefit as of the effective date of the
change.
-41-
<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>
Ira Leon Rennert............... 64 Chairman, Director and Chief Executive
Officer of the Company, Chairman of
Magcorp and Sabel
Roger L. Fay................... 53 Vice President, Finance of the Company
Michael H. Legge............... 52 President and Chief Executive Officer of
Magcorp
Keith Sabel.................... 48 Director, President and Chief Executive
Officer of Sabel
Justin W. D'Atri............... 71 Director of Sabel
Howard I. Kaplan............... 54 Vice President of Sales and Marketing of
Magcorp
Ron L. Thayer.................. 39 Vice President of Operations of Magcorp
Lee R. Brown................... 52 Vice President of Human Resources and Public
and Governmental Affairs of Magcorp
Todd R. Ogaard................. 43 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. Group holds controlling interests in a number of
manufacturing and distribution concerns operating in businesses not competing
with the Company, including WCI Steel, Inc. and its parent company, Renco
Steel Holdings, Inc., AM General Corporation, The Doe Run Resources
Corporation, and Lodestar Holdings, Inc., for all of which Mr. Rennert serves
as a Director.
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 has been 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
-42-
<PAGE>
Magnesium, a predecessor of Magcorp, in 1988. Prior to joining AMAX
Magnesium, Mr. Thayer was with Williams Resources, a chemical company in
Denver, Colorado.
LEE R. BROWN has been Vice President of Human Resources at Magcorp since
1984. Mr. Brown joined NL Industries, Inc., a predecessor of Magcorp, in
1978. Prior to joining NL Industries, he spent 2 years with Kennecott Copper.
TODD R. OGAARD joined Magcorp in February 1994 and assumed Vice President
of Finance responsibilities effective February, 1995. Mr. Ogaard is a
certified public accountant. Prior to joining Magcorp, he was a Senior
Manager with the accounting and consulting firm of KPMG 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 1998, 1997 and 1996:
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) 1998 $ - $ - $ - $1,200,000 (2)
Chairman and 1997 - - - 1,200,000 (2)
Chief Executive Officer 1996 - - - 1,200,000 (2)
Michael H. Legge 1998 153,333 250,000 216,000 24,419 (4)
President and 1997 120,756 250,000 198,000 24,139 (4)
Chief Executive Officer 1996 120,756 275,000 2,668,490 17,850 (4)
of Magcorp
Keith Sabel 1998 135,887 50,000 - - (5)
President and 1997 131,915 50,000 - - (5)
Chief Executive Officer 1996 128,797 141,000 - 5,625 (5)
of Sabel
Howard I. Kaplan 1998 103,149 110,000 72,000 24,915 (4)
Vice President of 1997 94,723 100,000 66,000 22,026 (4)
Sales and Marketing 1996 94,723 180,000 889,497 21,989 (4)
of Magcorp
Ron L.Thayer 1998 96,592 130,000 72,000 6,400 (4)
Vice President of 1997 85,550 100,000 66,000 5,850 (4)
Operations of Magcorp 1996 85,550 130,000 889,497 5,700 (4)
- ---------------------
</TABLE>
(1) Value of perquisites per individual did not exceed the lesser of $50,000
or 10% 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% owned through trusts established by
him for himself and members of his family. 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.
-43-
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company had no compensation committee during fiscal 1998. The
sole member of the Board of Directors was Mr. Rennert. The compensation for
the executive officers is fixed by negotiations between such executive
officers and Mr. Rennert acting on behalf of Group.
During 1998, no executive officer of the Company served (a) as a member
of the compensation committee (or other board committee performing equivalent
functions or, in the absence of any such committee, the entire board of
directors) of another entity, one of whose executive officers served on the
Company's board of directors, (b) as a director of another entity, one of
whose executive officers served on the Company's board of directors or (c) as
a member of the compensation committee (or other board committee performing
equivalent functions or, in the absence of any such committee, the entire
board of directors) of another entity, one of whose executive officers served
as a Director of the Company.
EMPLOYMENT AGREEMENTS
Mr. Legge is employed by Magcorp pursuant to an employment agreement
effective as of January 1, 1993 and as amended July 22, 1998, which continues
until December 31, 1999 and for additional one-year periods thereafter unless
terminated by either party by written notice given 30 days prior to the then
current expiration date. Pursuant to such employment agreement, Mr. Legge
will receive a base minimum annual salary of $220,000 and a bonus of at least
$35,000 for each year in which Magcorp is profitable.
Dr. Kaplan is employed by Magcorp pursuant to an employment agreement
effective as of June 1, 1994 and as amended July 22, 1998, which continues
until October 31, 1999 and for additional one-year periods thereafter unless
terminated by either party by written notice given six months prior to the
then current expiration date. Pursuant to such employment agreement, Mr.
Kaplan will receive a base minimum annual salary of $120,000 and a bonus of
at least $25,000 for each year in which Magcorp is profitable.
Mr. Thayer is employed by Magcorp pursuant to an employment agreement
effective as of January 1, 1993 and as amended July 22, 1998, which continues
until December 31, 1999 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 $120,000 and a bonus of at least
$20,000 for each 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 each 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% 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 Sabel 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, 1998, an aggregate of $696,400 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 $7.2 million in 1998, $6.6 million in 1997
and $88.95 million in 1996. Accordingly, an aggregate of $504,000 in 1998,
$462,000 in 1997 and $6.23 million in 1996 was paid to the five Magcorp
executive officers covered by Magcorp's NWAP Agreements.
-44-
<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 27, 1999:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
-------------- -------------------- -------------------- --------
<S> <C> <C> <C>
Common stock, no par value. ............ The Renco Group, Inc.(1)(2) 1,000 shares, Direct 100%
- ---------------------------------------------
</TABLE>
(1) The address of Group is 30 Rockefeller Plaza, Suite 4225,
New York, NY 10112.
(2) All of the Company's issued and outstanding capital stock is owned by
Group, which is 97.9% owned through trusts established by Mr. Rennert for
himself and members of his family. 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. the ownership by Mr. Rennert's trusts
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 years in the three year period
ended October 31, 1998. The Company believes that the cost of obtaining the type
and quality of services rendered by Group under the Management Agreement was,
and continues to be, no less favorable than that at which the Company could
obtain such services from unaffiliated entities.
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 1998, 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.
-45-
<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.
Effective with the beginning of fiscal 1999, Group, formerly a C
corporation, elected to be treated as an S corporation for income tax purposes,
pursuant to a change in the federal income tax laws allowing corporations with
subsidiaries to elect such status. In connection with that election, Group is
permitted to designate its wholly-owned subsidiaries as qualified Subchapter S
subsidiaries, and the Company has so been designated. Because of this
designation, substantially all of the Company's taxable income will be included
in Group's shareholders' income tax returns. Generally, no provision for income
taxes will be included in the Company's consolidated statements of income for
periods beginning after October 31, 1998. The Company will continue to provide
for state and local income taxes for those taxing jurisdictions that do not
recognize qualified Subchapter S subsidiary status, although management believes
such state and local taxes will not be material to the Company. However, under
the "built-in gains" provisions of the tax law, Federal and state taxes may
become payable and will be charged to the Company's consolidated statement of
income. Such taxes are measured by the excess of the fair market value of assets
over their tax bases on the effective date of the Subchapter S subsidiary
designation if the associated assets are disposed of within the ten-year
postdesignation period. It is not management's present intention to trigger any
taxes under the built-in gain provisions of the tax laws. The Company's net
deferred tax liabilities as of October 31, 1998 will be reflected as a credit to
income in the Company's consolidated statement of income in the first quarter
fiscal 1999.
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 1998 were $383,000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
A. Documents filed as part of this Form 10-K:
<TABLE>
1. FINANCIAL STATEMENTS (included in Part II, ITEM 8):
<S> <C>
Independent Auditors' Report 20
Consolidated Balance Sheets - October 31, 1998 and 1997 21
Consolidated Statements of Income - Years ended October 31, 1998, 1997 and 1996 22
Consolidated Statements of Stockholder's Equity (Deficit) - Years ended October 31, 1998,
1997 and 1996 23
Consolidated Statements of Cash Flows - Years ended October 31, 1998, 1997 and 1996 24
Notes to Consolidated Financial Statements 26
2. FINANCIAL STATEMENT SCHEDULES (included in Part IV):
Schedule II Valuation and Qualifying Accounts 49
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>
-46-
<PAGE>
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. IDENTIFICATION OF EXHIBITS
----------- --------------------------
<S> <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, (6)
Magnesium Corporation of America and Sabel Industries, Inc.,
Guarantors, and State Street Bank and Trust,
successor Trustee, relating to 11-1/2% Senior Notes
Due 2003 (with form of Note and form of guarantee annexed)
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)
10.1.1 ----Amendments to Employment Agreements between Magnesium Corporation
of America and:
a) Michael H. Legge (10)
b) Ron L. Thayer (10)
c) Howard I. Kaplan (10)
d) Lee R. Brown (10)
e) Todd R. Ogaard (10)
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 (1)
Group, Inc. and Renco Metals, Inc.
10.5 ----Amendment No. 1 to Management Consultant Agreement dated May 17, 1996 (5)
between The 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 (4)
Security Agreement dated as of August 4, 1993, between
Congress Financial Corporation and Magnesium
Corporation of America, extending the term thereof
to August 4, 1998
10.8 ----Amendment No. 2 dated July 3, 1996 to Amended and Restated Loan and (8)
Security 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 (9)
Security Agreement dated as of August 4, 1993, between
Congress Financial Corporation and Magnesium
Corporation of America
10.8.2 ----Amendment No. 4 dated January 19, 1999 to Amended and Restated Loan and (11)
Security Agreement dated as of August 4, 1993, between
Congress Financial Corporation and Magnesium
Corporation of America
10.9 ----Loan and Security Agreement between Congress Financial Corporation and (1)
Sabel Industries, Inc. dated August 4, 1993
10.10 ----Amendment No. 1 dated January 31, 1996 to Loan and Security Agreement (4)
dated as of August 4, 1993, between Congress Financial
Corporation and Sabel Industries, Inc., extending
the term thereof to August 4, 1998
10.11 ----Amendment No. 2 dated July 3, 1996 to Loan and Security Agreement dated (8)
as of August 4, 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 (9)
as of August 4, 1993, between Congress Financial Corporation and
Sabel Industries, Inc.
10.11.2 ----Amendment No. 4 dated January 19, 1999 to Loan and Security Agreement (11)
dated as of August 4, 1993, between Congress Financial Corporation and
Sabel Industries, Inc.
</TABLE>
-47-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. IDENTIFICATION OF EXHIBITS
----------- --------------------------
<S> <C> <C>
10.12 ----Agreement dated July 31, 1969 between the State of Utah, acting by and (1)
through the State Land Board, and National Lead Company, as
amended by Addendum dated March 7, 1970, Second
Addendum dated March 7, 1972 and Assignment to
Amax Magnesium Corporation dated October 31, 1980 (ML 18779)
10.13 ----Special Use Lease Agreement 711 dated July 14, 1987 between the State of (1)
Utah, 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 (1)
United States Department of the Interior Bureau of Land Management,
Salt Lake District Office to Magnesium Corporation of America
10.15 ----Lease dated May 13, 1991 between Sabel Industries, Inc. as tenant and (1)
Janis Sabel, the Estate of Mark Sabel, Marcelle Sabel Moers
a/k/a Marcel Sabel Moers, Dorothy Anne Bell and
Lee Altheimer as successors to the Estate of
Dorothy Altheimer with respect to premises known
as Theodore Highway 90, County of Mobile, Alabama
10.16 ----Lease dated July 1, 1977 between Dewey Emfinger and his wife, Bea (1)
Emfinger, to Sabel Steel Service Incorporated with respect to
premises known at 599 Ross Clark Circle, Dothan,
Alabama and the sublease thereof to Sabel
Industries, Inc. then known as Ren Alabama Inc.
dated July 30, 1987
10.17 ----Lease dated July 30, 1987 between Mark Sabel, Janis Sabel, Marcel Moers (1)
and Dorothy Altheimer, owner of an undivided 50% interest and Ted Cohen,
owner of an undivided 50% interest, all as tenants in common, to
Sabel Industries, Inc. (name subsequently changed to JiMark Investment
Company, Inc.) with respect to premises known as 2811 Day Street, Montgomery,
Alabama and the sublease thereof to Sabel Industries, Inc., then known
as Ren Alabama Inc., dated July 30, 1987. Note: Sabel Industries, Inc.
subsequently purchased the undivided 50% interest of Mr. Cohen
10.18 ----Master Lease Indenture dated July 30, 1987 between Sabel Land Company, (1)
a tenancy in 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 (1)
Magnesium Corporation of America
10.20 ----Net Worth Appreciation Agreements between Sabel Industries, Inc. and:
a) Keith Sabel, dated January 24, 1994 (2)
b) Phillip Brown, dated January 24, 1994 (2)
10.21 ----Waiver of "Additional Fees" through October 31, 1995 dated (3)
January 11,1996 between The Renco Group, Inc. and Renco Metals, Inc.
21.1 ----Subsidiaries of Renco Metals, Inc. (1)
27 ----Financial Data Schedule (11)
- -----------------------------------------------------------------------------------------------------------
</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) Previously filed and incorporated herein by reference from
Renco Metals, Inc.'s Form 10-K for the fiscal year ended
October 31, 1997 (File No. 333-4513)..
(10) Previously filed and incorporated herein by reference from
Renco Metals, Inc.'s Form 10-Q for the quarterly period ended
July 31, 1998 (File No. 333-4513).
(11) 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, 1998.
-48-
<PAGE>
Schedule II
RENCO METALS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended October 31, 1998, 1997, and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
Balance Additions Deductions -
at charged to write-offs Balance
beginning costs and against at end
of year expenses allowance of year
---------- ----------- -------------- --------
<S> <C> <C> <C> <C>
Year ended October 31, 1998: Applied against asset accounts:
Allowance for doubtful accounts $ 514 37 (37) 514
Allowance for inventory obsolescence 442 - - 442
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
</TABLE>
-49-
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RENCO METALS, INC.
(Registrant)
Date: January 27, 1999 By /s/ Ira Leon Rennert
- ------------------------------ --------------------------
Ira Leon Rennert
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: January 27, 1999 /s/ Ira Leon Rennert
- -------------------------------- ---------------------
Ira Leon Rennert
Chairman of the Board, sole
Director, and Chief Executive
Officer (Principal Executive
Officer)
Date: January 27, 1999 /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.
-50-
<PAGE>
Exhibit 10.8.2
AMENDMENT NO. 4 TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
------------------------------------
MAGNESIUM CORPORATION OF AMERICA
238 North 2200 West
Salt Lake City, Utah 84116
January 17, 1999
Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Congress Financial Corporation ("Lender") and Magnesium Corporation
of America ("Borrower") have entered into certain financing arrangements
pursuant to the Amended and Restated Loan and Security Agreement, dated as of
August 4, 1993, between Lender and Borrower, as amended pursuant to Amendment
No. 1 to Amended and Restated Loan and Security Agreement, dated January 31,
1996, Amendment No. 2 to Amended and Restated Loan and Security Agreement,
dated July 3, 1996 and Amendment No. 3 to Amended and Restated Loan and
Security Agreement, dated August 28, 1997 (as further amended hereby and as
the same may hereafter be 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 an extension to the term of the Financing
Agreements and certain additional amendments to the Loan Agreement and Lender
is willing to agree to such an extension and to such amendments, subject to
the terms and conditions contained herein. By this Amendment, Lender and
Borrower desire and intend to evidence such amendments. All capitalized terms
used herein shall have the meaning assigned thereto in the other Financing
Agreements, unless otherwise defined herein.
In consideration of the foregoing, and the respective agreements and
covenants contained herein, the parties hereto agree as follows:
1. RENEWAL DATE. The reference contained in Section 10.1(a) of the
Loan Agreement to "six (6) years from the date hereof (the "Renewal Date")"
is hereby deleted and the following
<PAGE>
substituted therefor: "nine (9) years from the date hereof (the "Renewal
Date")".
2. INTEREST RATE. All references in Section 1.33 of the Loan
Agreement to "one (1%) percent per annum" and "three (3%) percent per annum"
are hereby deleted and the following substituted therefor: "three-quarters of
one (3/4%) percent per annum" and "two and three-quarters of one (2-3/4%)
percent per annum", respectively.
3. EARLY TERMINATION FEE. Notwithstanding anything to the contrary
contained in Section 10.1(e) of the Loan Agreement or any of the other
Financing Agreements, if Lender terminates the Loan Agreement or the other
Financing Agreements upon the occurrence of an Event of Default or at the
request of Borrower prior to the Renewal Date (as amended herein), Borrower
hereby agrees to pay to Lender for the account of Lender, upon the effective
date of such termination, an early termination fee in an amount equal to:
(i) $660,000, if such termination is effective prior to the
seventh anniversary of the Loan Agreement; or
(ii) $330,000, if such termination is effective after the seventh
anniversary of the Loan Agreement but prior to the Renewal
Date or the anniversary of the Renewal Date in any
subsequent year thereafter.
4. EXTENSION FEE. Borrower shall pay to Lender an extension fee in
an amount equal to $50,000, which amount shall be payable simultaneously with
the execution hereof and which fee is fully earned as of the date hereof.
5. CONDITIONS PRECEDENT. The effectiveness of the other terms and
provisions 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 AGREEMENT. Except as modified pursuant hereto, no
other changes or modifications in the Loan Agreement or the other Financing
Agreements are intended or implied and the Financing Agreements are hereby
specifically ratified, restated and confirmed by all parties hereto as of the
affective date hereof. To the extent of conflict between the terms of this
Amendment and the other Financing Agreements, the terms of this Amendment
shall control.
7. 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.
-2-
<PAGE>
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 Agreement.
Please sign the enclosed counterpart of this Amendment in the space
provided below, whereupon this Amendment, as so accepted by Lender, shall
become a binding agreement between Borrower and Lender.
Very truly yours,
MAGNESIUM CORPORATION OF AMERICA
By: /s/ Roger L. Fay
----------------------
Title: Vice President
----------------------
AGREED:
CONGRESS FINANCIAL CORPORATION
By: /s/ Janet S. Last
----------------------------
Title: First Vice President
----------------------------
-3-
<PAGE>
Exhibit 10.11.2
AMENDMENT NO. 4 TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
------------------------------------
SABEL INDUSTRIES, INC.
749 North Court Street
Montgomery, Alabama 36102
January 19, 1999
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, Amendment No. 2 to Loan and Security
Agreement, dated July 3, 1996 and Amendment No. 3 to Loan and Security
Agreement, dated August 28, 1997 (as further amended hereby and as the same
may hereafter be 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 an extension to the term of the Financing
Agreements and certain additional amendments to the Loan Agreement and Lender
is willing to agree to such an extension and to such amendments, subject to
the terms and conditions contained herein. By this Amendment, Lender and
Borrower desire and intend to evidence such extension and amendments. All
capitalized terms used herein shall have the meaning assigned thereto in the
other Financing Agreements, unless otherwise defined herein.
In consideration of the foregoing, and the respective agreements and
covenants contained herein, the parties hereto agree as follows:
1. RENEWAL DATE. The reference contained in Section 9.1(a) of the
Loan Agreement to "six (6) years from the date hereof (the "Renewal Date")"
is hereby deleted and the following substituted therefor: "nine (9) years
from the date hereof (the "Renewal Date")".
<PAGE>
2. INTEREST RATE. All references in Section 1.23 of the Loan
Agreement to "one (1%) percent per annum" and "three (3%) percent per annum"
are hereby deleted and the following substituted therefor: "three-quarters of
one (3/4%) percent per annum" and "two and three-quarters of one (2-3/4%)
percent per annum", respectively.
3. EARLY TERMINATION FEE. Notwithstanding anything to the contrary
contained in Section 9.1(e) of the Loan Agreement or any of the other
Financing Agreements, if Lender terminates the Loan Agreement or the other
Financing Agreements upon the occurrence of an Event of Default or at the
request of Borrower prior to the Renewal Date (as amended herein), Borrower
hereby agrees to pay to Lender for the account of Lender, upon the effective
date of such termination, an early termination fee in an amount equal to:
(i) $140,000, if such termination is effective prior to the
seventh anniversary of the Loan Agreement; or
(ii) $70,000, if such termination is effective after the seventh
anniversary of the Loan Agreement but prior to the Renewal
Date or the anniversary of the Renewal Date in any subsequent
year thereafter.
4. CONDITIONS PRECEDENT. The effectiveness of the other terms and
provisions 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 AGREEMENT. Except as modified pursuant hereto, no
other changes or modifications in the Loan Agreement or the other Financing
Agreements are intended or implied and the Financing Agreements are hereby
specifically ratified, restated and confirmed by all parties hereto as of the
affective date hereof. To the extent of conflict between the terms of this
Amendment and the other Financing Agreements, the terms of this Amendment
shall control.
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
-2-
<PAGE>
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 action as may be necessary
or desirable to effectuate the provisions and purposes of this Agreement.
Please sign the enclosed counterpart of this Amendment in the space
provided below, whereupon this Amendment, as so accepted by Lender, shall
become a binding agreement between Borrower and Lender.
Very truly yours,
SABEL INDUSTRIES, INC.
By: /s/ Roger L. Fay
-----------------------
Title: Vice President
-----------------------
AGREED:
CONGRESS FINANCIAL CORPORATION
By: /s/ Janet S. Last
-------------------------
Title: First Vice President
-------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 21,690
<SECURITIES> 0
<RECEIVABLES> 26,263
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<PP&E> 87,373
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0
0
<COMMON> 1
<OTHER-SE> (66,112)
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<SALES> 189,699
<TOTAL-REVENUES> 189,699
<CGS> 125,823
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<INCOME-TAX> 4,342
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,455
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
