<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JULY 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
COMMISSION FILE NUMBER 333-4513
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. [ ] YES [X] NO
Number of shares outstanding of each of the registrant's classes of common
stock, as of September 7, 1999: COMMON STOCK, NO PAR VALUE 1,000 SHARES
<PAGE> 2
FORM 10-Q
RENCO METALS, INC.
QUARTER ENDED JULY 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - July 31, 1999 and October 31, 1998 3
Condensed Consolidated Statements Of Income - Nine Months and Three Months Ended
July 31, 1999 and 1998 4
Condensed Consolidated Statements Of Cash Flows - Nine Months Ended
July 31, 1999 and 1998 5
Notes To Consolidated Financial Statements 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 7
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 12
</TABLE>
-2-
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
RENCO METALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 31, October 31,
1999 1998
(UNAUDITED) (Audited)
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,377 $ 21,690
Accounts receivable, less allowance for doubtful accounts of
$554 in 1999 and $514 in 1998 22,611 25,749
Inventories, net (note 2) 45,550 34,500
Prepaid expenses and other current assets 3,224 3,024
--------- ---------
Total current assets 78,762 84,963
--------- ---------
Property, plant, and equipment, net 39,954 35,385
Other assets, net 5,010 5,626
--------- ---------
$ 123,726 $ 125,974
========= =========
Liabilities and Stockholder's Deficit
Current liabilities:
Current installments of long-term debt $ 23 $ 23
Accounts payable 6,190 7,279
Accrued expenses and other current liabilities 10,158 15,149
--------- ---------
Total current liabilities 16,371 22,451
--------- ---------
Long-term debt, excluding current installments 153,813 154,954
Other liabilities 12,504 14,180
--------- ---------
Total liabilities 182,688 191,585
--------- ---------
Stockholder's deficit:
Common stock, no par value. Authorized, issued, and
outstanding 1,000 shares 1 1
Additional paid-in capital 500 500
Accumulated deficit (59,463) (66,112)
--------- ---------
Total stockholder's deficit (58,962) (65,611)
--------- ---------
Commitments and contingencies
--------- ---------
$ 123,726 $ 125,974
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-3-
<PAGE> 4
RENCO METALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED JULY 31, ENDED JULY 31,
----------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 132,980 $ 142,886 $ 45,413 $ 47,922
Costs and expenses:
Cost of sales 92,301 91,915 31,988 31,375
Depreciation, depletion, and amortization 7,009 6,463 2,337 2,057
Selling, general, and administrative expenses 15,564 17,366 5,365 5,324
--------- --------- --------- ---------
Total costs and expenses 114,874 115,744 39,690 38,756
--------- --------- --------- ---------
Income from operations 18,106 27,142 5,723 9,166
Other income (expense):
Interest income 462 909 99 324
Interest expense (13,982) (14,186) (4,652) (4,736)
--------- --------- --------- ---------
Total other income (expense) (13,520) (13,277) (4,553) (4,412)
--------- --------- --------- ---------
Income before income taxes 4,586 13,865 1,170 4,754
Income tax (benefit) expense (note 3) (2,063) 4,158 -- 1,438
--------- --------- --------- ---------
Net income $ 6,649 $ 9,707 $ 1,170 $ 3,316
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-4-
<PAGE> 5
RENCO METALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JULY 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Net cash provided by (used in) operating activities $ (1,566) $ 3,494
-------- --------
Cash flows from investing activities -
Capital expenditures (11,636) (3,936)
Proceeds from sale of equipment 79 3
-------- --------
Net cash used in investing activities (11,557) (3,933)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreements (1,123) 1,478
Repayment of long-term debt (17) (1,512)
Payment of financing fees (50) (60)
Dividends -- (5,200)
-------- --------
Net cash used in financing activities (1,190) (5,294)
-------- --------
Decrease in cash and cash equivalents (14,313) (5,733)
Cash and cash equivalents, beginning of period 21,690 26,607
-------- --------
Cash and cash equivalents, end of period $ 7,377 $ 20,874
======== ========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for interest $ 17,553 $ 17,810
Cash paid during the period for income taxes $ 209 $ 4,271
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-5-
<PAGE> 6
RENCO METALS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared from the accounting records of Renco Metals, Inc. (Renco Metals)
and its subsidiaries (the Company), Magnesium Corporation of America
(Magcorp), and Sabel Industries, Inc. (Sabel), without audit (except
where presented data is specifically identified as audited) pursuant to
the rules and regulations of the Securities and Exchange Commission.
Renco Metals is a 100% owned subsidiary of The Renco Group, Inc. (Group).
The financial statements reflect all adjustments (consisting solely of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods
presented. The results of operations for the interim periods presented
are not necessarily indicative of the results to be expected for the full
year. These interim condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Form 10-K for the fiscal year ended
October 31, 1998.
Renco Metals' 11.5% Senior Notes due 2003 (Senior Notes) are
unconditionally and fully guaranteed, jointly and severally, by both of
its subsidiaries, Magcorp and Sabel (the Guarantors), each of which is
wholly-owned. Separate financial statements of the Guarantors are not
presented because, in management's opinion, such financial statements
would not be material to investors because Renco Metals is a holding
company with no independent operations and its only assets are cash and
its investment in Magcorp and Sabel. Summarized financial information on
the combined Guarantors is presented below:
SUMMARIZED COMBINED GUARANTOR FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Nine months Three months
Ended July 31, Ended July 31,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Statement of operations data:
Net sales $132,980 $142,886 $ 45,413 $ 47,922
Cost of sales $ 92,301 $ 91,915 $ 31,988 $ 31,375
Net income $ 6,576 $ 9,731 $ 1,154 $ 3,352
</TABLE>
<TABLE>
<CAPTION>
October 31,
JULY 31, 1998
1999 (Audited)
------- -------
(dollars in thousands)
<S> <C> <C>
Balance sheet data:
Current assets $77,277 $83,687
Noncurrent assets $44,964 $41,011
Current liabilities $14,096 $16,300
Noncurrent liabilities $16,317 $19,134
</TABLE>
-6-
<PAGE> 7
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 31, October 31,
1999 1998
(UNAUDITED) (Audited)
----------- -----------
(dollars in thousands)
<S> <C> <C>
Finished goods $36,275 $24,451
Brine in ponds 1,191 1,100
Spare parts and supplies 8,278 8,740
Raw materials and work-in-process 728 743
------- -------
46,472 35,034
Less LIFO reserve 922 534
------- -------
$45,550 $34,500
======= =======
</TABLE>
(3) INCOME TAXES
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 subchapter C corporation to that of a subchapter 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 which do not recognize QSSS
status; however, management believes this is not material to the Company.
As a result of this change in tax status, the Company recognized an
income tax benefit of $2,063,000 during the three months ended January
31, 1999, which included the elimination of net deferred tax liabilities
recorded as of October 31, 1998.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS - NINE MONTHS ENDED JULY 31, 1999 COMPARED TO
NINE MONTHS ENDED JULY 31, 1998
Sales for the nine-month period ended July 31, 1999 decreased 6.9% over the
prior period. The decrease was attributable to a 6.2% decrease in Magcorp's
revenues and a 9.1% decrease in Sabel's revenues. Magnesium shipments decreased
2.0% and Magcorp's average selling price for magnesium decreased 4.5%. Import
competition from foreign producers continues to put pressure on magnesium
volumes and pricing, particularly in the steel desulfurization segment of the
magnesium business. According to International Magnesium Association statistics,
first half of calendar 1999 shipments by non-western producers represented an
21.3% increase over comparable period 1998 levels, demonstrating the continuing
increased foreign imports in the markets in which Magcorp participates.
Magnesium pricing and volume are dependent on the overall market supply and
demand, and there is no certainty that current trends will not continue. Sabel's
sales decrease was due to overall price and volume decreases affecting the U.S.
steel industry.
Cost of sales for the nine-month period ended July 31, 1999 increased 0.4% on a
consolidated basis. Magcorp's cost of sales increased 5.5% due in large part to
increased processing costs associated with increased volumes of recycled
magnesium when compared to the corresponding period in 1998. Magcorp continues
to increase its participation in die cast markets, which also requires handling
and recycling of die cast customer scrap, increasing costs and decreasing
margins for the recycled material. The 12.9% cost of sales decrease at Sabel is
attributable to the volume and price decreases mentioned above.
Depreciation, depletion, and amortization for the nine-month period ended July
31, 1999 increased 8.4% due to increased depreciation of plant and equipment as
the result of recent capital equipment additions.
-7-
<PAGE> 8
Selling, general, and administrative expenses for the nine-month period ended
July 31, 1999 decreased 10.4% primarily due to decreased computer consulting
costs, development costs, legal costs, and profit-based compensation accruals
when compared to the corresponding period in 1998.
Interest income for the nine-month period ended July 31, 1999 decreased $447,000
due to cash and cash equivalent balances on hand that decreased to a month-end
average of $16.8 million in the current nine-month period from a month-end
average of $25.8 million in the corresponding prior period.
Interest expense for the nine-month period ended July 31, 1999 was slightly
lower than that of the corresponding prior period due to lower long-term debt
levels than in the corresponding prior period.
Income taxes for the nine-month period ended July 31, 1999 reflects the
Company's change in taxable status effective November 1, 1998 described in Note
3 to the condensed consolidated financial statements in Item 1 above.
Accordingly, the Company recognized an income tax benefit of $2.1 million that
represents the elimination of net deferred tax liabilities recorded as of
October 31, 1998.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JULY 31, 1999 COMPARED TO
THREE MONTHS ENDED JULY 31, 1998
Sales for the three-month period ended July 31, 1999 decreased 5.2% over the
prior period. The decrease was attributable to a 3.6% decrease in Magcorp's
revenues and a 9.9% decrease in Sabel's revenues. Magnesium shipments increased
1.4% while Magcorp's average selling price for magnesium decreased 5.7%.
Increased shipments of recycled magnesium helped offset reduced primary
magnesium shipments due to foreign imports discussed above, but imports continue
to put pressure on magnesium volumes and pricing. Because of recycled
magnesium's higher production costs, their higher sales volumes did not
contribute proportionately to income from operations. Magnesium pricing and
volume are dependent on the overall market supply and demand, and there is no
certainty that current trends will not continue. Sabel's sales decrease was due
to overall price and volume decreases affecting the U.S. steel industry.
Cost of sales for the three-month period ended July 31, 1999 increased 2.0% on a
consolidated basis. Magcorp's cost of sales increased 8.3% due in large part to
increased processing costs associated with increased volumes of recycled
magnesium from die cast customers when compared to the corresponding period in
1998. Magcorp continues to increase its participation in die cast markets, which
also requires handling and recycling of die cast customer scrap, increasing
costs and decreasing margins for the recycled material. Magcorp's cost of sales
increase was offset by a 15.0% cost of sales decrease at Sabel attributable to
the volume and price decreases mentioned above.
Depreciation, depletion, and amortization for the three-month period ended July
31, 1999 increased 13.6% due to increased depreciation of plant and equipment as
the result of recent capital equipment additions.
Interest income for the three-month period ended July 31, 1999 decreased
$225,000 due to cash and cash equivalent balances on hand that decreased to a
month-end average of $14.0 million in the current three-month period from a
month-end average of $22.6 million in the corresponding prior period.
Interest expense for the three-month period ended July 31, 1999 was slightly
lower than that of the corresponding prior period due to lower long-term debt
levels than in the corresponding prior period.
Income taxes for the three-month period ended July 31, 1999 were zero,
reflecting the Company's change in taxable status effective November 1, 1998
described in Note 3 to the condensed consolidated financial statements in Item 1
above.
-8-
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise from working capital requirements, capital
investments and interest payment obligations. The Company's primary source of
liquidity has historically been 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 $33.0 million for Magcorp
and $7.0 million for Sabel, net of outstanding letters of credit. As of July 31,
1999, the unused amounts available to Magcorp and Sabel were approximately $27.8
million and $3.6 million, respectively. During the nine-month period ended July
31, 1999, Sabel repaid a net amount of $1.5 million under its revolving credit
facility. With planned capital expenditures and declining margins, both
discussed below, Magcorp anticipates it will utilize its revolving credit
facility beginning in 2000.
Cash used in operating activities was $1.6 million for the nine-month period
ended July 31, 1999 compared to $3.5 million provided by operations for the
corresponding prior period. The $5.1 million decrease in cash provided by
operations resulted primarily from increased inventories and decreased operating
income. Magcorp is increasing inventory levels in 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 due to increased volumes on hand of recycled die cast magnesium to be
processed by third parties or already processed by third parties. The reduced
operating income is attributable to lower sales volume and pricing from
increased import competition in both the magnesium and steel operations and by
lower margins on increased sales of recycled magnesium. Pricing and volume are
dependent on the overall market supply and demand, and there is no assurance
that current trends will not continue.
Capital expenditures were $11.6 million for the nine-month period ended July 31,
1999, of which approximately $6.5 million is related to the new magnesium
direct-chill caster. The magnesium caster installation was essentially complete
at July 31, 1999 and commercial production from that new equipment is expected
to begin in October 1999. Capital expenditures are budgeted at approximately $5
million for the remainder of 1999, $34 million for 2000 and $19 million for
2001. Of these projected capital expenditure amounts, an estimated total of $40
to $45 million is 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 new electrolytic cells,
and long acquisition lead-time components have been designed and/or ordered.
Conversion of the cells is expected to commence in January 2000 and take place
over a period of approximately two years. Associated cost reductions and related
manufacturing efficiencies will occur gradually as conversion progresses, but
will not be fully realized in the Company's operating results until 2002.
Management anticipates that existing cash balances and cash generated from
operations and availability under its revolving credit facilities will be
sufficient to finance the Company's liquidity needs for the foreseeable future.
However, if magnesium market conditions further deteriorate, in order to fund
its planned capital expenditures through 2001, the Company may need to consider
additional sources of liquidity.
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 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. Projected funds to cover
remaining remediation costs as incurred are expected to come from operations.
-9-
<PAGE> 10
IT projects since 1994 have been planned with Year 2000 compliance in mind,
including replacement of mainframe-based IT systems that began in 1994 and were
completed in early 1999. Completion status of IT systems is estimated to be as
follows: evaluation-100%; renovation-100%; testing-98%; and implementation-97%.
The Company anticipates completion of all IT remediation phases by October 1999.
Since Year 2000-related replacements began in 1994, the Company has expensed
approximately $1.1 million in IT maintenance or modification costs and
capitalized approximately $700,000. Remaining IT modification costs, all
expected to be expensed, are estimated to be less than $20,000.
The Company's IT and non-IT systems are not materially interdependent. Process
control and other non-IT systems are being evaluated individually and depending
on the application, may require replacement software, reprogramming or other
corrective actions. Completion status of non-IT systems is estimated to be as
follows: evaluation-100%; renovation-99%; testing-98%; and implementation-97%.
The Company anticipates completion of all non-IT remediation phases by October
1999. Non-IT Year 2000 modification costs to date are approximately $25,000 and
total remaining costs are estimated not to exceed $10,000.
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 suppliers to determine the extent
of the Company's vulnerability to the failure of third parties to remediate
their own Year 2000 issues. Third parties material to the Company's operations,
including certain raw material suppliers and electric and natural gas utility
companies, have given the Company assurances regarding their Year 2000
preparedness. The Company has used 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. If certain vendors are unable to
supply energy or raw materials on a timely basis in 2000, it could result in the
Company's inability to operate or require the Company to operate at a reduced
level. 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 a material adverse effect on the Company's operations.
The Company believes that is has made the modifications necessary and has
contingency measures in place to mitigate the risk of disruption to its
operations. The remaining costs of this project, its timely completion and
effectiveness 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.
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 United States Environmental Protection
Agency (EPA) have visited Magcorp's facility in preparation for the process of
establishing NESHAPS for chlorine and hydrogen chloride emissions. It is
expected that Magcorp will be required to make substantial reductions in
chlorine emissions to meet NESHAPS for primary 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 January 2000, the conversion of
the remaining cells is expected to take place over a period of approximately two
years. With respect to hydrogen chloride, Magcorp has recently installed and is
successfully operating scrubbers to reduce pertinent 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 an estimated $40
to $45 million of its capital expenditure budget for 1999, 2000 and 2001,
directly or indirectly, to meet environmental regulatory requirements, primarily
for NESHAPS, and for other anticipated future requirements. Prototype
cell-related project development expenses to date total $5.4 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.
-10-
<PAGE> 11
Representatives of the Utah State Department 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 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 UDEQ does not
consider, a health hazard to be associated with these preliminary sampling
results, Magcorp conducted additional sampling to determine the extent of
accumulations of these compounds. Sampling results confirmed the accumulation of
small amounts of dioxin/furan compounds in soil and sediment from the process
wastewater collection and retention system, and that facility perimeter areas
contained only background levels of the compounds. 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.
Industrial companies such as Magcorp and Sabel have in recent years become
subject to changing and increasingly demanding environmental standards imposed
by governmental laws and regulations. The Company cannot currently assess the
impact of more stringent standards on its results of operations or financial
condition.
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements," which involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions;
industry capacity; demand; industry trends; competition; currency fluctuations;
the loss of any significant customers; availability of qualified personnel;
changes in environmental regulations; successful completion of planned
installation of new technology; and major equipment failures. These
forward-looking statements speak only as of the date of this report. The Company
expressly disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained herein to reflect any
change in the Company's expectations with regard thereto or any change in
events, conditions or circumstances on which any such forward-looking statement
is based.
PART II- OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this Report on Form
10-Q is set forth in the "Exhibit Index" which immediately precedes
such exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which this
report is filed.
-11-
<PAGE> 12
S I G N A T U R E S
Pursuant to the requirements 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)
September 7, 1999 /s/ Ira Leon Rennert
- -------------------------------- ----------------------------------
Date Ira Leon Rennert
Chairman of the Board and
Principal Executive Officer
September 7, 1999 /s/ Roger L. Fay
- -------------------------------- ----------------------------------
Date Roger L. Fay
Vice President - Finance
Principal Financial and
Accounting Officer
-12-
<PAGE> 13
RENCO METALS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- ------------
<S> <C>
10.8.3 Amendment No. 5 dated August 10, 1999 to Amended and
Restated Loan and Security Agreement dated as of August
4, 1993, between Congress Financial Corporation and
Magnesium Corporation of America
10.11.3 Amendment No. 5 dated August 10, 1999 to Loan and
Security Agreement dated as of August 4, 1993, between
Congress Financial Corporation and Sabel Industries,
Inc.
27. Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.8.3
AMENDMENT NO. 5 TO
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
MAGNESIUM CORPORATION OF AMERICA
238 North 2200 West
Salt Lake City, Utah 84116
August 10, 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, Amendment No. 3 to Amended and Restated Loan and Security Agreement,
dated August 28, 1997 and Amendment No. 4 Amended and Restated and Security
Agreement, dated January 19, 1999 (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 and certain additional amendments to the Loan
Agreement and Lender is willing to agree 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:
<PAGE> 2
1. Transactions with Affiliates.
(a) Section 7.6(b) of the Loan Agreement is hereby deleted in
its entirety and replaced with the following:
"(b) Borrower may (i) pay any dividend or any other
distribution on account of any shares of any class of capital stock of
Borrower now or hereafter outstanding, and (ii) make any loans or
advance money or property to any such persons, (iii) guarantee, assume,
endorse, or otherwise become responsible for (directly or indirectly)
the Indebtedness, performance, obligations or dividends of any such
person and (iv) make any payments in respect of any Indebtedness owing
to Renco Metals (whether arising pursuant to payments made by Renco
Metals on behalf of Borrower or otherwise); PROVIDED, THAT, in each
case as to any of the foregoing, each of the following conditions is
satisfied as determined by Lender:
(A) no Event of Default, or act, condition or event which
with notice or passage of time or both would constitute an Event of
Default shall have occurred and be continuing at the time of or
after giving effect to any such payments or incurring any such
obligations,
(B) any dividends or other distributions as described in
Section 7.6(b)(i) above shall be out of funds legally available
therefor, and
(C) as of the date of any such payments or the incurrence
of any such obligations, as the case may be, the aggregate amount of
all such payments made or such obligations incurred after July 3,
1996 shall not exceed the amount equal to fifty (50%) percent of.
(1) the cumulative Consolidated Net Income of Renco Metals (or if
the Consolidated Net Income shall be a loss, MINUS one hundred
(100%) percent of such loss) earned subsequent to July 3, 1996 and
prior to the date the payment occur or the obligation is incurred
(treating such period as a single accounting period) minus (2) all
payments made or obligations incurred by Sabel during the same
period and of the same type or nature described in Sections
7.6(b)(i), 7.6(b)(ii) and 7.6(b)(iii) above or Section 7.6(j) below
and all payments made by Borrower pursuant to Section 7.6(j) below
for federal, state and local income taxes based on the taxable
income of the immediately preceding fiscal year;"
(b) Section 7.6(c) of the Loan Agreement is hereby deleted in
its entirety and replaced with the following:
"(c) Borrower may make payments to Renco Group or an affiliate
of Renco Group on behalf of Renco Metals pursuant to the tax sharing
arrangement between Renco Metals and Renco Group (as in effect on the
date hereof); PROVIDED, THAT, (i) Borrower is included in the
consolidated federal income tax return filed by Renco Group or an
affiliate of Renco Group as to which Borrower is making such payments
for the 1998 tax year or any prior year, or for any taxable period
during which Borrower joins with Renco
<PAGE> 3
Group or an affiliate of Renco Group in filing any combined or
consolidated (or similar) state or local income tax return for a
jurisdiction which does not recognize Renco Metals and its Subsidiaries
as QSSS (as defined in Section 7.6(j) hereof), (ii) the payments in any
year shall not exceed the federal income tax liability that Borrower
and its Subsidiaries would have been liable for if Borrower and its
Subsidiaries had filed its tax returns on a stand-alone basis except
that Borrower will not have the benefit of any of its tax loss
carryforwards and any intercompany items shall, for tax liability
purposes, be recorded on a cash basis rather than on an accrual basis,
and (iii) such payments shall be made by Borrower no earlier than five
(5) days prior to the date on which Renco Group or an affiliate of
Renco Group is required to make its payments to the Internal Revenue
Service or to a state or local jurisdiction described in Section
7.6(c)(i) hereof;"
(c) The following is hereby added as a new Section 7.6(j) to the Loan
Agreement:
"(j) With respect to any year that Renco Metals and its
Subsidiaries have effectively been designated as qualified Subchapter S
subsidiary companies ("QSSS") under the Code, Borrower may pay cash
dividends to Renco Metals, from legally available funds therefor, to
the extent taxable income of Borrower is required to be included in the
taxable income shown by Renco Group as reported in its subchapter S tax
returns ("Form 1120S"), subject to the following:
(A) Such cash dividends shall be in any such period, in an
amount up to the product of (1) the taxable income of Borrower and
its Subsidiaries for such period which is the basis for Renco Group
being required to include such taxable income in its Form 1120S, as
amended or modified or determined by audit, and the required
estimated taxable income related thereto and the comparable state
and local reports and estimated taxable income, multiplied by (2)
the corporate Federal, State and local tax rates, whether calculated
on regular taxable income or alternative minimum taxable income, as
applicable, in effect for the taxable period applicable to Borrower
and its Subsidiaries using the rates that would be applicable if
Borrower and its Subsidiaries were not QSSS and calculated in
accordance with the tax sharing arrangement between Renco Metals and
Renco Group (as in effect on the date hereof),
(B) Borrower may pay such cash dividends for any period so
long as (1) in such period, Renco Metals and its Subsidiaries are
effectively designated QSSS, (2) the product of the taxable income
of Borrower and its Subsidiaries for such period multiplied by the
applicable tax rates as described above shall be reduced by any
applicable tax credits or deductions calculated in accordance with
the tax sharing arrangement between Renco Metals and Renco Group (as
in effect on the date hereof) available to Borrower and its
Subsidiaries which would reduce the amount of the income taxes
payable by Borrower and its Subsidiaries, (3) any such dividends
shall be paid no more than five (5) days prior to the date that
Renco Group's shareholders are required to make payment of the taxes
based on the taxable income of Renco Metals and its Subsidiaries,
(4) not less than five (5) days prior to the payment of any such
dividends, Lender shall have received a certificate signed by an
officer of Borrower, in form and
<PAGE> 4
substance satisfactory to Lender, stating the calculation of the
amount which is the basis for tax distributions permitted hereunder
through such period (if any) and providing full information and
computations with respect thereto and (5) such dividend shall not be
in violation of applicable law or any other agreement to which Renco
Metals or Borrower are a party or by which Borrower or its assets
are bound, and
(C) In no event shall dividends be paid to Renco Metals
based on taxable income of Borrower and its Subsidiaries for
jurisdictions which do not recognize Renco Metals and its
Subsidiaries as QSSS and where (1) Borrower and its Subsidiaries are
required to file and pay their individual taxes and (2) Renco Group
is not required to pay, or by virtue of a consolidated (or similar)
tax return does not make payments in respect of, the tax liabilities
of Borrower or any of its Subsidiaries in such jurisdiction."
2. Dividends. Section 7.7(b) of the Loan Agreement is hereby deleted in
its entirety and replaced with the following:
"(b) Borrower may pay dividends to Renco Metals to the extent
permitted under Sections 7.6 (b) and 7.6 (j) hereof."
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
<PAGE> 5
8. 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.
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
----------------------------
<PAGE> 1
EXHIBIT 10.11.3
AMENDMENT NO. 5 TO
LOAN AND SECURITY AGREEMENT
SABEL INDUSTRIES, INC.
749 North Court Street
Montgomery, Alabama 36102
August 10, 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, Amendment No. 3 to Loan and Security Agreement, dated August 28,
1997 and Amendment No. 4 to Loan and Security Agreement, dated January 19, 1999
(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 and certain additional amendments to the Loan
Agreement and Lender is willing to agree 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. Transactions with Affiliates.
(a) Section 6.6(b) of the Loan Agreement is hereby deleted in
its entirety and replaced with the following:
<PAGE> 2
"(b) Borrower may (i) pay any dividend or any other
distribution on account of any shares of any class of capital stock of
Borrower now or hereafter outstanding, and (ii) make any loans or
advance money or property to any such persons, (iii) guarantee, assume,
endorse, or otherwise become responsible for (directly or indirectly)
the Indebtedness, performance, obligations or dividends of any such
person and (iv) make any payments in respect of any Indebtedness owing
to Renco Metals (whether arising pursuant to payments made by Renco
Metals on behalf of Borrower or otherwise); PROVIDED, THAT, in each
case as to any of the foregoing, each of the following conditions is
satisfied as determined by Lender:
(A) no Event of Default, or act, condition or event which
with notice or passage of time or both would constitute an Event of
Default shall have occurred and be continuing at the time of or
after giving effect to any such payments or incurring any such
obligations,
(B) any dividends or other distributions as described in
Section 6.6(b)(i) above shall be out of funds legally available
therefor, and
(C) as of the date of any such payments or the incurrence
of any such obligations, as the case may be, and after giving effect
thereto, the aggregate amount of all such payments made or such
obligations incurred after July 3, 1996 shall not exceed the amount
equal to fifty (50%) percent of: (1) the cumulative Consolidated Net
Income of Renco Metals (or if the cumulative Consolidated Net Income
shall be a loss, minus one hundred (100%) percent of such loss)
earned subsequent to July 3, 1996 and prior to the date the payment
occurs or the obligation is incurred (treating such period as a
single accounting period) MINUS (2) all payments made or obligations
incurred by Magcorp during the same period and of the same type or
nature described in Sections 6.6(b)(i), 6.6 (b)(ii) and 6.6(b)(iii)
above or Section 6.6(i) below and all payments made by Borrower
pursuant to Section 6.6(i) below for federal, state and local income
taxes based on the taxable income of the immediately preceding
fiscal year,"
(b) Section 6.6(c) of the Loan Agreement is hereby deleted in
its entirety and replaced with the following:
"(c) Borrower may make payments to Renco Group or an affiliate
of Renco Group on behalf of Renco Metals pursuant to the tax sharing
arrangement between Renco Metals and Renco Group (as in effect on the
date hereof); PROVIDED, THAT, (i) Borrower is included in the
consolidated federal income tax return filed by Renco Group or an
affiliate of Renco Group as to which Borrower is making such payments
for the 1998 tax year or any prior year, or for any taxable period
during which Borrower joins with Renco Group or an affiliate of Renco
Group in filing any combined or consolidated (or similar) state or
local income tax return for a jurisdiction which does not recognize
Renco Metals and its Subsidiaries as QSSS (as defined in Section
6.6(i)hereof), (ii) the payments in any year shall not exceed the
federal income tax liability that Borrower and its Subsidiaries would
have been liable for if Borrower and its Subsidiaries had filed its tax
returns on a
<PAGE> 3
stand-alone basis except that Borrower will not have the benefit of any
of its tax loss carryforwards and any intercompany items shall, for tax
liability purposes, be recorded on a cash basis rather than on an
accrual basis, and (iii) such payments shall be made by Borrower no
earlier than five (5) days prior to the date on which Renco Group or an
affiliate of Renco Group is required to make its payments to the
Internal Revenue Service or to a state or local jurisdiction described
in Section 6.6(c)(i) hereof,"
(c) The following is hereby added as a new Section 6.6(i) to
the Loan Agreement:
"(i) With respect to any year that Renco Metals and its
Subsidiaries have effectively been designated as qualified Subchapter S
subsidiary companies ("QSSS") under the Code, Borrower may pay cash
dividends to Renco Metals, from legally available funds therefor, to
the extent taxable income of Borrower is required to be included in the
taxable income shown by Renco Group as reported in its subchapter S tax
returns ("Form 1120S"), subject to the following:
(A) Such cash dividends shall be in any such period, in an
amount up to the product of (1) the taxable income of Borrower and
its Subsidiaries for such period which is the basis for Renco Group
being required to include such taxable income in its Form 1120S, as
amended or modified or determined by audit, and the required
estimated taxable income related thereto and the comparable state
and local reports and estimated taxable income, multiplied by (2)
the corporate Federal, State and local tax rates, whether calculated
on regular taxable income or alternative minimum taxable income, as
applicable, in effect for the taxable period applicable to Borrower
and its Subsidiaries using the rates that would be applicable if
Borrower and its Subsidiaries were not QSSS and calculated in
accordance with the tax sharing arrangement between Renco Metals and
Renco Group (as in effect on the date hereof),
(B) Borrower may pay such cash dividends for any period so
long as(1) in such period, Renco Metals and its Subsidiaries are
effectively designated QSSS, (2) the product of the taxable income
of Borrower and its Subsidiaries for such period multiplied by the
applicable tax rates as described above shall be reduced by any
applicable tax credits or deductions calculated in accordance with
the tax sharing arrangement between Renco Metals and Renco Group (as
in effect on the date hereof) available to Borrower and its
Subsidiaries which would reduce the amount of the income taxes
payable by Borrower and its Subsidiaries, (3) any such dividends
shall be paid no more than five (5) days prior to the date that
Renco Group's shareholders are required to make payment of the taxes
based on the taxable income of Renco Metals and its Subsidiaries,
(4) not less than five (5) days prior to the payment of any such
dividends, Lender shall have received a certificate signed by an
officer of Borrower, in form and substance satisfactory to Lender,
stating the calculation of the amount which is the basis for tax
distributions permitted hereunder through such period (if any) and
providing full information and computations with respect thereto and
(5) such dividend shall not be in violation of applicable law or any
other agreement to which Renco Metals or Borrower are a party or by
which Borrower or its assets are bound, and
<PAGE> 4
(C) In no event shall dividends be paid to Renco Metals
based on taxable income of Borrower and its Subsidiaries for
jurisdictions which do not recognize Renco Metals and its
Subsidiaries as QSSS and where (1) Borrower and its Subsidiaries are
required to file and pay their individual taxes and (2) Renco Group
is not required to pay, or by virtue of a consolidated (or similar)
tax return does not make payments in respect of, the tax liabilities
of Borrower or any of its Subsidiaries in such jurisdiction."
2. Dividends. Section 6.7(b) of the Loan Agreement is hereby deleted in
its entirety and replaced with the following:
"(b) Borrower may pay dividends to Renco Metals to the extent
permitted under Sections 6.6 (b) and 6.6 (i) hereof."
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
<PAGE> 5
8. 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.
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>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 7,377
<SECURITIES> 0
<RECEIVABLES> 23,165
<ALLOWANCES> 554
<INVENTORY> 45,550
<CURRENT-ASSETS> 78,762
<PP&E> 98,468
<DEPRECIATION> 58,514
<TOTAL-ASSETS> 123,726
<CURRENT-LIABILITIES> 16,371
<BONDS> 153,836
0
0
<COMMON> 1
<OTHER-SE> (58,963)
<TOTAL-LIABILITY-AND-EQUITY> 123,726
<SALES> 132,980
<TOTAL-REVENUES> 132,980
<CGS> 92,301
<TOTAL-COSTS> 114,874
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 163
<INTEREST-EXPENSE> 13,982
<INCOME-PRETAX> 4,586
<INCOME-TAX> (2,063)
<INCOME-CONTINUING> 6,649
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,649
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
