<PAGE> 1
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, 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 (IRS Employer
of incorporation or Identification No.)
organization)
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. [ ] YES [X] 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, 2000: 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
- --------------------------------------------------------------------------------
<PAGE> 2
FORM 10-K
RENCO METALS, INC.
FISCAL YEAR ENDED OCTOBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
PART I
ITEM 1 - Business 3
ITEM 2 - Properties 9
ITEM 3 - Legal Proceedings 10
ITEM 4 - Submission of Matters to a Vote of
Security Holders 12
PART II
ITEM 5 - Market for Registrant's Common Equity and
Related Stockholder Matters 13
ITEM 6 - Selected Financial Data 13
ITEM 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
ITEM 8 - Financial Statements and Supplementary Data 17
ITEM 9 - Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure 39
PART III
ITEM 10 - Directors and Executive Officers of the
Registrant 39
ITEM 11 - Executive Compensation 40
ITEM 12 - Security Ownership of Certain Beneficial
Owners and Management 42
ITEM 13 - Certain Relationships and Related Transactions 42
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 43
SIGNATURES 48
</TABLE>
-2-
<PAGE> 3
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 owned by trusts established by Mr. Ira Leon
Rennert, the Chairman and Chief Executive Officer of the Company and Group, 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 operating segments: Magcorp's
operations comprise the magnesium production segment, and Sabel's operations
comprise the steel wholesaling and fabrication 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 Notes 2(i) and 14 to the Financial Statements,
"Research and Development Costs," and "Significant Customers and Export Sales,"
included in ITEM 8, Part II of this Form 10-K. Substantially all research costs
are attributable to Magcorp.
MAGCORP
Overview
Magcorp is 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 366,000 metric tons in calendar year 1999,
according to IMA information (based on nine-month statistical figures
annualized), a 1.5% increase over the prior year. Competitive conditions changed
significantly in 1999, most significantly with continued foreign import
competition and the resultant market price decline.
Description of Products, Markets, and Competitive Conditions
The magnesium industry has relatively few participants and is highly
competitive. Magcorp management estimates, from IMA and public information, that
four major producers, Magcorp, Norsk Hydro AS ("Norsk Hydro"), Northwest Alloys,
Inc. ("Northwest Alloys") and Dead Sea Magnesium, Ltd. ("Dead Sea Magnesium")
together account for 87% 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.
-3-
<PAGE> 4
Annualizing IMA nine-month statistical figures, calendar 1999 magnesium
shipments can be estimated. The seven primary western world magnesium producers
shipped an estimated 250,000 metric tons of magnesium in calendar year 1999. In
addition, an estimated 116,000 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 $1.0 billion, based on
1999 average market prices. Calendar year 1999 shipments by western and
non-western world producers represented a 3.8% decrease and 23.7% increase,
respectively, over prior year levels, demonstrating 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 in 1999 has demonstrated some
involvement 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, 59% in calendar year 1999, whereas Western Europe and Asia account
for 26% 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 the past five calendar years:
NORTH AMERICAN CONSUMPTION OF PRIMARY MAGNESIUM
<TABLE>
<CAPTION>
CUSTOMER CATEGORY 1999(*) 1998 1997 1996 1995 END USES
- ----------------- ------- ---- ---- ---- ---- --------
(in thousands of metric tons)
<S> <C> <C> <C> <C> <C> <C>
Die Casting ............. 88.1 70.9 68.6 50.6 42.7 Automotive, electronics and hand tools.
Aluminum Alloying ....... 81.5 81.1 72.8 66.0 77.6 Beverage cans, truck panels, home siding, aircraft
and marine alloys.
Desulfurization ......... 18.9 32.4 31.1 26.4 22.2 Steel production from iron.
Electro-Chemical ........ 10.0 6.9 5.4 6.1 6.8 Cast anodes for cathodic protection of underground
steel pipelines.
Ductile Iron ............ 4.5 5.8 6.5 6.5 6.5 Pipe production, automotive components and
heavy-earth moving equipment.
Metal Reduction ......... 2.1 3.6 3.8 3.4 2.6 Production of titanium, zirconium, beryllium and
uranium. Uses include aerospace, chemical processing
and nuclear products.
Others .................. 9.5 10.0 9.5 8.6 7.0 Sheet and plate and extrusion stock, gravity
castings for aerospace applications, powder for
flares, chemicals and exotic pharmaceuticals and
perfumes.
Total ............... 214.6 210.7 197.7 167.6 165.4
===== ===== ===== ===== =====
</TABLE>
(*) Based on 9 month IMA figures, annualized
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 approximately 30% from calendar year 1995 to 1999, or at an
average annual growth rate of 6% (although growth has not been uniform). This
growth is due to magnesium's inherent metallurgical properties including its
light weight, high strength-to-weight ratio, excellent corrosion resistance and
reactivity with certain elements. These metallurgical properties have helped die
casting to be the fastest growing segment of the domestic magnesium industry,
where automobile manufacturers are turning to more magnesium parts to help
lighten their vehicles. In calendar year 1999, combined consumption in all North
American end use markets increased 1.9% over prior year levels. Overall growth
in consumption in calendar 1999 was adversely affected by a sharp downturn in
the desulfurization market, brought about by the US steel industry's slump,
which is generally attributable to a surge in foreign steel import competition.
Excluding the desulfurization market, overall consumption grew 9.8% in 1999.
-4-
<PAGE> 5
Potential Magnesium Supply
The magnesium manufacturing process is highly technical and proprietary to
each producer. Management estimates a cost of at least $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 Dead Sea
Magnesium plant, located in Israel, which began commercial production in 1998,
and an additional investment of $100 million has been publicized as planned to
increase capacity above the current level of 25,000 metric tons per year.
Management estimates that North American producers, including Magcorp, operated
at an overall level of about 85% of capacity for the first nine months of
calendar year 1999.
Numerous possible new magnesium plants have been publicized in 1999,
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
sometime in 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 1999 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. Magcorp believes that exports 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 in the PRC, some of which have already reportedly shut
down due to low pricing. In 1999, limited amounts of PRC pure magnesium ingots
were imported into the U.S. due to the antidumping duties in place. See "ITEM 3.
Legal Proceedings--Pending Trade Issues." Duties also exist against imports of
PRC pure magnesium into Europe. Alloy magnesium from the PRC is not subject to
duties at the current time, and imports increased in 1999.
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 PRC magnesium powders are
estimated to be about 20,000 metric tons in calendar 1999, an increase of 37%
over the prior year, based on U.S. Department of Commerce ("DOC") statistics for
eleven months annualized. PRC magnesium powder imports had a strong negative
effect in 1999 on prices in the desulfurization market, where the powders are
primarily used.
Production in the CIS is believed to be relatively unchanged in 1999.
However, 9% less CIS pure magnesium reached the U.S. in calendar year 1999 than
in calendar year 1998, while alloy imports, primarily from Russian and
Kazakhstan, increased by 110%. Calendar year 1999 imports of Russian pure and
alloy magnesium were about 11,900 and 5,100 metric tons, respectively, based on
DOC statistics for eleven months annualized. Some domestic users have entered
into long-term arrangements to obtain Russian imports, as evidenced by General
Motors and Ford entering into magnesium alloy supply agreements with Solikamsk
Magnesium Works, one of the major Russian producers. Magcorp is continuing its
efforts to maintain and increase the dumping duties against certain CIS and PRC
imports, as well as limit circumvention of the duties, but there can be no
assurance of success. See "ITEM 3. Legal Proceedings--Pending Trade Issues."
-5-
<PAGE> 6
As of September 30, 1999, the latest available date of IMA statistics,
western world magnesium producer inventories on hand were 44,100 metric tons, as
compared to 41,600 metric tons as of September 30, 1998. There is no public data
available on PRC and CIS magnesium inventories on hand at producers, traders or
consumers. 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, but this is dependant
on the overall supply and demand balance in the coming years.
Customers and Products
Magcorp sells pure magnesium and magnesium alloys to domestic and
international customers in the key end-use markets, including the three largest
- -- die casting, aluminum alloying, and desulfurization. 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 1999, 1998 and 1997, sales to any single
customer did not exceed 10% of total consolidated revenues. Reference is hereby
made to Note 14 to the Financial Statements, "Significant Customers and Export
Sales," included in ITEM 8, Part II of this Form 10-K.
Raw Materials
Magcorp's source of raw material for magnesium production is brine from the
Great Salt Lake. The Great Salt Lake brine is concentrated through solar
evaporation and selective precipitation of undesirable salts until a high grade
magnesium chloride brine is produced for plant feedstock. The magnesium chloride
brine is further purified, spray dried to powder using gas turbines, and melted
to produce feed for electrolytic cells, which use direct electrical current to
separate the magnesium metal and chlorine. The magnesium metal from the
electrolytic cells is then refined and cast into the wide variety of pure
magnesium and magnesium alloy products produced by Magcorp.
Magcorp's natural gas requirements are purchased from gas producers or
marketers, transported by a gas transportation company and delivered to the
Rowley facility by a local gas distribution company. Management has negotiated
favorable gas pricing due to the volume of Magcorp's requirements.
Magcorp purchases its electrical requirements from a local utility pursuant
to a contract in effect until January 1, 2002. As is the case with other
industrial facilities, the terms of the contract grant the utility the right to
interrupt electrical power to Magcorp under certain limited circumstances and
with reasonable notice while providing Magcorp with advantageous electricity
rates. Additionally, Magcorp is able to produce on average 25% of its electrical
power needs through the gas turbines located at the Rowley facility.
A variety of chloride-based by-products that are produced during the
production of magnesium metal are sold into commercial markets or are
neutralized and disposed of in compliance with environmental regulations.
Magcorp has a 50 percent investment in KemMag LLC, ("KemMag"), a joint venture
affiliate that sells ferrous chloride and ferric chloride to the waste water
treatment industry. Aggregate sales of all by-products accounted for 2% or less
of consolidated revenues in 1999, 1998 and 1997.
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, 1999, Magcorp had 503 employees, 152 of whom were salaried
and 351 of whom were hourly workers. Approximately 84% 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.
-6-
<PAGE> 7
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. Cell
conversion is expected to commence in late summer of 2000 and take place over
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 $30 to $35 million of its capital expenditure budget for 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 $6.5 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 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. 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.
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
-7-
<PAGE> 8
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.
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 1999, SSC
accounted for 76% 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 list 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 that 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 130 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 1999, the scrap metal division accounted for 12% 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 1999, RFD contributed 9% of Sabel's
revenues.
Since its formation, RFD has focused on construction projects from dams to
driveways in its markets. Sabel's management believes RFD has established a
strong track record for accuracy of shape and size and for prompt delivery due
to the efficient design of the RFD facility. Orders for RFD's products are
affected by the levels of activity in the construction and building sectors, as
well as the conditions in the overall economy.
Other Operations. Sabel also operates a wholesale center that sells a
variety of tools and plumbing, sprinkler, building and general supplies. The
wholesale center represented 3% of Sabel's 1999 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 1999 Sabel was unfavorably impacted
by falling steel industry prices generally attributable to a surge in foreign
steel import competition.
-8-
<PAGE> 9
Employees
As of October 31, 1999, Sabel had 241 employees, 77 of whom were salaried
and 164 of whom were hourly workers. Of the hourly employees, 55 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.
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, from which Group acquired Sabel in 1987. The
steel service centers are equipped to process steel from stock for their
customers' needs and the rebar fabricating plant is equipped to fabricate bars
to customer specifications.
-9-
<PAGE> 10
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.
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, 1998 and 1999, but
none wer e. The next review request can be made in May 2000.
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. Magcorp did not prevail in its appeal to the CAFC, and the 80-104%
antidumping duties on imports of Ukrainian pure magnesium have been 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.
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. In October 1999 the CIT denied the PRC
exporter's appeal, leaving the DOC's determination intact. In December 1999, the
PRC exporter notified the CIT that it wished to appeal the decision to the CAFC.
Magcorp will appear in this appeal as a Defendant-Intervener in support of the
DOC.
-10-
<PAGE> 11
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>
<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 through sixth review
periods from August 1, 1994 through July 31, 1998, 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%. The seventh review, covering the August 1, 1998
through July 31, 1999 period, has been initiated.
A respondent is permitted to request the revocation of an antidumping order
after three years of findings by the DOC of no sales at less than fair value so
long as the sales during each of those three years were made in commercial
quantities. In connection with the fifth administrative review, NHCI requested
that the antidumping order be revoked. Although the DOC found that NHCI sales to
the United States were made at prices that were not below fair value during the
third, fourth, and fifth review periods, the DOC determined that NHCI had not
made sales in "commercial quantities" during any of these review periods, and,
therefore, NHCI was not eligible for revocation. In the sixth review, the DOC
again determined that the order would not be revoked because NHCI's sales in the
fourth and fifth review periods were not in commercial quantities. The DOC did
not make a determination as to whether sales during the sixth period of review
had been made in commercial quantities. NHCI has appealed the DOC determination
in the sixth review to the CIT. Magcorp has entered an appearance at the Court
in support of the DOC's determination not to revoke the order in the sixth
review.
The DOC and the ITC have initiated five-year "sunset reviews" of both the
antidumping order on pure magnesium from Canada and the countervailing duty
orders on pure magnesium and alloy magnesium from Canada. In a sunset review,
the DOC determines the level of dumping or subsidization that would be likely to
occur absent the orders, and the ITC determines whether revocation of the orders
would be likely to result in the continuation or recurrence of material injury
to the domestic industry. The ITC has voted to conduct a full review in the
sunset review investigations. The DOC has postponed its preliminary
determination in its aspects of the sunset reviews. An elimination of the
antidumping and countervailing duty orders as a result of adverse determinations
by the DOC or ITC 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 six review periods, as listed
in the table below. The DOC has initiated the seventh CVD administrative review,
which covers calendar 1998, and has scheduled the release of the final
determination for that review for September 2000.
<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 2.02%
7th Review Calendar 1998 Initiated
</TABLE>
-11-
<PAGE> 12
Other Legal Proceedings
In April 1998, the United States filed a complaint against 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 November 1998 disclosure statement requiring disclosure of
computation of damages, filed in accordance with Federal Rule of Civil Procedure
26(1)(C), 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. In 1999 the
United States added the State of Utah as a defendant and asserted that the
minerals being harvested belong to the United States. The State of Utah filed
its answer to the United States' allegations, and also denies the minerals being
harvested belong to the United States. 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, and accordingly,
believes that the ultimate outcome 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. 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 1999 to a
vote of security holders. On January 5, 2000, Group, as sole shareholder of the
Company, executed a written consent, in lieu of meeting of shareholders,
re-electing Mr. Rennert as Chairman of the Board and sole director of the
Company.
-12-
<PAGE> 13
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 1998 and $6.6
million in 1997. No dividends were paid in 1999. 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. As of October 31, 1999, $2.7
million was available for dividends under the terms of the Company's long-term
debt agreements.
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, 1999. 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,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA: (in thousands)
<S> <C> <C> <C> <C> <C>
Net sales $ 179,613 $ 189,699 $ 191,614 $ 196,974 $ 185,806
Cost of sales 127,694 125,823 129,093 116,808 121,189
Depreciation, depletion, and amortization 9,131 8,289 7,451 6,509 5,770
Selling, general, and administrative expenses 21,774 23,131 20,848 22,704 18,470
Operating income 21,014 32,456 34,222 50,953 40,377
Interest income 576 1,163 1,142 1,353 881
Interest expense 18,618 18,871 18,697 13,045 10,138
Income tax expense (benefit) (1,963) 4,342 4,963 13,534 11,143
Income from continuing operations 5,318 10,455 11,768 25,727 19,977
Extraordinary item - - - (7,284) -
Net income 5,318 10,455 11,768 18,443 19,977
</TABLE>
<TABLE>
<CAPTION>
October 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
BALANCE SHEET DATA: (in thousands)
<S> <C> <C> <C> <C> <C>
Working capital $ 59,221 $ 63,174 $ 54,079 $ 47,677 $ 58,880
Property, plant, and equipment, net 41,862 35,385 37,715 36,613 32,014
Total assets 126,091 126,649 126,387 118,658 116,551
Total debt 153,229 154,977 155,183 154,150 78,012
Stockholder's equity (deficit) (60,193) (65,611) (68,866) (74,034) 4,760
</TABLE>
-13-
<PAGE> 14
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,
-------------------------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Sales by operating segment:
Magcorp $ 134,728 $ 141,333 $ 147,113
Sabel 44,885 48,366 44,501
--------- --------- ---------
Total sales 179,613 189,699 191,614
Cost of sales 127,694 125,823 129,093
Depreciation, depletion, and amortization 9,131 8,289 7,451
Selling, general, and administrative expenses 21,774 23,131 20,848
--------- --------- ---------
Total operating income 21,014 32,456 34,222
Interest income 576 1,163 1,142
Interest expense (18,618) (18,871) (18,697)
Equity in earnings of affiliate 383 49 64
--------- --------- ---------
Earnings before income taxes 3,355 14,797 16,731
Income tax expense (benefit) (1,963) 4,342 4,963
--------- --------- ---------
Net income $ 5,318 $ 10,455 $ 11,768
========= ========= =========
</TABLE>
1999 COMPARED TO 1998
Sales for 1999 decreased 5.3% over 1998. The decrease was attributable to a
4.7% decrease in Magcorp's revenues and a 7.2% decrease in Sabel's revenues.
Magcorp's average selling price for magnesium decreased 5.0% while magnesium
shipments remained constant. Import competition from foreign producers continues
to put pressure on magnesium pricing and volumes, 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 decrease was due to overall
price and volume decreases affecting the U.S. steel industry.
Cost of sales for 1999 increased 1.5% on a consolidated basis. Magcorp's
cost of sales increased 6.6% 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. The 12.5% cost of sales
decrease at Sabel is attributable to the volume and price decreases mentioned
above.
Depreciation, depletion and amortization for 1999 increased 10.2% from 1998
primarily due to increased depreciation of property, plant and equipment as a
result of recent capital equipment additions.
-14-
<PAGE> 15
Selling, general and administrative expenses for 1999 decreased 5.9%
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 decreased $587,000 due to cash and cash equivalent balances
on hand that decreased to a month-end average of $14.8 million in 1999 from a
month-end average of $25.7 million in 1998.
Interest expense for 1999 decreased $253,000 due to lower long-term debt
levels than in the corresponding prior period.
Equity in earnings of affiliate reflects undistributed equity in earnings of
Magcorp's investment in KemMag, a joint venture more fully described in Note 6
to the consolidated financial statements in ITEM 8.
Income taxes reflects the Company's change in taxable status effective
November 1, 1998 described in Note 2(g) to the consolidated financial statements
in ITEM 8. Accordingly, the Company recognized an income tax benefit of $2.0
million that includes the elimination of net deferred tax liabilities recorded
as of October 31, 1998.
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 put pressure
on magnesium volumes and pricing in 1998, 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, reflects an 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.
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 11.0% 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.
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
-15-
<PAGE> 16
$33.0 million for Magcorp and $7.0 million for Sabel, net of outstanding letters
of credit. As of October 31, 1999, the unused amounts available to Magcorp and
Sabel were approximately $29.7 million and $4.2 million, respectively. During
the year ended October 31, 1999, Sabel repaid a net amount of $1.7 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 provided by operating activities was $4.1 million for the year ended
October 31, 1999 compared to $8.6 million provided by operations for the
corresponding prior period. The $4.5 million decrease in cash provided by
operations resulted primarily from decreased operating income. Magcorp is
increasing inventory levels 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 die cast market products. 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 $15.7 million for the year ended October 31, 1999,
of which approximately $7.3 million is related to the new magnesium direct-chill
caster. The new caster was put into service in September 1999 and 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.
Capital expenditures are budgeted at approximately $23 million for 2000, $13
million for 2001, and $3 million for 2002. Of these projected capital
expenditure amounts, an estimated total of $31 million is related to new
electrolytic cell technology that is expected to improve manufacturing
efficiencies and ensure compliance with future environmental standards. Original
plans for complete plant conversion have been scaled back to allow some
flexibility due to reduced cash flow from operations caused by worsened market
conditions. Prototype work is essentially complete on the new electrolytic
cells, and certain long acquisition lead-time components have been designed
and/or ordered. Conversion of the cells is expected to commence in late summer
of 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 or further scale back Magcorp's cell conversion
project.
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 READINESS
We have not experienced any operational problems as a result of Year 2000
issues. Replacements of mainframe-based information technology systems began in
1994 and were planned with Year 2000 compliance in mind. Since 1994, the Company
has expensed approximately $1.1 million in information technology and process
control maintenance or modification costs and capitalized approximately
$700,000. No additional Year 2000 costs are anticipated.
-16-
<PAGE> 17
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," 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; major equipment failures, import and customs
regulations, and outcome of litigation. 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.
ITEM 8. FINANCIAL STATEMENTS.
Financial statements follow immediately and are listed in ITEM 14 of Part IV
of this report.
-17-
<PAGE> 18
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, 1999 and 1998, and the related
consolidated statements of income, stockholder's deficit, and cash flows for
each of the years in the three-year period ended October 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 31, 1999, 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 3, 1999
-18-
<PAGE> 19
RENCO METALS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
October 31, 1999 and 1998
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS 1999 1998
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,448 21,690
Accounts receivable, less allowance for doubtful
accounts of $532 in 1999 and $514 in 1998 25,478 26,411
Inventories, net 44,979 36,525
Prepaid expenses and other current assets 1,678 999
--------- ---------
Total current assets 80,583 85,625
Property, plant, and equipment, net 41,862 35,385
Other assets, net 3,646 5,639
--------- ---------
$ 126,091 126,649
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current installments of long-term debt $ 25 23
Accounts payable 7,043 7,279
Accrued expenses 14,294 15,052
Deferred income taxes -- 97
--------- ---------
Total current liabilities 21,362 22,451
Long-term debt, excluding current installments 153,204 154,954
Postretirement medical benefits 6,779 6,773
Deferred income taxes -- 1,966
Other liabilities 4,939 6,116
--------- ---------
Total liabilities 186,284 192,260
--------- ---------
Stockholder's deficit:
Common stock, no par value. Authorized, issued, and
outstanding 1,000 shares 1 1
Additional paid-in capital 600 500
Accumulated deficit (60,794) (66,112)
--------- ---------
Net stockholder's deficit (60,193) (65,611)
Commitments and contingencies
--------- ---------
$ 126,091 126,649
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-19-
<PAGE> 20
RENCO METALS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended October 31, 1999, 1998, and 1997
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Sales $ 179,613 189,699 191,614
Costs and expenses:
Cost of sales 127,694 125,823 129,093
Depreciation, depletion, and amortization 9,131 8,289 7,451
Selling, general, and administrative expenses 21,774 23,131 20,848
--------- --------- ---------
Income from operations 21,014 32,456 34,222
Interest income 576 1,163 1,142
Interest expense (18,618) (18,871) (18,697)
Equity in earnings of affiliate 383 49 64
--------- --------- ---------
Income before income taxes 3,355 14,797 16,731
Income tax expense (benefit) (1,963) 4,342 4,963
--------- --------- ---------
Net income $ 5,318 10,455 11,768
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-20-
<PAGE> 21
RENCO METALS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholder's Deficit
Years ended October 31, 1999, 1998, and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
NET
ADDITIONAL ACCUM- STOCK-
COMMON PAID-IN ULATED HOLDER'S
STOCK CAPITAL DEFICIT DEFICIT
------- ------- ------- -------
<S> <C> <C> <C> <C>
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)
Capital contribution -- 100 -- 100
Net income -- -- 5,318 5,318
------- ------- ------- -------
Balances at October 31, 1999 $ 1 600 (60,794) (60,193)
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
-21-
<PAGE> 22
RENCO METALS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended October 31, 1999, 1998, and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,318 10,455 11,768
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion, and amortization 9,131 8,289 7,451
Amortization of financing fees 980 989 989
Loss (gain) on disposal of equipment (30) 43 29
Deferred income taxes (2,063) (175) (187)
Provision for bad debts 180 37 163
Postretirement and deferred compensation plans 245 118 476
Other (283) 11 (64)
Decrease (increase) in operating assets:
Accounts receivable 753 1,463 (3,065)
Inventories (8,454) (9,532) 224
Prepaid expenses and other assets (699) (45) 1,410
Increase (decrease) in operating liabilities:
Accounts payable (236) (983) 468
Accrued expenses (758) (4,399) (35)
Other liabilities 50 2,280 350
-------- -------- --------
Net cash provided by operating activities 4,134 8,551 19,977
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (15,671) (6,014) (8,604)
Proceeds from sale of equipment 93 12 22
-------- -------- --------
Net cash used in investing activities (15,578) (6,002) (8,582)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit agreements (1,725) 1,311 1,052
Repayment of long-term debt (23) (1,517) (19)
Financing fees and tender offer premiums paid (50) (60) --
Dividends to Group -- (7,200) (6,600)
-------- -------- --------
Net cash used in financing activities (1,798) (7,466) (5,567)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (13,242) (4,917) 5,828
Cash and cash equivalents, beginning of year 21,690 26,607 20,779
-------- -------- --------
Cash and cash equivalents, end of year $ 8,448 21,690 26,607
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 17,638 17,934 17,708
Cash paid during the year for income taxes 286 4,617 3,815
Supplemental schedule of noncash investing and financing activities:
Minimum pension liability adjustment to other assets $ (1,083) 23 806
Minimum pension liability adjustment to other liabilities (1,083) 23 806
</TABLE>
See accompanying notes to consolidated financial statements.
-22-
<PAGE> 23
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999, 1998, and 1997
(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 wholly-owned subsidiaries, Magnesium Corporation of
America (Magcorp) and Sabel Industries, Inc. (Sabel) (collectively the
Company). Intercompany transactions and balances have been eliminated.
Magcorp's 50 percent-owned affiliate is accounted for under the equity
method.
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,
--------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Combined Guarantor statement of operations data:
Net sales $179,613 189,699 191,614
Cost of sales 127,694 125,823 129,093
Net income 5,222 10,452 11,748
OCTOBER 31,
--------------------------
1998 1999
-------- --------
Combined Guarantor balance sheet data:
Current assets $ 78,701 84,349
Noncurrent assets 45,508 41,024
Current liabilities 14,701 16,300
Noncurrent liabilities 14,922 19,809
</TABLE>
-23-
<PAGE> 24
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999, 1998, and 1997
(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 an original
maturity to the Company of three months or less to be cash
equivalents. Cash equivalents consist of the following:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Money market funds $ 1,314 10,787
Certificates of deposit 211 203
------- -------
$ 1,525 10,990
======= =======
</TABLE>
(b) INVENTORIES
Inventories are stated at the lower of cost or market, using either
weighted average, 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>
1999 1998
------ ------
<S> <C> <C>
Loan origination and financing fees $6,550 6,680
Unrecognized pension prior service cost 149 1,232
Deposits and other 48 29
------ ------
6,747 7,941
Less accumulated amortization 3,101 2,302
------ ------
$3,646 5,639
====== ======
</TABLE>
-24-
<PAGE> 25
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999, 1998, and 1997
(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
cumulative net income, as defined in the agreement, 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
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 that do not recognize QSSS status, however,
management believes this is not material to the Company. However,
under the "built in gains" provisions of the tax law, federal and
state taxes may become payable and would 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 election if the
associated assets are disposed of within the ten-year post-election
period. It is not management's present intention to trigger any taxes
under the built-in-gain provisions of the tax law.
-25-
<PAGE> 26
RENCO METALS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
October 31, 1999, 1998, and 1997
(Dollars in thousands)
(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, included in selling, general, and
administrative expenses in the accompanying consolidated financial
statements, are expensed as incurred and totaled $1,863, $2,599, and
$2,263 for 1999, 1998, and 1997, respectively.
(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) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standard No.
130 ("SFAS 130"), Reporting Comprehensive Income, effective November
1, 1998. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in financial statements. For
each of the years in the three-year period ended October 31, 1999,
comprehensive income was equal to the net income presented in the
accompanying consolidated statements of income.
(l) RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997
consolidated financial statements to conform to the 1999
presentation.
(3) INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following:
1999 1998
------- -------
<S> <C> <C>
Finished goods $34,985 24,906
Brine in ponds 1,228 1,100
Spare parts and supplies 9,076 10,310
Raw materials and work-in-process 963 743
------- -------
46,252 37,059
Less LIFO reserve 1,273 534
------- -------
$44,979 36,525
======= =======
</TABLE>
-26-
<PAGE> 27
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999, 1998, and 1997
(Dollars in thousands)
(4) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are summarized as follows:
<TABLE>
<CAPTION>
DEPRECIABLE
LIVES 1999 1998
------------ ---------- ---------
<S> <C> <C> <C>
Land - $ 719 519
Buildings 30 7,587 6,232
Equipment 7-15 87,455 73,935
Leasehold improvements 3-5 970 859
Construction-in-process - 5,415 5,828
---------- ---------
102,146 87,373
Less accumulated depreciation and 60,284 51,988
amortization
---------- ---------
$ 41,862 35,385
========== =========
(5) LONG-TERM DEBT
Long-term debt is summarized as follows:
1999 1998
---------- ---------
For Renco Metals:
11.5% senior notes (a) $ 150,000 150,000
For Magcorp:
Revolving credit facility (b) - -
For Sabel:
Revolving credit facility (b) 2,813 4,538
9.7% mortgage note 416 439
---------- ---------
Total long-term debt 153,229 154,977
Less current installments 25 23
---------- ---------
Long-term debt, excluding current installments $ 153,204 154,954
========== =========
</TABLE>
The aggregate maturities of long-term debt for each of the twelve-month
periods subsequent to October 31, 1999 are as follows: 2000, $25; 2001,
$28; 2002, $2,843; 2003, $150,333; and thereafter, none.
-27-
<PAGE> 28
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999, 1998, and 1997
(Dollars in thousands)
As of October 31, 1999, the fair value of the 11.5% Senior Notes was
approximately $122,000, based on estimates obtained from brokers. 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% Senior Notes due July 1, 2003 (the 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.
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, 1999, Renco Metals was in compliance with all applicable
covenants.
(b) 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, 1999 total $1,621 for Magcorp and none for
Sabel. Based on these criteria as of October 31, 1999, the unused
amounts available to Magcorp and Sabel were approximately $29,700 and
$4,200, 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, 1999,
Magcorp and Sabel were in compliance with all applicable covenants.
-28-
<PAGE> 29
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999, 1998, and 1997
(Dollars in thousands)
(6) INVESTMENT IN AFFILIATE
Magcorp has a 50 percent investment in KemMag LLC, (KemMag), a joint
venture that sells iron salts. Sales and cost of sales of Magcorp include
iron salts supplied to KemMag at cost, in the amount of $1,569 in 1999,
$1,703 in 1998, and $1,626 in 1997. Condensed unaudited financial
statement information of KemMag follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income statement information:
Sales $ 5,143 4,558 4,442
Net income 760 96 170
OCTOBER 31,
-------------------
1999 1998
-------- --------
Balance sheet information:
Current assets $ 943 645
Current liabilities 1,635 2,097
-------- --------
Net deficit $ (692) (1,452)
======== ========
</TABLE>
Magcorp has historically provided financial support to KemMag and intends
to continue this practice. Accordingly, the Company has recognized
cumulative losses in excess of its investment. The carrying value of
Magcorp's investment is included in other liabilities in the accompanying
consolidated balance sheets and is calculated as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Investment $ 1 1
Advances - 50
Equity in losses of KemMag (347) (727)
-------- --------
(346) (676)
======== ========
</TABLE>
-29-
<PAGE> 30
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999, 1998, and 1997
(Dollars in thousands)
(7) INCOME TAXES
As a result of the change in tax status described in note 1(g), the
Company recognized a net income tax benefit of $1,963 during 1999, which
includes the elimination of the net deferred tax liability recorded as of
October 31, 1998, partially offset by a $100 charge related to the LIFO
reserve recapture. A corresponding amount has been presented as a capital
contribution in the accompanying consolidated financial statements, since
Group paid the tax on behalf of the Company. As of October 31, 1999, the
Company's book bases in its assets and liabilities exceeded its tax bases
by approximately $3,200.
The provision for income tax expense for the years ended October 31, 1998
and 1997 is comprised of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Federal:
Current $ 3,715 4,317
Deferred 10 (64)
-------- --------
Total 3,725 4,253
======== ========
State:
Current 802 833
Deferred (185) (123)
-------- --------
Total $ 617 710
======== ========
</TABLE>
The statutory federal income tax rate is reconciled to the effective
income tax rate for 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Computed "expected"
tax expense $ 5,179 5,856
State and local tax,
net of federal benefit 402 523
Depletion (1,060) (1,374)
Change in deferred tax
asset valuation allowance (66) -
Other (113) (42)
-------- --------
Income tax provision $ 4,342 4,963
======== ========
</TABLE>
Deferred income taxes result from temporary differences in the book basis
and tax basis of assets and liabilities. Total deferred tax assets and
deferred tax liabilities amounted to approximately $3,117 and $4,353,
respectively, as of October 31, 1998. The most significant items
comprising the deferred tax assets were postretirement benefits of $1,106
and compensation accruals of $870 while deferred tax liabilities consisted
primarily of deferred taxes on inventory of $827 and fixed assets of
$3,526. The Company had a valuation allowance of $827 for realization of
deferred tax assets as of October 31, 1998.
-30-
<PAGE> 31
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999, 1998, and 1997
(Dollars in thousands)
(8) RELATED PARTY TRANSACTIONS
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, Group provides such services to the
Company for an annual management fee of $1,200. The management agreement
extends to October 31, 2000, and continues thereafter for additional
three-year terms unless sooner terminated by either party giving six
months prior written notice. The Company paid management fees to Group of
$1,200 for each of the years in the three-year period ended October 31,
1999.
Magcorp has $318 payable to Group at October 31, 1999 and 1998 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.
During 1998 and 1997, the Company paid to Group dividends totaling $7,200
and $6,600, respectively.
(9) EMPLOYEE BENEFIT PLANS
Magcorp
Hourly Defined Benefit Pension Plan and Salaried Postretirement Medical
Plan
Pension benefits under 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.
-31-
<PAGE> 32
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999, 1998, and 1997
(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
------------------ -------------------
1999 1998 1999 1998
------ ------- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Beginning of year $ 6,765 5,919 2,925 2,563
Service cost 303 292 119 106
Interest cost 471 427 204 185
Actuarial (gain) loss (1,072) 214 (19) 112
Benefits paid (154) (87) (76) (41)
------- -------- ------- -------
End of year 6,313 6,765 3,153 2,925
Change in plan assets:
Fair value at beginning of year 5,511 4,555
Actual return on plan assets 371 514
Employer contributions - 530
Benefits paid (155) (88)
------- --------
Fair value at end of year 5,727 5,511
Reconciliation of funded status:
Funded status (586) (1,254) (3,153) (2,925)
Unrecognized actuarial gain (1,275) (300) (3,626) (3,848)
Unrecognized prior service cost 1,424 1,532 - -
------- -------- ------- -------
Net amount recognized (437) (22) (6,779) (6,773)
======= =======
Amounts recognized in the consolidated balance
sheets:
Accrued benefit liability (586) (1,254)
Intangible asset 149 1,232
------- ------
Net amount recognized $ (437) (22)
======= ======
Assumptions (weighted average):
Discount rate 7.75% 7.00% 7.75% 7.00%
Expected return on plan assets 8.25% 8.25%
</TABLE>
For measurement purposes, a 7.5 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 over ten years and remain
at that level.
-32-
<PAGE> 33
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999, 1998, and 1997
(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>
ONE-PERCENTAGE-POINT
----------------------
INCREASE DECREASE
-------- --------
<S> <C> <C>
Effect on total of service and interest cost components $ 32 (34)
Effect on postretirement benefit obligation 294 (304)
</TABLE>
Net periodic pension and other postretirement benefit costs include the
following components:
<TABLE>
<CAPTION>
OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
---------------------- ----------------------
1999 1998 1997 1999 1998 1997
----- ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit
cost
Service cost $ 303 292 202 118 106 166
Interest cost 471 427 314 204 185 239
Expected return on assets (467) (384) (306) - - -
Amortization of unrecognized
net gain - - - (240) (270) (202)
Amortization of prior year
service cost 108 108 38 - - -
----- ------ ------ ----- ------ ------
Net periodic benefit cost $ 415 443 248 82 21 203
===== ====== ====== ===== ====== ======
</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 $474,
$447, and $442 for 1999, 1998, and 1997, 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 $813, $735, and $557, for 1999, 1998, and 1997,
respectively.
-33-
<PAGE> 34
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999, 1998, and 1997
(Dollars in thousands)
Sabel
Under an agreement with the United Steelworkers' Union, which covers
certain production employees, Sabel contributes to a pension plan based on
a set amount per hour worked for covered employees. The contributions to
the plan were $84, $90, and $82 for 1999, 1998, and 1997, 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. Contributions to the plan were
$115 in 1999. No contributions were made in 1998 or 1997.
(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, 1999 are listed below:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31:
<S> <C>
2000 $ 1,928
2001 1,583
2002 1,046
2003 556
2004 352
Thereafter 91
-------
Total minimum lease payments $ 5,556
=======
</TABLE>
Rent expense aggregated $2,628, $4,101, and $2,412 for 1999, 1998, and
1997, respectively. Included in rental expense was contingent rental
expense of approximately $152, $118, and $73 for 1999, 1998, and 1997,
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, $383, and $336 for 1999, 1998, and 1997,
respectively.
-34-
<PAGE> 35
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999, 1998, and 1997
(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. In
1999 the United States added the State of Utah as a defendant. Like
Magcorp, the State of Utah denies the allegations in the United
States' complaint. 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.
-35-
<PAGE> 36
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999, 1998, and 1997
(Dollars in thousands)
(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 $30,000 of its capital
expenditure budget for 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.
(12) ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Utilities $ 3,075 1,854
Salaries, bonuses, vacation, and other related accruals 1,917 3,131
Interest 5,750 5,750
Taxes, other than income 579 581
Other 2,973 3,736
-------- -------
$ 14,294 15,052
======== =======
</TABLE>
-36-
<PAGE> 37
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999, 1998, and 1997
(Dollars in thousands)
(13) SEGMENT INFORMATION
The Company classifies its operations into two operating segments:
magnesium production and steel wholesaling and fabrication. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies (note 2). Management evaluates a segment's
performance based upon operating income. There are no intersegment sales,
allocated costs, or jointly used assets. Summarized financial information
by operating segment follows.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Magnesium $ 134,728 141,333 147,113
Steel 44,885 48,366 44,501
-------- -------- --------
Consolidated revenues $ 179,613 189,699 191,614
======== ======== ========
Profit or loss:
Income from operations:
Magnesium $ 19,056 30,921 32,825
Steel 2,044 1,640 1,444
-------- -------- --------
Total reportable segments 21,100 32,561 34,269
-------- -------- --------
Other income (expense), net (17,745) (17,764) (17,538)
-------- -------- --------
Consolidated income before income taxes $ 3,355 14,797 16,731
======== ======== ========
Assets:
Magnesium $ 108,340 108,034 107,460
Steel 15,869 16,926 16,124
-------- -------- --------
Total reportable segments 124,209 124,960 123,584
-------- -------- --------
Other assets 1,882 1,689 3,247
-------- -------- --------
Consolidated assets $ 126,091 126,649 126,831
======== ======== ========
Capital expenditures:
Magnesium $ 15,146 5,827 7,492
Steel 525 187 1,112
-------- -------- --------
Consolidated capital expenditures $ 15,671 6,014 8,604
======== ======== ========
Depreciation, depletion, and amortization:
Magnesium $ 8,678 7,838 7,054
Steel 453 451 397
-------- -------- --------
Consolidated depreciation,
depletion, and amortization $ 9,131 8,289 7,451
======== ======== ========
</TABLE>
-37-
<PAGE> 38
RENCO METALS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999, 1998, and 1997
(Dollars in thousands)
(14) SIGNIFICANT CUSTOMERS AND EXPORT SALES
During 1999, 1998, and 1997, sales to any single customer did not exceed
ten percent of total consolidated revenues. All of the Company's
long-lived assets are located in the United States. However, the Company
sells and ships products to many foreign countries. The following table
summarizes export sales to various geographic areas:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net export sales:
Germany $ 6,134 3,495 3,832
Canada 2,747 1,389 1,165
Japan 1,156 1,442 2,132
France 1,108 1,030 1,218
Other 781 1,562 1,420
------- ------- -------
$11,926 8,918 9,767
======= ======= =======
</TABLE>
-38-
<PAGE> 39
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.......65 Chairman, Director and Chief Executive Officer
of the Company, Chairman of Magcorp and Sabel
Roger L. Fay...........54 Vice President, Finance of the Company
Michael H. Legge.......53 President and Chief Executive Officer of Magcorp
Keith Sabel............50 Director, President and Chief Executive Office
of Sabel
Justin W. D'Atri.......72 Director of Sabel
Howard I. Kaplan.......55 Vice President of Sales and Marketing of Magcorp
Ron L. Thayer..........40 Vice President of Operations of Magcorp
Lee R. Brown...........53 Vice President of Public and Governmental Affairs
of Magcorp
Todd R. Ogaard.........44 Vice President of Finance and Administration
of Magcorp
Phillip B. Brown.......52 Vice President of Finance and Treasurer of Sabel
Frederick F. Callahan..49 Vice President of Sabel
</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 since 1973.
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.
-39-
<PAGE> 40
RON L. THAYER has served in his present position since January 1, 1993. He
was previously Operations Superintendent at the Rowley facility and has served
in several managerial and technical positions since joining AMAX Magnesium, a
predecessor of Magcorp, in 1988. Prior to joining AMAX Magnesium, Mr. Thayer was
with Williams Resources, a chemical company in Denver, Colorado.
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 two 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.
PHILLIP B. BROWN joined Sabel in 1975. He has served as comptroller since
1977, and assumed Vice President of Finance and Treasurer responsibilities in
1999.
FREDERICK F. CALLAHAN served as purchasing agent manager at Sabel from 1988
to 1992. After five years in other employment, Mr. Callahan rejoined Sabel in
1997 as sales manager, and assumed Vice President responsibilities in 1999.
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 1999, 1998 and 1997:
<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) 1999 $ - $ - $ - $1,200,000 (2)
Chairman and Chief Executive Officer 1998 - - - 1,200,000 (2)
1997 - - - 1,200,000 (2)
Michael H. Legge 1999 220,756 200,000 - 29,531 (4)
President and Chief Executive Officer of Magcorp 1998 153,333 250,000 216,000 24,419 (4)
1997 120,756 250,000 198,000 24,139 (4)
Keith Sabel 1999 188,525 20,000 - 5,401 (5)
President and Chief Executive Officer of Sabel 1998 135,887 50,000 - -
1997 131,915 50,000 - -
Howard I. Kaplan 1999 120,000 75,000 - 25,460 (4)
Vice President of Sales and Marketing of Magcorp 1998 103,149 110,000 72,000 24,915 (4)
1997 94,723 100,000 66,000 22,026 (4)
Ron L.Thayer 1999 120,756 100,000 - 8,018 (4)
Vice President of Operations of Magcorp 1998 96,592 130,000 72,000 6,400 (4)
1997 85,550 100,000 66,000 5,850 (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 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.
-40-
<PAGE> 41
(4) The other compensation shown consists of employer contributions to a defined
contribution pension plan and matching contributions under Magcorp's 401(k)
savings plan.
(5) Consists of employer contributions to a noncontributory profit sharing plan.
Compensation Committee Interlocks and Insider Participation
The Company had no compensation committee during fiscal 1999. 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 1999, 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, 2000 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, 2000 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, 2000 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, Mr. Brown and Mr. Ogaard 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
cumulative net income 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 cumulative net income of Magcorp.
Mr. Sabel and Mr. Brown 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 income of Sabel, as defined in the
agreements, 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,
1999, an aggregate of $935,000 would have been payable to such executive
officers pursuant to the NWAP Agreements.
The NWAP Agreements also provide that, if while employed by Magcorp or
Sabel, the respective company pays certain cash dividends 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
-41-
<PAGE> 42
declared and paid to Renco Metals dividends totaling $7.2 million in 1998 and
$6.6 million in 1997. Accordingly, an aggregate of $504,000 in 1998 and $462,000
in 1997 was paid to the five Magcorp executive officers covered by Magcorp's
NWAP Agreements.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of the outstanding
equity securities of the Company as of January 27, 2000:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHOF CLASS
-------------- ---------------- -------------------- -----
<S> <C> <C> <C>
Common stock, no par The Renco Group, Inc. 1,000 shares, Direct 100%
value................... (1)
Ira Leon Rennert(2)
c/o The Renco Group 1,000 shares 100%
Inc.(1)
All directors and
executive officers as 1,000 shares 100%
a group(2)
</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 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 director 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 above.
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 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 extends to October 31, 2000, and continues thereafter for
additional three-year terms unless sooner terminated by either party by giving
six months prior written notice. The Company paid management fees of $1.2
million to Group for each of the years in the three year period ended October
31, 1999. 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.
-42-
<PAGE> 43
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 that has reached its individual maximum. In 1999, the Company
incurred costs of approximately $1.2 million under the Group insurance program.
The Company believes that its insurance costs under this program were less than
it would have incurred if it had obtained its insurance directly.
Tax Sharing Agreement
Pursuant to a tax sharing agreement between the Company and Group, the
Company pays to Group an amount equal to the amount the Company would have been
required to pay for taxes on a stand-alone basis to the Internal Revenue Service
and the applicable state taxing authority, as the case may be, except that the
Company will not have the benefit of any of its tax loss carryforwards unless
such tax losses were a result of timing differences between the Company's
accounting for tax and financial reporting purposes, which agreement also
provides that transactions between the Company and Group and its other
subsidiaries are accounted for on a cash basis and not on an accrual basis. 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 that do not recognize QSSS
status, however, management believes this is not material to the Company.
However, under the "built in gains" provisions of the tax law, federal and state
taxes may become payable and would be charged to the Company's 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
election if the associated assets are disposed of within the ten-year
post-election period. It is not management's present intention to trigger any
taxes under the built-in-gain provisions of the tax law.
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 1999 were $383,000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
<S> <C>
A. Documents filed as part of this Form 10-K:
1. Financial Statements (included in Part II, ITEM 8):
Independent Auditors' Report 18
Consolidated Balance Sheets - October 31, 1999 and 1998 19
Consolidated Statements of Income - Years ended October 31, 1999, 1998 and
1997 20
Consolidated Statements of Stockholder's Deficit - Years ended October 31,
1999, 1998 and 1997 21
Consolidated Statements of Cash Flows - Years ended October 31, 1999, 1998
and 1997 22
Notes to Consolidated Financial Statements 23
2. Financial Statement Schedules (included in Part IV):
Schedule II Valuation and Qualifying Accounts 47
</TABLE>
Schedules not listed above have been omitted because the information required to
be set forth therein is not applicable or is included in the consolidated
financial statements or notes thereto.
-43-
<PAGE> 44
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 (1)
America
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, (6)
Inc., Issuer, 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 (1)
January 1, 1993
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 (1)
The Renco Group, Inc. and Renco Metals, Inc.
10.5 -- Amendment No. 1 to Management Consultant Agreement dated May (5)
17, 1996 between The Renco Group, Inc. and Renco Metals, Inc.
10.6 -- Amended and Restated Loan and Security Agreement between (1)
Congress Financial Corporation and Magnesium Corporation
of America dated August 4, 1993
10.7 -- Amendment No. 1 dated January 31, 1996 to Amended and (4)
Restated Loan and Security Agreement dated as of August
4, 1993, between Congress Financial Corporation and
Magnesium Corporation of America, extending the term
thereof to August 4, 1998
10.8 -- Amendment No. 2 dated July 3, 1996 to Amended and (8)
Restated Loan and Security Agreement dated as of August
4, 1993, between Congress Financial Corporation and
Magnesium Corporation of America
10.8.1 -- Amendment No. 3 dated August 28, 1997 to Amended and (9)
Restated Loan and 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 (11)
Restated Loan and Security Agreement dated as of August
4, 1993, between Congress Financial Corporation and
Magnesium Corporation of America
10.8.3 -- Amendment No. 5 dated August 10, 1999 to Amended and (12)
Restated Loan and Security Agreement dated as of August
4, 1993, between Congress Financial Corporation and
Magnesium Corporation of America
</TABLE>
-44-
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT NO. IDENTIFICATION OF EXHIBITS
-- -- --- -- -- -- -- -- -- --
<S> <C> <C>
10.9 -- Loan and Security Agreement between Congress Financial (1)
Corporation and Sabel Industries, Inc. dated August 4,
1993
10.10 -- Amendment No. 1 dated January 31, 1996 to Loan and (4)
Security Agreement dated as of August 4, 1993, between
Congress Financial Corporation and Sabel Industries,
Inc., extending the term thereof to August 4, 1998
10.11 -- Amendment No. 2 dated July 3, 1996 to Loan and Security (8)
Agreement dated as of August 4, 1993, between Congress
Financial Corporation and Sabel Industries, Inc.
10.11.1 -- Amendment No. 3 dated August 28, 1997 to Loan and (9)
Security Agreement dated 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 (11)
Security Agreement dated as of August 4, 1993, between
Congress Financial Corporation and Sabel Industries,
Inc.
10.11.3 -- Amendment No. 5 dated August 10, 1999 to Loan and (12)
Security Agreement dated as of August 4, 1993, between
Congress Financial Corporation and Sabel Industries,
Inc.
10.12 -- Agreement dated July 31, 1969 between the State of Utah, (1)
acting by and through the State Land Board, and National
Lead Company, as amended by Addendum dated March 7,
1970, Second Addendum dated March 7, 1972 and Assignment
to Amax Magnesium Corporation dated October 31, 1980 (ML
18779)
10.13 -- Special Use Lease Agreement 711 dated July 14, 1987 (1)
between the State of Utah, Division of State Lands and
Forestry and Amax Magnesium Corporation
10.14 -- Amended Rights of Way No. U-54897, dated June 21, 1993 (1)
issued by the United States Department of the Interior
Bureau of Land Management, Salt Lake District Office to
Magnesium Corporation of America
10.15 -- Lease dated May 13, 1991 between Sabel Industries, Inc. (1)
as tenant and Janis Sabel, the Estate of Mark Sabel,
Marcelle Sabel Moers a/k/a Marcel Sabel Moers, Dorothy
Anne Bell and Lee Altheimer as successors to the Estate
of Dorothy Altheimer with respect to premises known as
Theodore Highway 90, County of Mobile, Alabama
10.16 -- Lease dated July 1, 1977 between Dewey Emfinger and his (1)
wife, Bea Emfinger, to Sabel Steel Service Incorporated
with respect to premises known at 599 Ross Clark Circle,
Dothan, Alabama and the sublease thereof to Sabel
Industries, Inc. then known as Ren Alabama Inc. dated
July 30, 1987
10.17 -- Lease dated July 30, 1987 between Mark Sabel, Janis (1)
Sabel, Marcel Moers and Dorothy Altheimer, owner of an
undivided 50% interest and Ted Cohen, owner of an
undivided 50% interest, all as tenants in common, to
Sabel Industries, Inc. (name subsequently changed to
JiMark Investment Company, Inc.) with respect to
premises known as 2811 Day Street, Montgomery, Alabama
and the sublease thereof to Sabel Industries, Inc., then
known as Ren Alabama Inc., dated July 30, 1987. Note:
Sabel Industries, Inc. subsequently purchased the
undivided 50% interest of Mr. Cohen
10.18 -- Master Lease Indenture dated July 30, 1987 between Sabel (1)
Land Company, 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 (1)
Salt Inc. and Magnesium Corporation of America
10.20 -- Net Worth Appreciation Agreements between Sabel Industries,
Inc. and:
a) Keith Sabel, dated January 24, 1994 (2)
b) Phillip Brown, dated January 24, 1994 (2)
10.20.1 -- Amendment to Net Worth Appreciation Agreements between Sabel
Industries, Inc. and:
a) Keith Sabel, dated January 15, 1999 (13)
b) Phillip Brown, dated January 15, 1999 (13)
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
</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).
-45-
<PAGE> 46
(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)Previously filed and incorporated herein by reference from Renco Metals,
Inc.'s Form 10-K for the fiscal year ended October 31, 1998 (File No.
333-4513).
(12)Previously filed and incorporated herein by reference from Renco Metals,
Inc.'s Form 10-Q for the quarterly period ended July 31, 1999 (File No.
333-4513).
(13)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, 1999.
-46-
<PAGE> 47
Schedule II
RENCO METALS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended October 31, 1999, 1998, and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Balance Additions
at charged Deductions-
beginning to costs write-offs Balance
of and against at end
year expenses allowance of year
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
Year ended October 31, 1999:
Applied against asset accounts:
Allowance for doubtful accounts $ 514 180 (162) 532
Allowance for inventory obsolescence 442 295 (176) 561
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
</TABLE>
-47-
<PAGE> 48
SIGNATURES
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, 2000 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, 2000 /s/ Ira Leon Rennert
- ------------------------------------- ---------------------------------
Ira Leon Rennert
Chairman of the Board, sole
Director, and Chief Executive
Officer (Principal Executive
Officer)
Date: January 27, 2000 /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.
-48-
<PAGE> 1
EXHIBIT 10.20.1 (a)
SABEL INDUSTRIES, INC.
749 NORTH COURT STREET
MONTGOMERY, AL 36104
As of January 15, 1999
Mr. Keith Sabel
Sabel Industries, Inc.
749 North Court Street
Montgomery, AL 36104
RE: AMENDMENT TO NET WORTH APPRECIATION PARTICIPATION AGREEMENT
Dear Mr. Sabel:
This will confirm the understanding of this Corporation (the "Company")
with you with respect to our agreed amendments to your Net Worth Appreciation
Participation Agreement dated January 24, 1994 (the "Agreement").
As you know, our parent company, The Renco Group, Inc. ("Renco"), has
elected to become, for Federal Internal Revenue Code purposes, a subchapter S
corporation (instead of a subchapter C corporation), effective with its fiscal
year beginning November 1, 1998, and has designated this Company and its
subsidiaries as qualified subchapter S subsidiaries (the "S election"). This
designation is also applicable for those states which recognize such election.
This letter is intended to set forth our understanding as to the changes in the
Agreement intended to accommodate such election.
It is the intent of the parties to the Agreement that the S election not
alter the benefits payable under the Agreement; therefore we agree as follows:
A. For purposes of calculating the benefits payable under the Agreement,
the Company will continue to calculate Federal corporate income taxes and the
corporate income taxes for those jurisdictions in which the Company and its
subsidiaries do business, for fiscal periods beginning on or after November 1,
1998, as if this Company and its subsidiaries had continued to have C
corporation status, under the Federal Internal Revenue Code and under state and
local tax laws, in accordance with the provisions of generally accepted
accounting principles and the Internal Revenue Code and regulations thereunder
and under state and local tax laws applicable to C corporations as from time to
time in effect ("C Status"). Such tax calculations will include calculations of
current and deferred tax expense or benefit and current and non-current tax
assets and liabilities ("C Taxes") and the differences ("Tax Differences")
between the C Taxes and the taxes as recorded by the Company and its
subsidiaries while being designated a qualified subchapter S subsidiary ("S
Taxes").
Cumulative Income Statement Tax Difference shall be the cumulative
difference in income tax expense or benefit between the calculation of the C
Taxes and S Taxes, in each case calculated for the tax periods beginning on or
after November 1, 1998 and through the end of the calculation period. Cumulative
Cash Flow Tax Difference shall be the cumulative difference in income tax
payments, net of refunds, between the calculation of the C Taxes and S Taxes in
each case made after November 1, 1998 or, which would be in the case of C Taxes,
or are in the case of S Taxes, immediately due and payable contemporaneously
with the payment of any dividends.
<PAGE> 2
In connection with the annual audit of the financial statements of the
Company, the Company's Board of Directors will require that the independent
public accountants issue a special report indicating their agreement with the
Tax Differences.
B. Any payment due to you under Paragraph 2 of the Agreement (the
"Termination Benefit") shall be (A) 5% of the cumulative net income, as defined,
less (B) 5% of the Cumulative Income Statement Tax Difference (the calculation
period shall end at the end of the Company's fiscal quarter immediately
preceding your date of termination) and excluding such Cumulative Income
Statement Tax Difference to the extent equal to Cumulative Cash Flow Tax
Difference utilized in calculating an Additional Compensation Benefit under
Paragraph 3.
C. Any payment due to you under Paragraph 3 of the Agreement in regard
to dividends paid by the Company (the "Additional Compensation Benefit"), shall
be (A) the excess of 5% of the cumulative dividends paid by the Company
subsequent to November 1, 1998 over 5% of any positive Cumulative Cash Flow Tax
Difference less (B) the amount of Additional Compensation Benefit previously
paid to you under Paragraph 3 subsequent to November 1, 1998.
D. Any payment due to you under Paragraph 5 of the Agreement (the "Sale
Proceeds Benefit"), shall be (A) 5% of any net proceeds, as defined, plus (B) 5%
of the cumulative dividends paid by the Company subsequent to November 1, 1998,
less (C) 5% of the Cumulative Income Statement Tax Difference through the date
of sale, and less (D) the amount of any Additional Compensation Benefits
previously paid to you under Paragraph 3 subsequent to November 1, 1998.
E. As amended hereby, the Agreement shall continue in full force and
effect.
Please confirm that the foregoing correctly sets forth our understanding
by signing and returning the enclosed duplicate of this letter.
Very truly yours,
SABEL INDUSTRIES, INC.
/s/ Ira Leon Rennert
------------------------
Ira Leon Rennert
Chairman of the Board
Accepted and Agreed to:
/s/ Keith Sabel
- ------------------------
Keith Sabel
<PAGE> 3
EXHIBIT 10.20.1 (b)
SABEL INDUSTRIES, INC.
749 NORTH COURT STREET
MONTGOMERY, AL 36104
As of January 15, 1999
Mr. Phillip Brown
Sabel Industries, Inc.
749 North Court Street
Montgomery, AL 36104
RE: AMENDMENT TO NET WORTH APPRECIATION PARTICIPATION AGREEMENT
Dear Mr. Brown:
This will confirm the understanding of this Corporation (the "Company")
with you with respect to our agreed amendments to your Net Worth Appreciation
Participation Agreement dated January 24, 1994 (the "Agreement").
As you know, our parent company, The Renco Group, Inc. ("Renco"), has
elected to become, for Federal Internal Revenue Code purposes, a subchapter S
corporation (instead of a subchapter C corporation), effective with its fiscal
year beginning November 1, 1998, and has designated this Company and its
subsidiaries as qualified subchapter S subsidiaries (the "S election"). This
designation is also applicable for those states which recognize such election.
This letter is intended to set forth our understanding as to the changes in the
Agreement intended to accommodate such election.
It is the intent of the parties to the Agreement that the S election not
alter the benefits payable under the Agreement; therefore we agree as follows:
A. For purposes of calculating the benefits payable under the Agreement,
the Company will continue to calculate Federal corporate income taxes and the
corporate income taxes for those jurisdictions in which the Company and its
subsidiaries do business, for fiscal periods beginning on or after November 1,
1998, as if this Company and its subsidiaries had continued to have C
corporation status, under the Federal Internal Revenue Code and under state and
local tax laws, in accordance with the provisions of generally accepted
accounting principles and the Internal Revenue Code and regulations thereunder
and under state and local tax laws applicable to C corporations as from time to
time in effect ("C Status"). Such tax calculations will include calculations of
current and deferred tax expense or benefit and current and non-current tax
assets and liabilities ("C Taxes") and the differences ("Tax Differences")
between the C Taxes and the taxes as recorded by the Company and its
subsidiaries while being designated a qualified subchapter S subsidiary ("S
Taxes").
Cumulative Income Statement Tax Difference shall be the cumulative
difference in income tax expense or benefit between the calculation of the C
Taxes and S Taxes, in each case calculated for the tax periods beginning on or
after November 1, 1998 and through the end of the calculation period. Cumulative
Cash Flow Tax Difference shall be the cumulative difference in income tax
payments, net of refunds, between the calculation of the C Taxes and S Taxes in
each case made after November 1, 1998 or, which would be in the case of C Taxes,
or are in the case of S Taxes, immediately due and payable contemporaneously
with the payment of any dividends.
<PAGE> 4
In connection with the annual audit of the financial statements of the
Company, the Company's Board of Directors will require that the independent
public accountants issue a special report indicating their agreement with the
Tax Differences.
B. Any payment due to you under Paragraph 2 of the Agreement (the
"Termination Benefit") shall be (A) 2% of the cumulative net income, as defined,
less (B) 2% of the Cumulative Income Statement Tax Difference (the calculation
period shall end at the end of the Company's fiscal quarter immediately
preceding your date of termination) and excluding such Cumulative Income
Statement Tax Difference to the extent equal to Cumulative Cash Flow Tax
Difference utilized in calculating an Additional Compensation Benefit under
Paragraph 3.
C. Any payment due to you under Paragraph 3 of the Agreement in regard
to dividends paid by the Company (the "Additional Compensation Benefit"), shall
be (A) the excess of 2% of the cumulative dividends paid by the Company
subsequent to November 1, 1998 over 2% of any positive Cumulative Cash Flow Tax
Difference less (B) the amount of Additional Compensation Benefit previously
paid to you under Paragraph 3 subsequent to November 1, 1998.
D. Any payment due to you under Paragraph 5 of the Agreement (the "Sale
Proceeds Benefit"), shall be (A) 2% of any net proceeds, as defined, plus (B) 2%
of the cumulative dividends paid by the Company subsequent to November 1, 1998,
less (C) 2% of the Cumulative Income Statement Tax Difference through the date
of sale, and less (D) the amount of any Additional Compensation Benefits
previously paid to you under Paragraph 3 subsequent to November 1, 1998.
E. As amended hereby, the Agreement shall continue in full force and
effect.
Please confirm that the foregoing correctly sets forth our understanding
by signing and returning the enclosed duplicate of this letter.
Very truly yours,
SABEL INDUSTRIES, INC.
/s/ Ira Leon Rennert
------------------------
Ira Leon Rennert
Chairman of the Board
Accepted and Agreed to:
/s/ Phillip Brown
- ------------------------
Phillip Brown
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 8,448
<SECURITIES> 0
<RECEIVABLES> 26,010
<ALLOWANCES> 532
<INVENTORY> 44,979
<CURRENT-ASSETS> 80,583
<PP&E> 102,146
<DEPRECIATION> 60,284
<TOTAL-ASSETS> 126,091
<CURRENT-LIABILITIES> 21,362
<BONDS> 153,229
0
0
<COMMON> 1
<OTHER-SE> (60,194)
<TOTAL-LIABILITY-AND-EQUITY> 126,091
<SALES> 179,613
<TOTAL-REVENUES> 179,613
<CGS> 127,694
<TOTAL-COSTS> 158,599
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 180
<INTEREST-EXPENSE> 18,618
<INCOME-PRETAX> 3,355
<INCOME-TAX> (1,963)
<INCOME-CONTINUING> 5,318
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,318
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
