- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 1998.
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 333-48245
---------
RENCO STEEL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
OHIO 34-1854775
(State of incorporation) (I.R.S. Employer Identification No.)
1040 PINE AVE., S.E., WARREN, OHIO 44483-6528
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 399-6884
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of exchange on which registered
------------------- ------------------------------------
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 preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days.
/ X / Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. / X /
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant at January 29, 1999 was $0.
The number of shares of Common Stock (no par value, $.01 stated value) of the
registrant outstanding as of January 29, 1999 was 100.
DOCUMENTS INCORPORATED BY REFERENCE
None.
- --------------------------------------------------------------------------------
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-K
INDEX
------------------------------------------
PART I Page No.
- ------------------------------------------------------------------ --------
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
- ------------------------------------------------------------------
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk 20
Item 8. Financial Statements and Supplementary
Data of the Company 21
Financial Statements and Supplementary Data of WCI 39
Item 9. Changes in and disagreements with Accountants
on Accounting and Financial Disclosure 56
PART III
- ------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant 56
Item 11. Executive Compensation 57
Item 12. Security Ownership of Certain Beneficial Owners
and Management 57
Item 13. Certain Relationships and Related Transactions 58
PART IV
- ------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedule,
and Reports on Form 8-K 60
Financial Statement Schedule
(including Independent Auditors Report on Financial
Statement Schedule) 61
Signatures 63
Exhibit Index 64
PART I
ITEM 1. BUSINESS
GENERAL
Renco Steel Holdings, Inc. (Renco Steel) is a holding company incorporated in
Ohio which was formed on January 20, 1998 and is a wholly owned subsidiary of
The Renco Group, Inc. (Renco). On January 29, 1998, Renco contributed to Renco
Steel its interest in its wholly owned subsidiary WCI Steel, Inc. (WCI or
Predecessor). Renco Steel together with WCI are hereinafter referred to as the
Company.
WCI Steel, Inc. (WCI), a niche oriented integrated producer of value-added,
custom steel products, was incorporated in Ohio in 1988 and commenced operations
on September 1, 1988. WCI's primary facility covers approximately 1,100 acres in
Warren, Ohio, with additional facilities owned by subsidiaries located in Niles
and Youngstown, Ohio, all of which are situated between Cleveland and
Pittsburgh. WCI currently produces approximately 185 grades of flat rolled
custom and commodity steel products. Total shipments were 1,412,490 tons in
fiscal 1998 (77,244 tons of which were semi-finished) and 1,328,931 tons in
fiscal 1997 (22,642 tons of which were semi-finished). Custom flat rolled
products, which include high carbon, alloy, high strength, silicon electrical
and galvanized steel, constituted approximately 62.4% of net tons shipped during
fiscal 1998 (66.0% excluding semi-finished steel shipments) and 67.6% during
fiscal 1997 (68.8% excluding semi-finished steel shipments). Major users of WCI
products are steel converters, steel service centers, construction product
companies, electrical equipment manufacturers and, to a lesser extent,
automobile and automotive parts manufacturers. Shipping volume was adversely
affected in the fourth fiscal quarter of 1998 by a significant increase in
imports of foreign produced flat rolled steel, which is continuing. See
"Competition" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
In addition to being the parent company of WCI, Renco Steel's operations include
the management of its investment portfolio, which at October 31, 1998 was $20.7
million.
PRODUCTS
OVERVIEW
WCI produces a wide range of custom flat rolled steel products, including high
carbon, alloy, high strength, silicon electrical and galvanized steel. WCI's
custom products are characterized by small order quantities, specialized
chemistries, narrow widths and value added processing, with an emphasis on
customer specific quality requirements and delivery performance. WCI's commodity
steel product sales consist principally of hot and cold rolled low carbon sheet
steel. Export sales were approximately 2% of net sales during the last three
fiscal years.
Net Tons Shipped Percent of Total
Fiscal Year Ended Fiscal Year Ended
October 31, October 31,
1998 1997 1996 1998 1997 1996
Custom Products:
Hot and Cold
Rolled............. 502,149 481,740 426,945 35.5 36.2 30.5
Coated............. 379,045 416,854 382,352 26.9 31.4 27.4
--------- --------- --------- ------ ------ ------
Total Custom Products 881,194 898,594 809,297 62.4 67.6 57.9
Total Commodity...... 531,296 430,337 587,435 37.6 32.4 42.1
--------- --------- --------- ------ ------ ------
Total Steel
Products 1,412,490 1,328,931 1,396,732 100.0% 100.0% 100.0%
--------- --------- --------- ------ ------ ------
--------- --------- --------- ------ ------ ------
CUSTOM PRODUCTS
High Carbon, Alloy, High Strength---WCI has developed markets for high carbon,
alloy and high strength steel products that are sold to strip converters, steel
service centers, and automobile and automotive parts manufacturers. Products
required by the strip converter customers are characterized by small order
quantities, relatively narrow width and specific metallurgical properties. WCI
presently produces over 100 specialized chemistries for these markets.
WCI's customers in this sector, in turn, supply end-users which have highly
specific product needs requiring the strip converter to order steel with close
gauge tolerances, minimal crown profiles, critical surface qualities and, in
certain cases, in narrow widths.
In the high carbon and alloy market, WCI competes with several other domestic
integrated producers, as well as various steel producers in Canada, Europe and
Japan. In the high strength market, WCI competes with several major integrated
producers and minimills.
Silicon---Silicon electrical steel is sheet steel that exhibits certain
electrical or magnetic properties. The magnetic properties of this product
permit electric motors to run at high speeds for extended periods of time with
greater efficiency while minimizing heat loss.
The market for electrical sheet steel can be divided into two main segments:
grain oriented silicon sheet and non-grain oriented silicon sheet. The
distinction between grain and non-grain oriented silicon sheet pertains to the
electrical properties of the steel. WCI's silicon annealing line is designed for
production of non-grain oriented silicon sheet and all of WCI's silicon
shipments are in this segment. Presently, there is one domestic competitor in
this segment and several foreign competitors. In addition, WCI's product also
competes with cold rolled motor laminations produced by several other integrated
steelmakers which have been developed as a substitute product for silicon steel
in certain applications.
Galvanized---Galvanized steel is zinc-coated sheet steel produced on WCI's hot
dipped galvanizing line. The market for galvanized sheet steel is divided into
two broad categories: heavy and light gauge steel. Heavy gauge galvanized steel,
which is generally hot rolled based, is used in the manufacture of electrical
boxes, culvert coil and grain bins, as well as many other end uses.
WCI's galvanized finishing line is well suited to produce heavy gauge hot rolled
steel, and as a result, a majority of WCI's galvanized shipments are in this
sector. WCI competes with several other integrated producers and minimills, as
well as independent producers in the heavy gauge galvanized steel market.
COMMODITY PRODUCTS
In fiscal 1998, WCI shipped 531,296 tons in the aggregate of hot and cold rolled
low carbon, sheet and strip and low carbon semi-finished steel, which
represented approximately 37.6% of WCI's net tons shipped. Hot rolled low carbon
sheet is sold to steel service centers or manufacturers producing a broad array
of products, including tubing, stampings and roll formed parts. Cold rolled
sheet and strip is purchased by service centers, container manufacturers, and
the automotive and appliance industries. In these commodity steel markets, WCI
competes with all major integrated producers and several minimills.
MARKETING
WCI's marketing, sales and customer service functions are coordinated through
three wholly-owned subsidiaries, WCI Steel Sales LP (WCI Sales), WCI Steel
Metallurgical
Services Inc. (WCI Metallurgical Services) and WCI Steel Production Control
Services Inc. (WCI Production Services).
WCI Sales is responsible for developing and implementing a sales and marketing
strategy aimed at increasing the sales of custom steel products and building the
strategic customer base. WCI Sales employs a direct sales force covering
approximately 300 active accounts and other potential steel accounts within
WCI's geographic market. Over 50% of WCI Sales' shipments are to customers
within 200 miles of the Warren facility, and as a result of this concentration
of active and potential customers in its service area, WCI Sales believes that
it has a competitive advantage over competitors located farther away.
Sales outside WCI's geographic market are made through independent sales
representatives on a commission basis. Although transportation costs can be
prohibitive at extreme distances from the Warren facility, select custom
products are competitively priced outside WCI Sales normal target markets. WCI
Sales believes that independent sales representatives provide the most cost
effective method to access these customers. Approximately 4% of WCI Sales'
volume in fiscal 1998 was sold through the independent sales representatives.
Marketing and pricing are centralized at the Warren facility, where the
marketing strategy and pricing levels are established for all WCI products. WCI
Sales has a marketing staff that works closely with the sales and technical
service representatives to coordinate the implementation of the sales and
marketing strategy.
WCI Metallurgical Services is responsible for developing the specialized
chemistries that support WCI's custom product mix. In addition, WCI
Metallurgical has a staff of technical service representatives with strong
metallurgical and technical backgrounds who assist the sales force in the field.
Together, WCI believes the sales force and the technical staff comprise a
knowledgeable team qualified to identify and meet customer needs.
WCI Production Services provides order entry, production scheduling and order
status services to assist WCI Sales in meeting customer needs. WCI Production
Services provides customer service and utilizes a fully-automated computerized
sales network that provides the sales force and customers with product
specifications and timely order status information.
CUSTOMERS
WCI's customer base is dominated by steel converters and steel service centers,
which in fiscal 1998 represented 72% of shipments. The remaining shipments were
directly to end users.
The following table sets forth the percentage of WCI's net tons shipped to
various markets for the past three fiscal years.
Fiscal Year Ended
October 31,
Customer Category 1998 1997 1996
Conversion/further processing...... 47.6% 42.5% 44.6%
Steel service centers.............. 24.4 23.3 24.0
Construction....................... 12.1 15.8 11.5
Electrical equipment............... 6.2 7.3 7.1
Direct automotive.................. 4.7 6.3 8.1
Other.............................. 5.0 4.8 4.7
------ ------ ------
Total............................ 100.0% 100.0% 100.0%
------ ------ ------
------ ------ ------
In fiscal years 1998, 1997 and 1996, WCI's twenty largest customers represented
approximately 57%, 57% and 56%, respectively, of net sales. No customer
accounted for as much as 10% of net sales in fiscal years 1998, 1997 or 1996.
BACKLOG
On October 31, 1998, WCI's order backlog was approximately 155,000 net tons with
an approximate value of $76 million compared to approximately 232,000 net tons
with an approximate value of $116 million at October 31, 1997, based in each
case on the then current prices. Under the applicable orders, WCI is scheduled
to ship substantially all of the orders in the October 31, 1998 backlog by
February 28, 1999. Although customers may cancel orders included in the backlog,
such cancellations have been negligible in the past.
COMPETITION
The domestic steel industry is highly competitive. Despite significant
reductions in raw steel production capacity by major domestic producers in the
1980s, the domestic industry continues to be adversely affected by excess world
capacity.
In the United States, WCI competes with many other domestic steel companies. WCI
also faces increasing competitive pressures from minimills. Minimills are
generally smaller volume steel producers that use ferrous scrap metals as their
basic raw material. Compared to integrated producers, minimills, which rely on
less capital intensive hot metal sources, have certain advantages. Because
minimills typically are not unionized, they have more flexible work rules which
have resulted in lower employment costs per net ton shipped.
Since 1989, significant flat rolled minimill capacity has been constructed and
these minimills now compete with integrated producers in product areas that
traditionally had not faced significant competition from minimills. These
minimills compete with WCI primarily in the commodity flat rolled steel market
and more recently in certain custom flat rolled steel markets. In addition, the
increased competition in commodity product markets has resulted in certain
integrated producers increasing product offerings to compete with the Company's
custom products. This increased competition has also increased the price
volatility of certain of WCI's custom products.
During 1998, the domestic steel market continued to experience significant
increases in imports of foreign produced flat rolled steel. The relative
strength of the U.S. dollar and economy versus the strength of foreign
currencies and economies can significantly affect the import/export trade
balance for flat rolled steel. In the third and fourth calendar quarters of
1998, there was an unprecedented increase in imports of flat rolled steel from
Russia, Asia, particularly Japan and Korea, and Brazil. This caused significant
price decreases in the domestic steel market. The increase in imported product
offerings has adversely affected the supply-demand balance and resulted in a
significant reduction in production levels, shipping volume and prices for
domestic producers. Certain domestic steel producers filed unfair trade cases
with the U.S. International Trade Commission in September 1998 claiming that hot
rolled steel was being illegally exported to the United States from Japan,
Russia and Brazil at prices below the producers' cost. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In addition to competition from domestic and foreign steel producers, materials
such as aluminum, cement, composites, glass and plastics compete as substitutes
for steel in many markets.
MANUFACTURING PROCESS
In WCI's primary steelmaking process, iron ore pellets, coke, limestone, sinter
and other raw materials are consumed in the blast furnace to produce "hot
metal." Hot metal is further converted into liquid steel through the Basic
Oxygen Furnace (BOF) process where impurities are removed, recycled scrap is
added and metallurgical properties for end use are determined on a
batch-by-batch basis. WCI's BOF has two vessels, each with a steelmaking
capacity of 182 tons per heat. From the BOF, the heats of steel are sent to the
Ladle Metallurgy Facility (LMF), where the temperature and chemistry of the
steel are adjusted to precise tolerances. In addition, the steel may be vacuum
degassed to further improve its cleanliness. Liquid steel from the LMF then is
formed into slabs through the process of continuous casting. The twin-strand
continuous slab caster (Continuous Caster) allows WCI to cast all of its steel
products. After continuous casting, slabs then are reheated, reduced and
finished by extensive rolling, shaping, tempering and, in certain cases, by the
application of coatings at WCI's downstream operations. Finished products are
usually shipped to customers in the form of coils. WCI has linked its
steelmaking and rolling equipment with a computer based integrated manufacturing
control system to coordinate production and sales activities.
RAW MATERIALS
WCI's steelmaking operations are dependent on reliable supplies of various raw
materials, principally iron ore pellets, coke and energy. WCI believes that it
has adequate sources of its principal raw materials to meet its present needs.
Iron Ore Pellets
WCI has a contract with a major supplier of iron ore pellets for its
requirements through fiscal 1999. Iron ore pellets satisfied approximately 73%
of WCI's iron ore requirements in fiscal 1998, while WCI's sinter plant provided
the balance. The iron ore pellet contract requires WCI to purchase all of its
iron ore pellet requirements for 1999 from the contracting vendor. WCI carries
an increased level of iron ore pellet inventory immediately preceding the winter
months, due to the curtailment of vendor shipments during the winter as a result
of the freezing of the Great Lakes.
Coke
Coke is the principal fuel used to produce liquid iron and is an essential
ingredient in steelmaking. WCI has contracts with two integrated steel producers
for its estimated coke requirements through fiscal 1999. WCI's coke requirements
are approximately 600,000 tons per year. The domestic supply of coke has
decreased significantly over the last decade and may decrease further in the
future due to the requirements of the Clean Air Act. As WCI does not own a coke
battery, it is dependent upon commercially available domestic or imported coke
to sustain its operations. Although WCI believes that there will be adequate
supplies of domestic or imported coke available for its purposes after the
expiration of its contracts in 1999, there can be no assurance to such effect.
Energy and Gases
WCI's steel operation consumes large amounts of electricity, natural gas, oxygen
and other industrial gases. WCI purchases its electrical power requirements
under a contract that extends to 2002 from a local utility. WCI can generate
approximately 20% of its own electrical needs. Natural gas is also purchased
pursuant to a supply contract that extends to 2000. Oxygen is delivered, under a
contract that extends to 2002, from supplier-owned plants located at the Warren
facility. Pursuant to a contract entered into in 1988, WCI is required to
purchase all coke oven gas produced at an adjoining coke plant, which is usable
by WCI, at a price based upon, but at a discount to, natural gas prices.
ENVIRONMENTAL MATTERS
In common with much of the steel industry, WCI's facilities are located on sites
that have been used for heavy industrial purposes for decades. WCI is and will
continue to be subject to numerous federal, state and local environmental laws
and regulations governing, among other things, air emissions, waste water
discharge and solid and hazardous waste disposal. WCI has made and intends to
continue to make the necessary expenditures for environmental remediation and
compliance with environmental laws and regulations. Environmental laws and
regulations have changed rapidly in recent years, and WCI may be subject to more
stringent environmental laws and regulations in the future. During 1998 the
Environmental Protection Agency (EPA) adopted new standards regulating
particulate matter and ozone emissions. Data relating to these standards is to
be collected and analyzed with implementation as early as 2004. Like much of the
steel, utilities and other industries, WCI's current operations are not expected
to comply with these standards if implemented as currently adopted. WCI cannot
currently assess the impact of these standards on its results of operations or
financial condition. Compliance with more stringent environmental laws and
regulations could have a material adverse effect on WCI's financial condition
and results of operations.
WCI is defendant in three civil actions instituted by the Department of Justice,
on behalf of the EPA, in the United States District Court for the Northern
District of Ohio. The first action, instituted on June 29, 1995, under the Clean
Water Act, alleges numerous violations of WCI's National Pollution Discharge
Elimination System (NPDES) permit alleged to have occurred during the years 1989
through 1996. The second action, instituted on March 29, 1996, under the Clean
Air Act, alleges violations by WCI of the work practice, inspection and notice
requirements for demolition and renovation of the National Emission Standard for
Hazardous Air Pollutants for Asbestos and also violations of the particulate
standard and the opacity limits applicable to WCI's facilities in Warren, Ohio.
The third action, instituted on May 11, 1998, under the Resource Conservation
and Recovery Act of 1976, as amended (RCRA), alleges violations of RCRA, the
Ohio Administrative Code (OAC) and WCI's hazardous waste management permit
issued pursuant to RCRA and OAC related to WCI's management of hazardous waste
in surface impoundments at the Warren, Ohio facility. The action alleges that
from September 1988 to the present, WCI operated hazardous waste management
units at the Warren facility without the proper permits pursuant to RCRA. Each
action seeks a civil penalty of not more than the statutory maximum of $25,000
per day per violation ($27,500 per day per violation for violations since
January 30, 1997 in the case of the RCRA action) and also an injunction against
continuing violations. In addition, on December 17, 1997, WCI received a
compliance order from the EPA alleging certain violations of WCI's NPDES permit,
including exceedances of permit limits for pH and oil and grease and failure to
identify and sample for residual chlorine. WCI believes that imposition of the
statutory maximum penalties for the alleged violations is unlikely based upon
past judicial penalties imposed under the Acts and that it has defenses to
liability. WCI has been attempting to negotiate consent decrees with the EPA to
settle the Clean Water Act and Clean Air Act actions and the compliance order
dated December 17, 1997. A trial for the RCRA action has been scheduled for June
1999. If WCI is unable to reach a negotiated settlement of these actions, and if
a substantial penalty similar to the statutory maximum penalty were imposed, it
would have a material adverse effect on the operating results and financial
condition of WCI.
As a condition of a previous operating permit issued under RCRA, WCI will be
required to undertake a corrective action program with respect to historical
material handling practices at the Warren facility. WCI is currently undertaking
the first investigation step of the corrective action program, the RCRA Facility
Investigation (RFI), which is expected to be completed in 1999. The RFI workplan
identifies thirteen historical solid waste management units which are the
subject of the RFI, including areas of the facility which are the subject of the
RCRA civil action filed on May 11, 1998 described above. The final scope of the
corrective
action required to remediate or reclaim any contamination that may be present at
or emanating from the Warren facility is dependent upon the completion and
findings of the RFI and the development and approval of a corrective action
program. Accordingly, WCI is unable at this time to estimate the final cost of
the corrective action program or the period over which such costs may be
incurred and there can be no assurance that any such corrective action program
would not have a material adverse effect on the operating results or financial
condition of WCI.
WCI received from the EPA a formal request dated April 1, 1994 for information
pursuant to Section 3007 of RCRA and Section 104(e) of the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
(CERCLA). The request required WCI to submit information relating to the
generation, storage, treatment and disposal of solid or hazardous wastes or
hazardous substances at the Warren facility. The request also required WCI to
submit certain financial information and other information needed to evaluate
the facility's compliance with the RCRA and CERCLA requirements. WCI made the
requested information available to the EPA during 1994 and the EPA examined the
information in March 1997. The request did not identify violations, seek to
impose penalties or monetary sanctions or require the performance of remedial
activities or other capital expenditures. Among other items, the request sought
information about a specific area at which waste management occurred at the
Warren facility under a prior owner. This area was remediated by the prior owner
before the facility was sold to WCI, and the area is also scheduled to be
investigated under the corrective action RFI. Under EPA guidance, the area will
not be addressed under CERCLA when it is included in the corrective action
process. Because of the past remediation of the area by a prior owner and the
inclusion of the area in the corrective action process, WCI believes that the
area would not be regarded as a priority risk under CERCLA.
WCI operates a landfill at its Warren facility which receives waste materials
from the iron and steel-making operations. The Ohio EPA has issued a permit to
install a new lined landfill to replace this landfill. The plan involves closure
by removal of the present landfill by selling approximately one-third of its
contents to established markets for construction materials and recycling most of
the remaining contents over an extended period at the sinter plant in
Youngstown, Ohio operated by WCI's subsidiary, Youngstown Sinter Company, and
disposing of any non-salable or non-recyclable material in the new lined
landfill. Youngstown Sinter Company is presently exploring modifications to
sulfur dioxide emission regulations applicable to the sinter plant to enable it
to comply with applicable sulfur dioxide emission levels, as well as allow
faster recycling of the present landfill contents. WCI does not believe that the
sinter plant's noncompliance will result in any material expenditures. The new
lined landfill construction and existing landfill closure, if pursued, is
expected to be completed in seven consecutive phases. The estimated cost through
Phase I is approximately $2.7 million to $3.7 million expended over three years
and the estimated cost for Phase II is approximately $1.5 million expended over
six years. Construction is expected to begin during fiscal 1999.
EMPLOYEES
As of October 31, 1998, WCI had 542 salaried employees and 1,633 hourly
employees. Most of the employees are located at the Warren facility with most of
the hourly employees being represented by the United Steelworkers of America
(USWA) with which WCI has a four-year collective bargaining agreement that
expires September 1, 1999.
BENEFIT PLANS
Hourly Profit Sharing Plan
Certain hourly employees of WCI represented by the USWA participate in a profit
sharing plan under which WCI pays 12% of pretax income as defined in the profit
sharing agreement. WCI advances one-half of the amounts due under this plan on a
quarterly basis, within 45 days following the end of each fiscal quarter, and
pays the remaining amounts by February 15 of the subsequent year.
Salaried Variable Compensation Plan
WCI has a variable compensation plan for its salaried employees known as the
Company Performance Compensation Program (CPC). Under the CPC, salaried
employees receive variable compensation based on WCI's pretax income as defined
in the plan. CPC payments are measured as a percentage of the employees base
salary and paid quarterly.
Pension Plans
WCI has defined contribution retirement plans that cover substantially all
employees. WCI funds contributions to these plans as earned on a monthly basis.
Contributions to the plans are based on employee age, length of service and
compensation.
WCI has a defined benefit floor offset pension plan which covers substantially
all hourly employees at the Warren facility. The plan, when combined with
benefits from WCI's defined contribution plan and benefits from a predecessor
company's defined benefit pension plan, will provide a minimum level of pension
benefits for eligible employees. Benefits are based on age and years of service,
but not compensation. Under this plan, employees will receive upon retirement a
monthly benefit equal to $35 times the number of years of service with WCI or
its predecessors. If the employee has at least 30 years of service at
retirement, the monthly benefit is subject to certain minimums based on age at
retirement. No named executive officer is eligible to participate in this plan.
Postretirement Health Care Plans
WCI provides postretirement health care benefits to employees who retire while
meeting certain age and service eligibility requirements. WCI has established a
trust to hold contributions to fund future postretirement health care and life
insurance obligations related to the hourly workforce. This trust holds liens on
certain assets of WCI and one of its subsidiaries to secure WCI's obligation for
postretirement health care benefits. Minimum contributions are $.50 per hour
worked or a minimum of approximately $1.5 million per year.
ITEM 2. PROPERTIES
WCI's Warren, Ohio facility, situated on approximately 1,100 acres, includes a
blast furnace, a two vessel BOF shop, an LMF and a vacuum degasser, a
twin-strand Continuous Caster, a 56-inch hot strip mill, 54-inch tandem and
temper mills, annealing facilities, a silicon continuous annealing line, hot-dip
galvanizing and terne coating lines and other finishing facilities. The blast
furnace was relined during 1995 as part of its planned maintenance, a procedure
which is performed on a routine basis every six to eight years.
Youngstown Sinter Company, a subsidiary of WCI, owns and operates a sinter plant
located in Youngstown, Ohio on 51 acres. The sinter plant converts plant waste
dusts and iron ore into resources useable in the blast furnace, reducing WCI's
iron ore pellet feed requirements by approximately 27% in fiscal 1998.
Niles Properties, Inc., a subsidiary of WCI, is located approximately five miles
from the Warren facility, and has approximately 525,000 square feet of building
space with five long-term tenants occupying 70% of the facility. WCI is
continuing to seek other appropriate tenants.
WCI believes that its facilities are well maintained and they are considered
satisfactory for their purposes.
See Note 4 to the Consolidated Financial Statements, Part II, Item 8, for a
description of liens related to WCI's property, plant and equipment.
ITEM 3. LEGAL PROCEEDINGS
On January 23, 1996, two retired employees instituted an action against WCI and
the USWA in the United States District Court for the Northern District of Ohio
alleging in substance that certain distributions made by WCI to employees and
benefit plans violated certain agreements, the Employee Retirement Income
Security Act, the National Labor Relations Act and common law. On July 31, 1997
the court granted WCI's motion to dismiss this action and entered judgement in
favor of the Company and the USWA. The plaintiffs have filed an appeal regarding
the court's decision to dismiss. The appellate court heard the plaintiff's
appeal in June 1998 and has not rendered a decision.
On April 5, 1996, an employee instituted an action for damages against WCI in
the Court of Common Pleas, Trumbull County, Ohio, alleging that, under Ohio law,
her privacy rights were violated and that she was subjected to sexual
harassment. The case went to trial on August 24, 1998 and the judge directed a
verdict in favor of WCI. The plaintiff has filed an appeal regarding the
directed verdict.
In addition, WCI is involved in various claims and lawsuits incidental to the
ordinary course of business.
For a description of pending litigation related to environmental matters, see
"Item 1. Business-Environmental Matters."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
October 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Renco Steel is a direct wholly-owned subsidiary of Renco. There is no
established public trading market for Renco Steel's common stock. Since its
inception in January, 1998, Renco Steel has had one shareholder. WCI paid cash
dividends to Renco in fiscal 1997 in the amount of $118,000,000, of which
$108,000,000 was paid from the proceeds of WCI's issuance of $300.0 million 10%
Senior Secured Notes due 2004 (Senior Secured Notes of WCI). The Company paid
cash dividends to Renco in fiscal 1998 of $105,300,000 consisting of a
$100,000,000 dividend by Renco Steel in relation to the issuance of $120.0
million 10 7/8% Senior Secured Notes due 2005, (Senior Secured Notes), and a
$5,300,000 dividend by WCI prior to the formation of Renco Steel. See Note 4 to
the Consolidated Financial Statements, Part II, Item 8 for limitations on
dividends.
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended October 31,
1994(1) 1995(2) 1996(3) 1997(4) 1998
(Dollars and tons in thousands, except per ton amounts)
Statement of Income Data:
Net Sales..................... $709,363 $630,990 $660,801 $668,470 $665,741
Cost of products sold......... 574,610 544,789 550,609 547,545 560,686
-------- -------- -------- -------- --------
Gross margin.................. 134,753 86,201 110,192 120,925 105,055
Depreciation and amortization. 19,868 21,178 22,547 26,777 28,844
Selling, general and
administrative expenses...... 34,889 19,675 22,067 29,355 17,358
-------- -------- -------- -------- --------
Operating income.............. 79,996 45,348 65,578 64,793 58,853
Interest expense.............. 28,709 25,787 24,968 31,690 42,236
Interest and other income..... 1,505 6,212 6,545 1,239 2,778
Minority interest............. 1,763 2,465 2,944 423 -
-------- -------- -------- -------- --------
Income before income taxes,
extraordinary losses on early
retirement of debt and
cumulative effect of change
in accounting principle....... 51,029 23,308 44,211 33,919 19,395
Income taxes.................. 21,939 10,313 19,108 13,251 7,755
-------- -------- -------- -------- --------
Income before extraordinary
losses on early retirement
of debt and cumulative effect
of change in accounting
principle.................... $ 29,090 $ 12,995 $ 25,103 $ 20,668 $ 11,640
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Other Operating Data:
Net tons shipped.............. 1,468 1,222 1,397 1,329 1,412
Percent custom products....... 56.9% 59.4% 57.9% 67.6% 62.4%
Average selling price per net
ton shipped.................. $ 483 $ 516 $ 473 $ 503 $ 471
Average cost per net ton
shipped...................... 391 446 394 412 397
Average gross margin per
net ton shipped.............. 92 71 79 91 74
Average operating income per
net ton shipped.............. 54 37 47 49 42
Balance Sheet Data:
Cash and cash equivalents..... -- -- -- -- 4,957
Restricted cash and cash
equivalents.................. 71,426 106,548 139,541 18,989 62,195
Other investments............. -- -- -- -- 15,774
Working capital (excluding
cash, cash equivalents and
short-term investments)...... 69,193 61,881 42,093 67,983 43,423
Property, plant and equipment,
net.......................... 196,212 189,733 205,121 276,684 266,625
Total assets.................. 481,596 519,159 567,459 532,592 542,800
Total debt (including current
portion)..................... 216,108 213,854 211,506 302,937 421,230
Shareholder's equity (deficit) 36,877 50,030 67,478 (49,129) (142,788)
- ----------
(1) Fiscal 1994 Statement of Income reflects $11.1 million of compensation
expenses related to WCI's initial public offering and the offering of the
10.5% Senior Notes of WCI.
(2) Fiscal 1995 results were adversely impacted by a 54 day labor contract
dispute and resulting work stoppage at WCI commencing September 1, 1995 and
a 36 day blast furnace reline commencing on April 1, 1995.
(3) WCI's custom product mix and the results for fiscal 1996 were adversely
impacted by a 54 day labor contract dispute and resulting work stoppage
which was concluded on October 24, 1995.
(4) Fiscal 1997 statement of income reflects $8.6 million of compensation
expenses related to WCI's debt refinancing and equity redemption
transactions effected in November 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Unless otherwise indicated, references to a year are to the Company's fiscal
year ended October 31.
Throughout 1998, the United States has experienced an increase in imports of
steel products. In the third and fourth calendar quarters of 1998, steel imports
reached record levels and reflected an increase of 59% over the comparable
period of 1997. On September 30, 1998, several domestic producers filed unfair
trade cases against Japan, Russia and Brazil seeking anti-dumping duties on hot
rolled steel imports. On November 13, 1998, the International Trade Commission
(ITC) made a preliminary ruling that hot rolled steel imports from Japan, Russia
and Brazil have caused threat of injury to the domestic steel industry. On
November 23, 1998, the Commerce Department made an affirmative finding of
critical circumstances with respect to imports of hot rolled steel from Russia
and Japan, which, if subsequently upheld by the ITC, will require that duties
imposed on imports of hot rolled steel from these countries be retroactive 90
days from the ITC's final rulings, or mid-November 1998.
This unprecedented surge in imports has created a supply imbalance in the
domestic steel market and has resulted in significantly lower order intake
rates, production levels, shipping volumes and selling prices for domestic
producers, including WCI. The effects of these circumstances are reflected, in
part, in WCI's operating results for its fourth fiscal quarter of 1998,
including lower shipping volume and transaction prices discussed more fully
below. As of October 31, 1998, WCI has experienced a significant decline in
order backlog, is experiencing erosion in transaction prices for its forward
order book and has, therefore, reduced its production levels throughout its
operations. Management has taken steps to reduce the costs of WCI's operations
and has continued to maintain low levels of steel inventory in concert with its
forward order book. However, these steps will not fully mitigate the effects of
the current circumstances. Accordingly, management expects that production
levels and shipping volume will be significantly lower during the first fiscal
quarter of 1999 and perhaps subsequent quarters if the present supply imbalance
does not improve. Moreover, management anticipates that sales prices will be
lower throughout 1999 compared to 1998. As a result of these conditions,
management expects that the Company will incur a net loss in its first fiscal
quarter of 1999. Management believes that it has sufficient liquidity to support
its operations for the foreseeable future.
RESULTS OF OPERATIONS
Fiscal 1998 Compared to Fiscal 1997
Net sales in 1998 were $665.7 million on 1,412,490 tons shipped, representing a
0.4% decrease in net sales and a 6.3% increase in tons shipped compared to 1997.
Shipping volume increased in 1998 due to the shipment of 77,244 tons of lower
value added semi-finished steel compared with 22,642 tons in 1997. Shipments
during the fourth quarter of 1998 were 308,284 tons compared to 341,020 tons in
the comparable period in 1997. Shipments during the fourth quarter of 1998 were
adversely affected by the recent surge in the amount of flat roll steel exported
to the United States, as addressed above. Excluding semi-finished steel, net
sales per ton shipped decreased 4.7% to $483 in 1998 compared to $507 for 1997,
primarily as a result of lower selling prices and, to a lesser extent, changes
in product mix. Excluding semi-finished steel, custom carbon, alloy and
electrical steel accounted for 66.0% of shipments in 1998 compared to 68.8% in
1997.
Gross margin (sales less cost of goods sold) was $105.1 million in 1998 compared
to $120.9 million in 1997. The decrease in gross margin is primarily
attributable to the lower selling prices discussed above offset somewhat by
lower production costs, a LIFO inventory benefit and lower variable compensation
expense in 1998.
Operating income was $58.9 million, $42 per ton, for 1998 compared to $64.8
million, $49 per ton for 1997. The operating results for 1997 include $8.6
million of compensation charges related to the debt refinancing and equity
redemption transactions effected in November 1996. Excluding the charges
incurred as a result of these transactions, operating income was $73.4 million
during 1997 or $55 per ton shipped. The decrease in operating income in 1998
reflects the lower gross margin discussed above and higher depreciation charges
as a result of the hot strip mill upgrade substantially completed in late 1997,
offset by a decrease in selling, general and administrative expenses in 1998 as
a result of lower variable compensation and legal expenses.
Interest expense was $42.2 million in 1998 compared to $31.7 million in 1997.
The increase was primarily due to Renco Steel's issuance of the Senior Secured
Notes on February 3, 1998. Interest, investment and other income, net, increased
in 1998 by $1.5 million due to interest earned on significantly higher cash and
cash equivalent balances at WCI, and investment income at Renco Steel.
As a result of the items discussed above, income before extraordinary items was
$11.6 million in 1998 compared to $20.7 million in 1997. During 1997 the Company
recognized an extraordinary loss of $19.6 million, net of income taxes, on the
early retirement of $206.1 million principal amount of 10.5% Senior Notes due
2002 of WCI (Senior Notes of WCI). As a result, the Company had net income of
$1.1 million for 1997.
Fiscal 1997 Compared to Fiscal 1996
Net sales in 1997 were $668.5 million on 1,328,931 tons shipped, representing a
1.2% increase in net sales and a 4.9% decrease in tons shipped compared to 1996.
The upgrade of the hot strip mill, substantially completed during 1997, required
several equipment outages and resulted in lower shipping volume during the
second and third quarters of 1997. Net sales per ton shipped increased 6.3% to
$503 compared to $473 for 1996. This increase is primarily the result of changes
in product mix with shipments of custom carbon, alloy and electrical steels
accounting for 67.6% in 1997 and 57.9% in 1996 and, to a lesser extent,
increases in product selling prices. WCI's custom product mix in 1996 was
adversely effected by a 54 day labor contract dispute and resulting work
stoppage which was concluded on October 24, 1995. In addition, shipments during
1997 and 1996 included 22,642 tons and 45,904 tons, respectively, of lower value
added semi-finished steel.
Gross margin (net sales less cost of goods sold) was $120.9 million in 1997
compared to $110.2 million in 1996. The increase in gross margin reflects the
increase in selling prices and improvement in product mix offset somewhat by
higher LIFO inventory charges and lower shipping volume in 1997.
Operating income was $64.8 million, $49 per ton shipped, for 1997 compared to
$65.6 million, $47 per ton shipped, for 1996. The operating results for 1997
reflect the increase in gross margin discussed above offset by $8.6 million of
compensation charges related to the debt refinancing and equity redemption
transactions effected in November 1996. In addition, the operating results for
fiscal 1997 reflect $3.6 million of additional depreciation and amortization
resulting from purchase accounting adjustments aggregating $44.1 million
relating to the November 1996 transactions. Excluding the non-recurring charge
incurred as a result of these transactions, operating income was $73.4 million
during 1997 or $55 per ton shipped.
Interest expense increased to $31.7 million in 1997 compared to $25.0 million in
1996 as a result of the issuance of the Senior Secured Notes of WCI and the
retirement of the Senior Notes of WCI on November 27, 1996. Interest income
decreased to $1.1 million in 1997 compared to $6.2 million in 1996 as a result
of lower cash, cash equivalent and short-term investments in 1997 due to the
debt refinancing and equity redemption transactions. Minority interest expense
decreased by $2.5 million due to the purchase of the minority interest as part
of the November 1996 transactions.
As a result of the items discussed above, income before the extraordinary loss
was $20.7 million in 1997 compared to $25.1 million in 1996. During 1997, the
Company recognized an extraordinary loss of $19.6 million, net of income taxes,
on the early retirement of $206.1 million principal amount of the Senior Notes
of WCI. As a result, the Company had net income of $1.1 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Renco Steel
In February 1998, Renco Steel issued $120.0 million principal amount of Senior
Secured Notes. Interest on the Senior Secured Notes is payable semi-annually in
arrears on February 1, and August 1 of each year.
Renco Steel's liquidity requirements result from its debt service obligations
related to the Senior Secured Notes, as well as to a nominal extent general
corporate overhead. Renco Steel has met these requirements through distributions
from WCI, as permitted under the terms of WCI's outstanding indebtedness. In
addition, Renco Steel has available cash and investment balances which were
$20.7 million at October 31, 1998. Renco may also make contributions or advances
to Renco Steel to meet its debt services obligations. Renco, however, has no
obligation to do so.
A source of liquidity for Renco Steel to meet its debt services obligations has
been available payments from WCI under the tax sharing agreement. On January 15,
1999, Renco filed an election, with the consent of its shareholders, with the
Internal Revenue Service to change its taxable status from that of a C
corporation to that of an S corporation, effective November 1, 1998. At the same
time, Renco designated Renco Steel and WCI as qualified subchapter S
subsidiaries. (See Note 14 to the Consolidated Financial Statements Part II,
Item 8 and Item 13, "Certain Relationships and Related Transactions").
As a result of such election, Renco Steel generally will not be receiving income
tax payments from WCI pursuant to the tax sharing agreement. The effect of this
is the loss of cash generated from the tax benefit derived from Renco Steel's
interest expense. This may be partially offset by an increase in allowable
dividends
payable by WCI under the terms of WCI's indenture. Management believes that this
change in tax status will not have a material adverse effect on Renco Steel and
its ability to meet its debt service obligations.
The ability of Renco Steel to meet its debt service obligations is dependent
upon WCI's operating performance and financial results and the performance of
its investments, other than in WCI (Other Investments). WCI's operating
performance and financial results will be subject to financial, economic,
political, competitive and other factors affecting WCI, many of which are
beyond the Company's control. WCI expects to incur a loss in the first fiscal
quarter of 1999 and, as a result, Renco Steel does not expect to receive a
dividend distribution from WCI until late 1999, or later. WCI dividends are
generally limited to 50% of its cumulative earnings, since October 31, 1996.
Renco Steel's Other Investments consists of investments in limited partnerships
or corporations which invest in a variety of financial assets, including equity,
debt, and derivative securities. Because of the nature of the underlying
investments, Renco Steel's Other Investments are subject to a high degree of
risk, including, but not limited to, credit risk, interest risk, foreign
currency exchange risk, and equity price risk. Renco Steel does not have any off
balance sheet risk with respect to these investments and thus its risk is
limited to the loss of its investment. Each of the limited partnerships or
corporations in which Renco Steel has invested provide liquidity for withdrawal
within 90 days of notice and accordinly, these investments have been classified
as current assets in the accompanying balance sheet as of October 31, 1998.
These investments are held for trading purposes and are recorded at fair market
value for financial reporting purposes.
The indenture governing the Senior Secured Notes contains numerous covenants and
prohibitions that limit the financial activities of Renco Steel, including,
among others, limitations on the incurrence of additional indebtedness and
additional liens. The ability of Renco Steel to comply with such covenants will
be dependent upon WCI's future performance.
Dividends
During 1998, the Company paid dividends of $105.3 million. Based on
profitability and after taking into account Renco Steel's prospects and
liquidity needs, Renco Steel plans to pay dividends to the extent allowed by
Renco Steel's Senior Secured Notes indenture. Under the terms of the indenture,
at October 31, 1998, Renco Steel was permitted to declare and pay dividends of
$1.3 million.
Cash from Operations
Cash provided by the Company's operating activities was $69.9 million for 1998
compared to $39.6 million and $78.0 million for 1997 and 1996, respectively. The
increase in operating cash flow in 1998 compared to 1997 resulted primarily from
working capital changes including a reduction of WCI's steel inventory of $23.9
million.
WCI
WCI's liquidity requirements result from capital investments, working capital
requirements, postretirement health care and pension funding, interest expense
and, to a lesser extent, principal payments on its indebtedness. WCI has met
these requirements in each fiscal year since 1992 from cash balances and cash
provided by operating activities. WCI's primary sources of liquidity as of
October 31, 1998 consisted of cash and cash equivalents of $62.2 million and
available borrowing under its $100 million revolving credit agreement (WCI
Revolver).
The WCI Revolver has a maximum borrowing limit of $100 million, is secured by
eligible inventories and receivables, as defined therein, and expires on
December 29, 1999. As of October 31, 1998, WCI had no borrowings outstanding
under the WCI Revolver, with a borrowing limit of $88.9 million based on
eligible inventories and receivables, net of $6.6 million in outstanding letters
of credit.
The WCI Revolver and the indenture governing the Senior Secured Notes of WCI
contain numerous covenants and prohibitions that limit the financial activities
of WCI, including requirements that WCI satisfy certain financial ratios and
limitations on the incurrence of additional indebtedness. The ability of WCI to
meet its debt service requirements and to comply with such covenants will be
dependent upon future operating performance and financial results of WCI, which
will be subject to financial, economic, political, competitive and other factors
affecting WCI, many of which are beyond its control.
Cash from Operations
Cash provided by WCI's operating activities was $74.1 million for 1998 compared
to $39.6 million and $78.0 million for 1997 and 1996, respectively. The increase
in operating cash flow in 1998 compared to 1997 resulted primarily from working
capital changes including a reduction in steel inventory of $23.9 million.
As of October 31, 1998, at pricing then in effect, WCI had commitments under raw
material supply contracts of approximately $51.3 million for 1999 and $2.6
million thereafter.
Capital Expenditures
Capital expenditures at WCI were $15.6 million, $39.9 million and $35.4 million
during 1998, 1997 and 1996, respectively. Subject to market and business
conditions, capital expenditures at WCI are expected to range between $20
million and $30 million in 1999. The higher level of capital investment in 1997
and 1996 reflects expenditures on an upgrade of WCI's hot strip mill and the
installation of a new hydrogen anneal facility. WCI's capital expenditures have
been funded in 1998, 1997 and 1996 through cash balances and cash provided by
operating activities. At October 31, 1998, WCI had commitments for capital
expenditures of approximately $2.1 million.
Postretirement Benefit Plans
WCI provides postretirement health care and life insurance benefits to
substantially all employees who retire from WCI upon meeting certain age and
length of service eligibility requirements. Under terms of WCI's labor contract,
WCI is required to pay current claims and to contribute $.50 per hour worked by
certain hourly employees, or a minimum of $1.5 million annually to a trust
established to fund future benefits. Claims paid by WCI totaled $3.1 million,
$2.4 million and $1.7 million during 1998, 1997 and 1996, respectively.
WCI has a defined benefit pension plan which covers substantially all bargained
for employees. WCI contributed $3.1 million to the plan during 1998 and made
minimal contributions to the plan during 1997. WCI intends to contribute
approximately $1.6 million per quarter to the plan during 1999 and 2000 which is
expected to satisfy the minimum funding requirements of ERISA for those periods.
Environmental Matters
WCI has incurred and, in the future, will continue to incur capital expenditures
for matters relating to environmental control and monitoring. Capital
expenditures for environmental control and monitoring were $0.5 million, $0.8
million and $0.3 million in 1998, 1997 and 1996, respectively. Future
environmental capital expenditures may be dependent in part upon the outcome of
certain pending
environmental matters. Operating costs for control and monitoring equipment,
excluding depreciation and amortization expense, were $9.6 million, $10.8
million and $9.6 million for 1998, 1997 and 1996, respectively. Operating costs
for fiscal 1999 for control and monitoring equipment are not expected to
increase significantly from the prior periods.
Environmental laws and regulations have changed rapidly in recent years, and WCI
may be subject to more stringent environmental laws and regulations in the
future. Compliance with more stringent environmental laws and regulations could
have a material adverse effect on WCI's consolidated financial position and
future results of operations. During 1998, the EPA adopted new standards
regulating particulate matter and ozone emissions. Data relating to these
standards is to be collected and analyzed with implementation scheduled for
2004. Like much of the steel, utilities and other industries, WCI's current
operations are not expected to comply with these standards if implemented as
currently adopted. WCI cannot currently assess the impact of these standards on
its results of operations or financial condition. In addition, the EPA has
asserted certain alleged environmental violations against WCI which are
described in Note 12 to the Consolidated Financial Statements.
Year 2000 Business Matters
Many information and process control systems used in the current business
environment were designed to use only two digits in the date field and thus may
not function properly in the year 2000. Over the past several years, WCI has
been assessing and modifying its business systems to be year 2000 ready and has
completed in excess of 95% of the required program changes and has completed, or
has nearly completed, the replacement/upgrading of purchased systems. WCI is
testing each individual application for year 2000 readiness and has completed
testing of approximately 50% of the applications and, after completing
additional remediation on approximately 5% of the programs tested, has found
them to be year 2000 ready. WCI is developing a comprehensive enterprise-wide
testing plan for its business systems. The initial test is scheduled for April
1999 and further remediation may be required after this test. WCI has a second
enterprise-wide test scheduled for July 1999, if necessary. WCI has completed an
inventory of its process control environment including automation,
instrumentation and components with embedded chips. An assessment has been
completed on approximately 90% of the inventory, with approximately 87% of the
assessed inventory being year 2000 ready. WCI expects to complete the
assessment, remediation and testing of the process control systems and
components by May 1999. WCI is planning an enterprise-wide test for process
control in mid-1999. WCI does not expect year 2000 issues related to its
business systems or process control environment to cause any significant
disruption to operations. Based on information available at this time, WCI
estimates that the incremental costs associated with achieving year 2000
readiness will be approximately $2 million in 1999 and are expected to be
incurred primarily in the first two quarters of the year.
In conjunction with its efforts to achieve year 2000 readiness, WCI is also
monitoring the status of the year 2000 readiness programs at its significant
suppliers and business partners through questionnaires which were sent to each
such entity. WCI has received responses from approximately 75% of these
entities. WCI is evaluating these responses and intends to follow-up with each
entity during 1999 to monitor the status of its year 2000 readiness efforts. WCI
will use information learned from this process in developing its contingency
plans to mitigate the effect of suppliers that will not be year 2000 ready on a
timely basis.
While WCI is developing contingency plans for the sourcing and transportation of
raw material components critical to its operations, WCI is presently dependent
on a single source for certain of its energy, raw materials and transportation
needs. If certain vendors are unable to supply the energy, raw materials or
transportation services on a timely basis in the year 2000, it could result in
WCI being unable to
operate or require WCI to operate at a reduced level. In addition, the lack of
accurate and timely year 2000 information from suppliers of automation and
process control systems and components or suppliers' inability to provide year
2000 ready replacement components could result in WCI being unable to operate,
or require WCI to operate at a reduced level, in the year 2000.
Labor Matters
At October 31, 1998, WCI had 1,633 hourly employees, most of which are
represented by the USWA, with which WCI has a four-year collective bargaining
agreement that expires September 1, 1999. While WCI does not expect any
disruption to its operations as a result of the expiration of the current
agreement, WCI has experienced such disruptions in the past and no assurance can
be given that there will not be a disruption to operations at the expiration of
this agreement. WCI is unable to estimate the effect on its results of
operations that a new labor agreement may have.
Accounting Standards
In March 1998, the American Institute of Certified Public Accounts issued its
Statement of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidelines for companies to capitalize or expense costs incurred to develop or
obtain internal-use software. The Company expects to adopt SOP 98-1 effective
November 1, 1998. The incremental impact on results of operations of adoption of
SOP 98-1 is not expected to be material to the financial results of the Company,
however, it is likely that it will be initially favorable since certain
qualifying costs will be capitalized and amortized over future periods.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities." This new standard requires recognition of all
derivatives as either assets or liabilities at fair value. The Company does not
believe adoption of the standard will have a material effect on either financial
position or results of operations. The Company plans to adopt the standard
effective November 1, 1999, as required.
Forward-Looking Statements
This report includes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 which involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results, performance or achievements of the Company to differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions;
increasing industry capacity and levels of imports of steel or steel products;
industry trends, including product pricing; competition; currency fluctuations;
the loss of any significant customer; availability of qualified personnel;
effects of future collective bargaining agreements; major equipment failures;
unanticipated problems encountered in the year 2000 readiness program; and
availability of replacement equipment to achieve year 2000 readiness. 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 statement is based.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Renco Steel's Other Investments include investments in limited partnerships or
corporations which invest in a variety of financial assets, including, equity,
debt, commodity contracts, futures and derivative securities. Because of the
speculative nature of the underlying investments, Renco Steel's investments are
subject to a high degree of market risk, including, but not limited to, interest
rate risk, foreign currency exchange rate risk, commodity price risk and equity
price risk. In addition, as the limited partnerships or corporations' portfolio
of securities may not represent a broad diversification of investments among
particular issuers, industries or types of securities, Renco Steel's investments
are subject to a high degree of concentration of credit risk. While the
objectives of the limited partnerships or corporations are to maximize risk
adjusted total return and/or grow and preserve capital, they do not limit
themselves to a particular investment style and may engage in various
combinations of investments, including various ranges of investment types and
quality of securities.
Renco Steel does not have any off-balance sheet risk with respect to these
investments and thus, its risk is limited to the loss of its investment. Each of
the limited partnerships or corporations in which Renco Steel has invested,
provide for liquidity for withdrawal within 90 days of notice and accordingly,
these investments have been classified as current assets in the accompanying
consolidated balance sheet as of October 31, 1998. These investments are held
for trading purposes and are recorded at fair market value for financial
reporting purposes. The fair market value of these assets at October 31, 1998
was $15.8 million.
At October 31, 1998, Renco Steel also held $4.9 million in short term
securities including U.S. Treasuries and a variety of money market
securities, which have been classified as cash and cash equivalents in the
accompanying consolidated balance sheet as of October 31, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
CONSOLIDATED BALANCE
SHEETS ( Dollars in thousands,
except per share amount )
October 31,
------------------------
1998 1997
--------- ---------
ASSETS
Current assets
Cash and cash equivalents.........................$ 4,957 $ --
Restricted cash and cash equivalents ............. 62,195 18,989
Other investments................................. 15,774 --
Accounts receivable, less allowances for doubtful
accounts of $904 and $1,627, respectively....... 48,724 65,202
Inventories....................................... 88,138 107,363
Recoverable income taxes.......................... -- 4,273
Deferred income taxes............................. 8,462 8,188
Prepaid expenses.................................. 1,144 1,640
--------- ---------
Total current assets......................... 229,394 205,655
Property, plant and equipment, net.................. 266,625 276,684
Excess of cost over acquired net assets, net........ 12,439 12,980
Other assets, net................................... 34,342 37,273
--------- ---------
Total assets................................ $ 542,800 $ 532,592
--------- ---------
--------- ---------
LIABILITIES and SHAREHOLDER'S DEFICIT
Current liabilities
Current portion of long-term debt.................$ 116 $ 1,319
Accounts payable.................................. 46,620 64,123
Accrued liabilities............................... 54,445 51,504
Income taxes...................................... 1,864 1,737
--------- ---------
Total current liabilities.................... 103,045 118,683
Long-term debt, excluding current portion........... 421,114 301,618
Deferred income taxes............................... 30,393 26,829
Postretirement health care benefits................. 93,378 86,441
Pension benefits, excluding current portion......... 23,604 31,575
Other liabilities................................... 14,054 16,575
--------- ---------
Total liabilities............................ 685,588 581,721
--------- ---------
Shareholder's deficit
Common stock, no par value, stated value $.01
per share, 850 shares authorized, 100 shares
issued and outstanding at October 31, 1998.......... -- --
Additional paid-in capital.......................... 1 --
Accumulated deficit................................. (142,789) (49,129)
--------- ---------
Total shareholder's deficit................. (142,788) (49,129)
Commitments and contingencies...................... -- --
Total liabilities and
shareholder's deficit.................. $ 542,800 $ 532,592
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESS0R
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Years ended October 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Net sales.......................................$ 665,741 $ 668,470 $ 660,801
Operating costs and expenses
Cost of products sold.......................... 560,686 547,545 550,609
Depreciation and amortization.................. 28,844 26,777 22,547
Selling, general and administrative expenses... 17,358 29,355 22,067
--------- --------- ---------
606,888 603,677 595,223
--------- --------- ---------
Operating income............................. 58,853 64,793 65,578
--------- --------- ---------
Other income (expense)
Interest expense............................... (42,236) (31,690) (24,968)
Interest, investment and other income, net..... 2,778 1,239 6,545
Minority interest.............................. -- (423) (2,944)
--------- --------- ---------
(39,458) (30,874) (21,367)
--------- --------- ---------
Income before income taxes and
extraordinary loss......................... 19,395 33,919 44,211
Income tax expense.............................. 7,755 13,251 19,108
--------- --------- ---------
Income before extraordinary loss............. 11,640 20,668 25,103
Extraordinary loss on early retirement of
debt, net of income taxes..................... -- 19,606 --
--------- --------- ---------
Net income ..................................$ 11,640 $ 1,062 $ 25,103
--------- --------- ---------
--------- --------- ---------
See accompanying notes to consolidated financial statements.
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(Dollars in thousands)
Years ended October 31, 1998, 1997 and 1996
---------------------------------------------------------
Total
Share-
Additional Retained holder's
Preferred Common Paid-In Earnings Treasury Equity
Stock Stock Capital (Deficit) Stock (Deficit)
--------- ------ -------- --------- -------- ---------
Balance at October 31, 1995....... -- $366 $ 458 $ 49,206 $ -- $ 50,030
Net income........................ -- -- -- 25,103 -- 25,103
Dividends paid on Common Stock.... -- -- -- (6,567) -- (6,567)
Treasury stock purchases.......... -- -- -- -- (1,200) (1,200)
Other............................. -- -- 112 -- -- 112
-------- -------- ------- ---------- -------- ---------
Balance at October 31, 1996....... -- 366 570 67,742 (1,200) 67,478
Net income........................ -- -- -- 1,062 -- 1,062
Dividends paid on Common Stock.... -- -- -- (118,000) -- (118,000)
Repurchase of minority interest in
subsidiary....................... -- (366) (901) 67 1,200 --
Other............................. -- -- 331 -- -- 331
-------- -------- ------- -------- -------- ---------
Balance at October 31, 1997....... -- -- -- (49,129) -- (49,129)
Issuance of common stock at
inception of the Company......... -- -- 1 -- -- 1
Net income........................ -- -- -- 11,640 -- 11,640
Dividends paid on Common Stock.... -- -- -- (105,300) -- (105,300)
-------- -------- ------- --------- -------- ---------
Balance at October 31, 1998....... -- -- 1 $(142,789) $(142,788)
-------- -------- ------- --------- -------- ---------
-------- -------- ------- --------- -------- ---------
See accompanying notes to consolidated financial statements.
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended October 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................... $ 11,640 $ 1,062 $ 25,103
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization................ 25,913 23,846 19,617
Amortization of deferred maintenance costs... 2,931 2,931 2,930
Amortization of financing costs and bond
discount.................................... 1,785 1,435 2,180
Postretirement health care benefits.......... 6,937 3,960 5,508
Pension benefits............................. 1,292 5,101 6,507
Provision for losses on accounts receivable.. (475) 27 (658)
Deferred income taxes........................ 3,290 4,350 (5,537)
Extraordinary loss........................... -- 32,786 --
Minority interest in earnings of WCI......... -- 423 2,944
Gain on other investments.................... (401) -- --
Other........................................ 142 350 (7)
Cash provided (used) by changes in certain
assets and liabilities, net of acquisition
of minority interest
Accounts receivable........................ 16,953 640 (31,595)
Inventories................................ 19,225 (9,618) 4,414
Prepaid expenses and other assets.......... (3,077) (389) (132)
Accounts payable........................... (17,503) (15,015) 31,398
Accrued liabilities........................ (597) 9,707 1,113
Income taxes payable and recoverable, net.. 4,400 (12,585) 14,398
Other liabilities.......................... (2,521) (9,437) (182)
--------- --------- ---------
Net cash provided by operating activities ... 69,934 39,574 78,001
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment... (15,565) (39,902) (35,384)
Gross proceeds from the sale of assets....... 110 135 497
Purchase of minority interest in WCI......... -- (56,934) --
Short-term and other investments, net........ (15,373) 49,146 (36,864)
--------- --------- ---------
Net cash used by investing activities........ (30,828) (47,555) (71,751)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of Senior
Secured Notes.............................. 115,675 -- --
Net proceeds from issuance of Senior
Secured Notes of WCI....................... -- 290,103 --
Repurchase of Senior Notes of WCI............ -- (233,085) --
Principal payments on other long-term debt... (1,319) (2,449) (2,348)
Dividends paid............................... (105,300) (118,000) (6,567)
Purchases of treasury stock of WCI........... -- -- (1,200)
Issuance of common stock of the Company...... 1 -- --
--------- --------- ---------
Net cash provided (used) by
financing activities....................... 9,057 (63,431) (10,115)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. 48,163 (71,412) (3,871)
Total cash and cash equivalents at
beginning of period.......................... 18,989 90,401 94,266
--------- --------- ---------
Total cash and cash equivalents
at end of period............................. $ 67,152 $ 18,989 $ 90,401
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow
information
Cash paid for interest...................... $ 37,216 $ 21,412 $ 22,888
Cash paid for income taxes................... 65 8,306 10,247
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
AND PREDECESSOR
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
Renco Steel Holdings, Inc. (Renco Steel) is a holding company incorporated
in the State of Ohio which was formed on January 20, 1998 and is a wholly owned
subsidiary of The Renco Group, Inc. (Renco). On January 29, 1998, Renco
contributed to Renco Steel its interest in its wholly owned subsidiary WCI
Steel, Inc. (WCI or Predecessor). Accordingly the accompanying consolidated
financial statements include the accounts of Renco Steel and WCI (collectively,
the Company).
The Company's consolidated financial statements have been prepared as a
reorganization of companies under common control in a manner similar to a
pooling of interests. Renco's investment in WCI included the effects of certain
purchase accounting adjustments related to the acquisition of treasury stock by
WCI that were not reflected in the financial statements of WCI.
Accordingly the Company's consolidated financial statements include the
accounts of WCI and reflect purchase accounting adjustments of $44.1 million in
the aggregate relating to the purchase of minority interest in WCI in fiscal
1997 (see note 4). The purchase accounting adjustments reflect differences in
the basis of accounting for certain assets and liabilities in Renco Steel's
financial statements as compared to WCI's financial statements and affect the
valuation of inventories, property, plant and equipment, intangible pension
assets, excess of cost over net assets acquired, deferred income taxes,
postretirement health care benefits and the related depreciation and
amortization. All significant intercompany profits, transactions, and balances
have been eliminated in consolidation.
(b) Nature of Operations
In addition to being the parent company of WCI, Renco Steel's operations
include the management of its investment portfolio.
WCI is a niche oriented integrated producer of value-added, custom steel
products. WCI produces a wide range of custom flat rolled products at its
primary facility in Warren, Ohio, including high carbon, alloy, high strength,
silicon electrical and galvanized steel. In addition, WCI produces commodity
grade low carbon flat rolled steel. WCI's primary customers are steel
converters, steel service centers, construction product companies, electrical
equipment manufacturers and to a lesser extent, automobile and automotive parts
manufacturers located principally in the U.S.
During 1998, 1997 and 1996, no single customer accounted for 10% or more of
net sales. Concentration of credit risk related to trade receivables is limited
due to the large number of customers in a variety of industries. Approximately
50% of WCI's shipments are to customers within 200 miles of its primary
facility.
Since its inception, WCI has had labor agreements with the United States
Steelworkers of America (USWA) and other organized labor organizations. The USWA
represents approximately 75% of WCI's employees. WCI has a four-year agreement
with the USWA that expires September 1, 1999.
(c) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short-term investments
with maturities of three months or less from the date of acquisition.
(d) Other Investments
Renco Steel's Other Investments include investments in limited partnerships
or corporations which invest in a variety of financial assets, including,
equity, debt, commodity contracts, futures and derivative securities. Because of
the speculative nature of the underlying investments, Renco Steel's investments
are subject to a high degree of market risk, including, but not limited to,
interest rate risk, foreign currency exchange rate risk, commodity price risk
and equity price risk. In addition, as the limited partnerships or corporations'
portfolio of securities may not represent a broad diversification of investments
among particular issuers, industries or types of securities, Renco Steel's
investments are subject to a high degree of concentration of credit risk. While
the objectives of the limited partnerships or corporations are to maximize risk
adjusted total return and/or grow and preserve capital, they do not limit
themselves to a particular investment style and may engage in various
combinations of investments, including various ranges of investment types and
quality of securities.
Renco Steel does not have any off-balance sheet risk with respect to these
investments and thus, its risk is limited to the loss of its investment. Each
of the limited partnerships or corporations in which Renco Steel has
invested, provide for liquidity for withdrawal within 90 days of notice and
accordingly, these investments have been classified as current assets in the
accompanying consolidated balance sheet as of October 31, 1998. These
investments are held for trading purposes and are recorded at fair market
value for financial reporting purposes. The fair market value of these assets
at October 31, 1998 was $15.8 million, including $0.3 million of unrealized
gains which were reflected in the Company's consolidated statement of income
for the twelve months ended October 31, 1998.
(e) Inventories
Inventories are stated at the lower of cost or market. Cost is determined by
the last-in, first-out (LIFO) method.
(f) Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is
calculated on the straight-line method over the estimated useful lives of the
assets (buildings 20 to 30 years and machinery and equipment 4 to 25 years with
a weighted average of 17 years). Expenditures for normal repairs and maintenance
are charged to expense as incurred.
(g) Excess of Cost Over Acquired Net Assets
Cost in excess of net assets acquired represents the excess of cost over the
fair value of net assets resulting from WCI's tender offer in November 1996, of
the 15.53% of WCI's common stock not owned by Renco. It is being amortized on
the straight line method over 25 years. The Company periodically monitors the
asset value by assessing whether the asset can be recovered over its remaining
useful life through undiscounted cash flows generated by the underlying
business.
(h) Other Assets
Deferred financing costs, included in other assets, are amortized using the
effective yield method over the term of the related financing and deferred blast
furnace maintenance costs, also included in other assets, are amortized using
the straight-line method over a six-year period.
(i) Income Taxes
The Company is included in the consolidated income tax return of Renco.
Under the terms of a tax sharing agreement, income taxes are allocated to the
Company on a separate return basis, except that transactions for the purchase of
goods and services between the Company, its subsidiaries, Renco and Renco's
other subsidiaries are accounted for on a cash basis rather than an accrual
basis and the Company does not receive the benefit of net operating tax loss
carryforwards, unless such tax losses were generated by the net tax timing
differences between financial reporting and tax return treatment in calculating
the allocation of income taxes. See Note 14, "Subsequent Event."
(j) Environmental Compliance Costs
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial expenditures are probable, and the cost can be
reasonably estimated. Generally, the timing of these accruals coincides with the
earlier of completion of a feasibility study or development of, or commitment
to, a plan of action based on the then known facts.
(k) Use of Estimates in Preparation of Consolidated Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(l) Reclassifications
Certain items in the consolidated financial statements for 1997 and 1996
have been reclassified to conform to the 1998 presentation.
(2) Inventories
- -----------------------------------------------------------------------------
Inventories consist of the following:
October 31,
1998 1997
----------------------
(Dollars in thousands)
Raw materials........................ $36,259 $ 33,725
Finished and semi-finished product... 58,332 82,216
Supplies............................. 86 561
------- --------
94,677 116,502
Less LIFO reserve.................... 6,539 9,139
------- --------
$88,138 $107,363
------- --------
------- --------
(3) Property, Plant and Equipment
- -----------------------------------------------------------------------------
Property, plant and equipment consists of the following:
October 31,
1998 1997
-----------------------
(Dollars in thousands)
Land and improvements................ $ 435 $ 463
Buildings............................ 27,445 27,433
Machinery and equipment.............. 382,480 368,755
Construction in progress............. 3,821 6,265
-------- --------
414,181 402,916
Less accumulated depreciation........ 147,556 126,232
-------- --------
$266,625 $276,684
-------- --------
-------- --------
(4) Long-Term Debt
- -----------------------------------------------------------------------------
Long-term debt consists of the following:
October 31,
1998 1997
---------------------
(Dollars in thousands)
Senior Secured Notes (net of
unamortized discount of $388)
with interest at 10.875%,
payable semi-annually, due 2005...... $119,612 --
Senior Secured Notes of WCI
with interest at 10% payable
semi-annually, due 2004.............. $300,000 $300,000
Revolving Credit Facility of WCI
(WCI Revolver) with interest at prime
plus 0.5% (8.50% at October 31, 1998)
payable monthly...................... -- --
Other................................ 1,618 2,937
--------- ---------
421,230 302,937
Less current portion of long-term
debt............................... 116 1,319
--------- ---------
$421,114 $301,618
--------- ---------
--------- ---------
In February 1998, Renco Steel issued $120.0 million principal amount of 10
7/8% Senior Secured Notes due 2005 (Senior Secured Notes). The Senior Secured
Notes are secured by a pledge of all the outstanding capital stock of WCI. Renco
Steel intends to meet its debt service obligations from its cash and investment
balances which were $20.7 million at October 31, 1998 and earnings thereon and
through distributions from WCI, as permitted under the terms of WCI's
outstanding indebtedness as described below. Under WCI's agreements, $243,000
was available for dividends and other transactions with affiliates at October
31, 1998. Accordingly, other than as described above, WCI's assets may not be
utilized by Renco Steel. The cash and cash equivalents balances of WCI of $62.2
million and
$19.0 million at October 31, 1998 and 1997 respectively, and have been
classified as "Restricted Cash and Cash Equivalents" on the financial
statements.
Renco Steel's Senior Secured Notes contain covenants which limit the
incurrence of additional indebtedness, payments to shareholders, sale of assets,
change of control, transactions with affiliates and impairment of security
interest. Renco Steel is generally permitted to declare and pay dividends and
make other transactions with affiliates provided no condition of default exists
or will exist and the accumulated amount of such transactions is not greater
than fifty percent (50%) of the net income, as defined, which definition
excludes the earnings of subsidiaries unless actually received in cash by Renco
Steel, as a dividend, (less 100% of any net loss) earned for periods subsequent
to January 31, 1998 when taken as a single accounting period. At October 31,
1998, Renco Steel was permitted to pay dividends of $1.3 million under the terms
of its indebtedness.
The $300 million 10% Senior Secured Notes due 2004 of WCI (Senior Secured
Notes of WCI) are secured by a second priority lien on substantially all of the
existing property, plant and equipment of WCI which will become a first priority
lien if all of WCI's 10.5% Senior Notes due 2002 (Senior Notes of WCI) are
extinguished ($0.3 million currently outstanding). A Voluntary Employee
Beneficiaries Association trust fund, established to hold WCI contributions to
fund postretirement health care and life insurance obligations for the benefit
of hourly employees, also holds a second priority lien on the security for the
Senior Secured Notes, which lien will remain a second priority lien even if the
lien in favor of the Senior Secured Notes becomes a first priority lien.
WCI has a $100,000,000 Revolving Credit Facility (WCI Revolver) secured by
and subject to eligible inventories and receivables as defined, reduced by any
outstanding letters of credit. The WCI Revolver is subject to an annual
commitment fee of 0.5% of the unused balance up to $75,000,000 payable monthly.
There were no borrowings outstanding under the WCI Revolver as of or during the
year ended October 31, 1998. The WCI Revolver, which expires December 29, 1999,
also provides for up to an aggregate amount of $20,000,000 in letters of credit.
WCI had a borrowing limit of $88,945,000 based on eligible inventory and
receivables net of $6,586,000 in letters of credit outstanding at October 31,
1998.
On November 27, 1996, WCI completed the sale of the Senior Secured Notes of
WCI. The proceeds from the Senior Secured Notes of WCI, with existing cash
balances of WCI, were used to complete an equity tender offer in which
substantially all the common stock of WCI not held by Renco, its then parent
corporation, was acquired, complete a tender offer in which WCI acquired $206.1
million principal amount of the then outstanding Senior Notes of WCI at a
premium, pay a $108 million dividend to Renco, make contractual compensation
payments to certain executives of WCI and pay related transaction costs.
The WCI Revolver and Senior Secured Notes of WCI contain certain financial
and other covenants, including maintenance of specified levels of net worth as
defined, working capital, and debt service and limitations on capital
expenditures. Additional covenants limit the incurrence of additional
indebtedness, payments affecting subsidiaries, transactions with affiliates,
sale/leaseback transactions, impairment of security interest, consolidations,
mergers and transfer of WCI's assets. WCI is permitted to declare and pay
dividends, and make other transactions with affiliates provided no condition of
default exists or will exist, and the accumulated amount of such transactions is
no greater than fifty percent (50%) of the consolidated net income, as defined
(less 100% of any consolidated net loss) earned for periods subsequent to
October 31, 1996 when taken as a single accounting period less management fees
paid to Renco in excess of $1,200,000 annually for the same period.
Under these agreements $243,000 was available for dividends and other
transactions with affiliates at October 31,1998. Aggregate principal payments on
long-term debt for the five years subsequent to October 31, 1998 are as follows:
$116,000 in 1999, $122,000 in 2000, $128,000 in 2001, $415,000 in 2002, and
$838,000 in 2003.
As of October 31, 1998, based on the quoted market price, the fair value of
the Senior Secured Notes was $103,200,000 and the fair value of the Senior
Secured Notes of WCI was $282,000,000.
(5) Accrued Liabilities
- -----------------------------------------------------------------------------
Accrued liabilities included employment related costs of $28,941,000 and
$28,442,000 and interest of $15,790,000 and $12,555,000 at October 31, 1998 and
1997, respectively.
(6) Employee Compensation Plans
- -----------------------------------------------------------------------------
WCI has variable compensation plans for the benefit of substantially all
employees. The amount of compensation due under these plans is based on WCI's
income as defined under each plan. Total expense under the plans was
$11,761,000, $24,588,000 and $14,000,000, for the years ended October 31, 1998,
1997 and 1996, respectively. Certain amounts under these plans represent
deferred compensation.
(7) Pension Plans
- -----------------------------------------------------------------------------
WCI has defined contribution retirement plans under which it expensed
approximately $5,684,000, $5,929,000 and $5,376,000 for the years ended October
31, 1998, 1997 and 1996, respectively.
WCI also has a defined benefit pension plan for substantially all hourly
employees. The following table sets forth the actuarial present value of benefit
obligations and funded status of WCI's defined benefit pension plan:
October 31,
1998 1997
----------------------
(Dollars in thousands)
Projected benefit obligation................. $47,839 $ 49,077
Plan assets at fair value.................... 19,015 15,930
------- --------
Projected benefit obligation in excess
of plan assets............................. 28,824 33,147
Unrecognized net gain from past experience
different from that assumed and effects
of changes in assumptions.................. 14,260 11,998
Unrecognized prior service cost.............. (25,826) (29,179)
Additional minimum liability................. 10,984 16,709
------- --------
Accrued pension cost......................... 28,242 32,675
Less pension liability due within one year... 4,638 1,100
------- --------
Long-term pension liability.................. $23,604 $ 31,575
------- --------
------- --------
An assumed discount rate of 7.0% and 7.25% in 1998 and 1997, respectively,
and an expected return on plan assets of 8.5% were used for purposes of valuing
the benefits under the defined benefit pension plan.
The following table sets forth a reconciliation of the beginning and end of
year projected benefit obligation:
1998 1997
--------- ---------
(Dollars in thousands)
Projected benefit obligation at
beginning of year.......................... $49,077 $48,498
Service cost................................. (430) (332)
Interest cost................................ 3,237 3,404
Actuarial gains.............................. (2,578) (1,274)
Benefits paid................................ (1,467) (1,219)
Projected benefit obligation at end of year.. $47,839 $49,077
-------- --------
-------- --------
The following table sets forth a reconciliation of the beginning and end of
year fair value of plan assets:
1998 1997
-------- ---------
(Dollars in thousands)
Plan assets at beginning of year............. $15,930 $13,936
Actual return on assets...................... 1,452 3,188
Employer contributions....................... 3,100 25
Benefits paid................................ (1,467) (1,219)
--------- --------
Plan assets at end of year.................. $19,015 $15,930
--------- --------
--------- --------
The following table sets forth the components of pension expense:
Years Ended October 31,
1998 1997 1996
-----------------------------
(Dollars in thousands)
Service cost..................... $ (430) $ (332) $ (213)
Interest cost.................... 3,237 3,404 3,477
Expected return on plan assets... (963) (932) (534)
Amortization of unrecognized:
Prior service cost........... 3,353 3,756 3,831
Actuarial gain and losses, net (805) (770) (4)
------- ------- -------
$4,392 $5,126 $6,557
------- ------- -------
------- ------- -------
(8) Postretirement Health Care Benefits
- -----------------------------------------------------------------------------
The following table sets forth the accumulated postretirement benefit
obligation (APBO) of WCI's postretirement health care and life insurance plans:
Years Ended October 31,
1998 1997
-----------------------
(Dollars in thousands)
APBO........................................ $130,821 $108,998
Plan assets at fair value................... 12,953 8,485
--------- ---------
APBO in excess of plan assets............... 117,868 100,513
Unrecognized prior service cost resulting
from plan amendments...................... (4,828) (6,183)
Unrecognized net loss from past experience
different from that assumed and from
changes in assumptions.................... (19,662) (7,889)
--------- ---------
Accrued postretirement benefit cost......... $ 93,378 $ 86,441
--------- ---------
--------- ---------
The APBO was determined using a discount rate of 7.0% and 7.25% in 1998 and
1997, respectively, an expected return on plan assets of 8.5%, and an assumed
health care cost trend rate of 7% in 1999, gradually declining to 5% after 2003.
Assuming a 1% increase in the health care cost trend rate, the APBO at October
31, 1998 would increase by $21,937,000 along with an increase in the 1998
service and interest cost components of $2,126,000. Assuming a 1% decrease in
the health care cost trend rates, the APBO at October 31, 1998 would decrease by
$17,492,000 along with a decrease in the 1998 service and interest cost
components of $1,691,000.
The following table sets forth a reconciliation of the beginning and end of
year APBO:
1998 1997
--------- ---------
(Dollars in thousands)
APBO at beginning of year................... $108,998 $ 89,545
Service cost................................ 3,068 2,232
Interest cost............................... 8,441 7,260
Amendments.................................. -- 3,902
Actuarial gains and losses, net............. 13,369 8,442
Benefits paid............................... (3,055) (2,383)
--------- ---------
APBO at end of year......................... $130,821 $108,998
--------- ---------
--------- ---------
The following table sets forth a reconciliation of the beginning and end of
year fair value of plan assets:
1998 1997
-------- --------
(Dollars in thousands)
Plan assets at beginning of year............ $ 8,485 $3,332
Actual return on assets..................... 1,912 1,254
Employer contributions...................... 2,556 3,899
------- ------
Plan assets at end of year.................. $12,953 $8,485
------- ------
------- ------
Net periodic postretirement benefit costs included the following components:
Years Ended October 31,
1998 1997 1996
--------------------------------
(Dollars in thousands)
Service cost..................... $ 3,068 $ 2,232 $ 2,272
Interest cost................... 8,441 7,260 6,541
Expected return on plan assets... (804) (333) -
Amortization of unrecognized:
Prior service cost............. 1,355 1,400 1,582
Actuarial (gain) loss.......... 488 (317) (72)
------- -------- --------
Net periodic postretirement
benefit cost................... $12,548 $10,242 $10,323
------- -------- --------
------- -------- --------
WCI is required to contribute a minimum of $.50 per hour worked by certain
hourly employees to a Voluntary Employee Beneficiaries Association Trust (VEBA
Trust) established to fund future postretirement health care and life insurance
benefits. In accordance with WCI's labor contract, WCI will continue to pay
current claims as incurred until the trust assets exceed 50% of the APBO for the
hourly employees who are beneficiaries of the trust.
(9) Income Taxes
- -----------------------------------------------------------------------------
The provision for income tax expense (benefit) consists of the following:
Years Ended October 31,
1998 1997 1996
-------------------------------
(Dollars in thousands)
Federal income taxes
Current........................ $4,000 $ 8,301 $18,861
Deferred....................... 3,066 3,476 (3,714)
State income taxes
Current........................ 465 600 5,784
Deferred....................... 224 874 (1,823)
------- ------- --------
Provision for
income taxes................... $7,755 $13,251 $19,108
------- ------- --------
------- ------- --------
In addition to the above income taxes, WCI recognized $13,180,000 of current
income tax benefits in 1997 related to the extraordinary loss on the early
retirement of debt (see Note 4).
A reconciliation between income tax expense reported and income tax expense
computed by applying the federal statutory rate to income before income taxes
and extraordinary loss follows:
Years Ended October 31,
1998 1997 1996
---------------------------------
(Dollars in thousands)
Income taxes at federal
statutory rate............... $6,788 $12,020 $16,502
State income taxes, net of
federal income tax benefit.... 448 958 2,574
Other............................ 519 273 32
------ ------- -------
$7,755 $13,251 $19,108
------ ------- -------
------ ------- -------
Deferred income taxes result from temporary differences in the financial
basis and tax basis of assets and liabilities. Total deferred tax assets
amounted to approximately $53,536,000 and $53,520,000 as of October 31, 1998 and
1997; the most significant items comprising the deferred tax assets were
postretirement benefits of $33,034,000 and $32,112,000, respectively, and
compensation accruals of $5,965,000 and $7,137,000, respectively. Total deferred
tax liabilities amounted to approximately $75,467,000 and $72,161,000 as of
October 31, 1998 and 1997, respectively, consisting primarily of deferred taxes
on inventory of $3,466,000 and $3,956,000, respectively, and fixed assets of
$71,736,000 and $67,740,000, respectively. The Company had no valuation
allowance for realization of deferred tax assets as of October 31, 1998 or 1997.
See Note 14, "Subsequent Event."
(10) Leases
- -----------------------------------------------------------------------------
WCI leases a portion of its operating and data processing equipment. Minimum
future lease payments under noncancellable operating leases are $1,797,000,
$1,460,000, $1,009,000, $537,000, $231,000 and $331,000 for the years ending
October 31, 1999, 2000, 2001, 2002, 2003 and thereafter, respectively. Rent
expense for noncancellable operating leases amounted to approximately
$1,811,000, $1,386,000 and $1,094,000, for the years ended October 31, 1998,
1997 and 1996, respectively.
(11) Related Party Transactions
- -----------------------------------------------------------------------------
WCI has a management services agreement with Renco under which Renco
provides certain management services to WCI. Under terms of this agreement, WCI
is charged a monthly fee of $100,000. The term of this agreement extends to
October 31, 2001. Total expense for management services fees amounted to
$1,200,000 for each of the years ended October 31, 1998, 1997 and 1996.
To obtain the advantages of volume, Renco 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 Renco
programs are property, business interruption, general, product and auto
liability, workers' compensation (other than Ohio for which WCI is self insured)
and casualty umbrella. In fiscal 1998, 1997 and 1996, the Company incurred costs
of approximately $1.8 million, $1.7 million and $2.0 million, respectively,
under the Renco 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.
(12) Commitments and Contingencies
- -----------------------------------------------------------------------------
At October 31, 1998, WCI had commitments to purchase data processing services of
approximately $19,552,000 in the aggregate over the remaining 3.5 years of its
management information systems agreement and purchased services of approximately
$5,458,000, $5,463,000 and $5,322,000 in 1998, 1997 and 1996, respectively,
under the agreement. At October 31, 1998, at pricing then in effect, WCI had
firm commitments for the purchase of raw materials and gases of approximately
$51,258,000 in 1999 and $2,591,000 thereafter. In addition, at October 31, 1998
WCI had commitments for capital expenditures of approximately $2,065,000.
In common with much of the steel industry, WCI's facilities are located on sites
that have been used for heavy industrial purposes for decades. WCI is and will
continue to be subject to numerous federal, state and local environmental laws
and regulations governing, among other things, air emissions, waste water
discharge and solid and hazardous waste disposal. WCI has made and intends to
continue to make the necessary expenditures for environmental remediation and
compliance with environmental laws and regulations. Environmental laws and
regulations have changed rapidly in recent years, and WCI may be subject to more
stringent
environmental laws and regulations in the future. During 1998 the Environmental
Protection Agency (EPA) adopted new standards regulating particulate matter and
ozone emissions. Data relating to these standards is to be collected and
analyzed with implementation as early as 2004. Like much of the steel, utilities
and other industries, WCI's current operations are not expected to comply with
these standards if implemented as currently adopted. WCI cannot currently assess
the impact of these standards on its results of operations or financial
condition. Compliance with more stringent environmental laws and regulations
could have a material adverse effect on WCI's financial condition and results of
operations.
WCI is defendant in three civil actions instituted by the Department of Justice,
on behalf of the EPA, in the United States District Court for the Northern
District of Ohio. The first action, instituted on June 29, 1995, under the Clean
Water Act, alleges numerous violations of WCI's National Pollution Discharge
Elimination System permit alleged to have occurred during the years 1989 through
1996. The second action, instituted on March 29, 1996, under the Clean Air Act,
alleges violations by WCI of the work practice, inspection and notice
requirements for demolition and renovation of the National Emission Standard for
Hazardous Air Pollutants for Asbestos and also violations of the particulate
standard and the opacity limits applicable to WCI's facilities in Warren, Ohio.
The third action, instituted on May 11, 1998, under the Resource Conservation
and Recovery Act of 1976, as amended (RCRA), alleges violations of RCRA, the
Ohio Administrative Code (OAC) and WCI's hazardous waste management permit
issued pursuant to RCRA and OAC related to WCI's management of hazardous waste
in surface impoundments at the Warren, Ohio facility. The action alleges that
from September 1988 to the present WCI operated hazardous waste management units
at the Warren facility without the proper permits pursuant to RCRA. Each action
seeks a civil penalty of not more than the statutory maximum of $25,000 per day
per violation ($27,500 per day per violation for violations since January 30,
1997 in the case of the RCRA action) and also an injunction against continuing
violations. WCI believes that imposition of the statutory maximum penalties for
the alleged violations is unlikely based upon past judicial penalties imposed
under the Acts and that it has defenses to liability. WCI has been attempting to
negotiate consent decrees with the EPA to settle the Clean Water Act and Clean
Air Act actions. A trial for the RCRA action has been scheduled for June 1999.
If WCI is unable to reach a negotiated settlement of these actions, and if a
substantial penalty similar to the statutory maximum penalty were imposed, it
would have a material adverse effect on the operating results and financial
condition of WCI.
As a condition of a previous operating permit, WCI will be required to undertake
a corrective action program with respect to historical material handling
practices at the Warren facility. WCI is currently undertaking the first
investigation step of the corrective action program, the RCRA Facility
Investigation (RFI), which is expected to be completed in 1999. The RFI workplan
identifies thirteen historical solid waste management units which are the
subject of the RFI, including areas of the facility which are the subject of the
RCRA civil action filed on May 11, 1998 described above. The final scope of the
corrective action required to remediate or reclaim any contamination that may be
present at or emanating from the Warren facility is dependent upon the
completion and findings of the RFI and the development and approval of a
corrective action program. Accordingly, WCI is unable at this time to estimate
the final cost of the corrective action program or the period over which such
costs may be incurred and there can be no assurance that any such corrective
action program would not have a material adverse effect on the operating results
or financial condition of WCI.
On January 23, 1996, two retired employees instituted an action against WCI
and the United Steelworkers of America (USWA) in the United States District
Court for the Northern District of Ohio alleging in substance that certain
distributions made by WCI to employees and benefit plans violated certain
agreements, the Employee Retirement Income Security Act, the National Labor
Relations Act and common law. On July 31, 1997, the court granted WCI's motion
to dismiss this
action and entered judgement in favor of WCI and the USWA. The Plaintiffs have
filed an appeal regarding the court's decision to dismiss.
On April 5, 1996, an employee instituted an action for damages against WCI in
the Court of Common Pleas, Trumbull County, Ohio, alleging that, under Ohio
common law, her privacy rights were violated and that she had been subjected to
sexual harassment. The case went to trial on August 24, 1998 and the judge
directed a verdict in favor of WCI. The plaintiff has filed an appeal regarding
the directed verdict.
In addition to the above matters, WCI is contingently liable with respect to
lawsuits and other claims incidental to the ordinary course of its business. A
liability has been established for an amount, which WCI believes is adequate,
based on information currently available, to cover the costs to resolve the
above described matters, including remediation, if any, except for any costs of
corrective action that may result from the RFI for which no estimate can
currently be made. The outcome of the above described matters could have a
material adverse effect on the future operating results of WCI in a particular
quarterly or annual period; however, WCI believes that the effect of such
matters will not have a material adverse effect on WCI's consolidated financial
position.
(13) Selected Quarterly Data (Unaudited)
- -----------------------------------------------------------------------------
The following is a summary of unaudited quarterly results for the years ended
October 31, 1998 and 1997:
Three Months Ended 1998
January 31 April 30 July 31 October 31
-------------------------------------------------
(Dollars in thousands)
Net sales............. $166,592 $177,860 $174,947 $146,342
Gross margin.......... 24,744 28,788 30,067 21,456
Net income (loss)..... 3,580 4,286 5,072 (1,298)
Three Months Ended 1997
January 31 April 30 July 31 October 31
-------------------------------------------------
(Dollars in thousands)
Net sales............. $160,907 $172,634 $165,917 $169,012
Gross margin.......... 29,298 31,343 31,559 28,725
Income before
extraordinary loss.. 697 7,182 7,558 5,230
Net income (loss)..... (18,908) 7,182 7,558 5,230
During the three months ended January 31, 1997, WCI recognized $8,577,000 of
compensation expenses and an extraordinary loss, net of income taxes, of
$19,606,000 related to the debt refinancing and equity redemption transactions
effected in November 1997. During the three months ended October 31, 1997, WCI
recorded a charge of $2,123,000 under the LIFO inventory valuation method.
(14) Subsequent Event
- ------------------------------------------------------------------------------
On January 15, 1999, Renco 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, Renco elected for the Company to
be treated as a qualified subchapter S subsidiary (QSSS). Most states in which
the Company operates will follow similar tax treatment. QSSS status requires the
ultimate shareholders to include their pro rata share of the Company's income or
loss in their individual tax returns. The Company will continue to provide for
state and local income taxes for the taxing jurisdictions which do not recognize
QSSS status, however, management believes this is immaterial to the Company. As
a result of this change in tax status, the elimination of deferred tax assets
and liabilities for income tax purposes will be recorded as part of income tax
benefit as of the effective date of the change.
INDEPENDENT AUDITORS' REPORT
To the Shareholder and Board of Directors
Renco Steel Holdings, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Renco Steel
Holdings, Inc. and subsidiaries and predecessor (a wholly-owned subsidiary of
The Renco Group, Inc.) as of October 31, 1998 and 1997, and the related
consolidated statements of income, shareholder's equity (deficit), and cash
flows for each of the years in the three-year period ended October 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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 Steel
Holdings, Inc. and subsidiaries and predecessor as of October 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the years
in the three-year period ended October 31, 1998, in conformity with generally
accepted accounting principles.
/S/ KPMG LLP
- -------------------------
KPMG LLP
Cleveland, Ohio
January 27, 1999
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
( Dollars in thousands, except per share amount )
October 31,
-----------------------
1998 1997
--------- ---------
ASSETS
Current assets
Cash and cash equivalents......................... $ 62,195 $ 18,989
Accounts receivable, less allowances for doubtful
accounts of $904 and $1,627, respectively....... 48,724 65,202
Inventories....................................... 87,140 106,293
Recoverable income taxes.......................... -- 4,273
Deferred income taxes............................. 8,610 8,188
Prepaid expenses.................................. 1,144 1,640
--------- ---------
Total current assets......................... 207,813 204,585
Property, plant and equipment, net.................. 217,624 224,620
Other assets, net................................... 34,849 41,546
--------- ---------
Total assets............................ $460,286 $470,751
--------- ---------
--------- ---------
LIABILITIES and SHAREHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt................. $ 116 $ 1,319
Accounts payable.................................. 46,620 64,123
Accrued liabilities............................... 50,907 51,504
Income taxes...................................... 2,330 1,737
-------- ---------
Total current liabilities.................... 99,973 118,683
Long-term debt, excluding current portion........... 301,502 301,618
Deferred income taxes............................... 13,368 7,497
Postretirement health care benefits................. 92,738 85,755
Pension benefits.................................... 23,524 31,489
Other liabilities................................... 14,054 16,575
-------- ---------
Total liabilities....................... 545,159 561,617
-------- ---------
Shareholder's equity (deficit)
Preferred stock, par value $1,000 per share, 5,000
shares authorized, none issued. ................ -- --
Common stock, no par value, stated value $.01 per
share, 40,000,000 shares authorized, 100 shares
issued and outstanding.......................... -- --
Accumulated deficit............................... (84,873) (90,866)
-------- ---------
Total shareholder's equity (deficit).... (84,873) (90,866)
Commitments and contingencies....................... -- --
Total liabilities and -------- ---------
shareholder's equity (deficit).......... $460,286 $470,751
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Years ended October 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Net sales....................................... $665,741 $668,470 $660,801
Operating costs and expenses
Cost of products sold.......................... 560,951 547,545 550,609
Depreciation and amortization.................. 25,240 23,174 22,547
Selling, general and administrative expenses... 17,343 29,355 22,074
-------- -------- --------
603,534 600,074 595,230
-------- -------- --------
Operating income............................. 62,207 68,396 65,571
-------- -------- --------
Other income (expense)
Interest expense............................... (32,057) (31,690) (24,968)
Interest and other income, net................. 2,308 1,239 6,545
-------- -------- --------
(29,749) (30,451) (18,423)
-------- -------- --------
Income before income taxes and
extraordinary loss......................... 32,458 37,945 47,148
Income tax expense.............................. 12,365 14,482 19,108
-------- -------- --------
Income before extraordinary loss............. 20,093 23,463 28,040
Extraordinary loss on early retirement of
debt, net of income taxes..................... -- 19,606 --
-------- -------- --------
Net income................................... $ 20,093 $ 3,857 $ 28,040
-------- -------- --------
-------- -------- --------
See accompanying notes to consolidated financial statements.
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(Dollars in thousands)
Years ended October 31, 1998, 1997 and 1996
---------------------------------------------------------
Total
Share-
Additional Retained holder's
Preferred Common Paid-In Earnings Treasury Equity
Stock Stock Capital (Deficit) Stock (Deficit)
--------- ------- -------- -------- -------- --------
Balance at October 31, 1995....... -- $ 366 $ 458 $ 58,671 $ -- $ 59,495
Net income........................ -- -- -- 28,040 -- 28,040
Dividends paid on Common Stock.... -- -- -- (6,567) -- (6,567)
Treasury stock purchases.......... -- -- -- -- (1,200) (1,200)
Other............................. -- -- 112 -- -- 112
-------- ------- ------- -------- -------- --------
Balance at October 31, 1996....... -- $ 366 $ 570 $ 80,144 $(1,200) $ 79,880
Net income........................ -- -- -- 3,857 -- 3,857
Dividends paid on Common Stock.... -- -- -- (118,000) -- (118,000)
Repurchase of Common Stock........ -- (366) (901) (56,867) 1,200 (56,934)
Other............................. -- -- 331 -- -- 331
-------- ------- ------- -------- -------- --------
Balance at October 31, 1997....... -- -- -- $(90,866) -- $(90,866)
Net income........................ -- -- -- 20,093 -- 20,093
Dividends paid on Common Stock.... -- -- -- (14,100) -- (14,100)
-------- ------- ------- -------- -------- --------
Balance at October 31, 1998....... -- -- -- $(84,873) -- $(84,873)
-------- ------- ------- -------- -------- --------
-------- ------- ------- -------- -------- --------
See accompanying notes to consolidated financial statements.
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended October 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.....................................$ 20,093 $ 3,857 $ 28,040
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization................ 22,309 20,243 19,617
Amortization of deferred maintenance costs... 2,931 2,931 2,930
Amortization of financing costs.............. 1,321 1,435 2,180
Postretirement health care benefits.......... 6,983 3,960 5,508
Pension benefits............................. 1,583 5,101 6,507
Provision for losses on accounts receivable.. (475) 64 (646)
Deferred income taxes........................ 5,449 5,581 (5,537)
Extraordinary loss........................... -- 32,786 --
Other........................................ 142 356 (6)
Cash provided (used) by changes in certain
assets and liabilities
Accounts receivable........................ 16,953 603 (31,607)
Inventories................................ 19,153 (9,618) 4,414
Prepaid expenses and other assets.......... (3,069) (389) (132)
Accounts payable........................... (17,503) (15,015) 31,398
Accrued liabilities........................ (4,135) 9,707 1,113
Income taxes payable and recoverable, net.. 4,866 (12,585) 14,398
Other liabilities.......................... (2,521) (9,437) (182)
--------- --------- ---------
Net cash provided by operating activities...... 74,080 39,580 77,995
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment... (15,565) (39,902) (35,384)
Gross proceeds from the sale of assets....... 110 135 497
Short-term investments, net.................. -- 49,146 (36,864)
--------- --------- ---------
Net cash (used) provided by investing
activities................................... (15,455) 9,379 (71,751)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of Senior Secured
Notes...................................... -- 290,103 --
Repurchase of Senior Notes................... -- (233,085) --
Repurchase of Common Stock................... -- (56,934) --
Dividends paid............................... (14,100) (118,000) (6,567)
Principal payments on other long-term debt... (1,319) (2,449) (2,348)
Purchases of treasury stock.................. -- -- (1,200)
--------- --------- ---------
Net cash used by financing activities.......... (15,419) (120,365) (10,115)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. 43,206 (71,406) (3,871)
Cash and cash equivalents at beginning
of year...................................... 18,989 90,395 94,266
--------- --------- ---------
Cash and cash equivalents at end of year.......$ 62,195 $ 18,989 $ 90,395
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow
information
Cash paid for interest...................$ 30,763 $ 21,412 $ 22,888
Cash paid for income taxes .............. 2,050 8,306 10,247
See accompanying notes to consolidated financial statements.
WCI STEEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
- -------------------------------------------------------------------------------
WCI Steel, Inc. (Company or WCI) is a wholly-owned subsidiary of Renco Steel
Holdings, Inc. (Renco Steel) and an indirect wholly-owned subsidiary of The
Renco Group, Inc. (Renco).
(a) Nature of Operations
The Company is a niche oriented integrated producer of value-added, custom
steel products. The Company produces a wide range of custom flat rolled products
at its primary facility in Warren, Ohio, including high carbon, alloy, high
strength, silicon electrical and galvanized steel.
In addition, the Company produces commodity grade low carbon flat rolled
steel. The Company's primary customers are steel converters, steel service
centers, construction product companies, electrical equipment manufacturers and
to a lesser extent, automobile and automotive parts manufacturers located
principally in the United States.
During 1998, 1997 and 1996, no single customer accounted for 10% or more of
net sales. Concentration of credit risk related to trade receivables is limited
due to the large number of customers in a variety of industries. Approximately
50% of WCI's shipments are to customers within 200 miles of its primary
facility.
Since its inception, the Company has had labor agreements with the United
Steelworkers of America (USWA) and other organized labor organizations. The USWA
represents approximately 75% of the Company's employees. The Company has a
four-year agreement with the USWA that expires September 1, 1999.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany profits,
transactions, and balances have been eliminated in consolidation.
(c) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short-term investments
with maturities of three months or less from the date of acquisition.
(d) Inventories
Inventories are stated at the lower of cost or market. Cost is determined by
the last-in, first-out (LIFO) method.
(e) Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is
calculated on the straight-line method over the estimated useful lives of the
assets (buildings 20 to 30 years and machinery and equipment 4 to 25 years with
a weighted average of 17 years). Expenditures for normal repairs and maintenance
are charged to expense as incurred.
(f) Other Assets
Deferred financing costs, included in other assets, are amortized using the
effective yield method over the term of the related financing and deferred
blast furnace maintenance costs, also included in other assets, are amortized
using the straight-line method over a six-year period.
(g) Income Taxes
The Company is included in the consolidated income tax return of Renco.
Under the terms of a tax sharing agreement, income taxes are allocated to the
Company on a separate return basis, except that transactions for the purchase of
goods and services between the Company, its subsidiaries, Renco and Renco's
other subsidiaries are accounted for on a cash basis rather than an accrual
basis and the Company does not receive the benefit of net operating tax loss
carryforwards, unless such tax losses were generated by the net tax timing
differences between financial reporting and tax return treatment in calculating
the allocation of income taxes. See Note 14, "Events (Unaudited) Subsequent to
the Date of the Report of the Independent Auditors".
(h) Environmental Compliance Costs
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial expenditures are probable, and the cost can be
reasonably estimated. Generally, the timing of these accruals coincides with the
earlier of completion of a feasibility study or the Company's development of, or
commitment to, a plan of action based on the then known facts.
(i) Use of Estimates in Preparation of Consolidated Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(j) Reclassifications
Certain items in the consolidated financial statements for 1997 and 1996
have been reclassified to conform to the 1998 presentation.
2) Inventories
- ------------------------------------------------------------------------------
Inventories consist of the following:
October 31,
1998 1997
------------------------
(Dollars in thousands)
Raw materials........................ $ 36,259 $ 33,725
Finished and semi-finished product... 58,332 82,216
Supplies............................. 86 561
--------- ---------
94,677 116,502
Less LIFO reserve.................... 7,537 10,209
--------- ---------
$ 87,140 $ 106,293
--------- ---------
--------- ---------
(3) Property, Plant and Equipment
- -------------------------------------------------------------------------------
Property, plant and equipment is comprised of the following:
October 31,
1998 1997
-----------------------
(Dollars in thousands)
Land and improvements................ $ 435 $ 463
Buildings............................ 27,445 27,433
Machinery and equipment.............. 327,353 313,628
Construction in progress............. 3,821 6,265
--------- ---------
359,054 347,789
Less accumulated depreciation........ 141,430 123,169
--------- ---------
$ 217,624 $ 224,620
--------- ---------
--------- ---------
(4) Long-Term Debt
- -----------------------------------------------------------------------------
Long-term debt consists of the following:
October 31,
1998 1997
-----------------------
(Dollars in thousands)
Senior Secured Notes with interest
at 10% payable semi-annually,
due 2004........................... $ 300,000 $ 300,000
Revolving Credit Facility(Revolver)
with interest at prime plus 0.5%
(8.50% at October 31, 1998)
payable monthly.................... -- --
Other................................ 1,618 2,937
--------- ---------
301,618 302,937
Less current portion of long-term
debt............................... 116 1,319
--------- ---------
$ 301,502 $ 301,618
--------- ---------
--------- ---------
The $300 million 10% Senior Secured Notes due 2004 (Senior Secured Notes)
are secured by a second priority lien on substantially all of the existing
property, plant and equipment of the Company which will become a first priority
lien if all of the 10.5% Senior Notes due 2002 (Senior Notes) are extinguished
($.3 million currently outstanding). A Voluntary Employee Beneficiaries
Association trust fund, established to hold Company contributions to fund
postretirement health care and life insurance obligations for the benefit of
hourly employees, also holds a second priority lien on the security for the
Senior Secured Notes, which lien will remain a second priority lien even if the
lien in favor of the Senior Secured Notes becomes a first priority lien.
The Company has a $100,000,000 Revolver secured by and subject to eligible
inventories and receivables as defined, reduced by any outstanding letters of
credit. The Revolver is subject to an annual commitment fee of .5% of the unused
balance up to $75,000,000 payable monthly. There were no borrowings outstanding
under the Revolver as of or during the year ended October 31, 1998. The
Revolver, which expires December 29, 1999, also
provides for up to an aggregate amount of $20,000,000 in letters of credit. The
Company had a borrowing limit of $88,945,000 based on eligible inventory and
receivables net of $6,586,000 in letters of credit outstanding at October 31,
1998. The Revolver is subject to a penalty of $500,000 if terminated, without
being refinanced with the same lender, prior to December 29, 1998 and $250,000
thereafter if terminated before expiration.
On November 27, 1996, the Company completed the sale of the Senior Secured
Notes. The proceeds from the Senior Secured Notes, with existing cash balances
of the Company, were used to complete an equity tender offer in which
substantially all the common stock of the Company not held by Renco, its then
parent corporation, was acquired, complete a tender offer in which the Company
acquired $206.1 million principal amount of the then outstanding Senior Notes at
a premium, pay a $108 million dividend to Renco, make contractual compensation
payments to certain executives of the Company and pay related transaction costs.
The Company's Revolver and Senior Secured Notes contain certain financial
and other covenants, including maintenance of specified levels of net worth as
defined, working capital, and debt service and limitations on capital
expenditures. Additional covenants limit the incurrence of additional
indebtedness, payments affecting subsidiaries, transactions with affiliates,
sale/leaseback transactions, impairment of security interest, consolidations,
mergers and transfer of the Company's assets.
The Company is permitted to declare and pay dividends, and make other
transactions with affiliates provided no condition of default exists or will
exist, and the accumulated amount of such transactions is no greater than fifty
percent (50%) of the consolidated net income as defined (less 100% of any
consolidated net loss) earned for periods subsequent to October 31, 1996 when
taken as a single accounting period less management fees paid to Renco in excess
of $1,200,000 annually for the same period.
Under these agreements $243,000 was available for dividends and other
transactions with affiliates at October 31, 1998. Aggregate principal payments
on long-term debt for the five years subsequent to October 31, 1998 are as
follows: $116,000 in 1999, $122,000 in 2000, $128,000 in 2001, $415,000 in 2002,
and $838,000 in 2003.
As of October 31, 1998, the fair value of the Senior Secured Notes was
$282,000,000 based on the quoted market price.
(5) Accrued Liabilities
- -------------------------------------------------------------------------------
Accrued liabilities included employment related costs of $28,941,000 and
$28,442,000 and interest of $12,528,000 and $12,555,000 at October 31, 1998 and
1997, respectively.
(6) Employee Compensation Plans
- -------------------------------------------------------------------------------
The Company has variable compensation plans for the benefit of substantially
all employees. The amount of compensation due under these plans is based on the
Company's income as defined under each plan. Total expense under the plans was
$11,761,000, $24,588,000 and $14,000,000, for the years ended October 31, 1998,
1997 and 1996, respectively.
Certain amounts under these plans represent deferred compensation.
(7) Pension Plans
- --------------------------------------------------------------------------------
The Company has defined contribution retirement plans under which it
expensed approximately $5,684,000, $5,929,000 and $5,376,000 for the years ended
October 31, 1998, 1997 and 1996, respectively.
The Company also has a defined benefit pension plan for substantially all
hourly employees. The following table sets forth the actuarial present value of
benefit obligations and funded status of the Company's defined benefit pension
plan:
October 31,
1998 1997
----------------------
(Dollars in thousands)
Projected benefit obligation................. $ 47,839 $ 49,077
Plan assets at fair value.................... 19,015 15,930
-------- --------
Projected benefit obligation in excess
of plan assets............................. 28,824 33,147
Unrecognized net gain from past experience
different from that assumed and effects
of changes in assumptions.................. 15,846 13,697
Unrecognized prior service cost.............. (31,480) (35,237)
Additional minimum liability................. 14,972 20,982
-------- --------
Accrued pension cost......................... 28,162 32,589
Less pension liability due within one year... 4,638 1,100
-------- --------
Long-term pension liability.................. $ 23,524 $ 31,489
-------- --------
-------- --------
An assumed discount rate of 7.0% and 7.25% in 1998 and 1997, respectively,
and an expected return on plan assets of 8.5% were used for purposes of valuing
the benefits under the defined benefit pension plan.
The following table sets forth a reconciliation of the beginning and end of
year projected benefit obligation:
1998 1997
--------- ---------
(Dollars in thousands)
Projected benefit obligation at
beginning of year.......................... $ 49,077 $ 48,498
Service cost................................. (430) (332)
Interest cost................................ 3,237 3,404
Actuarial gains.............................. (2,578) (1,274)
Benefits paid................................ (1,467) (1,219)
--------- ---------
Projected benefit obligation at end of year.. $ 47,839 $ 49,077
--------- ---------
--------- ---------
The following table sets forth a reconciliation of the beginning and end of
year fair value of plan assets:
1998 1997
--------- ----------
(Dollars in thousands)
Plan assets at beginning of year............. $ 15,930 $ 13,936
Actual return on assets...................... 1,452 3,188
Employer contributions....................... 3,100 25
Benefits paid................................ (1,467) (1,219)
--------- ---------
Plan assets at end of year.................. $ 19,015 $ 15,930
--------- ---------
--------- ---------
The following table sets forth the components of pension expense:
Years Ended October 31,
1998 1997 1996
----------------------------------
(Dollars in thousands)
Service cost..................... $ (430) $ (332) $ (213)
Interest cost.................... 3,237 3,404 3,477
Expected return on plan assets... (963) (932) (534)
Amortization of unrecognized:
Prior service cost........... 3,757 3,756 3,831
Actuarial gain and losses, net (918) (770) (4)
--------- --------- ---------
$ 4,683 $ 5,126 $ 6,557
--------- --------- ---------
--------- --------- ---------
(8) Postretirement Health Care Benefits
- -------------------------------------------------------------------------------
The following table sets forth the accumulated postretirement benefit
obligation (APBO) of the Company's postretirement health care and life insurance
plans:
Years Ended October 31,
1998 1997
-----------------------
(Dollars in thousands)
APBO........................................ $ 130,821 $ 108,998
Plan assets at fair value................... 12,953 8,485
--------- ---------
APBO in excess of plan assets............... 117,868 100,513
Unrecognized prior service cost resulting
from plan amendments...................... (5,459) (6,859)
Unrecognized net loss from past experience
different from that assumed and from
changes in assumptions.................... (19,671) (7,899)
--------- ---------
Accrued postretirement benefit cost......... $ 92,738 $ 85,755
--------- ---------
--------- ---------
The APBO was determined using a discount rate of 7.0% and 7.25% in 1998 and
1997, respectively, an expected return on plan assets of 8.5%, and an assumed
health care cost trend rate of 7% in 1999, gradually declining to 5% after 2003.
Assuming a 1% increase in the health care cost trend rate, the APBO at October
31, 1998 would increase by $21,937,000 along with an increase in the 1998
service and interest cost components of $2,126,000. Assuming a 1% decrease in
the health care cost trend rates the APBO at October 31, 1998 would decrease by
$17,492,000 along with a decrease in the 1998 service and interest cost
components of $1,691,000. The following table sets forth a reconciliation of the
beginning and end of year APBO:
1998 1997
--------- ---------
(Dollars in thousands)
APBO at beginning of year................... $ 108,998 $ 89,545
Service cost................................ 3,068 2,232
Interest cost............................... 8,441 7,260
Amendments.................................. -- 3,902
Actuarial gains and losses, net............. 13,369 8,442
Benefits paid............................... (3,055) (2,383)
--------- ---------
APBO at end of year......................... $ 130,821 $ 108,998
--------- ---------
--------- ---------
The following table sets forth a reconciliation of the beginning and
end of year fair value of plan assets:
1998 1997
-------- --------
(Dollars in thousands)
Plan assets at beginning of year............ $ 8,485 $ 3,332
Actual return on assets..................... 1,912 1,254
Employer contributions...................... 2,556 3,899
-------- --------
Plan assets at end of year.................. $ 12,953 $ 8,485
-------- --------
-------- --------
Net periodic postretirement benefit costs included the following components:
Years Ended October 31,
1998 1997 1996
--------------------------------
(Dollars in thousands)
Service cost..................... $ 3,068 $ 2,232 $ 2,272
Interest cost................... 8,441 7,260 6,541
Expected return on plan assets... (804) (333) --
Amortization of unrecognized:
Prior service cost............. 1,400 1,400 1,582
Actuarial (gain) loss.......... 489 (317) (72)
-------- -------- --------
Net periodic postretirement
benefit cost................... $ 12,594 $ 10,242 $ 10,323
-------- -------- --------
-------- -------- --------
The Company is required to contribute a minimum of $.50 per hour worked by
certain hourly employees to a Voluntary Employee Beneficiaries Association Trust
(VEBA Trust) established to fund future postretirement health care and life
insurance benefits. In accordance with the Company's labor contract, the
Company will continue to pay current claims as incurred until the trust assets
exceed 50% of the APBO for the hourly employees who are beneficiaries of the
trust.
(9) Income Taxes
- -------------------------------------------------------------------------------
The provision for income tax expense (benefit) is comprised of the
following:
Years Ended October 31,
1998 1997 1996
--------------------------------
(Dollars in thousands)
Federal income taxes
Current........................ $ 6,317 $ 8,301 $ 18,861
Deferred....................... 5,009 4,461 (3,714)
State income taxes
Current........................ 599 600 5,784
Deferred....................... 440 1,120 (1,823)
-------- -------- --------
Provision for
income taxes................... $ 12,365 $ 14,482 $ 19,108
-------- -------- --------
-------- -------- --------
In addition to the above income taxes, the Company recognized $13,180,000 of
current income tax benefits in 1997 related to the extraordinary loss on the
early retirement of debt (see Note 4).
A reconciliation between income tax expense reported and income tax expense
computed by applying the federal statutory rate to income before income taxes
and extraordinary loss follows:
Years Ended October 31,
1998 1997 1996
---------------------------------
(Dollars in thousands)
Income taxes at federal
statutory rate............... $ 11,360 $ 13,282 $ 16,502
State income taxes, net of
federal income tax benefit.... 675 1,118 2,574
Other............................ 330 82 32
-------- -------- --------
$ 12,365 $ 14,482 $ 19,108
-------- -------- --------
-------- -------- --------
Deferred income taxes result from temporary differences in the financial
basis and tax basis of assets and liabilities. Total deferred tax assets
amounted to approximately $50,461,000 and $51,492,000 as of October 31, 1998 and
1997; the most significant items comprising the deferred tax assets were
postretirement benefits of $31,141,000 and $30,084,000, respectively, and
compensation accruals of $5,965,000 and $7,137,000, respectively. Total deferred
tax liabilities amounted to approximately $55,219,000 and $50,801,000 as of
October 31, 1998 and 1997, respectively, consisting primarily of deferred taxes
on inventory of $3,065,000 and $3,526,000, respectively, and fixed assets of
$52,037,000 and $46,810,000, respectively. The Company had no valuation
allowance for realization of deferred tax assets as of October 31, 1998 or 1997.
See Note 14, "Events (Unaudited) Subsequent to the Date of the Report of the
Independent Auditor."
(10) Leases
- -------------------------------------------------------------------------------
The Company leases a portion of its operating and data processing
equipment. Minimum future lease payments under noncancellable operating leases
are $1,797,000, $1,460,000, $1,009,000, $537,000, $231,000 and $331,000 for the
years ending October 31, 1999, 2000, 2001, 2002, 2003 and thereafter,
respectively. Rent expense for noncancellable operating leases amounted to
approximately $1,811,000, $1,386,000 and $1,094,000, for the years ended October
31, 1998, 1997 and 1996, respectively.
(11) Related Party Transactions
- -------------------------------------------------------------------------------
The Company has a management services agreement with Renco under which
Renco provides certain management services to the Company. Under terms of this
agreement, the Company is charged a monthly fee of $100,000. The term of this
agreement extends to October 31, 2001. Total expense for management services
fees amounted to $1,200,000 for each of the years ended October 31, 1998, 1997
and 1996.
To obtain the advantages of volume, Renco 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 Renco
programs are property, business interruption, general, product and auto
liability, workers' compensation (other than Ohio for which the Company is self
insured) and casualty umbrella. In fiscal 1998, 1997 and 1996, the Company
incurred costs of approximately $1.8 million, $1.7 million and $2.0 million,
respectively, under the Renco 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.
Renco Steel is a holding company formed by Renco in January 1998 which owns
all the outstanding shares of capital stock of the Company. In February 1998,
Renco Steel issued $120 million principal amount 10.875% Senior Secured Notes
due 2005. These notes are secured by a pledge of all the outstanding capital
stock of the Company. Renco Steel intends to meet its debt service obligations
from its cash balances and earnings thereon and through distributions from the
Company, including payments pursuant to a tax sharing agreement and dividends as
permitted under the Company's outstanding indebtedness as described in Note 4
and Note 14, "Events (Unaudited) Subsequent to the Date of the Report of the
Independent Auditor."
(12) Commitments and Contingencies
- -------------------------------------------------------------------------------
At October 31, 1998, the Company had commitments to purchase data
processing services of approximately $19,552,000 in the aggregate over the
remaining 3.5 years of its management information systems agreement and
purchased services of approximately $5,458,000, $5,463,000 and $5,322,000 in
1998, 1997 and 1996, respectively, under the agreement.
At October 31, 1998, at pricing then in effect, the Company had firm
commitments for the purchase of raw materials and gases of approximately
$51,258,000 in 1999 and $2,591,000 thereafter. In addition, at October 31, 1998
the Company had commitments for capital expenditures of approximately
$2,065,000.
In common with much of the steel industry, the Company's facilities are
located on sites that have been used for heavy industrial purposes for decades.
The Company is and will continue to be subject to numerous federal, state and
local environmental laws and regulations governing, among other things, air
emissions, waste water discharge and solid and hazardous waste
disposal. The Company has made and intends to continue to make the necessary
expenditures for environmental remediation and 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. During 1998 the Environmental Protection
Agency (EPA) adopted new standards regulating particulate matter and ozone
emissions. Data relating to these standards is to be collected and analyzed with
implementation as early as 2004. Like much of the steel, utilities and other
industries, the Company's current operations are not expected to comply with
these standards if implemented as currently adopted. The Company cannot
currently assess the impact of these standards on its results of operations or
financial condition. Compliance with more stringent environmental laws and
regulations could have a material adverse effect on the Company's financial
condition and results of operations.
The Company is defendant in three civil actions instituted by the
Department of Justice, on behalf of the EPA, in the United States District Court
for the Northern District of Ohio. The first action, instituted on June 29,
1995, under the Clean Water Act, alleges numerous violations of the Company's
National Pollution Discharge Elimination System permit alleged to have occurred
during the years 1989 through 1996. The second action, instituted on March 29,
1996, under the Clean Air Act, alleges violations by the Company of the work
practice, inspection and notice requirements for demolition and renovation of
the National Emission Standard for Hazardous Air Pollutants for Asbestos and
also violations of the particulate standard and the opacity limits applicable to
the Company's facilities in Warren, Ohio. The third action, instituted on May
11, 1998, under the Resource Conservation and Recovery Act of 1976, as amended
(RCRA), alleges violations of RCRA, the Ohio Administrative Code (OAC) and the
Company's hazardous waste management permit issued pursuant to RCRA and OAC
related to the Company's management of hazardous waste in surface impoundments
at the Warren, Ohio facility. The action alleges that from September 1988 to the
present the Company operated hazardous waste management units at the Warren
facility without the proper permits pursuant to RCRA. Each action seeks a civil
penalty of not more than the statutory maximum of $25,000 per day per violation
($27,500 per day per violation for violations since January 30, 1997 in the case
of the RCRA action) and also an injunction against continuing violations. The
Company believes that imposition of the statutory maximum penalties for the
alleged violations is unlikely based upon past judicial penalties imposed under
the Acts and that it has defenses to liability. The Company has been attempting
to negotiate consent decrees with the EPA to settle the Clean Water Act and
Clean Air Act actions. A trial for the RCRA action has been scheduled for June
1999. If the Company is unable to reach a negotiated settlement of these
actions, and if a substantial penalty similar to the statutory maximum penalty
were imposed, it would have a material adverse effect on the operating results
and financial condition of the Company.
As a condition of a previous operating permit, the Company will be required
to undertake a corrective action program with respect to historical material
handling practices at the Warren facility. The Company is currently undertaking
the first investigation step of the corrective action program, the RCRA Facility
Investigation (RFI), which is expected to be completed in 1999. The RFI workplan
identifies thirteen historical solid waste management units which are the
subject of the RFI, including areas of the facility which are the subject of the
RCRA civil action filed on May 11, 1998 described above. The final scope of the
corrective action required to remediate or reclaim any contamination that may be
present at or emanating from the Warren facility is dependent upon the
completion and findings of the RFI and the development and approval of a
corrective action program. Accordingly, the Company is unable at this time to
estimate the final cost of the corrective action program or the period over
which such costs may be incurred and there can be no assurance
that any such corrective action program would not have a material adverse effect
on the operating results or financial condition of the Company.
On January 23, 1996, two retired employees instituted an action against the
Company and the United Steelworkers of America (USWA) in the United States
District Court for the Northern District of Ohio alleging in substance that
certain distributions made by the Company to employees and benefit plans
violated certain agreements, the Employee Retirement Income Security Act, the
National Labor Relations Act and common law. On July 31, 1997, the court granted
the Company's motion to dismiss this action and entered judgement in favor of
the Company and the USWA. The Plaintiffs have filed an appeal regarding the
court's decision to dismiss.
On April 5, 1996, an employee instituted an action for damages against WCI
in the Court of Common Pleas, Trumbull County, Ohio, alleging that, under Ohio
common law, her privacy rights were violated and that she had been subjected to
sexual harassment. The case went to trial on August 24, 1998 and the judge
directed a verdict in favor of the Company. The plaintiff has filed an appeal
regarding the directed verdict.
In addition to the above matters, the Company is contingently liable with
respect to lawsuits and other claims incidental to the ordinary course of its
business. A liability has been established for an amount, which the Company
believes is adequate, based on information currently available, to cover the
costs to resolve the above described matters, including remediation, if any,
except for any costs of corrective action that may result from the RFI for which
no estimate can currently be made. The outcome of the above described matters
could have a material adverse effect on the future operating results of the
Company in a particular quarterly or annual period; however, the Company
believes that the effect of such matters will not have a material adverse effect
on the Company's consolidated financial position.
(13) Selected Quarterly Data (Unaudited)
- -----------------------------------------------------------------------------
The following is a summary of unaudited quarterly results for the years
ended October 31, 1998 and 1997:
Three Months Ended 1998
January 31 April 30 July 31 October 31
----------------------------------------------------
(Dollars in thousands)
Net sales............. $ 166,592 $ 177,860 $ 174,947 $ 146,342
Gross margin.......... 24,744 28,656 30,000 21,390
Net income............ 4,201 6,516 7,148 2,228
Three Months Ended 1997
January 31 April 30 July 31 October 31
----------------------------------------------------
(Dollars in thousands)
Net sales............. $ 160,907 $ 172,634 $ 165,917 $ 169,012
Gross margin.......... 29,298 31,343 31,559 28,725
Income before
extraordinary loss.. 1,713 7,777 8,150 5,823
Net income (loss)..... (17,893) 7,777 8,150 5,823
During the three months ended January 31, 1997, the Company recognized
$8,577,000 of compensation expenses and an extraordinary loss, net of income
taxes, of $19,606,000 related to the debt refinancing and equity redemption
transactions effected in November 1997. During the three months ended October
31, 1997, the Company recorded a charge of $2,123,000 under the LIFO inventory
valuation method.
(14) Events (Unaudited) Subsequent to the Date of the Report of the Independent
Auditors
- --------------------------------------------------------------------------------
On January 15, 1999 Renco 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, Renco elected for the Company to
be treated as a qualified subchapter S subsidiary (QSSS). Most states in which
the Company operates will follow similar tax treatment. QSSS status requires the
ultimate shareholders to include their pro rata share of the Company's income or
loss in their individual tax returns. The Company will continue to provide for
state and local income taxes for the taxing jurisdictions which do not recognize
QSSS status, however, management believes such taxes will be immaterial to the
Company. As a result of this change in tax status, the elimination of deferred
tax assets and liabilities for income tax purposes will be recorded as part of
income tax benefit as of the effective date of the change.
INDEPENDENT AUDITORS' REPORT
To the Shareholder and Board of Directors
WCI Steel, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of WCI Steel, Inc.
and subsidiaries (a wholly-owned subsidiary of Renco Steel Holdings, Inc.) as of
October 31, 1998 and 1997, and the related consolidated statements of income,
shareholder's equity (deficit), and cash flows for each of the years in the
three-year period ended October 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements 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 WCI Steel, Inc. and
subsidiaries as of October 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 31, 1998, in conformity with generally accepted accounting
principles.
/S/ KPMG LLP
- -------------------------
KPMG LLP
Cleveland, Ohio
December 3, 1998
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS
The following table sets forth certain information regarding the directors and
executive officers of Renco Steel:
Name Age Position
Ira Leon Rennert.................. 64 Chairman of the Board and Director
James N. Chapman.................. 36 President
Roger L. Fay...................... 53 Vice President and
Chief Financial Officer
Ira Leon Rennert has been Chairman, Chief Executive Officer and principal
shareholder of Renco Steel's parent company, Renco (including predecessors),
since Renco's first acquisition in 1975, and Chairman of Renco Steel since its
inception and of WCI since its formation in 1988. Renco holds controlling
interests in a number of manufacturing and distribution concerns operating in
businesses not competing with the Company, including Renco Metals, Inc., AM
General Corporation, The Doe Run Resources Corporation, and Lodestar Holdings,
Inc., for all of which he serves as a Director.
James N. Chapman has been President of Renco Steel since its inception and
Vice President-Investment Banking of Renco since December 1996. Prior to
joining Renco, Mr. Chapman was a Principal with the investment banking firm of
Fieldstone FPCG Services, L.P. from August 1990 through May 1996. Mr. Chapman
is a director of Coinmach Laundry Corporation.
Roger L. Fay has been Vice President and Chief Financial Officer of Renco
Steel since its inception and Vice President-Finance of Renco since 1983. Mr.
Fay is a certified public accountant.
Since inception, Mr. Rennert has been the sole Director of Renco Steel.
The sole director of Renco Steel serves at the pleasure of Renco Steel's sole
shareholder, Renco, for an unspecified term. The executive officers of Renco
Steel serve at the pleasure of the Renco Steel's sole director for an
unspecified term.
Executive Officers of WCI
The following sets forth the executive officers of WCI, who are not officers of
Renco Steel and who are not involved in the management or day-to-day operations
of Renco Steel:
Edward R. Caine has been President and Chief Executive Officer of WCI since
April 1996. Mr. Caine was a Director of WCI from April 1996 through December
1996. Prior to joining WCI, Mr. Caine had 37 years of experience in the steel
industry with U.S. Steel, most recently as General Manager of U.S. Steel's
Fairfield, Alabama integrated steel operations from April 1991 to March 1996.
David A. Howard has served as Vice President, Sales since August 1, 1998. Mr.
Howard, who has been with WCI since its inception in 1988, has held various
positions within WCI, including Marketing Manager, Regional Sales Manager and
General Manager of Sales.
Patrick T. Kenney has been Vice President, Operations of WCI since June 1994.
Prior to becoming Vice President of Operations, Mr. Kenney served as General
Superintendent of Finishing Operations of WCI since 1988.
Patrick G. Tatom has been Vice President, Commercial of WCI since November 1995.
He served as Vice President, Sales of WCI from February 1994 through October
1995 and as General Manager of Sales of WCI from September 1988 to February
1994.
Bret W. Wise has been Vice President, Finance and Chief Financial Officer of WCI
since September 1994. Prior to joining WCI, Mr. Wise was a partner with the
accounting and consulting firm of KPMG Peat Marwick LLP and had been with that
firm in various capacities from June 1982 through August 1994.
ITEM 11. EXECUTIVE COMPENSATION
The executive officers of Renco Steel do not receive any compensation from
Renco Steel or its subsidiaries. Renco receives a management consultant fee
from WCI. See "Item 13. Certain Relationships and Related Transactions."
The executive officers of WCI do not receive any compensation from Renco Steel.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of January 29, 1999
regarding the beneficial ownership of Common Stock by each beneficial owner of
5% or more of the Common Stock, each director and each named executive officer
of Renco Steel during the last fiscal year, and by all directors and executive
officers of Renco Steel as a group. Except as otherwise noted, the persons named
in the table below have sole voting and investment power with respect to all
shares shown as beneficially owned by them.
Beneficial Ownership
as of January 29, 1999
----------------------
Shares of
Name of Beneficial Owners and Address of 5% Beneficial Owners Common Stock Percent
The Renco Group, Inc. ....................................... 100 100.0%
30 Rockefeller Plaza, Suite 4225
New York, NY 10112
Ira Leon Rennert (1)......................................... 100 100.0%
c/o The Renco Group, Inc.
30 Rockefeller Plaza, Suite 4225
New York, NY 10112
James N. Chapman ............................................ -- --
Roger L. Fay ................................................ -- --
All directors and executive officers as a group (3 persons)... 100 100.0%
- --------------------
(1) Mr. Rennert is deemed to beneficially own the Common Stock of Renco Steel
owned by Renco due to the ownership through trusts established by him for
himself and members of his family of a total of 97.9% of the outstanding
Common Stock of Renco.
By virtue of Renco's ownership of all the outstanding shares of Common Stock of
Renco Steel, and Mr. Rennert's ownership of a majority of the Common Stock of
Renco, Mr. Rennert is in position to control actions that require the consent of
a majority of the holders of Renco Steel's outstanding shares of Common Stock,
including the election of the Board of Directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under a Management Consultant Agreement, effective October 1, 1992, as amended,
between Renco and WCI, WCI pays a monthly fee of $100,000 to Renco. The
Management Consultant Agreement provides that WCI shall not make any payment
thereunder which would violate any of its agreements with respect to any of its
outstanding indebtedness. The Management Consultant Agreement extends to October
31, 2001 and thereafter shall continue for additional terms of three years each
unless sooner terminated by either party by giving six months prior written
notice. In the year ended October 31, 1998, WCI incurred management fees in the
amount of $1,200,000. WCI believes that the cost of obtaining the type and
quality of services rendered by Renco under the Management Consultant Agreement
was, and continues to be, no less favorable than that at which WCI could obtain
such services from unaffiliated entities.
Renco Steel and WCI are included in the consolidated federal income tax return
of Renco. Under the terms of Renco Steel's tax sharing agreement with Renco,
income taxes are allocated by Renco to Renco Steel on a separate return basis,
consolidated with WCI and its subsidiaries, except that transactions between
Renco Steel and its subsidiaries and Renco and its other subsidiaries are
accounted for on a cash basis and not on an accrual basis. Similarly, under the
terms of WCI's tax sharing agreement with Renco Steel, income taxes are
allocated by Renco Steel to WCI on a separate return basis, except that
transactions between WCI and Renco Steel are accounted for on a cash basis and
not on an accrual basis. Neither Renco Steel nor WCI is entitled to the benefit
of net tax loss carryforwards, unless such tax losses were a result of timing
differences between their respective accounting for tax and financial reporting
purposes. As of October 31, 1998, WCI had no net operating tax loss
carryforwards. Renco has agreed to indemnify WCI for any tax imposed on or paid
by it in excess of the amount payable under its tax sharing agreement.
Effective with the beginning of fiscal 1999, Renco converted from a C
corporation to an S corporation due to a change in the tax laws allowing
entities with subsidiaries to elect this status. In connection with that
conversion, Renco is permitted to designate its subsidiaries as qualified S
corporation subsidiaries, and Renco Steel and WCI have been so designated.
Because of this designation, the Company's taxable income will be included in
Renco's shareholders' income tax returns. Generally, no provision for income
taxes will be included in the Company's statements of income for periods
beginning after October 31, 1998. The Company will continue to provide for state
and local income taxes for those taxing jurisdictions which do not recognize
qualified S corporation subsidiary status, although management believes such
state and local taxes will be immaterial to the Company. However, under the
"built in gains" provisions of the tax law federal and state taxes may become
payable and will be charged to the 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 S corporation election if the appreciated assets are
disposed of within the ten-year postconversion period. It is not management's
present intention to trigger any taxes under the built- in-gain provisions of
the tax laws. Accordingly, with the exception of deferred tax liabilities
related to Renco Steel's short term investments, the deferred tax assets and
deferred tax liabilities as of October 31, 1998 will be reflected as a charge
and credit to income, respectively, in the first quarter on the consolidated
statement of income in fiscal 1999.
To obtain the advantages of volume, Renco 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 Renco programs are
property, business interruption, general, product and auto liability, workers'
compensation (other than Ohio for which WCI is self insured) and casualty
umbrella. The premiums for director and officer, fidelity, fiduciary, property,
business interruption, auto liability and casualty umbrella are allocated by
Renco substantially as indicated in the underlying policies. General and product
liability and workers' compensation coverages (excluding the Ohio self insured
program) are loss sensitive programs with both fixed and variable premium
components. The fixed premium component for this coverage is allocated to each
insured Renco subsidiary based on factors that include historical guaranteed
cost premium, the overall growth of each subsidiary and an assessment of risk
based on loss experience. The fixed component is subject to revision resulting
from the insurance carrier's audit of actual premium factors. As claims (the
variable component) are paid, each insured within the loss sensitive program is
charged for its claims up to a maximum amount and subject to an overall maximum
for all insured subsidiaries. Each insured Renco 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 Renco subsidiary reaches its
individual maximum cost, the other insured subsidiaries are required to share
proportionately in the excess cost of the subsidiary which has reached its
individual maximum.
In fiscal 1998, the Company incurred costs of approximately $1.8 million under
the Renco 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.
During 1998, WCI purchased approximately $0.8 million of zinc and other alloys
from Doe Run Peru S.R. Ltd., an indirect subsidiary of Renco. The Company
believes that such purchases were on an arm's length basis at a price no less
favorable than at which WCI could obtain from unaffiliated entities.
PART IV
ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) Documents Filed as a Part of This Report.
1. Consolidated Financial Statements.
The consolidated financial statements listed below together with the reports
thereon of the independent auditors dated January 27, 1999 and December 3, 1998
for the Company and WCI respectively, are included in this report for ITEM 8.
and is incorporated by reference herein.
THE COMPANY
Consolidated Balance Sheets at October 31, 1998 and 1997.
Consolidated Statements of Income for the fiscal years ended October 31,
1998, 1997 and 1996.
Consolidated Statements of Shareholder's Equity (Deficit) for the fiscal
years ended October 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the fiscal years ended October
31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
WCI
Consolidated Balance Sheets at October 31, 1998 and 1997.
Consolidated Statements of Income for the fiscal years ended October 31,
1998, 1997 and 1996.
Consolidated Statements of Shareholder's Equity (Deficit) for the fiscal
years ended October 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the fiscal years ended October
31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
2. Financial Statement Schedule.
Independent Auditors' Report on Financial Statement Schedule.
Schedule II - Valuation and Qualifying Accounts.
3. Exhibits Required to be Filed by Item 601 of Regulation S-K.
The information called for by this paragraph is contained in the Exhibit
Index of this report which is incorporated herein by reference.
(b) Reports on Form 8-K.
No current reports on Form 8-K were filed during the last quarter of the
period covered by this report.
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Shareholder and Board of Directors
Renco Steel Holdings, Inc. and Subsidiaries:
Under date of January 27, 1999, we reported on the consolidated balance sheets
of Renco Steel Holdings, Inc. and subsidiaries and predecessor as of October 31,
1998 and 1997, and the related consolidated statements of income, shareholder's
equity (deficit), and cash flows for each of the years in the three-year period
ended October 31, 1998, which are contained as part of this report herein. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule (Schedule
II - Valuation and Qualifying Accounts) also contained as part of this report
herein. This financial statement schedule is the responsibility of Renco Steel
Holdings, Inc.'s management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits.
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.
/S/ KPMG LLP
- -------------------------
KPMG LLP
Cleveland, Ohio
January 27, 1999
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES AND PREDECESSORS
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996.
(DOLLARS IN THOUSANDS)
ADDITIONS
BALANCE AT ------------------------ BALANCE AT
BEGINNING CHARGED TO CHARGES TO DEDUCTIONS END
CLASSIFICATION OF YEAR EXPENSE (b) OTHER (c) OF YEAR
- -------------- ----------- ----------- ---------- ---------- ---------
ALLOWANCE FOR DOUBTFUL ACCOUNTS (a):
Year ended October 31, 1998...... $1,627 $ (475) $ -- $ 248 $ 904
Year ended October 31, 1997...... 1,600 64 -- 37 1,627
Year ended October 31, 1996...... 2,258 (646) -- 12 1,600
- -------------------------
(a) Allowance for doubtful accounts is shown as a reduction of accounts
receivable in the Company's Consolidated Financial Statements.
(b) Charges (credits) to expense for the provision for doubtful accounts.
(c) Trade receivables written-off.
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 on the 29th day of January
1999.
RENCO STEEL HOLDINGS, INC.
By: /s/ Ira Leon Rennert
---------------
Ira Leon Rennert
Chairman of the Board
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 indicated on the 29th day of January, 1999.
Signature Title
/s/ Ira Leon Rennert
----------------
Ira Leon Rennert Chairman of the Board and Director
/s/ James N. Chapman
---------------
James N. Chapman President
(principal executive officer)
/s/ Roger L. Fay
------------
Roger L. Fay Vice President, Chief Financial Officer
(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 or will be
sent to security holders.
Exhibit Index
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------
3.1 -- Articles of Incorporation of the Registrant, filed January 20,
1998.(9)
3.2 -- Code of Regulations of the Registrant.(9)
4.1 -- Indenture, dated as of February 3, 1998, by and between the
Registrant, as issuer, and State Street Bank and Trust
Company, as trustee, relating to the 10 7/8% Senior Secured
Notes due 2005, Series A and the 10 7/8% Senior Secured Notes
due 2005, Series B of the Registrant (containing, as exhibits,
specimens of the Series A Senior Secured Notes and Series B
Senior Secured Notes).(9)
4.2.1 -- Indenture, dated as of December 14, 1993, among Renco Steel,
Inc. (which subsequently was merged into WCI), as issuer, WCI,
as guarantor, and Shawmut Bank Connecticut, National
Association (now known as State Street Bank and Trust
Company), as trustee, relating to the 10 1/2% Senior Notes Due
2002, Series A and the 10 1/2% Senior Notes Due 2002, Series B
of WCI containing, as exhibits, specimens of the Series A
Senior Notes and Series B Senior Notes).(2a)
4.2.2 -- First Supplemental Indenture to the indenture, dated as of
December 14, 1993, among Renco Steel, Inc. (which subsequently
was merged into WCI), as issuer, WCI as guarantor, and Shawmut
Bank Connecticut, National Association (now known as State
Street Bank and Trust Company), as trustee, relating to the 10
1/2% Senior Notes Due 2002, Series A and the 10 1/2% Senior
Notes Due 2002, Series B of WCI (containing, as exhibits,
specimens of the Series A Senior Notes and Series B Senior
Notes).(2b)
4.2.3 -- Second Supplemental Indenture to the indenture, dated as of
December 14, 1993, among Renco Steel, Inc. (which subsequently
was merged into WCI), as issuer, WCI as guarantor, and Shawmut
Bank Connecticut, National Association (now known as State
Street Bank and Trust Company), as trustee, relating to the 10
1/2% Senior Notes Due 2002, Series A and the 10 1/2% Senior
Notes Due 2002, Series B of WCI (containing, as exhibits,
specimens of the Series A Senior Notes and Series B Senior
Notes).(7a)
4.3 -- Indenture, dated as of November 27, 1996, between WCI as
issuer, and Fleet National Bank (now known as State Street
Bank and Trust Company), as trustee, relating to the 10%
Senior Secured Notes due 2004, Series A, and the 10% Senior
Secured Notes due 2004, Series B of WCI (containing, as
exhibits, specimens of the Series A Senior Secured Notes and
Series B Senior Secured Notes).(7b)
10.1 -- Amended and Restated Loan and Security Agreement, dated
December 29, 1992, between WCI and Congress Financial
Corporation and Security Pacific Business Credit Inc. (the
"WCI Revolving Credit Agreement").(1)
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------
10.1.1 -- Amendment No. 1 to the WCI Revolving Credit Agreement, dated
December 14, 1993.(2c)
10.1.2 -- Amendment No. 2 to the WCI Revolving Credit Agreement, dated
July 13, 1994.(3)
10.1.3 -- Amendment No. 3 to the WCI Revolving Credit Agreement, dated
March 28, 1995.(4)
10.1.4 -- Amendment No. 4 to the WCI Revolving Credit Agreement, dated
February 23, 1996.(5)
10.1.5 -- Amendment No. 5 to the WCI Revolving Credit Agreement, dated
March 8, 1996.(5)
10.1.6 -- Amendment No. 6 to the WCI Revolving Credit Agreement, dated
June 17, 1996.(6)
10.1.7 -- Amendment No. 7 to the WCI Revolving Credit Agreement, dated
November 27, 1996.(7c)
10.1.8 -- Amendment No. 8 to the WCI Revolving Credit Agreement, dated
October 31, 1997.(8)
10.1.9 -- Guarantee, dated as of October 31, 1997, by WCI Steel
Production Control Services Inc., WCI Steel Metallurgical
Services Inc., WCI and Niles Properties, Inc. in favor of
Congress Financial Corporation, as lender and agent, and
BankAmerica Business Credit, Inc. as lender.(8)
10.1.10 -- Guarantee, dated as of October 31, 1997, by WCI Steel
Production Control Services Inc., WCI Steel Metallurgical
Services Inc. and Niles Properties, Inc. in favor of Congress
Financial Corporation, as lender and agent, and BankAmerica
Business Credit, Inc. as lender.(8)
10.2 -- Intercreditor Agreement, dated December 14, 1993, among the
Shawmut Bank Connecticut, National Association, Congress
Financial Corporation and Security Pacific Business Credit
Inc.(2)
10.3 -- Intercreditor Agreement, dated November 27, 1996, between
Fleet National Bank and Congress Financial Corporation.(7)
10.4 -- Intercreditor Agreement, dated November 27, 1996, among Fleet
National Bank, Bank One Trust Company, N.A. and WCI.(7)
10.5 -- Indemnification Agreement, dated as of November 27, 1996,
between WCI and Bank One Trust Company, N.A.(7)
10.6 -- Loan Agreement, dated as of May 1, 1990, between the Director
of Development of the State of Ohio and Youngstown Sinter
Company (Ohio Enterprise Bond Fund Program).(1)
10.7 -- Agreement, dated June 11, 1990, between the City of
Youngstown, Ohio and Youngstown Sinter Company (with UDAG
Grant Agreement).(1)
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------
10.8 -- Pledge Agreement, dated as of February 3, 1998, by the
Registrant, as pledgor, in favor of State Street Bank and
Trust Company, as trustee.(9)
21 -- List of Subsidiaries of Registrant.(9)
27 -- Financial Data Schedule.
- --------------------------------------------------------------------------------
(1) Incorporated by reference to Exhibit 10.4 filed with WCI's Registration
Statement on Form S-4, as amended (File No. 33-58648), originally filed
with the Commission on February 23, 1993.
Incorporated by reference to the following exhibits filed with WCI's
Registration Statement on Form S-4 (File No. 33-74108), originally filed
with the Commission on January 14, 1994:
(2a) Exhibit 4.1
(2b) Exhibit 4.1.1
(2c) Exhibit 10.4.1
(3) Incorporated by reference to Exhibit 10.4.5 filed with WCI's Pre-
Effective Amendment No. 3 to Registration Statement on Form S-1 (File No.
33-75722), filed with the Commission on May 4, 1994.
(4) Incorporated by reference to WCI's Form 10-Q (File No. 1-13028) for the
quarterly period ended April 30, 1995.
(5) Incorporated by reference to WCI's Form 10-Q (File No. 1-13028) for the
quarterly period ended April 30, 1996.
(6) Incorporated by reference to WCI's Form 10-Q (File No. 1-13028) for the
quarterly period ended July 31, 1996.
Incorporated by reference to the following exhibits filed with WCI's
Registration Statement on Form S-4, as amended (File No. 333-18019),
originally filed with the Commission on December 17, 1996:
(7a) Exhibit 4.1.2
(7b) Exhibit 4.2
(7c) Exhibit 10.4.10
(8) Incorporated by reference to WCI's Form 10-K (File No. 333-18019) for the
fiscal year ended October 31, 1997.
(9) Incorporated by reference to the same numbered exhibit filed with the
Company's Registration Statement on Form S-4 (File No. 333-48245),
originally filed with the Commission on March 19, 1998.