<Page>
PAGE 1
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2002.
-----------------
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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1040 Pine Ave., S.E., Warren, Ohio 44483-6528
(Address of principal executive offices) (Zip Code)
(330) 399-6884
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ ] Yes [X] No
Note: The Registrant files pursuant to an indenture but is not
otherwise subject to Section 13 or 15(d) filing requirements.
As of June 14, 2002, the registrant had 100 shares of its common stock,
no par value, $.01 stated value, outstanding.
- --------------------------------------------------------------------------------
<Page>
PAGE 2
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
INDEX
--------------------------------
<Table>
<Caption>
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS OF RENCO STEEL HOLDINGS, INC.
Consolidated Balance Sheets as of
April 30, 2002 and October 31, 2001. 3
Consolidated Statements of Operations for the
three months and six months ended
April 30, 2002 and 2001. 4
Consolidated Statements of Cash Flows for the
six months ended April 30, 2002 and 2001. 5
Condensed Notes to Consolidated Financial Statements. 6
FINANCIAL STATEMENTS OF WCI STEEL, INC.
Consolidated Balance Sheets as of
April 30, 2002 and October 31, 2001. 10
Consolidated Statements of Operations for the
three and six months ended April 30, 2002 and 2001. 11
Consolidated Statements of Cash Flows for the
six months ended April 30, 2002 and 2001. 12
Notes to Consolidated Financial Statements. 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 29
PART II OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
</Table>
<Page>
PAGE 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amount)
<Table>
<Caption>
April 30, October 31,
2002 2001
--------- ---------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents ............... $ 20 $ 25
Restricted cash and cash equivalents .... 3,882 32,244
Accounts receivable, less allowance for
doubtful accounts of $1,200 and $3,100,
respectively .......................... 62,818 48,875
Inventories ............................. 73,027 87,847
Prepaid expenses ........................ 3,617 1,049
--------- ---------
Total current assets ............... 143,364 170,040
Property, plant and equipment, net ........ 228,547 233,267
Intangible pension asset, net ............. 33,438 36,470
Other assets, net ......................... 5,267 6,127
--------- ---------
Total assets ....................... $ 410,616 $ 445,904
========= =========
LIABILITIES and SHAREHOLDER'S DEFICIT
Current liabilities
Current portion of long-term debt ....... $ 120,909 $ 120,334
Accounts payable ........................ 36,956 45,939
Accrued liabilities ..................... 87,391 79,607
Due to related party .................... 4,626 1,125
--------- ---------
Total current liabilities .......... 249,882 247,005
Long-term debt, excluding current portion . 311,882 301,111
Postretirement health care benefits ....... 121,695 118,214
Pension benefits, excluding current portion 25,880 35,062
Other liabilities ......................... 10,017 10,063
--------- ---------
Total liabilities .................. 719,356 711,455
--------- ---------
Shareholder's deficit
Common stock, no par value, stated value
$.01 per share, 850 shares authorized,
100 shares issued and outstanding ..... -- --
Additional paid-in capital .............. 8,425 5,118
Accumulated deficit ..................... (317,165) (270,669)
--------- ---------
Total shareholder's deficit ........ (308,740) (265,551)
Commitments and contingencies ............. -- --
--------- ---------
Total liabilities and
shareholder's deficit ......... $ 410,616 $ 445,904
========= =========
</Table>
See accompanying notes to consolidated financial statements.
<Page>
PAGE 4
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
<Table>
<Caption>
Three months Six months
ended April 30, ended April 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales .................... $ 127,678 $ 99,268 $ 217,282 $ 197,459
Operating costs and expenses
Cost of products sold ....... 124,443 100,953 224,579 202,922
Depreciation and amortization 5,452 6,549 10,929 13,155
Selling, general and
administrative expenses .... 2,054 3,750 5,454 9,579
Asset impairment and related
charges (note 8) ........... -- 3,909 -- 3,909
--------- --------- --------- ---------
131,949 115,161 240,962 229,565
--------- --------- --------- ---------
Operating loss ............... (4,271) (15,893) (23,680) (32,106)
--------- --------- --------- ---------
Other income (expense)
Interest expense ............ (11,788) (11,398) (23,278) (22,795)
Interest, investment and
other income (expense), net 22 867 462 (8,457)
--------- --------- --------- ---------
(11,766) (10,531) (22,816) (31,252)
--------- --------- --------- ---------
Loss before income taxes ..... (16,037) (26,424) (46,496) (63,358)
Income tax benefit ........... -- -- -- --
--------- --------- --------- ---------
Net loss ................... $ (16,037) $ (26,424) $ (46,496) $ (63,358)
========= ========= ========= =========
</Table>
See accompanying notes to consolidated financial statements.
<Page>
PAGE 5
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<Table>
<Caption>
Six months
ended April 30,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................... $(46,496) $(63,358)
Adjustments to reconcile net loss
to net cash used by operating activities
Depreciation and amortization ............. 10,929 11,670
Amortization of deferred maintenance costs -- 1,484
Amortization of financing costs ........... 991 948
Postretirement health care benefits ....... 4,081 6,601
Pension benefits .......................... 318 2,955
Provision for losses on accounts receivable 247 2,300
Gain on other investments ................. -- (191)
Asset impairment and other charges ........ -- 14,745
Other ..................................... 83 84
Cash provided (used) by changes in certain
assets and liabilities
Accounts receivable ....................... (14,190) (4,079)
Inventories ............................... 14,820 9,167
Prepaid expenses and other assets ......... (2,730) (3,256)
Accounts payable .......................... (8,983) (5,377)
Accrued liabilities ....................... 716 1,503
Other liabilities ......................... (46) 508
Due to related party ...................... 3,502 --
-------- --------
Net cash used by operating activities ..... (36,758) (24,296)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ....... (6,231) (4,112)
Other investments, net ........................... -- 5,800
-------- --------
Net cash (used) provided by investing
activities ............................... (6,231) 1,688
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in WCI Revolver ....................... 11,664 --
Other changes in long-term debt .................. (349) (63)
Capital contribution by parent ................... 3,307 --
-------- --------
Net cash provided (used) by financing
activities ............................... 14,622 (63)
-------- --------
Net decrease in cash and cash equivalents .......... (28,367) (22,671)
Total cash and cash equivalents at
beginning of period ............................... 32,269 90,607
-------- --------
Total cash and cash equivalents at end of period ... $ 3,902 $ 67,936
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest .................... $ 18,971 $ 21,849
Cash paid for income taxes ................ -- --
</Table>
See accompanying notes to consolidated financial statements.
<Page>
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and six months ended April 30, 2002 and 2001
( Unaudited )
NOTE 1: BASIS OF PRESENTATION
Renco Steel Holdings, Inc. (Renco Steel) is a holding company
incorporated in the state of Ohio 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). Accordingly the accompanying financial statements include the
accounts of Renco Steel and WCI (collectively, the Company).
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods. The results of operations for the
three and six months ended April 30, 2002 are not necessarily indicative of the
results to be expected for the full year.
These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the fiscal year ended October 31, 2001.
NOTE 2: CASH AND CASH EQUIVALENTS
Cash and cash equivalents of Renco Steel and WCI include cash on hand
and short-term investments with maturities of three months or less from the date
of acquisition. Renco Steel is generally restricted from utilizing the cash and
cash equivalents of WCI under the terms of the indenture governing WCI's 10%
Senior Secured Notes due 2004, except as permitted for the distribution of
dividends to Renco Steel.
NOTE 3: INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method. The composition of
inventories at April 30, 2002 and October 31, 2001 was as follows:
<Table>
<Caption>
April 30, October 31,
2002 2001
(Unaudited)
----------- ----------
(Dollars in thousands)
Raw materials ............................ $18,606 $33,710
Finished and semi-finished product ....... 54,268 54,042
Supplies ................................. 153 95
------- -------
73,027 87,847
Less LIFO reserve ........................ -- --
------- -------
$73,027 $87,847
======= =======
</Table>
<Page>
PAGE 7
NOTE 4: RELATED PARTY TRANSACTIONS
On February 27, 2002, Renco Steel borrowed $3.4 million from Renco
under terms of a promissory note. On July 30, 2001, Renco Steel also borrowed
$1.1 million from Renco under the terms of a promissory note. Renco's right to
payment under both loans is contractually subordinated to Renco Steel's 10 7/8%
Senior Secured Notes due 2005 ("Senior Secured Notes"). Both loans bear interest
at a rate of 8.75% and are payable upon demand. The loans and accrued interest
thereon are reflected as due to related party on the Consolidated Balance Sheet
at April 30, 2002.
As of April 30, 2002, Renco owned $62,320,000 principal amount of Renco
Steel's Senior Secured Notes after purchasing an additional $3.0 million
principal amount during the second fiscal quarter of 2002. Renco has irrevocably
waived its right to receive interest in regard to its ownership of the Senior
Secured Notes from February 1, 2001 to and including July 31, 2002. Accordingly,
a capital contribution of $3.3 million has been recorded in the six months ended
April 30, 2002 and interest expense of the same amount was recorded in the
Company's Statement of Operations for the same period. From February 1, 2001,
Renco's aggregate capital contribution has been $8.15 million in respect to its
waiver of interest.
NOTE 5: ENVIRONMENTAL MATTERS and OTHER CONTINGENCIES
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 management. 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 continue to change and have generally become
more stringent, 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 financial condition
and results of operations.
WCI is subject to a consent decree as a result of a civil action
instituted by the Department of Justice (DOJ), on behalf of the Environmental
Protection Agency (EPA). The consent decree requires WCI to complete certain
supplemental environmental projects estimated to cost $2.0 million that will be
expended by late 2002. These projects include sediment removal from the Mahoning
River at an estimated remaining cost of $0.8 million and the installation of a
liner for a surface impoundment estimated to cost approximately $1.2 million.
The consent decree also provides for stipulated penalties in the event of
noncompliance which WCI does not believe will be material.
As a condition of a previous Resource Conservation and Recovery Act
(RCRA) operating permit, WCI is required to undertake a corrective action
program with respect to historical material handling practices at the Warren
facility. WCI has completed the initial phase of the first investigation step of
the corrective action program, the RCRA
<Page>
PAGE 8
Facility Investigation (RFI), and has submitted its report to the EPA. WCI and
the EPA agreed that additional sampling would be required to complete a full RFI
which is expected to be completed by the end of 2003. The RFI workplan
identifies thirteen historical solid waste management units to be investigated.
The final scope of corrective action required to remediate 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 (ERISA), the National
Labor Relations Act (NLRA) 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 filed an appeal regarding the court's decision to
dismiss, which was heard in June 1998. In March 1999, the appellate court upheld
the dismissal of the claims under ERISA and common law, but reversed the
dismissal of the NLRA claim and remanded to the district court for further
proceedings. On October 9, 2000 the court granted WCI's motion to dismiss this
action and entered judgement in favor of WCI and the USWA. The plaintiffs filed
an appeal regarding the court's decision to dismiss which was heard on April 23,
2002. On May 24, 2002 the appellate court affirmed the decision to dismiss this
action.
In addition to the above-described 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 quarter 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.
NOTE 6: SEGMENT REPORTING
The Company applies Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information,"
which requires that companies disclose segment data based on how management
makes resource allocation decisions and evaluates segment operating performance.
<Page>
PAGE 9
In applying the Statement, the Company considered its operating and
management structure and the types of information subject to regular review by
its "chief operating decision maker." On this basis, the Company's only
reportable segment is WCI. The segment disclosure is presented on this basis for
the six months ended April 30, 2002 and April 30, 2001, respectively.
All revenues are generated by WCI. Geographic revenues are based on the
region in which the customer invoice was generated and all revenue was generated
within the United States. The Company measures segment profit for internal
reporting purposes as net income (loss).
A reconciliation of segment loss to consolidated net loss is presented
below for the six months ended April 30, 2002 and 2001:
<Table>
<Caption>
Six months ended
April 30,
2002 2001
------------------------
WCI .................................. $(37,385) $(54,718)
Other ................................ (9,111) (8,640)
-------- --------
Total Consolidated .... $ 46,496) $(63,358)
======== ========
</Table>
NOTE 7: OTHER MATTERS
In the past, Renco Steel's primary sources of liquidity were
investments in limited partnerships (which were liquidated in 2001) and dividend
payments from WCI. Renco Steel's sole source of liquidity currently is advances
and contributions from its parent, Renco. Dividends from WCI are currently
prohibited under the terms of the indenture governing WCI's 10% Senior Secured
Notes due 2004 due to WCI's significant cumulative losses, as defined. WCI is
required to earn in excess of its cumulative losses before it is permitted to
resume dividend payments to Renco Steel. At April 30, 2002, cumulative losses
were $146.0 million and may increase further in 2002 based upon WCI's outlook
(see Note 5 to the consolidated financial statements of WCI). It is not
anticipated that WCI will be able to generate earnings in excess of its
cumulative losses in the foreseeable future and therefore, Renco Steel does not
expect to receive any dividends from WCI. Support from Renco will be necessary
for Renco Steel to meet its debt service, and to a much lesser extent, its
administrative requirements. As of April 30, 2002, Renco has provided loans
amounting to $4.5 million and has irrevocably waived its right to collect
interest of $8.15 million in the aggregate from February 1, 2001 through April
30, 2002 on the Senior Secured Notes it owns. Renco may make future advances or
contributions to Renco Steel and may waive its right to future interest payments
on the Senior Secured Notes it owns, however, Renco has no obligation to do so.
<Page>
PAGE 10
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amount)
<Table>
<Caption>
April 30, October 31,
2002 2001
--------- ---------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents .................. $ 3,882 $ 32,244
Accounts receivable, less allowance
for doubtful accounts of $1,200 and
$3,100, respectively ...................... 62,818 48,875
Inventories ................................ 73,027 87,075
Prepaid expenses and other current assets .. 3,617 1,049
--------- ---------
Total current assets ................ 143,344 169,243
Property, plant and equipment, net ........... 190,265 193,453
Intangible pension asset, net ................ 36,369 39,556
Other assets, net ............................ 3,774 4,361
--------- ---------
Total assets ........................ $ 373,752 $ 406,613
========= =========
LIABILITIES and SHAREHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt .......... $ 1,080 $ 536
Accounts payable ........................... 36,956 45,939
Accrued liabilities ........................ 85,590 77,679
--------- ---------
Total current liabilities ........... 123,626 124,154
Long-term debt, excluding current portion .... 311,822 301,111
Postretirement health care benefits .......... 121,224 117,719
Pension benefits ............................. 25,822 35,000
Other liabilities ............................ 10,017 10,063
--------- ---------
Total liabilities ................... 592,571 588,047
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 .............................. -- --
Additional paid-in capital ................. 279 279
Accumulated deficit ........................ (219,098) (181,713)
--------- ---------
Total shareholder's equity (deficit) (218,819) (181,434)
Commitments and contingencies ................ -- --
--------- ---------
Total liabilities and
shareholder's equity (deficit) .... $ 373,752 $ 406,613
========= =========
</Table>
See accompanying notes to consolidated financial statements.
<Page>
PAGE 11
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
<Table>
<Caption>
Three months Six months
ended April 30, ended April 30,
2002 2001 2002 2001
------------------------ ------------------------
Net sales ........................ $ 127,678 $ 99,268 $ 217,282 $ 197,459
Operating costs and expenses
Cost of products sold ......... 124,534 101,026 223,988 203,066
Depreciation and amortization . 4,686 5,647 9,397 11,352
Selling, general and
administrative expenses ...... 2,043 3,722 5,427 9,543
Unusual charges ............... -- 3,909 -- 3,909
--------- --------- --------- ---------
131,263 114,304 238,812 227,870
--------- --------- --------- ---------
Operating income(loss) ........... (3,585) (15,036) (21,530) (30,411)
--------- --------- --------- ---------
Other income (expense)
Interest expense .............. (8,266) (7,983) (16,317) (15,968)
Interest and other income
(expense), net ............... 22 811 462 (8,339)
--------- --------- --------- ---------
(8,244) (7,172) (15,855) (24,307)
--------- --------- --------- ---------
Income (loss) before income
taxes ........................ (11,829) (22,208) (37,385) (54,718)
Income tax (benefit) expense ..... -- -- -- --
--------- --------- --------- ---------
Net income (loss) ................ $ (11,829) $ (22,208) $ (37,385) $ (54,718)
========= ========= ========= =========
</Table>
See accompanying notes to consolidated financial statements.
<Page>
PAGE 12
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<Table>
<Caption>
Six months
ended April 30,
2002 2001
----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................ $(37,385) $(54,718)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating
activities:
Depreciation and amortization ............... 9,397 9,868
Amortization of deferred maintenance costs .. -- 1,484
Amortization of financing costs ............. 689 645
Postretirement health care benefits ......... 4,105 6,626
Pension benefits ............................ 476 3,112
Provision for losses on accounts receivable . 247 2,300
Asset impairment and other charges .......... -- 14,393
Other ....................................... 83 84
Cash provided (used) by changes in certain
assets and liabilities
Accounts receivable ........................ (14,190) (4,079)
Inventories ................................ 14,048 9,129
Prepaid expenses and other assets .......... (2,731) (3,256)
Accounts payable ........................... (8,983) (5,377)
Accrued liabilities ........................ 844 1,574
Other liabilities .......................... (46) 508
-------- --------
Net cash provided (used) by operating
activities ............................... (33,446) (17,707)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ... (6,231) (4,112)
-------- --------
Net cash used by investing activities ..... (6,231) (4,112)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under Revolver Credit Facility 11,664 --
Other changes in long-term debt .............. (349) (63)
-------- --------
Net cash provided (used) by financing
activities ................................ 11,315 (63)
-------- --------
Net increase (decrease) in cash and
cash equivalents ............................ (28,362) (21,882)
Cash and cash equivalents at beginning
of year ..................................... 32,244 89,478
-------- --------
Cash and cash equivalents at end of period ... $ 3,882 $ 67,596
======== ========
Supplemental disclosure of cash flow
information
Cash paid for interest .................... $ 15,640 $ 15,324
Cash paid for income taxes ................ -- --
</Table>
See accompanying notes to consolidated financial statements.
<Page>
PAGE 13
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and six months ended April 30, 2002 and 2001
( Unaudited )
NOTE 1: BASIS OF PRESENTATION
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). The financial information included herein is
unaudited; however, such information reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods. The results
of operations for the three and six months ended April 30, 2002 are not
necessarily indicative of the results to be expected for the full year.
These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the fiscal year ended October 31, 2001.
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method. Market value is determined
based on expected selling price of each product. Inventories consist of the
following:
<Table>
<Caption>
April 30, October 31,
2002 2001
(Unaudited)
----------- ----------
(Dollars in Thousands)
Raw materials .................................. $18,606 $33,542
Finished and semi-finished product ............. 54,268 53,438
Supplies ....................................... 153 95
------- -------
73,027 87,075
Less LIFO reserve .............................. -- --
------- -------
$73,027 $87,075
======= =======
</Table>
<Page>
PAGE 14
NOTE 3: LONG-TERM DEBT
Long-term debt consists of the following:
<Table>
<Caption>
April 30, October 31,
2002 2001
-------- --------
(Unaudited)
(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 5.63%
at April 30, 2002 payable monthly . 11,664 --
Other ............................... 1,298 1,647
-------- --------
312,962 301,647
Less current portion of
long-term debt .................... 1,080 536
-------- --------
$311,882 $301,111
======== ========
</Table>
The $300 million 10% Senior Secured Notes due 2004 (Senior Secured
Notes) are secured by a first priority lien on substantially all of the existing
property, plant and equipment of the Company. 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, holds a second priority lien on the security for the Senior
Secured Notes.
The Company has a $100,000,000 Revolver secured by inventories and
receivables and subject to eligibility requirements, as defined, reduced by any
outstanding letters of credit. The Revolver is subject to a monthly service fee
of $15,000 and an annual commitment fee of 0.5% of the unused balance up to
$60,000,000 payable monthly. There were borrowings of $11,664,000 outstanding
under the Revolver as of April 30, 2002. The Revolver, which expires December
29, 2003, also provides for up to an aggregate amount of $20,000,000 in letters
of credit. At April 30, 2002 the Company had borrowing availability of
$68,156,000 based on eligible inventory and receivables after deducting
$11,664,000 of borrowings outstanding and $14,870,000 in letters of credit
outstanding or committed and before reflecting a $25,000,000 minimum borrowing
availability covenant as discussed below. The Revolver is subject to a penalty
of $250,000 if terminated before October 31, 2003.
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. On January 25, 2002 the Company
and its lenders under the Revolver agreed to amend the loan agreement to require
the
<Page>
PAGE 15
Company to maintain a minimum net worth, as defined, of not less than the
following for each period indicated: negative $225 million through January 31,
2002, negative $240 million from February 1, 2002 through April 30, 2002,
negative $255 million from May 1, 2002 through July 31, 2002, and negative $260
million on August 1, 2002 and thereafter. In addition, the Company is required
to maintain minimum borrowing availability under the Revolver of $25 million.
This amendment also changes the interest charged from prime rate to prime rate
plus 1.5% or as to Eurodollar Rate Loans, a rate of 3.5% in excess of the
Adjusted Eurodollar Rate applicable for the interest period selected by the
Company. 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, there were
no amounts available for dividends and other transactions with affiliates at
April 30, 2002.
NOTE 4: ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES
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 management. 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 continue to change and have
generally become more stringent, and the Company 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 the Company's financial condition and results of operations.
The Company is subject to a consent decree as a result of a civil action
instituted by the Department of Justice (DOJ), on behalf of the Environmental
Protection Agency (EPA). The consent decree requires the Company to complete
certain supplemental environmental projects estimated to cost $2.0 million that
will be expended by late 2002. These projects include sediment removal from the
Mahoning River at an estimated remaining cost of $0.8 million and the
installation of a liner for a surface impoundment estimated to cost
approximately $1.2 million. The consent decree also provides for stipulated
penalties in the event of noncompliance which the Company does not believe will
be material.
As a condition of a previous Resource Conservation and Recovery Act (RCRA)
operating permit, the Company is required to undertake a corrective action
program with respect to historical material handling practices at the Warren
facility. The Company has completed the initial phase of the first investigation
step of the corrective action program, the RCRA Facility Investigation (RFI),
and has submitted its
<Page>
PAGE 16
report to the EPA. The Company and the EPA agreed that additional sampling would
be required to complete a full RFI which is expected to be completed by the end
of 2003. The RFI workplan identifies thirteen historical solid waste management
units to be investigated. The final scope of corrective action required to
remediate 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
(ERISA), the National Labor Relations Act (NLRA) 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 filed an appeal
regarding the court's decision to dismiss, which was heard in June 1998. In
March 1999, the appellate court upheld the dismissal of the claims under ERISA
and common law, but reversed the dismissal of the NLRA claim and remanded to the
district court for further proceedings. On October 9, 2000 the court granted the
Company's motion to dismiss this action and entered judgement in favor of the
Company and the USWA. The plaintiffs filed an appeal regarding the court's
decision to dismiss which was heard on April 23, 2002. On May 24, 2002 the
appellate court affirmed the decision to dismiss this action.
In addition to the above-described 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 quarter 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.
NOTE 5: OTHER MATTERS
Based on WCI's current order intake rate and backlog, the Company expects
shipping volume to be approximately 335,000 tons in each of the third quarter
and fourth quarter of 2002. WCI's order backlog was approximately 352,000 tons
at April 30, 2002 compared to 158,000 at April 30, 2001 and 250,000 at January
31, 2002. We expect net sales per ton shipped to increase approximately 10%
during the third quarter compared to the second quarter. WCI expects cost of
products sold per
<Page>
PAGE 17
ton shipped to increase approximately 2% in the third quarter compared to the
second quarter (excluding the favorable adjustment to inventory valuation
reserves recorded in the second quarter totaling $4.7 million) due primarily to
changes in product mix with capacity utilization at 90% or greater. Based on
these expectations, the Company believes that it has adequate availability of
cash resources to maintain operations through at least fiscal 2002.
Significant uncertainty remains regarding the short-term as well as
long-term condition of the steel market. Recent improvements in order intake
rates and pricing could be reversed by a number of factors including increasing
domestic supply through the restart of closed facilities, increases in steel
imports due to rising domestic steel prices or the granting of exemptions to
tariffs imposed as a result of the Section 201 investigation or the failure of
an economic recovery to materialize or be sustained. If the volume or net sales
prices expected to be realized by WCI during the third and fourth quarters are
not realized or sustained due to these or other factors, WCI may not have
adequate availability under its existing financing arrangements to sustain its
operations and may require additional sources of financing. WCI cannot assure
that it has the ability to obtain such additional financing or what the terms of
such additional financing might be. Failure to obtain such additional financing
in these circumstances would likely have a material adverse effect on WCI's
operations.
<Page>
PAGE 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATION
Three months ended April 30, 2002 compared to
Three months ended April 30, 2001
Net sales for the three months ended April 30, 2002 were $127.7 million on
355,735 tons shipped, representing a 28.6% increase in net sales and a 47.5%
increase in tons shipped compared to the three months ended April 30, 2001. When
the second fiscal quarter of 2002 is compared to the prior quarter ended January
31, 2002, net sales and shipping volume also showed significant increases of
42.5% and 45.3%, respectively. However, net sales per ton shipped of $359 for
the three months ended April 30, 2002 was 12.9% lower than the net sales per ton
shipped of $412 for the comparable prior year period ended April 30, 2001, with
net selling prices down 4.2% in addition to a less favorable product mix. Net
sales per ton decreased a more modest 1.9% for the second fiscal quarter of 2002
compared to the first fiscal quarter of 2002, with net selling prices increasing
1.5% for the second fiscal quarter. A less favorable product mix and reduced
steam sales to a coke plant adjacent to WCI's facility however offset the impact
of these selling price increases. Shipments of custom carbon, alloy and
electrical steels accounted for 47.7% of total shipments for the three months
ended April 30, 2002 compared to 56.8% the three months ended April 30, 2001.
The improvements in shipping volume and increased net selling prices in the
second quarter compared to the first quarter resulted from a variety of factors
including a decrease in domestic supply due to the closing of facilities during
the last several years, the implementation of tariffs under a favorable Section
201 decision on certain imported steel in April 2002, a conclusion to inventory
reductions by customers and a slight improvement in overall economic activity.
<Page>
PAGE 19
The table below shows WCI's product mix for the three months ended
April 30, 2002 and April 30, 2001.
<Table>
<Caption>
Net Tons Shipped Percent of Total
------------------- ------------------
Three Months Ended Three Months Ended
April 30, April 30,
------------------- ------------------
2002 2001 2002 2001
------- ------- ------- -------
CUSTOM PRODUCTS:
Hot Rolled .......... 109,797 76,847 30.9% 31.9%
Cold Rolled ......... 6,598 4,325 1.9% 1.8%
Coated products ..... 53,040 55,610 14.9% 23.1%
------- ------- ------- -------
Total Custom Products .. 169,435 136,782 47.7% 56.8%
Total Commodity Products 186,300 104,349 52.3% 43.2%
------- ------- ------- -------
Total Steel Products ... 355,735 241,131 100.0% 100.0%
======= ======= ======= =======
</Table>
The following table sets forth the percentage of WCI's net tons shipped
to various markets for the three months ended April 30, 2002 and April 30, 2001.
<Table>
<Caption>
Three Months Ended
April 30,
CUSTOMER CATEGORY 2002 2001
- ------------------------------------------ ------------------
Conversion/further processing.............. 61.7% 47.0%
Steel service centers...................... 16.4% 20.9%
Construction............................... 11.9% 16.2%
Electrical equipment....................... 2.1% 5.5%
Direct automotive.......................... 3.8% 5.1%
Other...................................... 4.1% 5.3%
----- -----
Total............................. 100.0% 100.0%
</Table>
Gross margin (sales less cost of products sold) was $3.2 million for
the three months ended April 30, 2002 compared to gross margin (loss) of ($1.7)
million for the three months ended April 30, 2001. The increase in gross margin
reflects the increased shipping volume and lower production costs resulting from
a higher production volume and its effect on fixed operating costs per ton along
with favorable adjustments to lower of cost or market inventory valuation
reserves of $4.7 million during the second fiscal quarter based on lower
production costs per ton, partially offset by lower transaction prices as
discussed above. Excluding the favorable inventory adjustments for the 2002
period, the gross margin (loss) was ($1.5) million. Production volume for the
three months ended April 30, 2002 was approximately 90% of operating capacity
compared to approximately 73% for the three months ended April 30, 2001.
<Page>
PAGE 20
Operating loss was ($4.3) million, or ($12) per ton, for the three
months ended April 30, 2002 compared to operating loss of ($15.9) million, or
($66) per ton, for the three months ended April 30, 2001. The decrease in
operating loss reflects the improved gross margin discussed above in addition to
a $1.6 million gain realized from the resolution of contract issues relating to
the sale of a third party owned coke plant adjacent to WCI's facility. The
operating loss for the 2001 period included a charge of $3.9 million associated
with WCI's wholly-owned subsidiary, Youngstown Sinter Company, announced
indefinite idling of its operating facility by July 15, 2001. Excluding the gain
and adjustments to inventory valuation reserves for the 2002 period and the
impairment charge in the 2001 period, the operating loss was ($10.6) million, or
($30) per ton for the three months ended April 30, 2002 compared to an operating
loss of ($12.0) million, or ($50) per ton for the three months ended April 30,
2001.
Interest, investment and other income (expense), net was $22,000 for
the three months ended April 30, 2002 compared to $0.9 million for the three
months ended April 30, 2001. This decrease was due primarily to a decrease in
interest income resulting from lower cash balances for the three months ended
April 30, 2002 compared to the three months ended April 30, 2001.
As a result of the items discussed above, the Company had a loss before
taxes of ($16.0) million for the three months ended April 30, 2002 compared to a
loss before taxes of ($26.4) million for the three months ended April 30, 2001.
Effective November 1, 1998, the Company was designated as a qualified
subchapter S subsidiary by Renco. Accordingly, the Company is generally not
subject to income taxes.
Six Months Ended April 30, 2002 Compared to
Six Months Ended April 30, 2001.
Net sales for the six months ended April 30, 2002 were $217.3 million
on 600,553 tons shipped, representing a 10.0% increase in net sales and a 25.6%
increase in tons shipped compared to the six months ended April 30, 2001.
Shipping volume for the 2002 period increased, predominantly in the second
fiscal quarter, as a result of a variety of favorable factors that included a
decrease in domestic supply due to the closing of facilities during the past
several years, the implementation of tariffs under a favorable Section 201
decision on certain imported steel in April 2002, a conclusion to inventory
reductions by customers and a slight improvement in overall economic activity.
Net sales per ton shipped decreased 12.3% to $362 in the 2002 period compared to
$413 for the 2001 period, with net selling prices down 6.2% coupled with a less
favorable product mix. Shipments of custom carbon, alloy and electrical steels
accounted for 47.1% of total shipments for the six months ended April 30, 2002
compared to 54.6% for the six months ended April 30, 2001.
<Page>
PAGE 21
The table below shows WCI's product mix for the six months ended April
30, 2002 and April 30, 2001.
<Table>
<Caption>
Net Tons Shipped Percent of Total
------------------- ------------------
Six Months Ended Six Months Ended
April 30, April 30,
2002 2001 2002 2001
------- ------- ------- -------
CUSTOM PRODUCTS:
Hot Rolled ............ 179,541 153,810 29.9% 32.2%
Cold Rolled ........... 12,659 8,374 2.1% 1.8%
Coated products ....... 90,710 98,493 15.1% 20.6%
------- ------- ------- -------
Total Custom Products .... 282,910 260,677 47.1% 54.6%
Total Commodity Products . 317,643 217,477 52.9% 45.4%
------- ------- ------- -------
Total Steel Products ..... 600,553 478,154 100.0% 100.0%
======= ======= ======= =======
</Table>
The following table sets forth the percentage of WCI's net tons shipped
to various markets for the six months ended April 30, 2002 and April 30, 2001.
<Table>
<Caption>
Six Months Ended
April 30,
CUSTOMER CATEGORY 2002 2001
- ----------------------------------------- ------------------------
Conversion/further processing............ 60.1% 49.5%
Steel service centers.................... 15.5% 21.6%
Construction............................. 12.0% 13.8%
Electrical equipment..................... 3.1% 5.2%
Direct automotive........................ 4.4% 5.1%
Other.................................... 4.9% 4.8%
----- -----
Total.................................... 100.0% 100.0%
===== =====
</Table>
Gross margin (loss) (sales less cost of products sold) was ($7.3)
million for the six months ended April 30, 2002 compared to gross margin (loss)
of ($5.5) million for the six months ended April 30, 2001. The increase in gross
margin (loss) reflects the lower transaction prices as a result of less
favorable product mix discussed above partially offset by lower per ton
production costs resulting from significantly higher volume and its effect on
fixed operating costs per ton and higher shipping volume. The loss in the 2002
period included and was partially offset by favorable adjustments to inventory
valuation reserves of $3.5 million. Excluding these favorable adjustments the
gross margin (loss) was ($10.8) million for the 2002 period. Production volume
during the six months ended April 30, 2002 was approximately 83% of operating
capacity compared to approximately 67% in the 2001 period.
Operating loss was ($23.7) million, or ($39) per ton, for the six
months ended April 30, 2002 compared to operating income (loss) of ($32.1)
million, or ($67) per ton, for the six months ended April 30,
<Page>
PAGE 22
2001. The decrease in operating loss reflects lower depreciation expense and the
decrease in gross margin discussed above and also included significant
non-recurring items for both periods. The operating loss for the 2002 period
included a $1.6 million gain realized from the resolution of contract issues
relating to the sale of a third party owned coke plant adjacent to WCI's
facility. The operating loss for the 2001 period included a charge of $3.9
million associated with the Company's wholly-owned subsidiary, Youngstown Sinter
Company, announced indefinite idling of its operating facility by July 15, 2001
and a charge of $2.1 million to establish a reserve for amounts due from a
financially distressed steel company. Excluding the gain and adjustments to
inventory valuation reserves for the 2002 period and the non-recurring charges
in the 2001 period, the operating loss was ($28.8) million, or ($48) per ton for
the six months ended April 30, 2002 compared to an operating loss of ($26.1)
million, or ($55) per ton for the six months ended April 30, 2001.
Interest, investment and other income (expense), net was $0.5 million
for the six months ended April 30, 2002 compared to ($8.5) million for the six
months ended April 30, 2001. In the 2001 period, the Company recorded a charge
of $10.8 million to write down the carrying value of its investment in Acme
Metals 10.875% Senior Unsecured Notes. Investment income was zero and $0.2
million for the six months ended April 30, 2002 and 2001, respectively. The
investment balance of $1.9 million at April 30, 2001 was liquidated in July 2001
and has remained zero thereafter.
As a result of the items discussed above, the Company had a loss before
taxes of ($46.5) million for the six months ended April 30, 2002 compared to a
loss before taxes of ($63.4) million for the six months ended April 30, 2001.
Effective November 1, 1998, the Company was designated as a qualified
subchapter S subsidiary by Renco. Accordingly, the Company is generally not
subject to income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Renco Steel
In February 1998, Renco Steel issued $120.0 million 10 7/8% Senior
Secured Notes due 2005 ("Senior Secured Notes") which are secured by the stock
of WCI. Interest on the Senior Secured Notes is payable semi-annually in arrears
on February 1, and August 1 of each year.
As of April 30, 2002, and the date hereof, Renco owns the principal
amount of $62,320,000 and $69,470,000, respectively of Renco Steel's Senior
Secured Notes. Renco continues to seek additional Senior Secured Notes to
purchase. Renco is entitled to receive interest payments from Renco Steel in
accordance with the terms of the indenture governing the Senior Secured Notes,
however, Renco irrevocably waived its right to collect interest for the upcoming
payment on August 1, 2002. Renco has previously waived all interest it was
entitled to collect from February 1, 2001. Renco's waiver of interest has
resulted in a capital contribution to the Company in an amount of $3.3 million
in the six months ended April 30, 2002 and
<Page>
PAGE 23
interest expense of the same amount was also recorded in the Company's statement
of operations for the same six month period. As of April 30, 2002, in the
aggregate, Renco has waived a total of $8.15 million of interest.
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. In the past, Renco Steel has met these requirements
through distributions from WCI, from its cash and limited partnership
investments, and from Renco support in the form of loans and waiver of its right
to collect certain interest (from February 1, 2001 to July 31, 2002) on the
Senior Secured Notes it owns. Due to significant losses incurred by WCI in the
last six quarters, WCI does not expect to pay dividends to Renco Steel in the
foreseeable future. WCI's ability to pay dividends to Renco Steel is restricted
by the terms of the indenture governing WCI's 10% Senior Secured Notes due 2004
(Senior Secured Notes of WCI). Pursuant to the indenture, dividends are
generally limited to 50% of WCI's cumulative earnings since October 31, 1996
(Dividend Basket). As of April 30, 2002, WCI had a negative Dividend Basket of
$146.0 million, therefore, WCI will not be permitted to pay dividends to Renco
Steel until its earnings exceed such amount. Other than allowable dividends,
WCI's assets may not be utilized by Renco Steel. Renco Steel's ability to meet
its debt service and working capital needs, given WCI's inability to provide
dividends in the foreseeable future, will be completely dependent upon future
support from Renco. Renco may make future advances or contributions to Renco
Steel and may waive its right to future interest payments on the Senior Secured
Notes, however, Renco has no obligation to do so.
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 completely dependent upon future support from Renco. The
limitation on the incurrence of additional indebtedness is $15.0 million from a
related party and $15.0 million from other sources that may include related
parties. Based upon the outstanding principal and accrued interest of the two
Renco loans, approximately $25.4 million is available for future borrowing.
At April 30, 2002 Renco Steel was in compliance with the terms of the
indenture governing the Senior Secured Notes. The Senior Secured Notes have been
classified as a current liability on the Company's consolidated balance sheet as
of April 30, 2002 and October 31, 2001 due to Renco Steel's insufficient
liquidity position.
Renco Steel's ability to meet its debt service and working capital
obligations is completely dependent upon support from Renco. Failure to receive
such support will have a material adverse effect on Renco Steel's financial
condition and liquidity position.
Cash used by operating activities was $36.8 million for the six months
ended April 30, 2002 compared to $24.3 million for the 2001 period. The
decreased operating cash flow in the 2002 period compared to the 2001 period
resulted primarily from changes in working capital
<Page>
PAGE 24
primarily due to an increase in accounts receivable resulting from increased
revenue and by an increase in pension funding.
Cash used by investing activities was $6.2 million in the six months
ended April 30, 2002 compared to cash provided by investing activities of $1.7
million in the 2001 period. Capital expenditures accounted for all of the
investing activity in 2002 and were $2.1 million higher than the comparable 2001
period. Capital expenditures are expected to be approximately $10 million for
all of fiscal 2002. At April 30, 2002, WCI had commitments for capital
expenditures of approximately $1.8 million. WCI expects to complete a reline of
its blast furnace within the next two years at an estimated cost of up to $30
million. In 2001, Renco Steel redeemed a portion of its investment in a limited
partnership investment and received proceeds of $5.8 million.
Cash provided by financing activities was $14.6 million in the six
months ended April 30, 2002 due to borrowing by WCI under its $100 million
revolving credit agreement (WCI Revolver) and to the capital contribution
resulting from Renco's waiver of its right to receive interest from the Senior
Secured Notes. WCI did not borrow under the WCI Revolver in 2001.
Renco Steel paid no dividends and was not permitted to do so under the
Senior Secured Notes indenture during the six months ended April 30, 2002.
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's
primary sources of liquidity as of April 30, 2002 consisted of cash and cash
equivalents of $3.9 million and available borrowing under the WCI Revolver.
The WCI Revolver has a maximum borrowing limit of $100 million, is
secured by inventories and receivables and subject to eligibility requirements,
as defined therein, and expires on December 29, 2003. As of April 30, 2002, WCI
had borrowing availability of $68.2 million based on eligible inventories and
receivables after deducting $11.7 million of borrowings outstanding and $14.9
million in letters of credit outstanding or committed and before reflecting a
$25 million minimum borrowing availability covenant.
Cash from Operations
Cash used by operating activities was $33.4 million for the six months
ended April 30, 2002 compared to $17.7 million for the six months ended April
30, 2001. The decreased operating cash flow for the 2002 period compared to the
2001 period resulted primarily from changes in working capital primarily due to
an increase in accounts receivable resulting from increased revenue and by an
increase in pension funding.
<Page>
PAGE 25
Capital Expenditures
Capital expenditures were $6.2 million and $4.1 million for the six
months ended April 30, 2002 and April 30, 2001, respectively. Capital
expenditures are expected to be approximately $10 million for all of fiscal
2002. At April 30, 2002, WCI had commitments for capital expenditures of
approximately $1.8 million. WCI expects to complete a reline of its blast
furnace within the next two years at an estimated cost of up to $30 million.
Debt Covenants
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. On January
25, 2002 WCI and its lenders under the WCI Revolver agreed to amend the loan
agreement to require WCI to maintain a minimum net worth, as defined, of not
less than the following for each period indicated: negative $225 million through
January 31, 2002, negative $240 million from February 1, 2002 through April 30,
2002, negative $255 million from May 1, 2002 through July 31, 2002, and negative
$260 million on August 1, 2002 and thereafter. In addition, WCI is required to
maintain minimum availability under the WCI Revolver of $25 million. 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.
Dividends
WCI paid no dividends and was not permitted to do so under the Senior
Secured Notes of WCI indenture during the six months ended April 30, 2002. WCI
does not expect to be permitted to pay dividends for the foreseeable future
based on limitations under the Senior Secured Notes of WCI indenture.
Defined Benefit Pension Plan
WCI has a defined benefit pension plan (DBP) which covers substantially
all bargained for employees. WCI expects to contribute approximately $29.6
million (including $17.8 million during the third quarter), $26.3 million and
$21.1 million to the DBP during fiscal years 2002, 2003 and 2004, respectively,
which is expected to satisfy the minimum funding requirements of ERISA for those
periods. This funding reflects the results of the actuarial valuation completed
as of November 1, 2001. Due primarily to the reduction in the offset from the
frozen defined contribution plan resulting from adverse investment experience
and from changes in the status of plan participants different from assumptions,
WCI's projected benefit obligation increased from $98.7 million as reported in
WCI's 10-K as of October 31, 2001 to $114.9 million. WCI contributed $6.8
million, $7.2 million, $4.2 million and $6.7 million to the DBP during the six
months ended April 30, 2002 and fiscal years ended October 31, 2001, 2000 and
1999, respectively.
<Page>
PAGE 26
Outlook
During the last four years steel imports into the U.S. have adversely
affected shipping volume and have contributed significantly to pricing
volatility. During this period, WCI and the steel industry have filed various
trade cases against hot-rolled and cold-rolled carbon steel flat products from
various countries in response to this increase in imports. While various duties
have been imposed on these products from certain countries, to date these duties
have been ineffective in reducing overall steel imports to the U.S.
In response to the surging imports, in June 2001 the U.S. Trade
Representative, at the direction of President Bush, requested an investigation
by the International Trade Commission under Section 201 of the Trade Act of 1974
to determine whether steel is being imported into the U.S. in such quantities as
to be a substantial cause of serious injury to the U.S. steel industry. This
request included the investigation of carbon and alloy flat rolled products
among other products. On October 22, 2001 the ITC determined that the requisite
injury had been demonstrated related to carbon and alloy slabs, hot-rolled,
cold-rolled and coated products. These determinations pertain to imports from
all countries except Canada. On December 19, 2001 the ITC forwarded its remedy
recommendations to President Bush.
On March 5, 2002 President Bush issued his remedy regarding the Section
201 investigation. This remedy includes a tariff rate quota on carbon and alloy
slabs of 30% in excess of 5.4 million tons per year adjusting over a three year
period to 18% on imports in excess of 6.4 million tons and a 30% tariff on
hot-rolled, cold-rolled and coated sheet and strip declining over a three year
period to 18%. These remedies pertain to imports from all countries except
Canada, Mexico, Jordan, Israel and certain developing countries. A significant
number of exemption requests have been filed by various countries regarding the
tariffs imposed which the Bush administration is considering.
For the longer term, the shipping levels and realized selling prices of
WCI products will be influenced by the levels of imported steel, the strength of
the manufacturing sector of the domestic economy and production capacity changes
by domestic competitors. Domestic flat rolled steel production capacity has been
reduced by the closing of seven producers during the past several years with
total hot strip mill capacity of 16.7 million tons. This has contributed to the
recent increases in product pricing and order intake. A portion of this capacity
is expected to be restarted at potentially significantly lower production costs
during the next six months and as a result the impact of this closed capacity
may be reversed in part.
Based on WCI's current order intake rate and backlog, the Company
expects shipping volume to be approximately 335,000 tons in each of the third
and fourth quarters of 2002. WCI's order backlog was approximately 352,000 tons
at April 30, 2002 compared to 158,000 at April 30, 2001 and 250,000 at January
31, 2002. We expect net sales per ton shipped to increase approximately 10%
during the third quarter compared to the second quarter. WCI expects cost of
products sold per ton shipped to increase approximately 2% in the third quarter
compared to the second quarter (excluding the favorable adjustment to inventory
valuation reserves recorded in the second quarter) due primarily to
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changes in product mix with capacity utilization remaining at 90% or greater.
Based on these expectations, WCI believes that it has adequate availability of
cash resources to maintain operations through at least fiscal 2002.
Significant uncertainty remains regarding the short-term as well as
long-term condition of the steel market. Recent improvements in order intake
rates and pricing could be reversed by a number of factors including increasing
domestic supply through the restart of closed facilities, increases in steel
imports due to rising domestic steel prices or the granting of exemptions to
tariffs imposed as a result ofthe Section 201 investigation or the failure of an
economic recovery to materialize or be sustained. If the volume or net sales
prices expected to be realized by WCI during the third and fourth quarters are
not realized or sustained due to these or other factors, WCI may not have
adequate availability under its existing financing arrangements to sustain its
operations and may require additional sources of financing. WCI cannot assure
that it has the ability to obtain such additional financing or what the terms of
such additional financing might be. Failure to obtain such additional financing
in these circumstances would likely have a material adverse effect on WCI's
operations.
In the past, Renco Steel's primary sources of liquidity were
investments in limited partnerships (which were liquidated in 2001) and dividend
payments from WCI. Renco Steel's soley source of liquidity currently is advances
and contributions from its parent, Renco. Dividends from WCI are currently
prohibited under the terms of the indenture governing the Senior Secured Notes
of WCI due to WCI's significant cumulative losses, as defined. WCI is required
to earn in excess of its cumulative losses before it is permitted to resume
dividend payments to Renco Steel. At April 30, 2002, cumulative losses were
$146.0 million and may increase further in 2002 based upon WCI's outlook. It is
not anticipated that WCI will be able to generate earnings in excess of its
cumulative losses in the foreseeable future and therefore, Renco Steel does not
expect to receive any dividends from WCI. Support from Renco will be necessary
for Renco Steel to meet its debt service, and to a much lesser extent, its
administrative requirements. As of April 30, 2002, Renco has provided loans
amounting to $4.5 million and has irrevocably waived its right to collect
interest of $8.15 million in the aggregate from February 1, 2001 to April 30,
2002 on the Senior Secured Notes it owns. Renco may make future advances or
contributions to Renco Steel and may waive its right to future interest payments
on the Senior Secured Notes it owns, however, Renco has no obligation to do so.
Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 142, Goodwill and Other Intangible Assets. Statement 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. The Company adopted Statement 142
effective November 1, 2001. The adoption of Statement 142 did not have a
material effect on either financial position or result of operations.
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PAGE 28
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations. Statement 143 applies to legal obligations associated
with the retirement of certain long-lived assets. It requires companies to
record the fair value of the liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially recorded, the
company capitalizes a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, the company either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
Statement 143 is required to be adopted in fiscal years beginning after June 15,
2002. The Company has not yet determined the effect, if any, that adopting
Statement 143 will have on future earnings and financial position.
In August 2001, the FASB issued Statement No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. This statement establishes a single
accounting model for long-lived assets to be disposed of by sale and provides
additional implementation guidance for assets to be held and used and assets to
be disposed of other than by sale. The Company adopted the Statement effective
November 1, 2001. There was no financial implication related to the adoption of
Statement No. 144, and the guidance will be applied on a prospective basis.
Forward-Looking Statements
This report includes "forward-looking statements" which involve known
and unknown risks, uncertainties and other important factors that could cause
the actual results, performance or achievements of the Company to differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such risks, uncertainties and other
important factors include, among others: general economic and business
conditions; demand for Company products; changes in industry capacity and levels
of imports of steel or steel products; effectiveness of the Section 201
remedies; industry trends, including product pricing; competition; currency
fluctuations; the loss of any significant customers; availability of qualified
personnel; major equipment failures; future loans from Renco; future waivers of
interest by Renco in regard to the Senior Secured Notes it owns; changes in, or
the failure or inability to comply with, government regulation, including,
without limitation, environmental regulations; and the outcome of legal matters.
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.
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PAGE 29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
WCI is exposed to commodity price risk with respect to natural gas and
zinc. WCI uses forward purchase contracts to manage the volatility related to
the exposure. No contracts are entered into for speculative purposes. WCI's
market risk has not changed materially from that reported in the Company's Form
10-K for the fiscal year ended October 31, 2001.
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PAGE 30
PART II - OTHER INFORMATION
RENCO STEEL HOLDINGS, INC.
ITEM 1. LEGAL PROCEEDINGS
For information as to the environmental matters described in the
Company's Form 10-K for the year ended October 31, 2001, see Part I, Note 5 to
Item 1, Financial Statements.
WILLIAMS / REBER V. WCI STEEL, INC.
Reference is made to the description of this action instituted by two
retired employees contained in the Company's annual report on Form 10-K, Part I,
Item 3 for the year ended October 31, 2001 and as described in Note 5 to the
consolidated financial statements herein. The plaintiffs filed an appeal
regarding the court's decision to dismiss, which was heard on April 23, 2002. On
May 24, 2002 the appellate court affirmed the decision to dismiss this action.
ITEM 6. EXHIBITS and REPORTS ON FORM 8-K
Exhibits:
None
(b) Reports on Form 8-K:
None
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PAGE 31
RENCO STEEL HOLDINGS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RENCO STEEL HOLDINGS, INC.
(registrant)
Date: June 14, 2002 /S/ IRA L. RENNERT
------------------------------
Ira L. Rennert
Chairman of the Board,
President and Director
(principal executive officer)
/S/ ROGER L. FAY
------------------------------
Roger L. Fay
Vice President and
Chief Financial Officer
(principal financial and
accounting officer)