10-Q 1 a2051873z10-q.txt FORM 10Q 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, 2001. ----------------- 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 As of June 13, 2001, the registrant had 100 shares of its common stock, no par value, $.01 stated value, outstanding. -------------------------------------------------------------------------------- PAGE 2 RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES INDEX -------------------------------- Page No. -------- PART I FINANCIAL INFORMATION --------------------------------------- Item 1. FINANCIAL STATEMENTS OF RENCO STEEL HOLDINGS, INC. -------------------------------------------------- Consolidated Balance Sheets as of April 30, 2001 and October 31, 2000. 3 Consolidated Statements of Operations for the three and six months ended April 30, 2001 and 2000. 4 Consolidated Statements of Cash Flows for the six months ended April 30, 2001 and 2000. 5 Notes to Consolidated Financial Statements. 6 FINANCIAL STATEMENTS OF WCI STEEL, INC. Consolidated Balance Sheets as of April 30, 2001 and October 31, 2000. 10 Consolidated Statements of Operations for the three and six months ended April 30, 2001 and 2000. 11 Consolidated Statements of Cash Flows for the six months ended April 30, 2001 and 2000. 12 Notes to Consolidated Financial Statements. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 PART II OTHER INFORMATION ----------------------------------- Item 1. Legal Proceedings 26 Item 6. Exhibits and Reports on Form 8-K 26 Signatures 27 Exhibit Index 28 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)

See accompanying notes to consolidated financial statements. PAGE 4 RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands) (Unaudited)

See accompanying notes to consolidated financial statements. PAGE 5 RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)

See accompanying notes to consolidated financial statements. PAGE 6 RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three and six months ended April 30, 2001 and 2000 ( 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 six months ended April 30, 2001 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, 2000. 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. The unrestricted cash amounts at April 30, 2001 and October 31, 2000 were $0.3 million and $1.1 million, respectively. NOTE 3: OTHER INVESTMENTS Renco Steel has from time to time invested in various limited partnerships which invest in a variety of financial assets, including equity, debt, and derivative securities. Renco Steel was invested in one such limited partership on April 30, 2001 and intends to fully redeem its investment in the third fiscal quarter to partially fund the August 1, 2001 Renco Steel interest payment. Because of the nature of the underlying investments, Renco Steel's investment is subject to a high degree of risk, including, but not limited to, credit risk, interest rate risk, foreign currency exchange risk, and equity price risk. Renco Steel does not have any off balance sheet risk with respect to this investment, and thus its risk is limited to the amount of this investment. This investment has been classified as a current asset in the accompanying balance sheet as of April 30, 2001. Renco Steel accounts for its investment in the limited partnership under the equity method and includes its pro- rata share of the partnership's realized and unrealized gains in investment income. PAGE 7 The Company's consolidated statements of operations include unrealized earnings under the equity method of $0.2 million and $0.4 million for the six months ended April 30, 2001 and April 30, 2000 respectively, and $0.1 million and $0.2 million for the three months ended April 30, 2001 and April 30, 2000, respectively. NOTE 4: 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, 2001 and October 31, 2000 was as follows:

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 consent decrees as a result of two civil actions instituted by the Department of Justice, on behalf of the Environmental Protection Agency ("EPA"). These consent decrees require WCI to complete certain supplemental environmental projects estimated to cost approximately $2.4 million which will be expended by late 2002. These projects include sediment removal from the Mahoning River at an estimated remaining cost of $0.9 million and the installation of a liner for a surface impoundment estimated to cost $1.5 million. The consent decrees also provide for stipulated penalties in the event of noncompliance which WCI does not believe will be material. PAGE 8 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 Facility Investigation ("RFI"), and has submitted its report to the EPA. WCI believes that additional sampling will be required to complete a full RFI and will negotiate the extent of the second phase with the EPA. 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. On appeal by the plaintiffs 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 district 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. 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 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, 2001 and April 30, 2000, 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 income to consolidated net income (loss) is presented below:

NOTE 7: OTHER MATTERS LTV Corporation ("LTV") filed for reorganization under Chapter 11 of the United States Bankruptcy Code on December 29, 2000. WCI supplies steam to an LTV Steel Company coke plant adjacent to WCI's facility in Warren, Ohio. As a result of the filing, WCI recorded a charge of $2.1 million in the first fiscal quarter of 2001 to reduce the amounts due from LTV to estimated net realizable value. WCI has an ongoing exposure to LTV with respect to the supply of steam from both a credit risk aspect and the uncertainty of actions that LTV may take due to the filing. Cessation of operations at the coke plant or termination of the contract for the supply of steam through reorganization proceedings, could have a material adverse effect on WCI's results of operations until such time as WCI would be able to install electrical generating equipment to convert the steam to a productive use. During fiscal year 2000, WCI recorded revenue of $10.2 million for the sale of steam to LTV. WCI continues to sell steam to LTV in the normal course of business. NOTE 8: ASSET IMPAIRMENT and RELATED CHARGES The Youngstown Sinter Company ("YSC"), a wholly-owned subsidiary of WCI, will idle its plant indefinitely effective July 15, 2001. YSC has been in operation since 1991 producing a clinker-type material ("Sinter") from steelmaking by-products such as slag and ore fines. The Sinter is then used as a substitute feed stock in WCI's blast furnace facility located in Warren, Ohio. WCI recorded a charge of $3.9 million during the three months ended April 30, 2001 to reflect plant idling costs, of which $3.0 million represents the recognition of an impairment in the value of the assets of the facility. The sinter plant may be restarted in the future if economically advantageous. PAGE 10 WCI STEEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amount)

See accompanying notes to consolidated financial statements. PAGE 11 WCI STEEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands) (Unaudited)

See accompanying notes to consolidated financial statements. PAGE 12 WCI STEEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)

See accompanying notes to consolidated financial statements PAGE 13 WCI STEEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three and six months ended April 30, 2001 and 2000 ( 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, 2001 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, 2000. NOTE 2: 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, 2001 and October 31, 2000 was as follows:

NOTE 3: 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 PAGE 14 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 consent decrees as a result of two civil actions instituted by the Department of Justice, on behalf of the Environmental Protection Agency ("EPA"). These consent decrees require the Company to complete certain supplemental environmental projects estimated to cost approximately $2.4 million which will be expended by late 2002. These projects include sediment removal from the Mahoning River at an estimated remaining cost of $0.9 million and the installation of a liner for a surface impoundment estimated to cost $1.5 million. The consent decrees also provide 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 report to the EPA. The Company believes that additional sampling will be required to complete a full RFI and will negotiate the extent of the second phase with the EPA. 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. On appeal by the plaintiffs 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 district 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. 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, PAGE 15 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 4: OTHER MATTERS LTV Corporation ("LTV") filed for reorganization under Chapter 11 of the United States Bankruptcy Code on December 29, 2000. WCI supplies steam to an LTV Steel Company coke plant adjacent to WCI's facility in Warren, Ohio. As a result of the filing, WCI recorded a charge of $2.1 million in the first fiscal quarter of 2001 to reduce the amounts due from LTV to estimated net realizable value. WCI has an ongoing exposure to LTV with respect to the supply of steam from both a credit risk aspect and the uncertainty of actions that LTV may take due to the filing. Cessation of operations at the coke plant or termination of the contract for the supply of steam through reorganization proceedings, could have a material adverse effect on WCI's results of operations until such time as WCI would be able to install electrical generating equipment to convert the steam to a productive use. During fiscal year 2000, WCI recorded revenue of $10.2 million for the sale of steam to LTV. NOTE 5: ASSET IMPAIRMENT and RELATED CHARGES The Youngstown Sinter Company ("YSC"), a wholly-owned subsidiary of WCI, will idle its plant indefinitely effective July 15, 2001. YSC has been in operation since 1991 producing a clinker-type material ("Sinter") from steelmaking by-products such as slag and ore fines. The sinter is then used as a substitute feed stock in WCI's blast furnace facility located in Warren, Ohio. WCI recorded a charge of $3.9 million during the three months ended April 30, 2001 to reflect plant idling costs, of which $3.0 million represents the recognition of an impairment in the value of the assets of the facility. The sinter plant may be restarted in the future if economically advantageous. PAGE 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS Three Months Ended April 30, 2001 Compared to Three Months Ended April 30, 2000. Net sales for the three months ended April 30, 2001 were $99.3 million on 241,131 tons shipped, representing a 36.4% decrease in net sales and a 31.1% decrease in tons shipped compared to the three months ended April 30, 2000. Shipping volume for the 2001 period decreased due primarily to lower customer demand resulting from a general slowing in the U.S. economy. Net sales per ton shipped decreased 7.6% to $412 in the 2001 period compared to $446 for the 2000 period, with net selling prices down 11.7% offset somewhat by changes in product mix. Shipments of custom carbon, alloy and electrical steels accounted for 56.8% of total shipments for the three months ended April 30, 2001 compared to 50.6% for the three months ended April 30, 2000. On April 30, 2001, WCI's order backlog was approximately 158,000 net tons compared to approximately 234,000 net tons at April 30, 2000 and 144,000 net tons at October 31, 2000. The table below shows WCI's product mix for the three months ended April 30, 2001 and April 30, 2000.

PAGE 17 The following table sets forth the percentage of WCI's net tons shipped to various markets for the three months ended April 30, 2001 and April 30, 2000.

Gross margin (loss) (sales less cost of products sold) was ($1.7) million for the three months ended April 30, 2001 compared to gross margin of $25.0 million for the three months ended April 30, 2000. The decrease in gross margin reflects the lower shipping volume and transaction prices discussed above and higher per ton production costs resulting from significantly lower production volume and its effect on fixed operating costs per ton. Production volume during the second quarter of 2001 was approximately 73% of operating capacity compared to approximately 98% in the 2000 period. Operating income (loss) was ($15.9) million, or ($66) per ton, for the three months ended April 30, 2001 compared to operating income of $14.0 million, or $40 per ton, for the three months ended April 30, 2000. The decrease in operating income for the 2001 period reflects the lower gross margin discussed above along with a charge of $3.9 million associated with YSC's announced indefinite idling of its operating facility by July 15, 2001. (See "Note 8: Asset Impairment and Related Charges" above). Excluding the impairment charge, the operating loss was ($12.0) million, or ($50) per ton for the three months ended April 30, 2001. Interest, investment and other (expense) income, net was $0.9 million for the three months ended April 30, 2001 compared to $1.4 million for the three months ended April 30, 2000. Interest and investment income declined by $0.5 million in the second quarter of 2001 due to lower returns from the limited partnership investment and lower interest income from lower levels of cash and cash equivalent balances. As a result of the items discussed above, the Company had a loss before taxes of $26.4 million for the three months ended April 30, 2001 compared to income before taxes of $4.0 million for the three months ended April 30, 2000. 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. PAGE 18 Six Months Ended April 30, 2001 Compared to Six Months Ended April 30, 2000. Net sales for the six months ended April 30, 2001 were $197.5 million on 478,154 tons shipped, representing a 33.6 % decrease in net sales and a 29.2% decrease in tons shipped compared to the six months ended April 30, 2000. Shipping volume for the 2001 period was lower due primarily to lower customer demand resulting from a general slowing in the U.S. economy coupled with high levels of imported steel. Net sales per ton shipped decreased 6.1% to $413 in the 2001 period compared to $440 for the 2000 period, with net selling prices down 9.5% offset somewhat by changes in product mix. Shipments of custom carbon, alloy and electrical steels accounted for 54.6% of total shipments for the six months ended April 30, 2001 compared to 51.4% for the six months ended April 30, 2000. The table below shows WCI's product mix for the six months ended April 30, 2001 and April 30, 2000.

The following table sets forth the percentage of WCI's net tons shipped to various markets for the six months ended April 30, 2001 and April 30, 2000.

PAGE 19 Gross margin (loss) (sales less cost of products sold) was ($5.5) million for the six months ended April 30, 2001 compared to gross margin of $47.1 million for the six months ended April 30, 2000. The decrease in gross margin reflects the lower shipping volume and transaction prices discussed above and higher per ton production costs resulting from significantly lower production volume and its effect on fixed operating costs per ton. Production volume during the six months ended April 30, 2001 was approximately 67% of operating capacity compared to approximately 98% in the 2000 period. Operating income (loss) was ($32.1) million, or ($67) per ton, for the six months ended April 30, 2001 compared to operating income of $25.1 million, or $37 per ton, for the six months ended April 30, 2000. The decrease in operating income for the 2001 period reflects the lower gross margin discussed above along with a charge of $3.9 million associated with YSC's announced indefinite idling of its operating facility by July 15, 2001 (See "Note 8: Asset Impairment and Related Charges" above) and a charge of $2.1 million to establish a reserve for amounts due from a financially distressed steel company (See "Note 7: Other Matters" above). Excluding these charges, the operating loss was ($26.1) million, or ($55) per ton for the six months ended April 30, 2001. Interest income and other income (expense), net was ($8.5) million for the six months ended April 30, 2001 compared to income of $6.6 million for the six months ended April 30, 2000. Investment income declined by $1.5 million in the first six months of 2001 due to significantly lower returns from the limited partnership investment as a result of lower amounts of invested capital. 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. In the 2000 period, WCI recorded a gain of $2.8 million as a result of an agreement with the United Steelworkers, which permitted WCI to pay certain medical benefits from assets in a trust previously restricted for other benefits. As a result of the items discussed above, the Company had a loss before taxes of $63.4 million for the six months ended April 30, 2001 compared to income before taxes of $8.8 million for the six months ended April 30, 2000. 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. PAGE 20 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 and from its cash and its investments, other than in WCI (Other Investments). Renco Steel had available cash and Other Investment balances of $2.2 million at April 30, 2001. Renco may also make contributions or advances to Renco Steel to meet its debt services obligations. Renco, however, has no obligation to do so. Renco has indicated it intends to support the working capital needs of Renco Steel in fiscal 2001. 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 Renco Steel's Other Investments. WCI's operating performance and financial results are subject to financial, economic, political, competitive and other factors, many of which are beyond the Company's control. In addition, 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, 2001, WCI had a negative Dividend Basket of $62.5 million, therefore, WCI will not be permitted to pay dividends to Renco Steel until its future earnings exceed such amount. WCI has reported that it expects to incur a loss in the third quarter of 2001 and such loss would increase the negative Dividend Basket. As a result, WCI does not expect to pay dividends to Renco Steel in the foreseeable future. Other than allowable dividends, WCI's assets may not be utilized by Renco Steel. Renco Steel expects to meet the August 1, 2001 interest payment on its Senior Secured Notes with available cash, proceeds from the planned redemption of its Other Investments and an advance from Renco. 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. As of June 13, 2001, Renco owns $59,320,000 face value of Renco Steel's Senior Secured Notes. Renco is entitled to receive interest payments from Renco Steel in accordance with the terms of the indenture governing the Senior Secured Notes. Cash used by operating activities was $24.3 million for six months ended April 30, 2001 compared to cash provided by operating activities of $21.4 million for the 2000 period. The decreased operating cash flow in the 2001 period compared to the 2000 period resulted primarily from a decrease in income before taxes excluding non-cash charges offset somewhat by changes in working capital. Cash provided by investing activities was $1.7 million in the six months ended April 30, 2001 compared with cash used by investing activities of $1.4 million in the six months ended April 30, 2000. Renco Steel's proceeds from the sale of Other Investments were $5.8 million in 2001 and in 2000 the proceeds, net of purchases of Other PAGE 21 Investments were $4.8 million. WCI's capital expenditures were $4.1 million and $6.1 million during the six months ended April 30, 2001 and 2000, respectively. Capital expenditures are expected to be approximately $15 million for all of fiscal 2001. WCI expects to reline the blast furnace during the second calendar quarter of 2002 at an estimated cost of $10 million to $15 million. Capital expenditures in 2001 and 2000 have been funded through cash balances and cash provided by operating activities. At April 30, 2001, WCI had commitments for capital expenditures of approximately $3.1 million. 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, 2001. 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 April 30, 2001 consisted of cash and cash equivalents of $67.6 million and available borrowing under its $100 million revolving credit agreement (Revolving Credit Facility of WCI). The Revolving Credit Facility of WCI has a maximum borrowing limit of $100 million, is secured by eligible inventories and receivables, as defined therein, and expires on December 29, 2003. As of April 30, 2001, WCI had no borrowings outstanding under the Revolving Credit Facility of WCI, with a borrowing limit of $76.3 million based on eligible inventories and receivables, net of $14.1 million in letters of credit outstanding or committed. Cash (used) provided by operating activities was ($17.7) million for the six months ended April 30, 2001 compared to $28.2 million for the 2000 period. The decreased operating cash flow in the 2001 period compared to the 2000 period resulted primarily from a decrease in income before taxes excluding non-cash charges offset somewhat by changes in working capital. Capital expenditures were $4.1 million and $6.1 million during the six months ended April 30, 2001 and 2000, respectively. Capital expenditures are expected to be approximately $15 million for all of fiscal 2001. WCI expects to reline its blast furnace during the second calendar quarter of 2002 at an estimated cost of $10 million to $15 million. WCI has funded its capital expenditures in 2001 and 2000 through cash balances and cash provided by operating activities. At April 30, 2001, WCI had commitments for capital expenditures of approximately $3.1 million. The Revolving Credit Facility of WCI 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. On April 30, 2001 WCI and its lenders under the Revolving Credit Facility of WCI agreed to amend the loan agreement to require WCI to maintain a minimum net worth, as defined, of not less than a negative $200 million instead PAGE 22 of the previous minimum net worth requirement of not less than a negative $150 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. 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, 2001. 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. 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. As a result of the collective bargaining agreement effective September 1, 1999, WCI is permitted to pay current claims up to $8.8 million from a trust, after which time (expected to occur late in the third fiscal quarter or early in the fourth fiscal quarter of 2001) WCI will be required to pay claims from corporate assets. Claims paid by WCI or trust totaled $2.6 million, $4.4 million and $3.4 million during the six months ended April 30, 2001,and fiscal years 2000 and 1999, respectively. WCI has a defined benefit pension plan ("DBP") which covers substantially all bargained for employees. WCI expects to contribute approximately $7.2 million, $24.6 million and $15.4 million to the plan during 2001, 2002 and 2003, respectively, which is expected to satisfy the minimum funding requirements of ERISA for those periods. WCI contributed $4.2 million and $6.7 million to the plan during fiscal 2000 and fiscal 1999, respectively. Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS133"). In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 138, "Accounting for Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133," ("FAS138") which amended FAS133 and added guidance for certain derivative instruments and hedging activities. The new standard, FAS133 as amended by FAS138, requires recognition of all derivatives as either assets or liabilities at fair value. One of the primary amendments to FAS133, which is covered by FAS138 establishes a "normal purchases and normal sales" exception. This exception permits companies to exclude contracts which provide for the purchase or sale of something other than a financial or derivative instrument that will be delivered in quantities expected to be used or sold by the entity over a reasonable period of time in the normal course of business operations. The Company adopted FAS133 as amended by FAS138 effective November 1, 2000. WCI has forward purchase contracts for certain energy and coating metal commodities that qualify for the "normal purchase exception" provisions of FAS138. The adoption of FAS133 as amended by FAS138 had no material effect on either financial position or results of operations. PAGE 23 Outlook The domestic steel market continues to be negatively impacted by high levels of steel imports and a general slowing of the economy. However, the recent interest rate cuts by the Federal Reserve are expected to strengthen the economy and lead to increased steel consumption later this year. In addition, service center inventories and car and light truck inventories have dropped significantly from their recent highs. While we are encouraged by the preliminary determinations recently announced by the U.S. Department of Commerce regarding the importation of hot-rolled carbon steel products and the initiation of an investigation of steel imports by the International Trade Commission under Section 201 of the United States trade law, imports are expected to continue to supply a significant portion of domestic steel demand which will result in continued price pressure. The WCI's order entry rate has improved modestly and WCI expects shipping volume increases to approach approximately 10% in the third fiscal quarter of 2001 from the record lows experienced in the first and second quarters. Net sales prices are expected to be flat in the third quarter compared to the second quarter as price increases announced effective March 1, 2001 have generally not been successful. Custom products are expected to comprise approximately 54% of shipments in the third quarter compared to 56.8% in the second quarter. Per ton production costs are expected to decline slightly in the third quarter compared to the second quarter as the effect of production rate increases more than offset the effect of higher natural gas prices. As a result, WCI expects to incur a loss in the third quarter that is slightly less than that reported in the second quarter excluding special charges. While WCI expects its cash balance to decrease during the third quarter due to the $15 million coupon payment on the Senior Secured Notes of WCI, management of WCI believes that it has sufficient liquidity to support its operations. Renco Steel's liquidity is significantly impacted by WCI's expected losses and WCI's inability to pay dividends to Renco Steel for the foreseeable future. As of April 30, 2001, WCI would need to earn in excess of $62.5 million, the negative Dividend Basket amount, before it is permitted to resume dividend payments. Renco Steel expects to meet the August 1, 2001 interest payment on its Senior Secured Notes with available cash, proceeds from the planned redemption of its Other Investments and an advance from Renco. 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; 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 customers; availability of qualified personnel; major equipment failures; changes in, or the failure or inability to comply with, government regulation, including, without PAGE 24 limitation, environmental regulations; the outcome of legal matters; and the performance of the Other Investments. 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. PAGE 25 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 these exposures. No contracts are entered into for speculative purposes. WCI's previously placed forward purchase contracts for natural gas expired in March 2001 requiring WCI to place new forward purchase contracts at higher market prices. Market prices for natural gas are currently approximately 50% higher than WCI's cost during the six months ended April 30, 2001. This increase will result in an increase of per ton production costs of approximately 2% in the third quarter of 2001 compared to the second quarter. PAGE 26 PART II - OTHER INFORMATION RENCO STEEL HOLDINGS, INC. ITEM 1. LEGAL PROCEEDINGS For information as to the environmental matters and as to the employee litigation described in the Company's Form 10-K for the year ended October 31, 2000, see Part I, Note 5 to Item 1, Financial Statements. ITEM 6. EXHIBITS and REPORTS ON FORM 8-K Exhibits: (a) A list of the exhibits required to be filed as part of this Report on Form 10-Q is set forth in the "Exhibit Index" which immediately precedes such exhibits, and is incorporated herein by reference. (b) Reports on Form 8-K: On April 30, 2001, the Company filed a current report on Form 8-K, responding to Item 5. Other Events, to report material events that have occurred since the Company filed its quarterly report on Form 10-Q on March 15, 2001 for the three months ended January 31, 2001. PAGE 27 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 13, 2001 /s/ JAMES N. CHAPMAN ------------------------------ James N. Chapman President (principal executive officer) /S/ ROGER L. FAY ------------------------------ Roger L. Fay Vice President and Chief Financial Officer (principal financial and accounting officer) PAGE 28 RENCO STEEL HOLDINGS, INC. EXHIBIT INDEX Exhibit Number Description -------------- ----------- 10.1.3(1) Amendment No. 1 dated April 30, 2001 to the Second Amended and Restated Loan and Security Agreement dated July 30, 1999, between WCI Steel, Inc. and Congress Financial Corporation. ---------- (1) Incorporated by reference to the WCI Steel, Inc. Form 10-Q report for the quarterly period ended April 30, 2001.

RENCO STEEL HOLDINGS INC 10-Q