10-Q 1 a2059453z10-q.txt 10-Q 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 July 31, 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 September 18, 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 July 31, 2001 and October 31, 2000. 3 Consolidated Statements of Operations for the three and nine months ended July 31, 2001 and 2000. 4 Consolidated Statements of Cash Flows for the nine months ended July 31, 2001 and 2000. 5 Notes to Consolidated Financial Statements. 6 FINANCIAL STATEMENTS OF WCI STEEL, INC. Consolidated Balance Sheets as of July 31, 2001 and October 31, 2000. 11 Consolidated Statements of Operations for the three and nine months ended July 31, 2001 and 2000. 12 Consolidated Statements of Cash Flows for the nine months ended July 31, 2001 and 2000. 13 Notes to Consolidated Financial Statements. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 PART II OTHER INFORMATION --------------------------- Item 1. Legal Proceedings 27 Item 6. Exhibits and Reports on Form 8-K 27 Signatures 28 Exhibit Index 29 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)

~~April~~July 3031, October 31, 2001 2000 ----------- ----------- (Unaudited) ASSETS Current assets Cash and cash equivalents ...................... $ 6749,~~936~~216 $ 90,607 Other investments .............................. ~~1,905~~-- 7,514 Accounts receivable, less allowances for doubtful accounts of $3,~~050~~200 and $750, respectively ................................. 4952,~~378~~393 47,599 Inventories .................................... 8791,~~853~~705 97,021 Prepaid expenses ............................... ~~1,149~~643 1,076 --------- --------- Total current assets ...................... ~~208~~193,~~221~~957 243,817 Property, plant and equipment, net ............... ~~235~~233,~~102~~568 245,454 Excess of cost over acquired net assets, net 11..... 10,~~087~~951 11,357 Intangible pension asset, net .................... 1917,~~250~~734 22,283 Other assets, net ................................ 8,~~205~~287 18,259 --------- --------- Total assets .............................. $ ~~481~~464,~~865~~497 $ 541,170 ========= ========= LIABILITIES and SHAREHOLDER'S DEFICIT Current liabilities Current portion of long-term debt .............. $ ~~131~~181 $ 128 Accounts payable ............................... 4148,~~824~~517 47,199 Accrued liabilities ............................ 6271,~~824~~548 54,138 --------- --------- Total current liabilities ................. ~~104~~120,~~779~~246 101,465 Long-term debt, excluding current portion ........ ~~420~~421,~~953~~156 420,988 Postretirement health care benefits .............. ~~114~~116,~~931~~605 112,130 Pension benefits, excluding current portion 33...... 18,~~846~~924 36,381 Other liabilities ................................ 12,~~264~~214 11,756 --------- --------- Total liabilities ......................... ~~686~~689,~~773~~145 682,720 --------- --------- 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 ..................... ~~280~~3,505 280 Accumulated deficit ............................ (~~205~~228,~~188~~153) (141,830) --------- --------- Total shareholder's deficit ............... (~~204~~224,~~908~~648) (141,550) Commitments and contingencies .................... -- -- --------- --------- Total liabilities and shareholder's deficit ................... $ ~~481~~464,~~865~~497 $ 541,170 ========= =========

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

Three months ~~Six~~Nine months ended ~~April~~July 3031, ended ~~April~~July 3031, 2001 2000 2001 2000 --------- ------------- --------- ------------- Net sales ......................... $ 99109,~~268~~989 $ ~~156~~140,~~149~~726 $ ~~197~~307,~~459~~448 $ ~~297~~438,~~361~~087 Operating costs and expenses Cost of products sold ............ ~~100~~112,~~953~~755 ~~131~~122,~~137~~185 ~~202~~315,~~922~~677 ~~250~~372,~~245~~430 Depreciation and amortization .... 65,~~549~~709 6,~~703~~738 1318,~~155~~864 1320,~~448~~186 Selling, general and administrative expenses ......... 3,~~750~~628 4,~~261~~074 913,~~579~~207 812,~~609~~684 Asset impairment and related charges (note 89) ................ ~~3,909~~-- -- 3,909 -- --------- --------- --------- --------- ~~115~~122,~~161~~092 ~~142~~132,~~101~~997 ~~229~~351,~~565~~657 ~~272~~405,~~302~~300 --------- --------- --------- --------- Operating (loss) income ........... (1512,~~893~~103) 147,~~048~~729 (3244,~~106~~209) 2532,~~059~~787 --------- --------- --------- --------- Other income (expense) Interest expense ................. (11,~~398~~418) (11,395) (2234,~~795~~213) (2234,~~804~~200) Interest, investment and other income (expense) ~~income~~, net ..... ~~867~~556 12,~~365~~154 (87,~~457~~901) 68,~~557~~712 --------- --------- --------- --------- (10,~~531~~862) (109,~~030~~241) (3142,~~252~~114) (1625,~~247~~488) --------- --------- --------- --------- (Loss) income before income taxes . (2622,~~424~~965) 4(1,~~018~~512) (6386,~~358~~323) 87,~~812~~299 Income tax benefit ................ -- -- -- -- --------- --------- --------- --------- Net (loss) income ............... $ (2622,~~424~~965) $ 4(1,~~018~~512) $ (6386,~~358~~323) $ 87,~~812~~299 ========= ========= ========= =========

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

~~Six~~Nine months ended ~~April~~July 3031, 2001 2000 -------- -------------------- Cash flows from operating activities: Net (loss) income ................................... $(6386,~~358~~323) $ 87,~~812~~299 Adjustments to reconcile net (loss) income to net cash provided by operating activities Depreciation and amortization .............. 1117,~~670~~362 1117,980 Amortization of deferred maintenance costs . 1,~~484~~502 12,~~468~~206 Amortization of financing costs ............ ~~948~~1,431 ~~948~~1,421 Postretirement health care benefits ........ 69,~~601~~875 58,~~261~~832 Pension benefits ........................... 2,~~955~~938 3,~~961~~817 Provision for losses on accounts receivable 2,~~300~~450 -- Deferred income taxes ...................... -- (243) Asset impairment and other charges ......... 14,745 -- Gain on other investments .................. (~~191~~204) (1,~~584~~807) ~~Asset impairment and other charges ......... 14,745 --~~ Other ...................................... 8493 1,~~105~~150 Cash provided (used) by changes in certain assets and liabilities Accounts receivable ........................ (47,~~079~~244) (34,~~551)~~920 Inventories ................................ 95,~~167~~316 (310,~~702~~330) Prepaid expenses and other assets .......... (3,~~256~~319) ~~(1,980)~~419 Accounts payable ........................... (51,~~377)~~316 (67,~~359~~670) Accrued liabilities ........................ 1(4,~~503~~760) 4(1,~~617~~326) Other liabilities .......................... ~~508~~458 ~~649~~828 -------- -------- Net cash (used) provided by operating activities ...................... (2444,~~296~~364) 2127,~~382~~496 -------- -------- Cash flows from investing activities: Additions to property, plant and equipment .......... (48,~~112~~248) (612,~~103~~404) Gross proceeds from the sale of assets .............. 105 -- Other investments, net .............................. 57,~~800~~717 4,~~753~~752 -------- -------- Net cash ~~provided (~~used) by investing activities ......~~..........................~~ ~~1,688~~(426) (17,~~350~~652) -------- -------- Cash flows from financing activities: ~~Principal~~Net ~~payments~~change onin long-term debt ........................ 174 (6390) Dividends paid ...................................... -- (603,250) Capital Contribution ................................ 3,225 -- -------- -------- Net cash provided (used) by financing activities ................................ ~~(63)~~3,399 (603,340) -------- -------- Net (decrease) increase in cash and cash equivalents ........................................ (2241,~~671~~391) 1916,~~972~~504 Total cash and cash equivalents at beginning of period ......................................... 90,607 80,004 -------- -------- Total cash and cash equivalents at end of period ............. $ 6749,~~936~~216 $ 9996,~~976~~508 ======== ======== Supplemental disclosure of cash flow information Cash paid for interest .............................. $ 2137,~~849~~014 $ 2137,~~856~~008 Cash paid for income taxes .......................... -- 21

See accompanying notes to consolidated financial statements. PAGE 6 RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three and nine months ended July 31, 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 nine months ended July 31, 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 July 31, 2001 and October 31, 2000 were $3.35 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. At July 31, 2001, Renco Steel did not have any limited partnership investments. Renco Steel has accounted 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. The Company's consolidated statements of operations include earnings under the equity method of $0.2 million and $1.8 million for the nine months ended July 31, 2001 and July 31, 2000 respectively, and $0.0 and $0.2 million for the three months ended July 31, 2001 and July 31, 2000, respectively. PAGE 7 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 July 31, 2001 and October 31, 2000 was as follows:

~~April~~July 3031, October 31, 2001 2000 (Unaudited) ----------- ----------- (Dollars in thousands) Raw materials ....................................... $3031,~~952~~154 $38,873 Finished and semi-finished product 59.................. 62,~~039~~122 60,785 Supplies ............................................ 79122 74 ------- ------- 9093,~~070~~398 99,732 Less LIFO reserve ................................... 21,~~217~~693 2,711 ------- ------- $8791,~~853~~705 $97,021 ======= =======

NOTE 5: RELATED PARTY TRANSACTIONS On July 30, 2001, Renco Steel borrowed $1.1 million from Renco under the terms of a promissory note. The loan is subordinated to Renco Steel's 10 7/8% Senior Secured Notes due 2005 ("Senior Secured Notes"). The loan bears interest at a rate of 8.75% and is payable upon demand, subject to the terms of the indenture governing the Senior Secured Notes. The loan is included in accrued liabilities on the Consolidated Balance Sheet at July 31, 2001. In addition, Renco has waived its right to the August 1, 2001 interest payment in regard to its ownership interest in Renco Steel's Senior Secured Notes. Accordingly, a capital contribution of $3.2 million has been recorded. NOTE 6: 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 PAGE 8 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. 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. PAGE 9 NOTE 7: 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. 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 nine months ended July 31, 2001 and July 31, 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 (loss) to consolidated net income (loss) is presented below for the three and nine months ended July 31, 2001 and 2000:

~~Six~~Three months ended ~~April~~Nine 30months ended July 31, July 31, 2001 2000 2001 2000 -------- -------- --------- --------- WCI ........................~~.....~~ $(5418,~~718~~730) $ 152,~~608~~400 $(73,448) $ 18,008 Other ......................~~.....~~ (84,~~640~~235) (63,~~796~~912) (12,875) (10,709) -------- -------- -------- -------- Total ~~Consolidated~~consolidated net (loss) income... $(6322,~~358~~965) $ 8(1,~~812~~512) $(86,323) $ 7,299 ======== ======== ======== ========

NOTE 8: 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 the nine months ended July 31, 2001, WCI recorded revenue of $8.3 million for the sale of steam to LTV. PAGE 10 NOTE 9: ASSET IMPAIRMENT and RELATED CHARGES The Youngstown Sinter Company ("YSC"), a wholly-owned subsidiary of WCI, idled its plant indefinitely effective July 15, 2001. YSC had been in operation since 1991 producing a clinker-type material ("Sinter") from steelmaking by-products such as slag and ore fines. The Sinter was 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. NOTE 10: NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 142 will require 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 is required to adopt the provisions of Statement 141 immediately, and Statement 142 effective November 1, 2002. As of the date of adoption, the Company expects to have unamortized goodwill in the amount of approximately $10.3 million, which will be subject to the transition provisions of Statement 142. Amortization expense related to goodwill was approximatley $0.5 million and $0.4 million for the year ended December 31, 2000, and the nine months ended July 31, 2001, respectively. The Company is currently studying the effects of adopting the new rules, including whether any transitional impairment losses will be required. 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. The Company 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 11 WCI STEEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amount)

~~April~~July 3031, Oct. 31, 2001 2000 --------- --------- (Unaudited) ASSETS Current assets Cash and cash equivalents ................................ $ 6745,~~596~~862 $ 89,478 Accounts receivable, less allowance for doubtful accounts of $3,~~050~~200 and $750, respectively ............................................ 4952,~~378~~393 47,599 Inventories .............................................. 8790,~~042~~913 96,171 Prepaid expenses and other current assets ................ ~~1,149~~643 1,076 --------- --------- Total current assets ............................. ~~205~~189,~~165~~811 234,324 Property, plant and equipment, net ......................... ~~193~~192,~~756~~988 202,578 Intangible pension asset, net .............................. 2220,~~490~~897 25,677 Other assets, net .......................................... 6,~~167~~386 15,597 --------- --------- Total assets ..................................... $ ~~427~~410,~~578~~082 $ 478,176 ========= ========= LIABILITIES and SHAREHOLDER'S EQUITY Current liabilities Current portion of long-term debt ........................ $ ~~131~~181 $ 128 Accounts payable ......................................... 4148,~~824~~517 47,201 Accrued liabilities ...................................... 5966,~~329~~915 50,571 --------- --------- Total current liabilities ........................ ~~101~~115,~~284~~613 97,900 Long-term debt, excluding current portion .................. 301,~~186~~374 301,252 Postretirement health care benefits ........................ ~~114~~116,~~410~~097 111,584 Pension benefits ........................................... 3318,~~781~~861 36,313 Other liabilities .......................................... 12,~~264~~214 11,756 --------- --------- Total liabilities ................................ ~~562~~564,~~295~~159 558,805 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 ...................................... (~~135~~154,~~626~~356) (80,908) --------- --------- Total shareholder's equity (deficit) ............. (~~135~~154,~~347~~077) (80,629) Commitments and contingencies .............................. -- -- --------- --------- Total liabilities and shareholder's equity (deficit) ................. $ ~~427~~410,~~578~~082 $ 478,176 ========= =========

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

Three months ~~Six~~Nine months ended ~~April~~July 3031, ended ~~April~~July 3031, 2001 2000 2001 2000 ------------------------ ------------------------ Net sales ........................ $ 99109,~~268~~988 $ ~~156~~140,~~149~~726 $ ~~197~~307,~~459~~448 $ ~~297~~438,~~361~~087 Operating costs and expenses Cost of products sold ......... ~~101~~112,~~026~~827 ~~131~~122,~~208~~258 ~~203~~315,~~066~~893 ~~250~~372,~~388~~646 Depreciation and amortization 54,~~647~~808 5,~~801~~837 1116,~~352~~160 1117,~~645~~482 Selling, general and administrative expenses ...... 3,~~722~~619 4,~~232~~060 913,~~543~~163 812,~~577~~637 Asset impairment and related charges (note 5) ............. ~~3,909~~-- -- 3,909 -- --------- --------- --------- --------- ~~114~~121,~~304~~254 ~~141~~132,~~241~~155 ~~227~~349,~~870~~125 ~~270~~402,~~610~~765 --------- --------- --------- --------- Operating income (loss) ........ (1511,~~036~~266) 148,~~908~~571 (3041,~~411~~677) 2635,~~751~~322 --------- --------- --------- --------- Other income (expense) Interest expense .............. (78,~~983~~004) (7,~~981~~983) (1523,~~968~~972) (1523,~~976~~959) Interest and other income (expense), net ............. ~~811~~540 1,~~095~~812 (87,~~339~~799) 46,~~833~~645 --------- --------- --------- --------- (7,~~172~~464) (6,~~886~~171) (2431,~~307~~771) (1117,~~143~~314) --------- --------- --------- --------- Income (loss) before income taxes ........................ (2218,~~208~~730) 82,~~022~~400 (5473,~~718~~448) 1518,~~608~~008 Income tax (benefit) expense ... -- -- -- -- --------- --------- --------- --------- Net income (loss) .............. $ (2218,~~208~~730) $ 82,~~022~~400 $ (5473,~~718~~448) $ 1518,~~608~~008 ========= ========= ========= =========

See accompanying notes to consolidated financial statements. PAGE 13 WCI STEEL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)

~~Six~~Nine months ended ~~April~~July 3031, 2001 2000 -------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ................................... $(5473,~~718~~448) $ 1518,~~608~~008 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization ..................... 914,~~868~~658 1015,~~177~~276 Amortization of deferred maintenance costs ........ 1,~~484~~502 12,~~468~~206 Amortization of financing costs ................... ~~645~~977 ~~645~~968 Postretirement health care benefits ............... 69,~~626~~913 58,~~286~~869 Pension benefits .................................. 3,~~112~~174 4,~~118~~053 Provision for losses on accounts receivable ....... 2,~~300~~450 -- Asset impairment and other charges ................ 14,393 -- Other ............................................. 8493 1,~~108~~150 Cash provided (used) by changes in certain assets and liabilities Accounts receivable ............................... (47,~~079~~244) (34,~~551)~~920 Inventories ....................................... 95,~~129~~258 (310,~~741~~388) Prepaid expenses and other assets ................. (3,~~256~~319) ~~(1,628)~~770 Accounts payable .................................. (51,~~377)~~316 (67,~~359~~670) Accrued liabilities ............................... 1(5,~~574~~829) (4,~~419~~765) Other ~~assets and~~ liabilities, ~~net~~ ................................. ~~508~~458 ~~(980)~~807 -------- -------- Net cash ~~provided~~ (used) provided by operating activities .............................. (1735,~~707~~648) 2834,~~198~~204 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment .......... (48,~~112~~248) (612,~~103~~404) Gross proceeds from the sale of assets .............. 105 -- -------- -------- Net cash used by investing activities ........... (48,~~112~~143) (612,~~103~~404) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: ~~Principal~~Net ~~payments~~change onin long-term debt ........................ ~~(63)~~175 (6090) Dividends paid ...................................... -- (59,~~300~~200) -------- -------- Net cash provided (used) by financing activities ~~(63)~~..................................... 175 (59,~~360~~290) -------- -------- Net increase (decrease) in cash and cash equivalents ........................................ (2143,~~882~~616) 1612,~~735~~510 Cash and cash equivalents at beginning of period ................................ 89,478 76,349 -------- -------- Cash and cash equivalents at end of period ................. $ 6745,~~596~~862 $ 9388,~~084~~859 ======== ======== Supplemental disclosure of cash flow information Cash paid for interest .............................. $ 1530,~~324~~489 $ 1530,~~331~~483 Cash paid for income taxes .......................... -- 21

See accompanying notes to consolidated financial statements. PAGE 14 WCI STEEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three and nine months ended July 31, 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 nine months ended July 31, 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 July 31, 2001 and October 31, 2000 was as follows:

~~April~~July 3031, October 31, 2001 2000 (Unaudited) ----------- ----------- (Dollars in thousands) Raw materials ........................................ $3031,~~952~~154 $38,873 Finished and semi-finished product 59................... 62,~~039~~122 60,785 Supplies ............................................. 79122 74 ------- ------- 9093,~~070~~398 99,732 Less LIFO reserve .................................... 32,~~028~~485 3,561 ------- ------- $8790,~~042~~913 $96,171 ======= =======

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 have generally become more stringent, and the Company may be subject to more stringent environmental laws and regulations in the future. Compliance PAGE 15 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, based on information currently available, to cover the costs to resolve PAGE 16 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 the nine months ended July 31, 2001, WCI recorded revenue of $8.3 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, idled its plant indefinitely effective July 15, 2001. YSC had been in operation since 1991 producing a clinker-type material ("Sinter") from steelmaking by-products such as slag and ore fines. The sinter was 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 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS Three Months Ended July 31, 2001 Compared to Three Months Ended July 31, 2000 Net sales for the three months ended July 31, 2001 were $110.0 million on 278,552 tons shipped, representing a 21.8% decrease in net sales and a 9.8% decrease in tons shipped compared to the three months ended July 31, 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 13.4% to $395 in the 2001 period compared to $456 for the 2000 period, with net selling prices down 13.9% offset somewhat by changes in product mix. However, net selling prices in the third quarter were flat compared to the second quarter of 2001. Shipments of custom carbon, alloy and electrical steels accounted for 52.4% of total shipments for the three months ended July 31, 2001 compared to 54.3% for the three months ended July 31, 2000. On July 31, 2001, WCI's order backlog was approximately 158,000 net tons compared to approximately 187,000 net tons at July 31, 2000 and 144,000 net tons at October 31, 2000. The table below shows WCI's product mix for the three months ended July 31, 2001 and July 31, 2000.

Net Tons Shipped Percent of Total ------------------- ------------------ Three Months Ended Three Months Ended ~~April~~July 3031, ~~April~~July 3031, ------------------- ------------------ 2001 2000 2001 2000 ------- ------- ------- ------- CUSTOM PRODUCTS: Hot Rolled ............... 7675,~~847~~747 ~~105~~93,~~771~~700 3127.92% 30.23% Cold Rolled .............. 45,~~325~~193 45,~~658~~856 1.89% 1.39% Coated products .......... 5564,~~610~~899 6668,~~747~~116 23.13% 1922.1% ------- ------- ------- ------- Total Custom Products ....... ~~136~~145,~~782~~839 ~~177~~167,~~176~~672 5652.84% 5054.63% Total Commodity Products ~~104~~.... 132,~~349~~713 ~~172~~141,~~569~~240 4347.26% 4945.47% ------- ------- ------- ------- Total Steel Products ........ ~~241~~278,~~131~~552 ~~349~~308,~~745~~912 100.0% 100.0% ======= ======= ======= =======

PAGE 18 The following table sets forth the percentage of WCI's net tons shipped to various markets for the three months ended July 31, 2001 and July 31, 2000.

Three Months Ended ~~April~~July 3031, CUSTOMER CATEGORY 2001 2000 ----------------------------- ------------- --------------- Conversion/further processing 47.0........... 51.6% 4843.32% Steel service centers .................... 2016.95% 26.46% Construction ............................. 1618.2% 1115.90% Electrical equipment ..................... 54.54% 45.80% Direct automotive ........................ 54.18% 46.92% Other .................................... 54.35% 34.70% ......................................... ------- ------- Total ........................... 100.0% 100.0% ===== =====

Gross margin (loss) (sales less cost of products sold) was ($2.8) million for the three months ended July 31, 2001 compared to gross margin of $18.5 million for the three months ended July 31, 2000. The decrease in gross margin reflects the lower shipping volume and transaction prices discussed above and higher per ton production costs resulting from lower production volume and its effect on fixed operating costs per ton. Production volume during the third quarter of 2001 was approximately 82% of operating capacity compared to approximately 85% in the 2000 period. Operating income (loss) was ($12.1) million, or ($44) per ton, for the three months ended July 31, 2001 compared to operating income of $7.7 million, or $25 per ton, for the three months ended July 31, 2000. The decrease in operating income for the 2001 period reflects the lower gross margin discussed above. Interest, investment and other income (expense), net was $0.6 million for the three months ended July 31, 2001 compared to $2.2 million for the three months ended July 31, 2000. The decrease in interest and investment income was due primarily to lower cash balances and lower interest rates as well as significantly reduced investment balances and less favorable financial market conditions in the 2001 period compared to the 2000 period. As a result of the items discussed above, the Company had a loss before taxes of $23.0 million for the three months ended July 31, 2001 compared to income before taxes of $1.5 million for the three months ended July 31, 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. Nine Months Ended July 31, 2001 Compared to Nine Months Ended July 31, 2000 Net sales for the nine months ended July 31, 2001 were $307.4 million on 756,706 tons shipped, representing a 29.8% decrease in net sales and a 23.2% decrease in tons shipped compared to the nine months ended July 31, 2000. Shipping volume for the 2001 period was lower due primarily to lower customer demand resulting from a general slowing in PAGE 19 the U.S. economy coupled with high levels of imported steel. Net sales per ton shipped decreased 8.8% to $406 in the 2001 period compared to $445 for the 2000 period, with net selling prices down 11.0% offset somewhat by changes in product mix. Shipments of custom carbon, alloy and electrical steels accounted for 53.7% of total shipments for the nine months ended July 31, 2001 compared to 52.4% for the nine months ended July 31, 2000. The table below shows WCI's product mix for the nine months ended July 31, 2001 and July 31, 2000.

Net Tons Shipped Percent of Total ----------------~~---~~ ------------------ ~~Six~~Nine Months Ended ~~Six~~Nine Months Ended ~~April~~July 3031, ~~April~~July 3031, 2001 2000 2001 2000 -------- ------- ------- ------- CUSTOM PRODUCTS: Hot Rolled ................. ~~153~~229,~~810~~557 ~~218~~312,~~583~~283 3230.23% 3231.37% Cold Rolled ................ 813,~~374~~567 814,~~705~~561 1.8% 1.35% Coated products ............ 98163,~~493~~392 ~~120~~188,~~479~~595 2021.6% 1719.82% ------- ------- ----~~---~~ ------- Total Custom Products ......... ~~260~~406,~~677~~516 ~~347~~515,~~767~~439 5453.67% 5152.4% Total Commodity Products ...... ~~217~~350,~~477~~190 ~~328~~469,~~021~~261 4546.43% 4847.6% ------- ------- ------- ------- Total Steel Products .......... ~~478~~756,~~154~~706 ~~675~~984,~~788~~700 100.0% 100.0% ======= ======= ======= =======

The following table sets forth the percentage of WCI's net tons shipped to various markets for the nine months ended July 31, 2001 and July 31, 2000.

~~Six~~Nine Months Ended ~~April~~July 3031, CUSTOMER CATEGORY 2001 2000 ----------------------------- ------------ ---------------- Conversion/further processing 49.5.......... 50.3% 5249.24% Steel service centers ................... 2119.67% 2425.73% Construction ............................ 1315.84% 1011.48% Electrical equipment .................... 54.29% 5.0% Direct automotive ....................... 5.10% 4.39% Other ................................... 4.87% 3.46% ------- ------- Total .......................... 100.0% 100.0% ======= =======

Gross margin (loss) (sales less cost of products sold) was ($8.3) million for the nine months ended July 31, 2001 compared to gross margin of $65.7 million for the nine months ended July 31, 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 nine months ended July 31, 2001 was approximately 73% of operating capacity compared to approximately 94% in the 2000 period. PAGE 20 Operating income (loss) was ($44.2) million, or ($58) per ton, for the nine months ended July 31, 2001 compared to operating income of $32.8 million, or $33 per ton, for the nine months ended July 31, 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 indefinite idling of its operating facility on July 15, 2001 (See "Note 9: 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 8: Other Matters" above). Excluding these charges, the operating loss was ($38.2) million, or ($51) per ton for the nine months ended July 31, 2001. Interest, investment and other income (expense), net was ($7.9) million for the nine months ended July 31, 2001 compared to income of $8.7 million for the nine months ended July 31, 2000. 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, Inc. 10.875% Senior Unsecured Notes. Investment income declined by $1.6 million in the nine months ended July 31, 2001 due to lower returns from the limited partnership investment resulting from lower amounts of invested capital and less favorable financial market conditions. Interest income declined $1.0 million in the nine months ended July 31, 2001 due primarily to lower cash balances and lower interest rates. 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 $86.3 million for the nine months ended July 31, 2001 compared to income before taxes of $7.3 million for the nine months ended July 31, 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. As of July 31, 2001, and the date hereof, 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, however, Renco has waived its right to collect interest for the August 1, 2001 interest payment. This waiver has been recorded as a capital contribution of $3.2 million as reflected in the Company's shareholder deficit section of the Consolidated Balance Sheet dated July 31, 2001. PAGE 21 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 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"). WCI's net loss of $73.4 million for the nine months ended July 31, 2001 precludes WCI from paying 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 July 31, 2001, WCI had a negative Dividend Basket of $81.2 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 fourth quarter of 2001 and such loss would increase the negative Dividend Basket. Other than allowable dividends, WCI's assets may not be utilized by Renco Steel. At July 31, 2001, Renco Steel had redeemed all of its Other Investments and borrowed $1.1 million from Renco, resulting in a cash balance of $3.35 million. The interest payment of $3.30 million was paid on August 1, 2001. Renco Steel's ability to meet its debt service and working capital needs, given WCI's recent financial performance, will be 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. Renco Steel's ability to comply with such covenants will be dependent upon future support from Renco, however, the limitation of indebtedness permitted to be incurred from a related party is $15.0 million. With Renco's $1.1 million loan to Renco Steel, approximately $13.9 million is available under this financial limitation. Cash used by operating activities was $41.1 million for the nine months ended July 31, 2001 compared to cash provided by operating activities of $27.5 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 used by investing activities was $0.4 million in the nine months ended July 31, 2001 compared with $7.7 million in the nine months ended July 31, 2000. Renco Steel's proceeds from the sale of Other Investments were $7.7 million in 2001 and in 2000 the proceeds, net of purchases of Other Investments were $4.8 million. WCI's capital expenditures were $8.2 million and $12.4 million during the nine months ended July 31, 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 third calendar quarter of 2002 at an estimated cost of $15 million. WCI's capital PAGE 22 expenditures in 2001 and 2000 have been funded through cash balances and cash provided by operating activities. At July 31, 2001, WCI had commitments for capital expenditures of approximately $5.9 million. Renco Steel paid no dividends and was not permitted to do so under the Senior Secured Notes indenture during the nine months ended July 31, 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 July 31, 2001 consisted of cash and cash equivalents of $45.9 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 July 31, 2001, WCI had no borrowings outstanding under the Revolving Credit Facility of WCI, with a borrowing limit of $81.5 million based on eligible inventories and receivables, net of $14.2 million in letters of credit outstanding or committed. Cash (used) provided by operating activities was ($35.6) million for nine months ended July 31, 2001 compared to $34.2 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 $8.2 million and $12.4 million during the nine months ended July 31, 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 third calendar quarter of 2002 at an estimated cost of $15 million. Management has funded WCI's capital expenditures in 2001 and 2000 through cash balances and cash provided by operating activities. At July 31, 2001, WCI had commitments for capital expenditures of approximately $5.9 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. The Revolving Credit Facility of WCI requires WCI to maintain a minimum net worth, as defined, of not less than a negative $200 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. PAGE 23 WCI paid no dividends and was not permitted to do so under the Senior Secured Notes of WCI indenture during the nine months ended July 31, 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 was permitted to pay current claims up to $8.8 million from a trust. That limit was reached during the three months ended July 31, 2001 which will now require WCI to pay claims from corporate assets. Claims paid by WCI or trust totaled $4.0 million, $4.4 million and $3.4 million during the nine months ended July 31, 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 $5.4 million, $4.2 million and $6.7 million to the plan during the nine months ended July 31, 2001 and fiscal years 2000 and 1999, respectively. Accounting Standards In July 2001, the Financial Accounting Standards Board issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 142 will require 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 is required to adopt the provisions of Statement 141 immediately, and Statement 142 effective November 1, 2002. As of the date of adoption, the Company expects to have unamortized goodwill in the amount of approximately $10.3 million, which will be subject to the transition provisions of Statement 142. Amortization expense related to goodwill was approximatley $0.5 million and $0.4 million for the year ended December 31, 2000, and the nine months ended July 31, 2001, respectively. The Company is currently studying the effects of adopting the new rules, including whether any transitional impairment losses will be required. 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. PAGE 24 133," ("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. The Company 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. 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 early next year. In addition, service center inventories and car and light truck inventories have dropped significantly from their recent highs. While we are encouraged by both the preliminary and final determinations recently announced by the U.S. Department of Commerce regarding the importation of hot-rolled carbon steel products, and the initiation of a Section 201 International Trade Commission investigation, imports are expected to continue to supply a significant portion of domestic steel demand which will result in continued price pressure. WCI's order entry rate has stabilized and WCI expects shipping volume to be flat in the fourth fiscal quarter of 2001 compared to the third quarter. Selling prices are expected to decline slightly in the fourth quarter compared to the third quarter due to decreases in prices for cold rolled and galvanized products. Custom products are expected to comprise approximately 50% of shipments in the fourth quarter compared to 52.4% in the third quarter. Per ton production costs are expected to increase slightly in the fourth quarter compared to the third quarter due to increased maintenance costs and natural gas prices and the cost of idling certain finishing facilities periodically during the quarter. As a result, the Company expects to incur a loss in the fourth quarter that is larger than that reported in the third quarter. Renco Steel's dividend income from WCI is no longer a viable source of liquidity based on WCI's negative Dividend Basket of $81.2 million at July 31, 2001. Additional advances or contributions from Renco as well as Renco's future waiver of interest payments relating to its ownership interest in the Senior Secured Notes will be necessary to sustain Renco Steel's debt service and working capital needs, however, Renco has no obligation to do so. PAGE 25 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 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. PAGE 26 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 market risk has not changed materially from that reported in the Company's 10-K for the fiscal year ended October 31, 2000. PAGE 27 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 6 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: None. PAGE 28 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: September 18, 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 29 RENCO STEEL HOLDINGS, INC. EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION -------------- ----------- 10.1.4 Promissory Note dated July 30, 2001 between Renco Steel Holdings, Inc. and The Renco Group, Inc.

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