10-Q 1 a2089378z10-q.txt FORM 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, 2002. -------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 333-48245 -------------------- RENCO STEEL HOLDINGS, INC. (Exact name of registrant as specified in its charter) Ohio 34-1854775 ---------------------------------- ----------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 30 Rockefeller Plaza, 42nd Floor, New York, New York 10112 ----------------------------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) (212) 541-6000 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ ] Yes [X] No Note: The Registrant files pursuant to an indenture but is not otherwise subject to Section 13 or 15(d) filing requirements. As of September 16, 2002, 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 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 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three and nine months ended July 31, 2002 and 2001 ( Unaudited ) NOTE 1: BASIS OF PRESENTATION Renco Steel Holdings, Inc. (Renco Steel) is a holding company incorporated in the state of Ohio on January 20, 1998 and is a wholly owned subsidiary of The Renco Group, Inc. (Renco). On January 29, 1998, Renco contributed to Renco Steel its interest in its wholly owned subsidiary WCI Steel, Inc. (WCI). Accordingly the accompanying financial statements include the accounts of Renco Steel and WCI (collectively, the Company). The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. Certain reclassifications of prior year data have been made to conform to the 2002 presentation. The results of operations for the three and nine months ended July 31, 2002 are not necessarily indicative of the results to be expected for the full year. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K for the fiscal year ended October 31, 2001. NOTE 2: CASH AND CASH EQUIVALENTS Cash and cash equivalents of Renco Steel and WCI include cash on hand and short-term investments with maturities of three months or less from the date of acquisition. Renco Steel is generally restricted from utilizing the cash and cash equivalents of WCI under the terms of the indenture governing WCI's 10% Senior Secured Notes due 2004, except as permitted for the distribution of dividends to Renco Steel. Page 7 NOTE 3: INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method. The composition of inventories at July 31, 2002 and October 31, 2001 was as follows:

NOTE 4: RELATED PARTY TRANSACTIONS Renco Steel has borrowed $7.3 million from Renco since July 2001 under the terms of three separate demand promissory notes ("the Renco Loans"). Renco's right to payment under the Renco Loans is contractually subordinated to Renco Steel's $120.0 million 10 7/8% Senior Secured Notes due 2005 ("Senior Secured Notes"). The Renco Loans bear interest at a rate of 8.75% and are payable upon demand. These loans and accrued interest thereon are reflected as due to related party on the Consolidated Balance Sheet at July 31, 2002. As of July 31, 2002, Renco owned $69,470 principal amount of Renco Steel's Senior Secured Notes after purchasing an additional $7.15 million principal amount during the third fiscal quarter of 2002. Renco has irrevocably waived its right to receive interest in regard to its ownership of the Senior Secured Notes from February 1, 2001 to and including July 31, 2002. Accordingly, capital contributions of $5.4 million and $3.2 million have been recorded in the nine months ended July 31, 2002 and 2001, respectively, and interest expense of the same amounts were also recorded in the Company's Statement of Operations for the same periods. From February 1, 2001, Renco's aggregate capital contribution has been $10.2 million in respect to its waiver of interest. NOTE 5: ENVIRONMENTAL MATTERS and OTHER CONTINGENCIES In common with much of the steel industry, WCI's facilities are located on sites that have been used for heavy industrial purposes for decades. WCI is and will continue to be subject to numerous federal, state and local environmental laws and regulations governing, among other things, air emissions, waste water discharge and solid and hazardous waste management. WCI has made and intends to continue to make the necessary expenditures for environmental remediation and compliance with environmental laws and regulations. Environmental laws and regulations continue to change and have generally become more stringent, and WCI may be subject to more Page 8 stringent environmental laws and regulations in the future. Compliance with more stringent environmental laws and regulations could have a material adverse effect on WCI's financial condition and results of operations. WCI is subject to a consent decree as a result of a civil action instituted by the Department of Justice (DOJ), on behalf of the Environmental Protection Agency (EPA). The consent decree requires WCI to complete certain supplemental environmental projects with a remaining estimated cost of $2.0 million that will be expended by late 2002. These projects include sediment removal from the Mahoning River at an estimated cost of $0.8 million and the installation of a liner for a surface impoundment estimated to cost approximately $1.2 million. The consent decree also provides for stipulated penalties in the event of noncompliance which WCI does not believe will be material. As a condition of a previous Resource Conservation and Recovery Act (RCRA) operating permit, WCI is required to undertake a corrective action program with respect to historical material handling practices at the Warren facility. WCI has completed the initial phase of the first investigation step of the corrective action program, the RCRA Facility Investigation (RFI), and has submitted its report to the EPA. WCI and the EPA agreed that additional sampling would be required to complete a full RFI which is expected to be completed by the end of 2003. The RFI workplan identifies thirteen historical solid waste management units to be investigated. The final scope of corrective action required to remediate any contamination that may be present at or emanating from the Warren facility is dependent upon the completion and findings of the RFI and the development and approval of a corrective action program. Accordingly, WCI is unable at this time to estimate the final cost of the corrective action program or the period over which such costs may be incurred and there can be no assurance that any such corrective action program would not have a material adverse effect on the operating results or financial condition of WCI. On January 23, 1996, two retired employees instituted an action against WCI and the United Steelworkers of America (USWA) in the United States District Court for the Northern District of Ohio alleging in substance that certain distributions made by WCI to employees and benefit plans violated certain agreements, the Employee Retirement Income Security Act (ERISA), the National Labor Relations Act (NLRA) and common law. On July 31, 1997, the court granted WCI's motion to dismiss this action and entered judgement in favor of WCI and the USWA. The Plaintiffs filed an appeal regarding the court's decision to dismiss, which was heard in June 1998. In March 1999, the appellate court upheld the dismissal of the claims under ERISA and common law, but reversed the dismissal of the NLRA claim and remanded to the district court for further proceedings. On October 9, 2000 the court granted WCI's motion to dismiss this action and entered judgement in favor of WCI and the USWA. The plaintiffs filed an appeal regarding the court's decision to dismiss which was heard on April 23, 2002. On May 24, 2002 the appellate court affirmed the decision to dismiss this action. No appeal has been filed regarding the decision and the time frame for filing an appeal has expired. In addition to the above-described matters, WCI is contingently liable with respect to lawsuits and other claims incidental to the Page 9 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. 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, 2002 and July 31, 2001, respectively. All revenues are generated by WCI. Geographic revenues are based on the region in which the customer invoice was generated and all revenue was generated within the United States. The Company measures segment profit for internal reporting purposes as net income (loss). A reconciliation of segment income (loss) to consolidated net income (loss) is presented below for the three and nine months ended July 31, 2002 and 2001:

NOTE 7: OTHER MATTERS In the past, Renco Steel's primary sources of liquidity were investments in limited partnerships (which were liquidated in 2001) and dividend payments from WCI. Renco Steel's sole source of liquidity currently is advances and contributions from its parent, Renco. Dividends from WCI are currently prohibited under the terms of the indenture governing WCI's 10% Senior Secured Notes due 2004 due to WCI's significant cumulative losses, as defined. WCI is required to Page 10 earn in excess of its cumulative losses before it is permitted to resume dividend payments to Renco Steel. At July 31, 2002, WCI's cumulative losses were $154.1 million. It is not anticipated that WCI will be able to generate earnings in excess of its cumulative losses in the foreseeable future and therefore, Renco Steel does not expect to receive any dividends from WCI. Support from Renco will be necessary for Renco Steel to meet its debt service, and to a much lesser extent, its administrative requirements. As of July 31, 2002, Renco has provided loans amounting to $7.3 million and has irrevocably waived its right to collect interest of $10.2 million in the aggregate from February 1, 2001 through July 31, 2002 on the Senior Secured Notes it owns. Renco may make future advances or contributions to Renco Steel and may waive its right to future interest payments on the Senior Secured Notes it owns, however, Renco has no obligation to do so. Page 11 WCI STEEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amount)

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

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

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, 2002 and 2001 ( Unaudited ) NOTE 1: BASIS OF PRESENTATION WCI Steel, Inc. (Company or WCI) is a wholly-owned subsidiary of Renco Steel Holdings, Inc. (Renco Steel) and an indirect wholly-owned subsidiary of The Renco Group, Inc. (Renco). The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. Certain reclassifications of prior year data have been made to conform to the 2002 classifications. The results of operations for the three and nine months ended July 31, 2002 are not necessarily indicative of the results to be expected for the full year. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K for the fiscal year ended October 31, 2001. NOTE 2: INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method. Market value is determined based on expected selling price of each product. Inventories consist of the following:

Page 15 NOTE 3: LONG-TERM DEBT Long-term debt consists of the following:

The $300 million 10% Senior Secured Notes due December 1, 2004 (Senior Secured Notes) are secured by a first priority lien on substantially all of the existing property, plant and equipment of the Company. A Voluntary Employee Beneficiaries Association trust fund, established to hold Company contributions to fund postretirement health care and life insurance obligations for the benefit of hourly employees, holds a second priority lien on the security for the Senior Secured Notes. The Company has a $100,000,000 Revolver secured by inventories and receivables and subject to eligibility requirements, as defined, reduced by any outstanding letters of credit. The Revolver is subject to a monthly service fee of $15,000 and an annual commitment fee of 0.5% of the unused balance up to $60,000,000 payable monthly. There were borrowings of $34,250,000 outstanding under the Revolver as of July 31, 2002. The Revolver, which expires December 29, 2003, also provides for up to an aggregate amount of $20,000,000 in letters of credit. On September 13, 2002 the Company and its lenders under the Revolver agreed to amend the loan agreement as described below. At July 31, 2002 assuming this amendment had been in place, the Company had borrowing availability of $51,836,000 based on eligible inventory and receivables after deducting $34,250,000 of borrowings outstanding and $14,870,000 in letters of credit outstanding and before reflecting a $20,000,000 minimum borrowing availability covenant as discussed below. The Revolver is subject to a penalty of $250,000 if terminated before October 31, 2003. The Company's Revolver and Senior Secured Notes contain certain financial and other covenants, including maintenance of specified levels of net worth as defined, working capital, and debt service and limitations on capital expenditures. Additional covenants limit the incurrence of additional indebtedness, payments affecting subsidiaries, transactions with affiliates, sale/leaseback transactions, impairment Page 16 of security interest, consolidations, mergers and transfer of the Company's assets. On January 25, 2002 the Company and its lenders under the Revolver agreed to amend the loan agreement to require the Company to maintain a minimum net worth, as defined, of not less than the following for each period indicated: negative $225 million through January 31, 2002, negative $240 million from February 1, 2002 through April 30, 2002, negative $255 million from May 1, 2002 through July 31, 2002, and negative $260 million on August 1, 2002 and thereafter. In addition, the Company was required to maintain minimum borrowing availability under the Revolver of $25 million. The January amendment also changes the interest charged from prime rate to prime rate plus 1.5% or as to Eurodollar Rate Loans, a rate of 3.5% in excess of the Adjusted Eurodollar Rate applicable for the interest period selected by the Company. On September 13, 2002 the Company and its lenders under the Revolver further agreed to reduce the minimum borrowing availability requirement from $25 million to $20 million provided the Company is able to meet certain minimum cumulative earnings before interest, taxes, depreciation and amortization (EBITDA) targets. A mimimum cumulative EBITDA target has been established for each month from August 2002 to December 2003 and totals $73.0 million with monthly increments of not more than $5.5 million and not less than $4.0 million. In addition, while loans and letters of credit continue to be subject to a $100 million maximum, WCI can use up to $105 million of qualifying inventories and receivables based on established advance rates in determining availability with respect to the minimum availability covenant. The Company is permitted to declare and pay dividends, and make other transactions with affiliates provided no condition of default exists or will exist, and the accumulated amount of such transactions is no greater than fifty percent (50%) of the consolidated net income as defined (less 100% of any consolidated net loss) earned for periods subsequent to October 31, 1996 when taken as a single accounting period less management fees paid to Renco in excess of $1,200,000 annually for the same period. Under these agreements, there were no amounts available for dividends and other transactions with affiliates at July 31, 2002. NOTE 4: ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES In common with much of the steel industry, the Company's facilities are located on sites that have been used for heavy industrial purposes for decades. The Company is and will continue to be subject to numerous federal, state and local environmental laws and regulations governing, among other things, air emissions, waste water discharge and solid and hazardous waste management. The Company has made and intends to continue to make the necessary expenditures for environmental remediation and compliance with environmental laws and regulations. Environmental laws and regulations continue to change and have generally become more stringent, and the Company may be subject to more stringent environmental laws and regulations in the future. Compliance with more stringent environmental laws and regulations could have a material adverse effect on the Company's financial condition and results of operations. The Company is subject to a consent decree as a result of a civil action instituted by the Department of Justice (DOJ), on behalf of the Environmental Protection Agency (EPA). The consent decree requires the Company to complete certain supplemental environmental projects with a Page 17 remaining estimated cost of $2.0 million that will be expended by late 2002. These projects include sediment removal from the Mahoning River at an estimated cost of $0.8 million and the installation of a liner for a surface impoundment estimated to cost approximately $1.2 million. The consent decree also provides for stipulated penalties in the event of noncompliance which the Company does not believe will be material. As a condition of a previous Resource Conservation and Recovery Act (RCRA) operating permit, the Company is required to undertake a corrective action program with respect to historical material handling practices at the Warren facility. The Company has completed the initial phase of the first investigation step of the corrective action program, the RCRA Facility Investigation (RFI), and has submitted its report to the EPA. The Company and the EPA agreed that additional sampling would be required to complete a full RFI which is expected to be completed by the end of 2003. The RFI workplan identifies thirteen historical solid waste management units to be investigated. The final scope of corrective action required to remediate any contamination that may be present at or emanating from the Warren facility is dependent upon the completion and findings of the RFI and the development and approval of a corrective action program. Accordingly, the Company is unable at this time to estimate the final cost of the corrective action program or the period over which such costs may be incurred and there can be no assurance that any such corrective action program would not have a material adverse effect on the operating results or financial condition of the Company. On January 23, 1996, two retired employees instituted an action against the Company and the United Steelworkers of America (USWA) in the United States District Court for the Northern District of Ohio alleging in substance that certain distributions made by the Company to employees and benefit plans violated certain agreements, the Employee Retirement Income Security Act (ERISA), the National Labor Relations Act (NLRA) and common law. On July 31, 1997, the court granted the Company's motion to dismiss this action and entered judgement in favor of the Company and the USWA. The Plaintiffs filed an appeal regarding the court's decision to dismiss, which was heard in June 1998. In March 1999, the appellate court upheld the dismissal of the claims under ERISA and common law, but reversed the dismissal of the NLRA claim and remanded to the district court for further proceedings. On October 9, 2000 the court granted the Company's motion to dismiss this action and entered judgement in favor of the Company and the USWA. The plaintiffs filed an appeal regarding the court's decision to dismiss which was heard on April 23, 2002. On May 24, 2002 the appellate court affirmed the decision to dismiss this action. No appeal has been filed regarding the decision and the time frame for filing an appeal has expired. In addition to the above-described matters, the Company is contingently liable with respect to lawsuits and other claims incidental to the ordinary course of its business. A liability has been established for an amount, which the Company believes is adequate, based on information currently available, to cover the costs to resolve the above described matters, including remediation, if any, except for any costs of corrective action that may result from the RFI for which no estimate can currently be made. The outcome of the above described Page 18 matters could have a material adverse effect on the future operating results of the Company in a particular quarter or annual period; however, the Company believes that the effect of such matters will not have a material adverse effect on the Company's consolidated financial position. NOTE 5: OTHER MATTERS Based on WCI's current order intake rate and backlog, the Company expects shipping volume to be approximately 330,000 tons in the fourth quarter of 2002. WCI's order backlog was approximately 293,000 tons at July 31, 2002 compared to 158,000 at July 31, 2001 and 352,000 at April 30, 2002. We expect net sales per ton shipped to increase approximately 10% during the fourth quarter compared to the third quarter. WCI expects cost of products sold per ton shipped to increase approximately 2% in the fourth quarter compared to the third quarter due primarily to changes in product mix with capacity utilization remaining at approximately 90% or greater. During the fourth quarter of 2002, the Company expects its working capital needs to increase by approximately $15 million as a result of increasing iron ore pellet inventories prior to the end of the shipping season and due to increased accounts receivable resulting from increasing revenues. Assuming no change in the U.S. economy or level of steel imports, WCI expects shipping volume during the first fiscal quarter of 2003 to decline approximately 5% compared to the fourth quarter of 2002 with net sales and cost of goods sold per ton remaining flat. Based on these expectations, the Company believes that it has adequate availability of cash resources to maintain operations and meet its debt service requirements into 2003 and if current market conditions persist, the Company expects to generate significant free cash flow both from operations and working capital in the first half of 2003. Significant uncertainty remains regarding the direction of the U.S. economy and the short-term as well as long-term condition of the steel market. Improvements in order intake rates and pricing realized during 2002 could be reversed by a number of factors including increasing domestic supply through the restart of closed facilities, increases in steel imports due to rising domestic steel prices or the granting of exemptions to tariffs imposed as a result of the Section 201 investigation or the failure of an economic recovery to materialize or be sustained in the U.S. If the volume or net sales prices expected to be realized by WCI during the fourth quarter are not sustained in subsequent quarters due to these or other factors, WCI may not have adequate availability under its existing financing arrangements to sustain its operations and may require additional sources of financing. WCI cannot assure that it has the ability to obtain such additional financing or what the terms of such additional financing might be. Failure to obtain such additional financing in these circumstances would likely have a material adverse effect on WCI's operations. Page 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATION Three months ended July 31, 2002 compared to Three months ended July 31, 2001 Net sales for the three months ended July 31, 2002 were $132.8 million on 334,367 tons shipped, representing a 20.7% increase in net sales and a 20.0% increase in tons shipped compared to the three months ended July 31, 2001. When the third fiscal quarter of 2002 is compared to the prior quarter ended April 30, 2002, net sales showed a more modest increase of 4.0%, however tons shipped decreased by 6.0%. Net sales per ton shipped of $397 for the three months ended July 31, 2002 was 0.5% higher than the net sales per ton shipped of $395 for the comparable prior year period ended July 31, 2001, with net selling prices up 6.0% offset by changes to product mix. Net sales per ton increased 10.6% for the third fiscal quarter of 2002 compared to the second fiscal quarter of 2002, with net selling prices increasing 9.4%. Shipments of custom carbon, alloy and electrical steels accounted for 47.4% of total shipments for the three months ended July 31, 2002 compared to 52.4% for the three months ended July 31, 2001 and 47.6% for the three months ended April 30, 2002. The improvements in shipping volume and increased net selling prices in the third quarter 2002 compared to the third quarter 2001 resulted from a variety of factors including a decrease in domestic supply due to the closing of facilities during the last several years, the implementation of tariffs under a favorable Section 201 decision on certain imported steel which became effective for imports entering the U.S. on or after March 20, 2002, a conclusion to inventory reductions by customers and a slight improvement in overall economic activity. Page 20 The table below shows WCI's product mix for the three months ended July 31, 2002 and July 31, 2001.

The following table sets forth the percentage of WCI's net tons shipped to various markets for the three months ended July 31, 2002 and July 31, 2001.

Gross margin (sales less cost of products sold) was $10.5 million for the three months ended July 31, 2002 compared to gross margin (loss) of ($2.8) million for the three months ended July 31, 2001. The increase in gross margin reflects the increased shipping volume and lower production costs resulting from a higher production volume and its effect on fixed operating costs per ton. Production volume for the three months ended July 31, 2002 was approximately 89% of operating capacity compared to approximately 82% for the three months ended July 31, 2001. Operating loss was ($0.5) million, or ($2) per ton, for the three months ended July 31, 2002 compared to operating loss of ($12.1) million, or ($44) per ton, for the three months ended July 31, 2001. The improvement in operating loss reflects the increased gross margin discussed above partially offset by a charge of $2.1 million in the Page 21 2002 period to establish a reserve for amounts due from a financially distressed customer. Interest, investment and other income (expense), net was $40,000 for the three months ended July 31, 2002 compared to $0.6 million for the three months ended July 31, 2001. This decrease was due primarily to a decrease in interest income resulting from lower cash balances for the three months ended July 31, 2002 compared to the three months ended July 31, 2001. As a result of the items discussed above, the Company had a loss before taxes of ($12.3) million for the three months ended July 31, 2002 compared to a loss before taxes of ($23.0) million for the three months ended July 31, 2001. Effective November 1, 1998, the Company was designated as a qualified subchapter S subsidiary by Renco. Accordingly, the Company is generally not subject to income taxes. Nine Months Ended July 31, 2002 Compared to Nine Months Ended July 31, 2001. Net sales for the nine months ended July 31, 2002 were $350.0 million on 934,920 tons shipped, representing a 13.9% increase in net sales and a 23.6% increase in tons shipped compared to the nine months ended July 31, 2001. Shipping volume for 2002 began to increase more substantially during the second fiscal quarter and has leveled off to more historical levels during the third fiscal quarter. This is a result of a variety of favorable factors that included a decrease in domestic supply due to the closing of facilities during the past several years, the implementation of tariffs under a favorable Section 201 decision on certain imported steel which became effective for imports entering the U.S. on or after March 20, 2002, and a conclusion to inventory reductions by customers and a slight improvement in overall economic activity. Net sales per ton shipped decreased 7.9% to $374 in the 2002 period compared to $406 for the 2001 period, with net selling prices down 1.9% coupled with a less favorable product mix. Shipments of custom carbon, alloy and electrical steels accounted for 47.2% of total shipments for the nine months ended July 31, 2002 compared to 53.7% for the nine months ended July 31, 2001. Page 22 The table below shows WCI's product mix for the nine months ended July 31, 2002 and July 31, 2001.

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.

Gross margin (sales less cost of products sold) was $3.2 million for the nine months ended July 31, 2002 compared to gross margin (loss) of ($8.2) million for the nine months ended July 31, 2001. The increase in gross margin reflects the lower per ton production costs resulting from significantly higher volume and its effect on fixed operating costs per ton and higher shipping volume partially offset by lower transaction prices and less favorable product mix discussed above. The 2002 period included favorable adjustments to inventory valuation reserves of $4.1 million. Excluding these favorable adjustments the gross margin (loss) was ($0.9) million for the 2002 period. Production volume during the nine months ended July 31, 2002 was approximately 85% of operating capacity compared to approximately 73% in the 2001 period. Operating income (loss) was ($24.2) million, or ($26) per ton, for the nine months ended July 31, 2002 compared to operating income (loss) of ($44.2) million, or ($58) per ton, for the nine months ended July 31, 2001. Page 23 The decrease in operating loss reflects lower depreciation expense and the decrease in gross margin (loss) discussed above and also included significant non-recurring items for both periods. The operating loss for the 2002 period included a $1.6 million gain realized from the resolution of contract issues relating to the sale of a third party owned coke plant adjacent to WCI's facility and a charge of $2.1 million to establish a reserve for amounts due from a financially distressed customer. The operating loss for the 2001 period included a charge of $3.9 million associated with WCI's wholly-owned subsidiary, Youngstown Sinter Company, announced indefinite idling of its operating facility by July 15, 2001 and a charge of $2.1 million to establish a reserve for amounts due from a financially distressed steel company. Excluding the gain and adjustments to inventory valuation reserves for the 2002 period and the non-recurring charges in both the 2002 and 2001 periods, the operating loss was ($27.8) million, or ($30) per ton for the nine months ended July 31, 2002 compared to an operating loss of ($38.2) million, or ($51) per ton for the nine months ended July 31, 2001. Interest, investment and other income (expense), net was $0.5 million for the nine months ended July 31, 2002 compared to ($7.9) million for the nine months ended July 31, 2001. Declining cash balances during the 2002 period resulted in a decrease in interest income. 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. As a result of the items discussed above, the Company had a loss before taxes of ($58.8) million for the nine months ended July 31, 2002 compared to a loss before taxes of ($86.3) million for the nine months ended July 31, 2001. Effective November 1, 1998, the Company was designated as a qualified subchapter S subsidiary by Renco. Accordingly, the Company is generally not subject to income taxes. LIQUIDITY AND CAPITAL RESOURCES Renco Steel In February 1998, Renco Steel issued $120.0 million 10 7/8% Senior Secured Notes due 2005 ("Senior Secured Notes") which are secured by the stock of WCI. Interest on the Senior Secured Notes is payable semi-annually in arrears on February 1, and August 1 of each year. As of July 31, 2002, and the date hereof, Renco owns the principal amount of $69,470,000 and $70,470,000, respectively of Renco Steel's Senior Secured Notes. Renco continues to seek additional Senior Secured Notes to purchase. Renco is entitled to receive interest payments from Renco Steel in accordance with the terms of the indenture governing the Senior Secured Notes, however, Renco irrevocably waived its right to collect interest for the interest payment that was made on August 1, 2002 and Renco previously waived all interest it was entitled to collect from February 1, 2001. Renco's waiver of interest has resulted in capital contributions to the Company in the amounts of $5.4 million and $3.2 million in the nine months ended July 31, 2002 Page 24 and 2001, respectively, and interest expense of the same amounts were also recorded in the Company's statement of operations for the same nine month periods. As of July 31, 2002, in the aggregate, Renco has waived a total of $10.2 million of interest. At July 31, 2002 Renco Steel had available cash of $68,000, net of cash appropriated for the August 1, 2002 interest payment on the Senior Secured Notes. Renco Steel's liquidity requirements result from its debt service obligations related to the Senior Secured Notes, as well as to a nominal extent general corporate overhead. In the past, Renco Steel has met these requirements through distributions from WCI, from its cash and limited partnership investments, and from Renco support in the form of loans and waiver of its right to collect certain interest (from February 1, 2001 to July 31, 2002) on the Senior Secured Notes it owns. Due to significant losses incurred by WCI in 2001 and 2002 , WCI does not expect to pay dividends to Renco Steel in the foreseeable future. WCI's ability to pay dividends to Renco Steel is restricted by the terms of the indenture governing WCI's 10% Senior Secured Notes due 2004 (Senior Secured Notes of WCI). Pursuant to the indenture, dividends are generally limited to 50% of WCI's cumulative earnings since October 31, 1996 (Dividend Basket). As of July 31, 2002, WCI had a negative Dividend Basket of $154.1 million, therefore, WCI will not be permitted to pay dividends to Renco Steel until its earnings exceed such amount. Other than allowable dividends, WCI's assets may not be utilized by Renco Steel. Renco Steel's ability to meet its debt service and working capital needs, given WCI's inability to provide dividends in the foreseeable future, will be completely dependent upon future support from Renco. Renco has provided advances amounting to $7.3 million to Renco Steel since July 2001 under the terms of three separate demand promissory notes ("Renco Loans") that each bear interest of 8.75%. Renco may make future advances or contributions to Renco Steel and may waive its right to future interest payments on the Senior Secured Notes, however, Renco has no obligation to do so. The indenture governing the Senior Secured Notes contains numerous covenants and prohibitions that limit the financial activities of Renco Steel, including, among others, limitations on the incurrence of additional indebtedness and additional liens. The ability of Renco Steel to comply with such covenants will be completely dependent upon future support from Renco. The limitation on the incurrence of additional indebtedness is $15.0 million from a related party and $15.0 million from other sources that may include related parties. Based upon the outstanding principal and accrued interest of the Renco Loans, approximately $22.5 million is permitted for future borrowing. At July 31, 2002 Renco Steel was in compliance with the terms of the indenture governing the Senior Secured Notes. The Senior Secured Notes have been classified as a current liability on the Company's consolidated balance sheet as of July 31, 2002 and October 31, 2001 due to Renco Steel's insufficient liquidity position. Renco Steel's ability to meet its debt service and working capital obligations is completely dependent upon support from Renco. Failure to receive such support will have a material adverse effect on Renco Steel's financial condition and liquidity position. Page 25 Cash used by operating activities was $57.7 million for the nine months ended July 31, 2002 compared to $44.4 million for the 2001 period. The decreased operating cash flow in the 2002 period compared to the 2001 period resulted primarily from changes in working capital due to an increase in accounts receivable resulting from increased revenue and by an increase in pension funding partially offset by a reduction in net loss. Cash used by investing activities was $8.5 million in the nine months ended July 31, 2002 compared to $0.4 million in the 2001 period. Capital expenditures accounted for all of the investing activity in 2002 and were comparable to the $8.2 million spent in the 2001 period. Capital expenditures are expected to be approximately $10 million for all of fiscal 2002. At July 31, 2002, WCI had commitments for capital expenditures of approximately $1.5 million. WCI expects to complete a reline of its blast furnace within the next two years at an estimated cost of up to $30 million. In 2001, Renco Steel redeemed a portion of its investment in a limited partnership investment and received proceeds of $7.7 million. Cash provided by financing activities was $39.6 million in the nine months ended July 31, 2002 primarily due to borrowing by WCI under its $100 million revolving credit agreement (WCI Revolver) in the net amount of $34.3 million and to the capital contribution of $5.4 million resulting from Renco's waiver of its right to receive interest from the Senior Secured Notes it owns. WCI did not borrow under the WCI Revolver in 2001. Renco Steel paid no dividends and was not permitted to do so under the Senior Secured Notes indenture during the nine months ended July 31, 2002. WCI WCI's liquidity requirements result from capital investments, working capital requirements, postretirement health care and pension funding, interest expense and, to a lesser extent, principal payments on its indebtedness. WCI's primary sources of liquidity as of July 31, 2002 consisted of cash and cash equivalents of $2.8 million and available borrowing under the WCI Revolver. The WCI Revolver has a maximum borrowing limit of $100 million, is secured by inventories and receivables and is subject to eligibility requirements, as defined therein, and expires on December 29, 2003. On September 13, 2002 WCI and its lenders under the WCI Revolver agreed to amend the loan agreement as described below. As of July 31, 2002, assuming this amendment had been in place, WCI had borrowing availability of $51.8 million based on eligible inventories and receivables after deducting $34.3 million of borrowings outstanding and $14.9 million in letters of credit outstanding and before reflecting a $20 million minimum borrowing availability covenant. Cash from Operations Cash used by operating activities was $55.1 million for the nine months ended July 31, 2002 compared to $35.6 million for the nine Page 26 months ended July 31, 2001. The decreased operating cash flow for the 2002 period compared to the 2001 period resulted primarily from changes in working capital due to an increase in accounts receivable resulting from increased revenue and by an increase in pension funding partially offset by a reduction in net loss. Capital Expenditures Capital expenditures were $8.5 million and $8.2 million for the nine months ended July 31, 2002 and July 31, 2001, respectively. Capital expenditures are expected to be approximately $10 million for all of fiscal 2002. At July 31, 2002, WCI had commitments for capital expenditures of approximately $1.5 million. WCI expects to complete a reline of its blast furnace within the next two years at an estimated cost of up to $30 million. Debt Covenants The WCI Revolver and the indenture governing the Senior Secured Notes of WCI contain numerous covenants and prohibitions that limit the financial activities of WCI, including requirements that WCI satisfy certain financial ratios and limitations on the incurrence of additional indebtedness. On January 25, 2002 WCI and its lenders under the WCI Revolver agreed to amend the loan agreement to require WCI to maintain a minimum net worth, as defined, of not less than the following for each period indicated: negative $225 million through January 31, 2002, negative $240 million from February 1, 2002 through April 30, 2002, negative $255 million from May 1, 2002 through July 31, 2002, and negative $260 million on August 1, 2002 and thereafter. In addition, WCI was required to maintain minimum availability under the WCI Revolver of $25 million. On September 13, 2002 WCI and its lenders under the WCI Revolver further agreed to reduce the minimum borrowing availability requirement from $25 million to $20 million provided WCI is able to meet certain minimum cumulative earnings before interest, taxes, depreciation and amortization (EBITDA) targets. A minimum cumulative EBITDA target has been established for each month from August 2002 to December 2003 and totals $73.0 million with monthly increments of not more than $5.5 million and not less than $4.0 million. In addition, while loans and letters of credit continue to be subject to a $100 million maximum, WCI can use up to $105 million of qualifying inventories and receivables based on established advance rates in determining availability with respect to the minimum availability covenant. The ability of WCI to meet its debt service requirements and to comply with such covenants will be dependent upon future operating performance and financial results of WCI, which will be subject to financial, economic, political, competitive and other factors affecting WCI, many of which are beyond its control. Dividends WCI paid no dividends and was not permitted to do so under the Senior Secured Notes of WCI indenture during the nine months ended July 31, 2002. WCI does not expect to be permitted to pay dividends for the foreseeable future based on limitations under the Senior Secured Notes of WCI indenture. Page 27 Defined Benefit Pension Plan WCI has a defined benefit pension plan (DBP) which covers substantially all bargained for employees. WCI expects to contribute approximately $29.6 million, $26.3 million and $21.1 million to the DBP during fiscal years 2002, 2003 and 2004, respectively, which is expected to satisfy the minimum funding requirements of ERISA for those periods. This funding reflects the results of the actuarial valuation completed as of November 1, 2001. Due primarily to the reduction in the offset from the frozen defined contribution plan resulting from adverse investment experience and from changes in the status of plan participants different from assumptions, WCI's projected benefit obligation increased from $98.7 million as reported in WCI's 10-K as of October 31, 2001 to $114.9 million. WCI contributed $24.6 million, $7.2 million, $4.2 million and $6.7 million to the DBP during the nine months ended July 31, 2002 and fiscal years ended October 31, 2001, 2000 and 1999, respectively. Outlook During the last four years steel imports into the U.S. have adversely affected shipping volume and have contributed significantly to pricing volatility. During this period, WCI and the steel industry have filed various trade cases against hot-rolled and cold-rolled carbon steel flat products from various countries in response to this increase in imports. While various duties have been imposed on these products from certain countries, to date these duties have been ineffective in reducing overall steel imports to the U.S. In response to the surging imports, in June 2001 the U.S. Trade Representative, at the direction of President Bush, requested an investigation by the International Trade Commission under Section 201 of the Trade Act of 1974 to determine whether steel is being imported into the U.S. in such quantities as to be a substantial cause of serious injury to the U.S. steel industry. This request included the investigation of carbon and alloy flat rolled products among other products. On October 22, 2001 the ITC determined that the requisite injury had been demonstrated related to carbon and alloy slabs, hot-rolled, cold-rolled and coated products. These determinations pertain to imports from all countries except Canada. On December 19, 2001 the ITC forwarded its remedy recommendations to President Bush. On March 5, 2002 President Bush issued his remedy regarding the Section 201 investigation which became effective for imports entering the U.S. on or after March 20, 2002. This remedy includes a tariff rate quota on carbon and alloy slabs of 30% in excess of 5.4 million tons per year adjusting over a three year period to 18% on imports in excess of 6.4 million tons and a 30% tariff on hot-rolled, cold-rolled and coated sheet and strip declining over a three year period to 18%. These remedies pertain to imports from all countries except Canada, Mexico, Jordan, Israel and certain developing countries. A significant number of exemption requests have been filed by various countries regarding the tariffs imposed and granted by the U.S. government with a significant number of exemption requests still pending. For the longer term, the shipping levels and realized selling prices of WCI products will continue to be influenced by the levels of Page 28 imported steel, the strength of the manufacturing sector of the domestic economy and production capacity changes by domestic competitors. Domestic flat rolled steel production capacity has been reduced by the closing of seven producers during the past several years with total hot strip mill capacity of 16.7 million tons. This has contributed to the recent increases in product pricing and order intake. A portion of this capacity has been or is expected to be restarted at potentially significantly lower production costs during the next six months and as a result the impact of this closed capacity may be reversed in part. Based on WCI's current order intake rate and backlog, the Company expects shipping volume to be approximately 330,000 tons in the fourth quarter of 2002. WCI's order backlog was approximately 293,000 tons at July 31, 2002 compared to 158,000 at July 31, 2001 and 352,000 at April 30, 2002. We expect net sales per ton shipped to increase approximately 10% during the fourth quarter compared to the third quarter. WCI expects cost of products sold per ton shipped to increase approximately 2% in the fourth quarter compared to the third quarter due primarily to changes in product mix with capacity utilization remaining at approximately 90% or greater. During the fourth quarter of 2002, WCI expects its working capital needs to increase by approximately $15 million as a result of increasing iron ore pellet inventories prior to the end of the shipping season and due to increased accounts receivable resulting from increasing revenues. Assuming no change in the U.S. economy or level of steel imports, WCI expects shipping volume during the first fiscal quarter of 2003 to decline approximately 5% compared to the fourth quarter of 2002 with net sales and cost of goods sold per ton remaining flat. Based on these expectations, WCI believes that it has adequate availability of cash resources to maintain operations and meet its debt service requirements into 2003 and if current market conditions persist, WCI expects to generate significant free cash flow both from operations and working capital in the first half of 2003. Significant uncertainty remains regarding the direction of the U.S. economy and the short-term as well as long-term condition of the steel market. Improvements in order intake rates and pricing realized during fiscal 2002 could be reversed by a number of factors including increasing domestic supply through the restart of closed facilities, increases in steel imports due to rising domestic steel prices or the granting of exemptions to tariffs imposed as a result of the Section 201 investigation or the failure of an economic recovery to materialize or be sustained in the U.S. If the volume or net sales prices expected to be realized by WCI during the fourth quarter are not sustained in subsequent quarters due to these or other factors, WCI may not have adequate availability under its existing financing arrangements to sustain its operations and may require additional sources of financing. WCI cannot assure that it has the ability to obtain such additional financing or what the terms of such additional financing might be. Failure to obtain such additional financing in these circumstances would likely have a material adverse effect on WCI's operations. In the past, Renco Steel's primary sources of liquidity were investments in limited partnerships (which were liquidated in 2001) and dividend payments from WCI. Renco Steel's sole source of liquidity currently is advances and contributions from its parent, Renco. Page 29 Dividends from WCI are currently prohibited under the terms of the indenture governing WCI's 10% Senior Secured Notes due 2004 due to WCI's significant cumulative losses, as defined. WCI is required to earn in excess of its cumulative losses before it is permitted to resume dividend payments to Renco Steel. At July 31, 2002, WCI's cumulative losses were $154.1 million. It is not anticipated that WCI will be able to generate earnings in excess of its cumulative losses in the foreseeable future and therefore, Renco Steel does not expect to receive any dividends from WCI. Support from Renco will be necessary for Renco Steel to meet its debt service, and to a much lesser extent, its administrative requirements. As of July 31, 2002, Renco has provided loans amounting to $7.3 million and has irrevocably waived its right to collect interest of $10.2 million in the aggregate from February 1, 2001 through July 31, 2002 on the Senior Secured Notes it owns. Renco may make future advances or contributions to Renco Steel and may waive its right to future interest payments on the Senior Secured Notes it owns, however, Renco has no obligation to do so. Accounting Standards In July 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 142, Goodwill and Other Intangible Assets. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. The Company adopted Statement 142 effective November 1, 2001. The adoption of Statement 142 did not have a material effect on either financial position or results of operations. In August 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations. Statement 143 applies to legal obligations associated with the retirement of certain long-lived assets. It requires companies to record the fair value of the liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the company capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, the company either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. Statement 143 is required to be adopted in fiscal years beginning after June 15, 2002. WCI has not yet determined the effect, if any, that adopting Statement 143 will have on future earnings and financial position. In August 2001, the FASB issued Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. This statement establishes a single accounting model for long-lived assets to be disposed of by sale and provides additional implementation guidance for assets to be held and used and assets to be disposed of other than by sale. WCI adopted the statement effective November 1, 2001. There was no financial implication related to the adoption of Statement No. 144, and the guidance will be applied on a prospective basis. In July 2002, FASB issued Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Page 30 The statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002, and is not expected to have a significant impact on the Company's financial position and results of operations. Forward-Looking Statements This report includes "forward-looking statements" which involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: general economic and business conditions; demand for Company products; changes in industry capacity and levels of imports of steel or steel products; effectiveness of the Section 201 remedies; industry trends, including product pricing; competition; currency fluctuations; the loss of any significant customers; availability of qualified personnel; major equipment failures; 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK WCI is exposed to commodity price risk with respect to natural gas and zinc. WCI uses forward purchase contracts to manage the volatility related to the exposure. No contracts are entered into for speculative purposes. WCI's market risk has not changed materially from that reported in the Company's 10-K for the fiscal year ended October 31, 2001. Page 31 PART II - OTHER INFORMATION RENCO STEEL HOLDINGS, INC. ITEM 1. LEGAL PROCEEDINGS For information as to the environmental matters described in the Company's Form 10-K for the year ended October 31, 2001, see Part I, Note 5 to Item 1, Financial Satements. WILLIAMS / REBER V. WCI STEEL, INC. Reference is made to the description of this action instituted by two retired employees contained in the Company's annual report on Form 10-K, Part I, Item 3 for the year ended October 31, 2001 and as described in Note 5 to the consolidated financial statements herein. The plaintiffs filed an appeal regarding the court's decision to dismiss, which was heard on April 23, 2002. On May 24, 2002 the appellate court affirmed the decision to dismiss this action. No appeal has been filed regarding the decision and the time frame for filing an appeal has expired. ITEM 6. EXHIBITS and REPORTS ON FORM 8-K Exhibits: None (b) Reports on Form 8-K: None Page 32 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 16, 2002 /s/ IRA L. RENNERT ------------------------------ Ira L. Rennert Chairman of the Board, President and Director (principal executive officer) /s/ ROGER L. FAY ----------------------------- Roger L. Fay Vice President and Chief Financial Officer (principal financial and accounting officer)

RENCO STEEL HOLDINGS INC 10-Q