<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1998.
---------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 333-18019
---------
WCI STEEL, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-1585405
(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) 841-8314
(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.
[X] Yes [ ] No
As of April 30, 1998, the registrant had 100 shares of its common
stock, no par value, $.01 stated value, outstanding.
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<PAGE> 2
WCI STEEL, INC. AND SUBSIDIARIES
INDEX
--------------------------------
Page No.
--------
PART I FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
April 30, 1998 and October 31, 1997. 3
Condensed Consolidated Statements of Operations for the
three months and six months ended April 30, 1998 and 1997. 4
Condensed Consolidated Statements of Cash Flows for the
six months ended April 30, 1998 and 1997. 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WCI STEEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
April 30, October 31,
1998 1997
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.........................$ 58,156 $ 18,989
Accounts receivable, less allowances.............. 62,924 65,202
Inventories....................................... 85,582 106,293
Recoverable income taxes.......................... - 4,273
Deferred income taxes............................. 7,842 8,188
Prepaid expenses.................................. 1,668 1,640
-------- --------
Total current assets......................... 216,172 204,585
Property, plant and equipment, net.................. 222,775 224,620
Intangible pension asset............................ 19,023 20,982
Other assets, net................................... 17,096 20,564
-------- --------
Total assets............................$ 475,066 $ 470,751
======== ========
LIABILITIES and SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt.................$ 113 $ 1,319
Accounts payable.................................. 64,504 64,123
Accrued liabilities............................... 51,310 51,504
Income taxes...................................... 1,364 1,737
-------- --------
Total current liabilities.................... 117,291 118,683
Long-term debt, excluding current portion........... 301,561 301,618
Deferred income taxes............................... 8,564 7,497
Postretirement health benefits...................... 88,931 85,755
Pension benefits, excluding current portion......... 29,274 31,489
Other liabilities................................... 14,894 16,575
-------- --------
Total liabilities....................... 560,515 561,617
-------- --------
Shareholder's equity (deficit)
Preferred stock, par value $1,000 per share, 5,000
shares authorized, none issued. ................ - -
Common stock, no par value, stated value $.01 per
share, 40,000,000 shares authorized, 100 shares
issued and outstanding.......................... - -
Accumulated deficit............................... (85,449) (90,866)
-------- --------
<PAGE> 4
Total shareholder's equity (deficit).... (85,449) (90,866)
Commitments and contingencies....................... - -
Total liabilities and -------- --------
shareholder's equity (deficit)........$ 475,066 $ 470,751
======== ========
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
WCI STEEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
Three months Six months
ended April 30, ended April 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales........................ $ 177,860 $ 172,634 $ 344,452 $ 333,541
Operating costs and expenses
Cost of products sold.......... 149,204 141,291 291,052 272,900
Depreciation and amortization.. 6,404 5,582 12,817 11,126
Selling, general and
administrative expenses...... 4,480 5,287 8,532 19,303
------- ------- ------- -------
160,088 152,160 312,401 303,329
------- ------- ------- -------
Operating income................. 17,772 20,474 32,051 30,212
------- ------- ------- -------
Other income (expense)
Interest expense............... (8,008) (8,068) (16,022) (15,593)
Interest and other income, net. 417 137 716 788
------- ------- ------- -------
(7,591) (7,931) (15,306) (14,805)
------- ------- ------- -------
Income before extraordinary loss
and income taxes............... 10,181 12,543 16,745 15,407
Income tax expense............... (3,665) (4,766) (6,028) (5,917)
------- ------- ------- -------
Income before extraordinary
loss........................... 6,516 7,777 10,717 9,490
Extraordinary loss on early
retirement of debt, net
of income tax.................. - - - (19,606)
------- ------- ------- -------
Net income (loss)................ $ 6,516 $ 7,777 $ 10,717 $ (10,116)
======= ======= ======= =======
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</FN>
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
WCI STEEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited) Six months
ended April 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities
Net income (loss).................................$ 10,717 $(10,116)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization................ 11,352 9,661
Amortization of deferred maintenance costs... 1,465 1,465
Amortization of financing costs.............. 665 743
Postretirement health benefits............... 3,176 2,334
Pension benefits............................. 2,344 3,000
Deferred income taxes........................ 1,413 (518)
Extraordinary loss on early retirement of
debt....................................... - 32,786
Other........................................ (447) 394
Cash provided (used) by changes in certain assets
and liabilities
Accounts receivable........................ 2,753 (1,016)
Inventories................................ 20,711 4,343
Prepaid expenses and other assets.......... 1,309 794
Accounts payable........................... 381 (17,831)
Accrued liabilities........................ (2,794) 11,975
Income taxes payable and recoverable, net.. 3,900 (12,078)
Other liabilities.......................... (1,680) (5,915)
------ -------
Net cash provided by operating
activities.............................. 55,265 20,021
------ -------
Cash flows from investing activities
Additions to property, plant and equipment, net... (9,645) (25,241)
Short-term investments, net....................... - 49,146
Gross proceeds from the sale of assets............ 110 -
------ -------
Net cash (used) provided by investing
activities.............................. (9,535) 23,905
------ -------
Cash flows from financing activities
Net proceeds from issuance of Senior Secured
Notes........................................... - 290,275
Repurchase of Senior Notes........................ - (233,085)
Repurchase of common stock........................ - (56,936)
Dividends paid.................................... (5,300) (112,000)
Principal payments on other long-term debt........ (1,263) (1,211)
-------- -------
Net cash used by financing activities..... (6,563) (112,957)
-------- -------
Net increase (decrease) in cash and cash equivalents... 39,167 (69,031)
Cash and cash equivalents at beginning of period....... 18,989 90,395
------- -------
Cash and cash equivalents at end of period.............$ 58,156 $ 21,364
======= =======
<PAGE> 6
Supplemental disclosure of cash flow information
Cash paid for interest............................$ 15,384 $ 5,649
Cash paid for income taxes........................ 715 5,335
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</FN>
</TABLE>
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and six months ended April 30, 1998 and 1997
( Unaudited )
NOTE 1 : BASIS OF PRESENTATION
WCI Steel, Inc. (Company or WCI) is a wholly-owned subsidiary of Renco Steel
Holdings, Inc. (Renco Steel) and an indirect wholly-owned subsidiary of The
Renco Group, Inc. (Renco). The financial information included herein is
unaudited; however, such information reflects all adjustments (consisting
solely of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the interim
periods. The results of operations for the three and six months ended April
30, 1998 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, 1997.
NOTE 2 : INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by
the last-in, first-out (LIFO) method. The composition of inventories at
April 30, 1998 and October 31, 1997 was as follows:
<TABLE>
<CAPTION>
April 30, October 31,
1998 1997
(Unaudited)
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Raw materials.........................$ 23,600 $ 33,725
Finished and semi-finished product.... 70,949 82,216
Supplies.............................. 317 561
-------- --------
94,866 116,502
Less LIFO reserve..................... 9,284 10,209
-------- --------
$ 85,582 $ 106,293
======== ========
</TABLE>
<PAGE> 7
NOTE 3 : LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
April 30, October 31,
1998 1997
(Unaudited)
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Senior Secured Notes with interest at 10%
payable semi-annually, due 2004..............$ 300,000 $ 300,000
Revolving Credit Facility (Revolver) with
interest at prime plus 0.5% (9.00% at
April 30, 1998) payable monthly.............. - -
Other.......................................... 1,674 2,937
------- -------
301,674 302,937
Less current portion of long-term debt......... 113 1,319
------- -------
$ 301,561 $ 301,618
======= =======
</TABLE>
The $300 million 10% Senior Secured Notes are secured by a second priority
lien on substantially all of the existing property, plant and equipment of
the Company which will become a first priority lien if all of the 10.5%
Senior Notes due 2002 (Senior Notes) are extinguished ($.3 million currently
outstanding). A Voluntary Employee Beneficiaries Association trust fund,
established to hold Company contributions to fund postretirement health care
and life insurance obligations for the benefit of hourly employees, also
holds a second priority lien on the security for the Senior Secured Notes,
which lien will remain a second priority lien even if the lien in favor of
the Senior Secured Notes becomes a first priority lien.
The Company's $100 million revolving credit facility (Revolving Credit
Facility) and Senior Secured Notes contain certain financial and other
covenants, including maintenance of specified levels of net worth as defined,
working capital, and debt service and limitations on capital expenditures.
Additional covenants limit the incurrence of additional indebtedness,
payments affecting subsidiaries, transactions with affiliates, sale/leaseback
transactions, impairment of security interest, consolidations, mergers and
transfer of the Company's assets. The Company is permitted to declare and
pay dividends, and make other transactions with affiliates provided no
condition of default exists or will exist as a result of the transactions or
dividends, 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, as defined) earned for periods subsequent to
October 31, 1996 when taken as a single accounting period. Under these
agreements $4.4 million was available for dividends and other transactions
with affiliates at April 30, 1998.
On November 27, 1996, the Company completed the sale of the Senior Secured
Notes. The proceeds from the Senior Secured Notes, with existing cash
balances of the Company, were used to complete an equity tender offer in
<PAGE> 8
which substantially all the common stock of the Company not held by Renco was
acquired, complete a tender offer in which the Company acquired $206.1
million principal amount of the then outstanding Senior Notes at a premium,
pay a $108 million dividend to Renco, make contractual compensation payments
to certain executives of the Company and pay related transaction costs. The
debt transactions, equity tender offer, dividend payment and compensation
payments are collectively referred to as the "Transactions".
Renco Steel is a holding company formed by Renco in January 1998 which owns
all the outstanding shares of capital stock of the Company. In February 1998
Renco Steel issued $120 million principal amount 10.875% Senior Secured Notes
due 2005. These notes are secured by a pledge of all the outstanding capital
stock of the Company. Renco Steel intends to meet its debt service
obligations from its cash balances and earnings thereon and through
distributions from the Company, including payments pursuant to a tax sharing
agreement and dividends as permitted under the Company's outstanding
indebtedness as described above.
NOTE 4 : 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 disposal. WCI
believes that it has made, and intends to continue to make, the necessary
expenditures for environmental remediation and compliance with environmental
laws and regulations. Environmental laws and regulations have changed
rapidly in recent years, and WCI may be subject to more stringent
environmental laws and regulations in the future. During 1997, the EPA
proposed new standards regulating particulate matter and ozone emissions.
Data relating to these standards is to be collected and analyzed with
implementation as early as 2004. These standards have been the subject of
significant discussion throughout federal and state governments, and changes
to the standards or the implementation date may be made prior to final
approval. Like much of the steel, utilities and other industries, the
Company's current operations are not expected to comply with these standards
as currently proposed. The Company cannot currently assess the impact of
these proposed standards on its results of operations or financial condition.
Compliance with more stringent environmental laws and regulations could have
a material adverse effect on WCI's financial condition and results of
operations.
On June 29, 1995, the Department of Justice (DOJ), on behalf of the
Environmental Protection Agency (EPA), instituted a civil action against WCI
under the Clean Water Act in the United States District Court for the
Northern District of Ohio. The action alleges numerous violations of the
Company's National Pollution Discharge Elimination System (NPDES) permit
alleged to have occurred during the years 1989 through 1996, inclusive. On
March 29, 1996, the DOJ on behalf of the EPA, instituted another civil action
against the Company in the same court under the Clean Air Act alleging
violations by the Company of the work practice, inspection and notice
requirements for demolition and renovation of the National Emission Standard
for Hazardous Air Pollutants for Asbestos and also violations of the
particulate standard and the opacity limits applicable to the Company's
facilities in Warren, Ohio. Each action seeks a civil penalty not to exceed
the statutory maximum of $25,000 per day per violation and also seeks an
<PAGE> 9
injunction against continuing violations. The Company believes that
imposition of the statutory maximum penalty for the alleged violations is
unlikely based upon past judicial penalties imposed under the Clean Water Act
and the Clean Air Act, and that it has defenses to liability. By letter
dated November 1, 1996, EPA's Region V Water Division Director requested
information pursuant to the Clean Water Act from the Company relating to the
Warren facility, including information as to the effect of a prohibition
against federal procurement of the Company's products on the Company's
business. The Company responded to the EPA's request on December 2, 1996.
The Company has not been notified that the EPA will seek a federal
procurement prohibition based on alleged permit violations. However, there
can be no assurance that a federal procurement prohibition will not be
imposed. The Company is negotiating a consent decree with the EPA to settle
the Clean Water Act civil action and is also negotiating with the EPA toward
a settlement of the Clean Air Act civil action. If the Company is unable to
reach a negotiated settlement, and if a substantial penalty similar to the
statutory maximum penalty or federal procurement prohibition were imposed, it
could have a material adverse effect on the operating results or financial
condition of the Company, the extent of which the Company is unable to
estimate at this time. Discovery has been completed in both of these
actions and a trial date has been scheduled for August 1998 for the Clean Air
Act civil action.
On December 17, 1997, the Company received a compliance order from the EPA
alleging certain violations of the Company's NPDES permit, including
exceedances of permit limits for pH and oil and grease and failure to
identify and sample for residual chlorine. The Company is investigating the
alleged exceedances.
On May 11, 1998, the DOJ, on behalf of the EPA, instituted a civil action
against WCI under the Resource Conservation and Recovery Act of 1976, as
amended (RCRA) in the United States District Court for the Northern District
of Ohio. The action seeks injunctive relief and civil penalties for alleged
violations of RCRA, the Ohio Administrative Code (OAC) and WCI's hazardous
waste management permit issued pursuant to RCRA and OAC related to WCI's
management of hazardous waste in surface impoundments at the Warren, Ohio
facility. The action alleges that from September 1988 to the present, WCI
operated hazardous waste management units at the Warren facility without the
proper permits pursuant to RCRA and seeks civil penalties not to exceed the
statutory maximum of $25,000 per day per violation for each day of violation
prior to January 30, 1997 and $27,500 per day per violation for each day of
violation since January 30, 1997. WCI intends to assert several defenses,
including that these claims are subject to a five-year statute of
limitations. The Company believes that imposition of the statutory maximum
penalty is unlikely based on past judicial penalties imposed under RCRA.
However, there can be no assurance that WCI will not be found to have
liability and, if it has liability, that the statutory maximum penalty will
not be imposed. If the statutory maximum penalty or other substantial
penalty were imposed, it could have a material adverse effect on the
financial condition or results of operations of WCI.
On May 18, 1998, the Company received a Findings of Violation and Order of
Compliance (Order) from the EPA, alleging that unpermitted discharges
occurred from a landfill at the Company's Warren, Ohio facility in November
1997. The Order requires that the Company submit to the EPA certain
information regarding possible discharges from the landfill from June 1993 to
the present, conduct sampling of discharges from the landfill over a 60-day
period and eliminate any unpermitted discharges within 100 days of the Order.
<PAGE> 10
The Company is investigating the alleged discharges and is unable
at this time to estimate the costs, if any, which may be incurred related to
the Order.
The Company has obtained a RCRA storage permit for waste pickle liquor at its
Warren facility acid regeneration plant. As a provision of the permit, the
Company will be required to undertake a corrective action program with
respect to historical material handling practices at the Warren facility.
The Company has developed and submitted a workplan for the first
investigation step of the corrective action program, the RCRA Facility
Investigation (RFI), to the EPA. In April 1997 the Company received notice
from the EPA that it had approved the RFI, which is expected to be completed
in 1999. The workplan identifies thirteen historical solid waste management
units which are the subject of the RFI, including areas of the facility which
are the subject of the RCRA civil action filed on May 11, 1998 described
above. The final scope of the corrective action required to remediate or
reclaim any contamination that may be present at or emanating from the Warren
facility is dependent upon the completion and findings of the RFI and the
development and approval of a corrective action program. Accordingly, the
Company is unable at this time to estimate the final cost of the corrective
action program or the period over which such costs may be incurred and there
can be no assurance that it would not have a material adverse effect on the
operating results or financial condition of the Company.
On January 23, 1996, two retired employees instituted an action against the
Company and the United Steelworkers of America (USWA) in the United States
District Court for the Northern District of Ohio alleging in substance that
certain distributions made by the Company to employees and benefit plans
violated certain agreements, the Employee Retirement Income Security Act, the
National Labor Relations Act and common law. On July 31, 1997, the court
granted the Company's motion to dismiss this action and entered judgement in
favor of the Company and the USWA. The Plaintiffs have filed an appeal
regarding the court's decision to dismiss.
On April 5, 1996, an employee instituted an action for damages against the
Company in the Court of Common Pleas, Trumbull County, Ohio alleging that,
under Ohio common law, her privacy rights were violated and that she has been
subjected to sexual harassment. On April 28, 1997 the plaintiff filed for
summary judgement which the court denied. The Company denies plaintiff's
allegations of liability. The court has scheduled a trial date for August
1998.
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 or costs
associated with the compliance order dated May 18, 1998 for which no estimate
can currently be made. The outcome of the above described matters could have
a material adverse effect on the future operating results of the Company in a
particular quarterly or annual period, however, the Company believes that the
effect of such matters will not have a material adverse effect on the
Company's consolidated financial position. In addition to the above matters,
the Company is contingently liable with respect to lawsuits and other claims
incidental to the ordinary course of its operations.
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended April 30, 1998 Compared to
Three Months Ended April 30, 1997
Net sales for the three months ended April 30, 1998 were $177.9 million on
388,493 tons shipped, representing a 3.0% increase in net sales and a 14.2%
increase in tons shipped compared to the three months ended April 30, 1997.
Shipping volume increased in 1998 due to the shipment of 36,862 tons of lower
value added semi-finished steel. The Company expects to ship approximately
20,000 tons of semi-finished steel during the third quarter to further reduce
inventory levels. Excluding semi-finished steel, net sales per ton shipped
decreased 6.1% to $478 compared to $509 for the 1997 quarter. This decrease
is the result of lower selling prices and, to a lesser extent, changes in
product mix. Excluding semi-finished steel, shipments of custom carbon,
alloy and electrical steels accounting for 64.8% in 1998 and 70.4% in 1997.
Gross margin (net sales less cost of goods sold) was $28.7 million for the
three months ended April 30, 1998 compared to $31.3 million for the three
months ended April 30, 1997. The decrease in gross margin reflects the lower
selling prices and change in product mix discussed above offset somewhat by
higher volume and lower production costs in 1998.
Operating income was $17.8 million, $46 per ton, for the three months ended
April 30, 1998 compared to $20.5 million, $60 per ton, for the three months
ended April 30, 1997. The lower operating income for 1998 reflects the lower
gross margin discussed above, higher depreciation expense relating to the hot
strip mill upgrade substantially completed in late 1997, offset by lower
selling, general and administration expense in 1998 attributable primarily to
lower variable compensation and bad debt expenses.
As a result of the items discussed above, net income was $6.5 million in the
1998 quarter compared to $7.8 million in 1997.
Six Months Ended April 30, 1998 Compared to
Six Months Ended April 30, 1997
Net sales for the six months ended April 30, 1998 were $344.5 million on
736,424 tons shipped, representing a 3.3% increase in net sales and a 10.8%
increase in tons shipped compared to the six months ended April 30, 1997.
The Company shipped 46,256 tons of lower value added semi-finished steel
during the 1998 period. Excluding semi-finished steel, net sales per ton
shipped decreased 4.4% to $481 compared to $503 for the 1997 period. This
decrease is the result of lower selling prices and changes in product mix.
Excluding semi-finished steel, shipments of custom carbon, alloy and
electrical steels accounting for 64.4% in 1998 and 68.2% in 1997.
Gross margin (net sales less cost of goods sold) was $53.4 million for the
six months ended April 30, 1998 compared to $60.6 million for the six months
ended April 30, 1997. The decrease in gross margin reflects the lower
selling prices and change in product mix discussed above offset somewhat by
higher volume in 1998.
Operating income was $32.1 million for the six months ended April 30, 1998
compared to $30.2 million for the six months ended April 30, 1997. The
operating results for 1997 include $8.6 million of compensation expenses
<PAGE> 12
related to the Transactions. Excluding the expenses incurred as a result of
the Transactions, operating income was $38.8 million during the 1997 period
or $58 per ton shipped compared to $44 per ton shipped in the 1998 period.
The decrease in operating income in 1998 (excluding the previously mentioned
compensation charges in 1997) reflects the lower gross margin discussed above
and higher depreciation expense as a result of the hot strip mill upgrade
substantially completed in late 1997 offset by a decrease in selling, general
and administrative expenses in 1998 as a result of lower variable
compensation, legal and bad debt expenses.
As a result of the items discussed above, income before extraordinary items
was $10.7 million in 1998 compared to $9.5 million in 1997. During the six
months ended April 30, 1997, the Company recognized an extraordinary loss of
$19.6 million, net of income taxes, on the early retirement of $206.1 million
principal amount of Senior Notes. As a result, the Company had a net loss of
$10.1 million for the six months ended April 30, 1997.
Liquidity and Capital Resources
WCI's liquidity requirements result from capital investments, working capital
requirements, postretirement healthcare 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. The Company's primary sources of liquidity
as of April 30, 1998 consisted of $58.2 million of cash and cash equivalents
and available borrowing under the Revolving Credit Facility. The Revolving
Credit Facility has a maximum borrowing limit of $100 million, is secured by
eligible inventories and receivables, as defined therein, and expires on
December 29, 1999. As of April 30, 1998, WCI had no borrowings outstanding
under the Revolving Credit Facility, with a borrowing limit of $100 million
less any outstanding letters of credit ($5.6 million as of April 30, 1998).
Cash provided by operating activities was $55.3 million for the six months
ended April 30, 1998 compared to $20.0 million for the 1997 period. The
increase in operating cash flow in 1998 compared to 1997 resulted primarily
from working capital changes including a planned reduction in steel inventory
of $11.3 million. Under the minimum funding requirements of ERISA, the
Company is required to contribute approximately $0.4 million during the
remainder of 1998 and $7.8 million in 1999 to its defined benefit pension
plan. The Company made no contributions to this plan during 1998 to-date and
made minimal contributions during 1997.
Capital expenditures were $9.6 million and $25.2 million for the six months
ended April 30, 1998 and 1997, respectively, and are estimated to be $20
million to $25 million for all of fiscal 1998. Capital expenditures in 1997
included expenditures for the Company's hot strip mill upgrade which was
substantially completed in late 1997. Management has funded capital
expenditures in 1998 and 1997 through cash balances and cash provided by
operating activities. At April 30, 1998, the Company had commitments for
capital expenditures of approximately $4.3 million.
The Revolving Credit Facility and Senior Secured Notes contain numerous
covenants and prohibitions that limit the financial activities of the
Company, including requirements that the Company satisfy certain financial
ratios and limitations on the incurrence of additional indebtedness. The
ability of the Company to meet its debt service requirements and to comply
<PAGE> 13
with such covenants will be dependent upon future operating performance and
financial results of the Company, which will be subject to financial,
economic, political, competitive and other factors affecting the Company,
many of which are beyond its control.
During 1998, the Company paid dividends of $5.3 million and expects that
further dividends will be declared and paid throughout the remainder of 1998,
up to the amount permitted under the Senior Secured Notes indenture.
Renco Steel is a holding company formed by Renco in January 1998 which owns
all the outstanding shares of capital stock of the Company. In February
1998, Renco Steel issued $120 million principal amount 10.875% Senior Secured
Notes due 2005. These notes are secured by a pledge of all the outstanding
capital stock of the Company. Renco Steel intends to meet its debt service
obligations from its cash balances and earnings thereon and through
distributions from the Company, including payments pursuant to a tax sharing
agreement and dividends as permitted under the Company's outstanding
indebtedness.
Year 2000 Business Matters
Many information and process control systems used in the current business
environment were designed to use only two digits in the date field and thus
may not function properly in the year 2000. Over the past several years, the
Company has been assessing and modifying its business systems to be year 2000
compliant. The Company has a plan to achieve year 2000 compliance with
respect to its business systems, including systems and user testing. The
Company does not currently expect year 2000 issues related to its business
systems to have any material effect on the Company's costs or to cause any
significant disruption in operations. The Company has initiated a program to
assess its process control environment for year 2000 compliance, which is
expected to be completed by mid-1998, and intends to make the necessary
modifications to prevent disruption to its operations. The Company is unable
at this time to estimate the cost or potential effect on its operations of
achieving year 2000 compliance in its process control environment.
Forward-Looking Statements
This report includes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 which involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company to differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such risks, uncertainties and
other important factors include, among others: general economic and business
conditions; increasing industry capacity and levels of imports of steel or
steel products; industry trends, including product pricing; competition;
currency fluctuations; the loss of any significant 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 pending
environmental and other 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> 14
PART II - OTHER INFORMATION
WCI STEEL, INC.
ITEM 1. LEGAL PROCEEDINGS
On May 11, 1998, the DOJ, on behalf of the EPA, instituted a civil
action against WCI under RCRA in the United States District Court
for the Northern District of Ohio. The action seeks injunctive
relief and civil penalties for alleged violations of RCRA, the Ohio
Administrative Code (OAC) and WCI's hazardous waste management
permit issued pursuant to RCRA and OAC related to WCI's management
of hazardous waste in surface impoundments at the Warren, Ohio
facility. The action alleges that from September 1988 to the
present, WCI operated hazardous waste management units at the
Warren facility without the proper permits pursuant to RCRA and
seeks civil penalties not to exceed the statutory maximum of
$25,000 per day per violation for each day of violation prior to
January 30, 1997 and $27,500 per day per violation for each day of
violation since January 30, 1997. WCI intends to assert several
defenses, including that these claims are subject to a five-year
statute of limitations.
ITEM 6. EXHIBITS and REPORTS ON FORM 8-K
(a) Exhibits:
A list of the exhibits required to be filed as part of this
Report on Form 10-Q is set forth in the "Exhibit Index" which
immediately precedes such exhibits, and is incorporated herein
by reference.
(b) Reports on Form 8-K:
On May 19, 1998, the Company filed Form 8-K to report the
civil action filed against the Company under RCRA on May 11,
1998. This matter is described in Note 4 to the condensed
consolidated financial statements and under Item 1. Legal
Proceedings.
<PAGE> 15
WCI STEEL, 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 hereunto duly authorized.
WCI STEEL, INC.
(registrant)
Date: May 27, 1998 /S/ BRET W. WISE
-----------------------------
Bret W. Wise
Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
/S/ JOHN P. JACUNSKI
-----------------------------
John P. Jacunski
Controller
<PAGE> 16
WCI STEEL, INC.
EXHIBIT INDEX
Exhibit Number Description
27. Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AT APRIL 30, 1998 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTH PERIOD ENDED
APRIL 30, 1998 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> APR-30-1998
<CASH> 58,156
<SECURITIES> 0
<RECEIVABLES> 64,076
<ALLOWANCES> 1,152
<INVENTORY> 85,582
<CURRENT-ASSETS> 216,963
<PP&E> 354,987
<DEPRECIATION> 132,212
<TOTAL-ASSETS> 475,857
<CURRENT-LIABILITIES> 118,082
<BONDS> 301,561
0
0
<COMMON> 0
<OTHER-SE> (85,449)
<TOTAL-LIABILITY-AND-EQUITY> 475,857
<SALES> 344,452
<TOTAL-REVENUES> 344,452
<CGS> 291,052
<TOTAL-COSTS> 291,052
<OTHER-EXPENSES> 21,449
<LOSS-PROVISION> (100)
<INTEREST-EXPENSE> 16,022
<INCOME-PRETAX> 16,745
<INCOME-TAX> 6,028
<INCOME-CONTINUING> 10,717
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,717
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
