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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
/ / TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from __________ to __________
Commission file number 033-89746
WHEELING-PITTSBURGH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 55-0309927
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1134 Market Street 26003
Wheeling, WV (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 212-355-5200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
9 1/4% Senior Notes due 2007 NA
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The registrant meets the conditions set forth in General Instruction
I(1)(a) and (b) of Form 10-K and is therefore filing this Form with reduced
disclosure format.
Incorporation of documents by reference: None
PART I
ITEM 1. BUSINESS
OVERVIEW
Wheeling-Pittsburgh Corporation ("WPC") and together with its
subsidiaries, ( the "Company"), is a wholly owned subsidiary of WHX Corporation
("WHX"). Wheeling-Pittsburgh Steel Corporation ("WPSC"), a wholly owned
subsidiary of WPC, is the ninth largest domestic integrated steel manufacturer.
The Company is a vertically integrated manufacturer of value-added flat rolled
steel products. The Company sells a broad array of value-added products,
including cold rolled steel, tin and zinc-coated steels and fabricated steel
products. The Company's products are sold to steel service centers, converters,
processors, the construction industry, and the container and appliance
industries.
The Company believes that it is one of the lowest cost domestic flat
rolled steel producers. The Company's low cost structure is the result of: (i)
the restructuring of its work rules and staffing requirements under its new
five-year labor agreement which settled a ten-month strike in 1997; (ii) the
strategic balance between its basic steel operations and its finishing and
fabricating facilities; and (iii) its efficient production of low cost, high
quality metallurgical coke.
The Company believes that its 1997 labor agreement is one of the
most flexible in the industry. The new work rule package affords the Company
substantially greater flexibility in reducing its overall workforce and
assigning and scheduling work, thereby reducing costs and increasing efficiency.
Furthermore, the Company has achieved pre-strike steel production levels with
850 fewer employees (a reduction of approximately 20% in its hourly workforce).
The Company has structured its operations so that its hot strip mill
and downstream operations have greater capacity than do its raw steel making
operations. The Company therefore can purchase slabs and ship at greater than
100% of its internal production capacity in periods of high demand, while
maintaining the ability to curtail such purchases and still operate its basic
steel facilities at or near capacity during periods of lower demand. The Company
believes this flexibility results in enhanced profitability throughout an
economic cycle. The Company also believes that it produces metallurgical coke at
a substantially lower cost than do other coke manufacturers because of its
proximity to high quality coal reserves and its efficient coke producing plant.
This reduces the Company's costs and, as coke demand remains high, allows the
Company to sell coke profitably in the spot and contract markets.
BUSINESS STRATEGY
The Company's business strategy includes the following initiatives:
IMPROVE COST STRUCTURE. The Company continues to improve its cost
structure and enhance productivity through job eliminations (850 positions were
eliminated in 1997, approximately 20% of its pre-strike hourly workforce) and
capital expenditures, upgrading and modernizing its steelmaking facilities.
EXPAND PRODUCTION OF VALUE-ADDED PRODUCTS. The Company will continue
to expand production of value-added products, principally through growth of
fabricated products, and its emphasis on joint ventures, such as
Wheeling-Nisshin, Inc. ("Wheeling-Nisshin") and Ohio Coatings Company ("OCC").
The following table lists operating statistics for the Company and
the steel industry (as reported by the American Iron and Steel Institute) for
the five-year period ending December 31, 1998.
Year Ended December 31,
--------------------------------------------------------------------------------
1994 1995 1996(1) 1997(1) 1998(1)(2)
---- ---- ---- ---- ----
(Tons in millions)
Company Raw Steel Production ............ 2.27 2.20 1.78 .66 2.45
Capability .................. 2.40 2.40 2.40 2.40 2.40
Utilization ................. 95% 92% 98.9% 90% 102%
Shipments ................... 2.4 2.4 2.1 .9 2.2
Industry Raw Steel Production(2) ........ 100.6 104.9 105.3 108.6 107.6
Capability .................. 108.2 112.4 116.1 121.4 125.3
Utilization ................. 93% 93% 91% 89% 86%
Shipments ................... 95.1 97.5 100.9 105.9 102.1
(1) Results for 1996, 1997 and the first half of 1998 were affected by a
ten-month work stoppage at the Company's primary steel-making
facilities beginning October 1, 1996. The utilization rate for the
nine months prior to the work stoppage was 98.9%. The utilization
rate for the fourth quarter of 1997 was 90%.
(2) Preliminary estimates regarding 1998.
PRODUCTS AND PRODUCT MIX
The table below reflects the historical product mix of the Company's
shipments, expressed as a percentage of tons shipped. Increases in the
percentage of higher value products have been realized during the 1990's as (i)
fabricated products operations were expanded and (ii) Wheeling-Nisshin's second
coating line increased its requirements of cold rolled coils from WPC. In
addition, the OCC joint venture should enable the Company to increase tin mill
product shipments in 1999 up to an additional 92,000 tons compared to 1998
levels.
Historical Product Mix
Year Ended December 31,
1994 1995 1996(1) 1997(1) 1998
---- ---- ------ ------ ----
PRODUCT CATEGORY:
Higher Value-Added Products:
Cold Rolled Products--Trade 10.5% 7.9% 8.4% 5.6% 11.0%
Cold Rolled Products--Wheeling-Nisshin 17.3 18.9 16.6 7.7 19.0
Coated Products 21.7 21.3 21.5 12.3 17.5
Tin Mill Products 7.2 7.1 7.5 3.3 7.1
Fabricated Products 11.9 14.9 17.9 39.0 15.6
---- ---- ---- ---- ----
Higher Value-Added Products as a Percentage
of Total Shipments 68.6 70.1 71.9 67.9 70.2
Hot Rolled Products 31.4 29.9 28.1 20.0 29.5
Semi-Finished -- -- -- 12.1 0.3
---- ---- ---- ---- ----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
AVERAGE NET SALES PER TON $ 498 $ 532 $ 528 $ 576 $ 496
(1) The allocation among product categories was affected by the ten-month work
stoppage.
Products produced by the Company are described below. These products
are sold directly to third party customers, and to Wheeling-Nisshin and OCC
pursuant to long-term supply agreements.
COLD ROLLED PRODUCTS. Cold rolled coils are manufactured from hot
rolled coils by employing a variety of processing techniques, including
pickling, cold reduction, annealing and temper rolling. Cold rolled processing
is designed to reduce the thickness and improve the shape, surface
characteristics and formability of the product. In its finished form, the
product may be sold to service centers and to a variety of end users such as
appliance or automotive manufacturers or further processed internally into
corrosion-resistant coated products including hot dipped galvanized,
electrogalvanized, or tin mill products. In recent years, the Company has
increased its cold rolled production to support increased sales to
Wheeling-Nisshin, which is labeled as a separate product category above.
COATED PRODUCTS. The Company manufactures a number of
corrosion-resistant, zinc-coated products including hot dipped galvanized and
electrogalvanized sheets for resale to trade accounts. The coated products are
manufactured from a steel substrate of cold rolled or hot rolled pickled coils
by applying zinc to the surface of the material to enhance its corrosion
protection. The Company's trade sales of galvanized products are heavily
oriented to unexposed applications, principally in the appliance, construction,
service center and automotive markets. Typical industry applications include
auto underbody parts, culvert pipe, refrigerator backs and heating/air
conditioning ducts. The Company sells electrogalvanized products for application
in the appliance and construction markets.
TIN MILL PRODUCTS. Tin mill products consist of blackplate and
tinplate. Blackplate is a cold rolled substrate (uncoated), the thickness of
which is less than .0142 inches and is utilized extensively in the
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manufacture of pails, shelving and sold to OCC for the manufacture of tinplate
products. Tinplate is produced by the electro-deposition of tin to a blackplate
substrate and is utilized principally in the manufacture of food, beverage,
general line and aerosol containers. While the majority of the Company's sales
of these products is concentrated in container markets, the Company also markets
products for automotive applications, such as oil filters and gaskets. The
Company has phased out its existing tin mill facilities and produces all of its
tin coated products through OCC. WPSC expects that its participation in OCC will
enable it to expand WPSC's presence in the tin plate market. OCC's $69 million
tin coating mill, which commenced commercial operations in January 1997, has a
nominal annual capacity of 250,000 net tons. The Company will supply up to
230,000 tons of the substrate requirements of the joint venture subject to
quality requirements and competitive pricing. The Company will act as a
distributor of the joint venture's product.
HOT ROLLED PRODUCTS. Hot rolled coils represent the least processed
of the Company's finished goods. Approximately 70% of the Company's 1998
production of hot rolled coils was further processed internally into value-added
finished products. The balance of the tonnage is sold as hot rolled black or
pickled (acid cleaned) coils to a variety of consumers such as
converters/processors, steel service centers and the appliance industries.
FABRICATED PRODUCTS. Fabricated products consist of cold rolled or
coated products further processed mainly via roll forming and sold in the
construction, highway, and agricultural products industries.
Construction Products. Construction products consist of
roll-formed sheets, which are utilized in sectors of the non-residential
building market such as commercial, institutional and manufacturing. They are
classified into three basic categories: roof deck; form deck; and composite
floor deck. Roof deck is a formed steel sheet, painted or galvanized, which
provides structural support in non-residential roofing systems. Form deck is a
formed steel sheet, painted, galvanized or uncoated, that provides structural
form support for structural or insulating concrete slabs in non-residential
floor or roofing systems. Composite floor deck is a formed steel sheet, painted,
galvanized or uncoated, that provides structural form support and positive
reinforcement for structural concrete slabs in non-residential floor systems.
Agricultural Products. Agricultural products consist of
roll-formed, corrugated sheets which are used as roofing and siding in the
construction of barns, farm machinery enclosures and light commercial buildings
and certain residential roofing applications. These products can be manufactured
from hot dipped or painted hot dipped galvanized coils. Historically, these
products have been sold primarily in rural areas. In recent years, however, such
products have found increasing acceptance in light commercial buildings.
Highway Products. Highway products consist of bridge
form, which is roll-formed corrugated sheets that are swedged on both ends and
are utilized as concrete support forms in the construction of highway bridges.
WHEELING-NISSHIN
The Company owns a 35.7% equity interest in Wheeling-Nisshin, which
is a joint venture between the Company and Nisshin Holding, Incorporated, a
wholly-owned subsidiary of Nisshin Steel Co., Ltd. Wheeling-Nisshin is a
state-of-the-art processing facility located in Follansbee, West Virginia which
produces among the lightest gauge galvanized steel products available in the
United States. Shipments by Wheeling-Nisshin of hot dipped galvanized,
galvanneal, galvalume and aluminized products, principally to the construction
industry, have increased from 158,600 tons in 1988 to 702,700 tons in 1998.
Wheeling-Nisshin products are marketed through trading companies, and its
shipments are not consolidated into the Company's shipments.
Wheeling-Nisshin began commercial operations in 1988 with an initial
capacity of 360,000 tons. In March 1993, Wheeling-Nisshin added a second hot
dipped galvanizing line, which increased its capacity by approximately 94%, to
over 700,000 annual tons and allows Wheeling-Nisshin to offer the lightest-gauge
galvanized sheet products manufactured in the United States for construction,
heating, ventilation and
-4-
air-conditioning and after-market automotive applications.
The Company's amended and restated supply agreement with
Wheeling-Nisshin expires in 2013. Pursuant to the amended supply agreement, the
Company will provide not less than 75% of Wheeling-Nisshin's steel substrate
requirements, up to an aggregate maximum of 9,000 tons per week subject to
product quality requirements. Pricing under the supply agreement is negotiated
quarterly based on a formula which gives effect to competitive market prices.
Shipments of cold rolled steel by the Company to Wheeling-Nisshin were
approximately 428,000 tons, or 19.1% of the Company's total tons shipped in 1998
and approximately 66,500 tons, or 7.8%, in 1997. Shipments to Wheeling Nisshin
in 1997 were negatively affected by the strike.
OHIO COATINGS COMPANY
The Company has a 50.0% equity interest in OCC, which is a joint
venture between the Company and Dong Yang, a leading South Korea-based tin plate
producer. Nittetsu Shoji America ("Nittetsu"), a U.S. based tin plate importer,
holds non-voting preferred stock in OCC. OCC completed construction of a $69
million state-of-the-art tin coating mill in 1996 and commenced commercial
operations in January 1997. The OCC tin-coating facility is the only domestic
electro-tin plating facility constructed in the past 30 years and is positioned
to become a premier supplier of tin plate to the container and automotive
industries. The OCC tin coating line is anticipated to have a nominal annual
capacity of 250,000 net tons, and shipped approximately 71,000 tons in 1997 and
138,000 tons in 1998. The Company has phased out its existing tin coating
facilities and produces all of its tin coated products through OCC. As part of
the joint venture agreement, the Company has the right to supply up to 230,000
tons of the substrate requirements of OCC through the year 2012, subject to
quality requirements and competitive pricing. The Company will market all of
OCC's products partially through Nittetsu. In 1997 and 1998 OCC had an operating
loss of $14.3 million and operating income of $.3 million, respectively. The
1997 results reflected OCC's start-up, inability to source substrate during the
1997 strike and competitive market conditions for tinplate.
OTHER STEEL RELATED OPERATIONS OF THE COMPANY
The Company owns an electrogalvanizing facility which had revenues
of $45.7 million in 1998 and $34.8 million in 1997, while providing an outlet
for approximately 60,000 tons of steel in a normal year and a facility that
produces oxygen and other gases used in the Company's steel-making operations.
The Company also has a 12 1/2% ownership interest in Empire Iron Mining
Partnership ("Empire"), which operates a mine located in Palmer, Michigan.
CUSTOMERS
The Company markets an extensive mix of products to a wide range of
manufacturers, converters and processors. The Company's 10 largest customers
(including Wheeling-Nisshin) accounted for approximately 34.9%of its net sales
in 1996, 30.2% in 1997, and 39.7% in 1998. Wheeling-Nisshin was the only
customer to account for more than 10% of net sales in 1996 and 1998.
Wheeling-Nisshin accounted for 12.7% and 14.6% of net sales in 1996 and 1998,
respectively. No single customer accounted for more than 10% of net sales in
1997. Geographically, the majority of the Company's customers are located within
a 350-mile radius of the Ohio Valley. However, the Company has taken advantage
of its river-oriented production facilities to market via barge into more
distant locations such as the Houston, Texas and St. Louis, Missouri areas. The
Company has also acquired regional fabricated product facilities to service an
even broader geographical area.
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The Company's shipments historically have been concentrated within
seven major market segments: steel service centers, converters/processors,
construction, agriculture, container, automotive, and appliances. The Company's
overall participation in the construction and the converters/processors markets
substantially exceeds the industry average and its reliance on automotive
shipments as a percentage of total shipments is substantially less than the
industry average.
Percent Of Total Net Tons Shipped
Year Ended December 31,
MAJOR CUSTOMER CATEGORY: 1994 1995 1996(1) 1997(1) 1998(1)
- ----------------------- ---- ---- ------ ------ ------
Steel Service Centers 32% 29% 26% 32% 29%
Converters/Processors(2) 28 28 25 16 32
Construction 18 18 22 31 19
Agriculture 5 6 7 14 6
Containers(2) 6 6 7 2 8
Automotive 6 5 5 2 1
Appliances 3 4 4 2 2
Exports -- 1 1 -- 1
Other 2 3 3 1 2
--- --- --- --- ---
Total 100% 100% 100% 100% 100%
=== === === === ===
(1) The allocation among customer categories was affected by the ten-month work
stoppage.
(2) Products shipped to Wheeling-Nisshin and OCC are included primarily in the
Converters/Processors and Containers markets, respectively.
Set forth below is a description of the Company's major customer
categories:
STEEL SERVICE CENTERS. The Company's shipments to steel service
centers are heavily concentrated in the areas of hot rolled and hot dipped
galvanized coils. Due to increased in-house costs to steel companies during the
1980's for processing services such as slitting, shearing and blanking, steel
service centers have become a major factor in the distribution of hot rolled
products to ultimate end users. In addition, steel service centers have become a
significant factor in the sale of hot dipped galvanized products to a variety of
small consumers such as mechanical contractors, who desire not to be burdened
with large steel inventories.
CONVERTERS/PROCESSORS. The growth of the Company's shipments to the
converters/processors market is principally attributable to the increase in
shipments of cold rolled products to Wheeling-Nisshin, which uses cold rolled
coils as a substrate to manufacture a variety of coated products, including hot
dipped galvanized and aluminized coils for the automotive, appliance and
construction markets. As a result of the second line expansion, the Company's
shipments to Wheeling-Nisshin increased significantly beginning in 1993. The
converters/processors industry also represents a major outlet for the Company's
hot rolled products, which are converted into finished commodities such as pipe,
tubing and cold rolled strip.
CONSTRUCTION. The Company's shipments to the construction industry
are heavily influenced by fabricated product sales. The Company services the
non-residential and agricultural building and highway industries, principally
through shipments of hot dipped galvanized and painted cold rolled products.
With its acquisitions during the 1980's and early 1990's of regional facilities,
the Company has doubled its fabricated products shipments and has been able to
market its products into broad geographical areas.
AGRICULTURE. The Company's shipments to the agricultural market are
principally sales of roll-formed, corrugated sheets which are used as roofing
and siding in the construction of barns, farm machinery enclosures and light
commercial buildings.
-6-
CONTAINERS. The vast majority of the Company's shipments to the
container market are concentrated in tin mill products, which are utilized
extensively in the manufacture of food, aerosol, beverage and general line cans.
The container industry has represented a stable market. The balance of the
Company's shipments to this market consists of cold rolled products for pails
and drums. As a result of the OCC joint venture, the Company phased out its
existing tin mill production facilities in 1996, and has begun to sell substrate
to, and to distribute products produced by, OCC.
AUTOMOTIVE. Unlike the majority of its competitors, the Company is
not heavily dependent on shipments to the automotive industry. However, the
Company seeks to establish higher value-added niches in this market,
particularly in the area of hot dipped galvanized products for deep drawn
automotive underbody parts. In addition, the Company has been a supplier of tin
mill products for automotive applications, such as oil filters and gaskets. As a
result of the strike, the Company was unable to secure automotive contracts for
1998. The Company will compete for automotive contracts in future periods.
APPLIANCE. The Company's shipments to the appliance market are
concentrated in hot dipped galvanized, electrogalvanized and hot rolled coils.
These products are furnished directly to appliance manufacturers as well as to
blanking, drawing and stamping companies that supply OEMs. The Company has
concentrated on niche product applications primarily used in washer/dryer,
refrigerator/freezer and range appliances. The Company expects to be in a
favorable position to compete for contracts to supply appliance manufacturers in
1999 and future periods.
MANUFACTURING PROCESS
In the Company's primary steelmaking process, iron ore pellets,
coke, limestone, sinter and other raw materials are consumed in the blast
furnace to produce hot metal. Hot metal is further converted into liquid steel
through its basic oxygen furnace ("BOF") process where impurities are removed,
recycled scrap is added and metallurgical properties for end use are determined
on a batch-by-batch (heat) basis. The Company's BOF has two vessels, each with a
steelmaking capacity of 285 tons per heat. From the BOF, the heats of steel are
sent to the ladle metallurgy facility ("LMF"), where the temperature and
chemistry of the steel are adjusted to precise tolerances. Liquid steel from the
LMF then is formed into slabs through the process of continuous casting. After
continuous casting, slabs are reheated, reduced and finished by extensive
rolling, shaping, tempering and, in certain cases, by the application of
coatings at the Company's downstream operations. Finished products are normally
shipped to customers in the form of coils or fabricated products. The Company
has linked its steelmaking and rolling equipment with a computer based
integrated manufacturing control system to coordinate production tracking and
sales activities.
RAW MATERIALS
The Company has a 12.5% ownership interest in Empire Iron Mining
Partnership which operates a mine located in Palmer, Michigan. The Company is
obligated to purchase approximately 12.5% or 1.0 million gross tons per year (at
current production levels) of the mine's annual ore output. Interest in related
ore reserves as of December 31, 1998, is estimated to be 19.8 million gross
tons. The Company generally consumes approximately 2.4 million gross tons of
iron ore pellets in its blast furnaces. The Company's pro rata cash operating
cost of Empire currently approximates the market price of ore. The Company
obtains approximately half of its iron ore from spot and medium-term purchase
agreements at prevailing world market prices. It has commitments for the
majority of its blast furnace iron ore pellet needs through 2000 from world
class suppliers.
In 1993 the Company sold the operating assets of its coal company to
an unrelated third party. The Company also entered into a long-term supply
agreement with such third party to provide the Company with a substantial
portion of the Company's metallurgical coal requirements at competitive prices.
The Company's coking operations require a substantial amount of metallurgical
coal.
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The Company currently produces coke in excess of its requirements
and typically consumes generally all of the resultant by-product coke oven gas.
In 1998, approximately 1.7 million tons of coking coal were consumed in the
production of blast furnace coke by the Company. The Company may continue to
sell its excess coke and coke oven by-products to third-party trade customers.
The Company's operations require material amounts of other raw
materials, including limestone, oxygen, natural gas and electricity. These raw
materials are readily available and are purchased on the open market. The
Company is presently dependent on external steel scrap for approximately 8% of
its steel melt. The cost of these materials has been susceptible in the past to
price fluctuations, but worldwide competition in the steel industry has
frequently limited the ability of steel producers to raise finished product
prices to recover higher material costs. Certain of the Company's raw material
supply contracts provide for price adjustments in the event of increased
commodity or energy prices.
BACKLOG
Order backlog was 365,622 net tons at December 31, 1998, compared to
368,025 net tons at December 31, 1997. The Company believes that the December
31, 1998 order backlog will be shipped by June 30, 1999.
CAPITAL INVESTMENTS
The Company believes that it must continuously strive to improve
productivity, product quality and control manufacturing costs in order to remain
competitive. Accordingly, the Company is committed to continuing to make
necessary capital investments with the objective of reducing manufacturing costs
per ton, improving the quality of steel produced and broadening the array of
products offered to the Company's served markets. The Company's capital
expenditures (including capitalized interest) for 1998 were approximately $33.6
million, including $9.5 million on environmental projects. Capital expenditures
in 1997 and 1998 were lower than in recent years due to the strike. From 1994 to
1998, such expenditures aggregated approximately $249.2 million. This level of
capital expenditures was needed to maintain productive capacity, improve
productivity and upgrade selected facilities to meet competitive requirements
and maintain compliance with environmental laws and regulations. The capital
expenditure program has included improvements to the Company's infrastructure,
blast furnaces, steel-making facilities, 80-inch hot strip mill and finishing
operations, and has resulted in improved shape, gauge, surface and physical
characteristics for its products. Continuous and substantial capital and
maintenance expenditures will be required to maintain operating facilities,
modernize finishing facilities to remain competitive and to comply with
environmental control requirements. The Company anticipates funding its capital
expenditures in 1999 from cash on hand and funds generated by operations, sale
of receivables under the Receivables Facility and funds available under the
Revolving Credit Facility. During the 1997 strike, the Company had delayed
substantially all capital expenditures at the strike-affected plants. The
Company anticipates that capital expenditures will approximate depreciation on
average, over the next few years.
ENERGY REQUIREMENTS
During 1998 coal constituted approximately 76% of the Company's
total energy consumption, natural gas 20% and electricity 4%. Many of the
Company's major facilities that use natural gas have been equipped to use
alternative fuels. The Company continually monitors its operations regarding
potential equipment conversion and fuel substitution to reduce energy costs.
EMPLOYMENT
Total active employment of the Company at December 31, 1998 totaled
4,238 employees, of which 3,204 were represented by the United Steelworkers of
America ("USWA"), and 120 by other unions. The remainder consisted of 852
salaried employees and 62 non-union operating employees.
-8-
On August 12, 1997, the Company and the USWA entered into a new
five-year labor agreement.
COMPETITION
The steel industry is cyclical in nature and has been marked
historically by overcapacity, resulting in intense competition. The Company
faces increasing competitive pressures from other domestic integrated producers,
minimills and processors. Processors compete with the Company in the areas of
slitting, cold rolling and coating. Minimills are generally smaller volume steel
producers that use ferrous scrap metals as their basic raw material. Compared to
integrated producers, minimills, which rely on less capital intensive steel
production methods, have certain advantages. Since minimills typically are not
unionized, they have more flexible work rules that have resulted in lower
employment costs per net ton shipped. Since 1989, significant flat rolled
minimill capacity has been constructed and these minimills now compete with
integrated producers in product areas that traditionally have not faced
significant competition from minimills. In addition, there is significant
additional flat rolled minimill capacity under construction or announced with
completion dates sometime in 1999. Near term, these minimills and processors are
expected to compete with the Company primarily in the commodity flat rolled
steel market. In the long-term, such minimills and processors may also compete
with the Company in producing value-added products. In addition, the increased
competition in commodity product markets influence certain integrated producers
to increase product offerings to compete with the Company's custom products.
As the single largest steel consuming country in the western world,
the United States has long been a favorite market of steel producers in Europe
and Japan. In addition, steel producers from Korea, Taiwan, and Brazil, and
non-market economies such as Russia and China, have also recognized the United
States as a target market.
Total annual steel consumption in the United States has increased
from 88 million to slightly over 117 million tons since 1991. A number of steel
substitutes, including plastics, aluminum, composites and glass, have reduced
the growth of domestic steel consumption.
Steel imports of flat rolled products as a percentage of domestic
apparent consumption, excluding semi-finished steel, have been approximately 19%
in 1996, 20% in 1997 and 27% in 1998. Imports surged in 1998 due to severe
economic conditions in Southeast Asia, Latin America, Japan and Russia, among
others. World steel demand, world export prices, U.S. dollar exchange rates and
the international competitiveness of the domestic steel industry have all been
factors in these import levels.
ITEM 2. PROPERTIES
The Company has one raw steel producing plant and various other
finishing and fabricating facilities. The Steubenville complex is an integrated
steel producing facility located at Steubenville and Mingo Junction, Ohio and
Follansbee, West Virginia. The Steubenville complex includes a sinter plant,
coke oven batteries that produce all coke requirements, two operating blast
furnaces, two basic oxygen furnaces, a two-strand continuous slab caster with an
annual slab production capacity of approximately 2.4 million tons, an 80-inch
hot strip mill and pickling and coil finishing facilities. The Ohio and West
Virginia locations, which are separated by the Ohio River, are connected by a
railroad bridge owned by the Company. A pipeline is maintained for the transfer
of coke oven gas for use as fuel from the coke plant to several other portions
of the Steubenville complex. The Steubenville complex primarily produces hot
rolled products, which are either sold to third parties or shipped to other of
the Company's facilities for further processing into value-added products.
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The following table lists the other principal plants of the Company
and the annual capacity of the major products produced at each facility:
OTHER MAJOR FACILITIES
LOCATION AND OPERATIONS CAPACITY TONS/YEAR MAJOR PRODUCTS
Allenport, Pennsylvania:
Continuous pickler, tandem mill, temper 950,000 Cold rolled sheets
mill and annealing
Beech Bottom, West Virginia:
Paint line 120,000 Painted steel in coil form
Canfield, Ohio:
Electrogalvanizing line, paint line, ribbon 65,000 Electrolytic galvanized sheet and strip
and oscillating rewind slitters
Martins Ferry, Ohio: 750,000 Hot dipped galvanized sheets and coils
Temper mill, zinc coating lines Yorkville, Ohio:
Continuous pickler, tandem mill, temper mills and
annealing lines 660,000 Black plate and cold rolled sheets
All of the above facilities currently owned by the Company are
regularly maintained in good operating condition. However, continuous and
substantial capital and maintenance expenditures are required to maintain the
operating facilities, to modernize finishing facilities in order to remain
competitive and to meet environmental control requirements.
The Company has fabricated products facilities at Fort Payne,
Alabama; Houston, Texas; Lenexa, Kansas; Louisville, Kentucky; Minneapolis,
Minnesota; Warren, Ohio; Gary, Indiana; Wilmington, North Carolina and Klamath
Falls, Medford and Brooks, Oregon.
The Company maintains regional sales offices in Atlanta, Chicago,
Detroit, Philadelphia and Pittsburgh.
ITEM 3. LEGAL PROCEEDINGS
ENVIRONMENTAL MATTERS
The Company, as are other industrial manufacturers, is subject to
increasingly stringent standards relating to the protection of the environment.
In order to facilitate compliance with these environmental standards, the
Company has incurred capital expenditures for environmental control projects
aggregating $6.8 million, $12.4 million and $9.5 million for 1996, 1997 and
1998, respectively. The Company anticipates spending approximately $30.8 million
in the aggregate on major environmental compliance projects through the year
2002, estimated to be spent as follows: $7.5 million in year 1999, $7.3 million
in 2000, $7.2 million in 2001 and $8.8 million in 2002. Due to the possibility
of unanticipated factual or regulatory developments, the amount and timing of
future expenditures may vary substantially from such estimates.
The Company has been identified as a potentially responsible party
under the Comprehensive Environmental Response, Compensation and Liability Act
("Superfund") or similar state statutes at several waste sites. The Company is
subject to joint and several liability imposed by Superfund on potentially
responsible parties. Due to the technical and regulatory complexity of remedial
activities and the difficulties attendant to identifying potentially responsible
parties and allocating or determining liability among them, the Company is
unable to reasonably estimate the ultimate cost of compliance with Superfund
laws. The Company believes, based upon information currently available, that
it's liability for clean up and remediation costs in connection with the Buckeye
Reclamation will be between $2.5 million and $3.0 million. At five
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other sites (MIDC Glassport, Tex-Tin, Breslube Penn, Four County Landfill and
Beazer) the Company estimates the costs to approximate $500,000. The Company is
currently funding its share of remediation costs.
The Clean Air Act Amendments of 1990 ("the Clean Air Act") directly
affect the operations of many of the Company's facilities, including coke ovens.
The Company is presently in compliance with the provisions of the Act. However,
under the Clean Air Act, coke ovens generally will be required to comply with
progressively more stringent standards which will result in an increase in
environmental capital expenditures and costs for environmental compliance. The
forecasted environmental expenditures include amounts which will be spent on
projects relating to compliance with these standards.
In March 1993 the EPA notified the Company of Clean Air Act
violations, alleging particulate matter and hydrogen sulfide emissions in excess
of allowable concentrations, at the Company's Follansbee Coke Plant. The parties
have entered into a consent decree settling the civil penalties related to this
matter for $700,000 and the Company completed payment of all civil penalties in
January 1997.
In an action brought in 1985 in the U.S. District Court for the
Northern District of West Virginia, the EPA claimed violations of the Solid
Waste Disposal Act at a surface impoundment area at the Follansbee facility. The
Company and the EPA entered into a consent decree in October 1989 whereby soil
and groundwater testing and monitoring procedures are required. The surface
impoundment has been removed and a final closure plan has been submitted to the
USEPA. The Company is waiting for approval from the USEPA to implement the plan.
Until the USEPA responds to the Company, the full extent and cost of remediation
cannot be ascertained.
In June of 1995 the USEPA informally requested corrective action
affecting other areas of the Follansbee facility. The USEPA sought to require
the Company to perform a site investigation of the Follansbee plant. The Company
actively contested the USEPA's jurisdiction to require a site investigation, but
subsequently entered into a final administrative order with the USEPA to conduct
a Resource Conservation and Recovery Act ("RCRA") facility investigation.
By letter dated March 15, 1994 the Ohio Attorney General advised the
Company of its intention to file suit on behalf of the Ohio EPA for alleged
hazardous waste violations at the Company's Steubenville, Mingo Junction,
Martins Ferry and Yorkville facilities. In subsequent correspondence the State
of Ohio demanded a civil penalty of approximately $300,000. Negotiations for
settlement of past violations is on-going.
In January 1998 the Ohio Attorney General notified the Company of a
draft consent order and initial civil penalties in the amount of $1 million for
various air violations at the Company's Steubenville and Mingo Junction
facilities occurring from 1992 through 1996. The Company entered into
discussions with the Ohio Environmental Enforcement Section to resolve these
issues.
The Company is currently operating in substantial compliance with
three consent decrees (two with the EPA and one with the Pennsylvania Department
of Environmental Resources) with respect to wastewater discharges at Allenport,
Pennsylvania and Mingo Junction, Steubenville, and Yorkville, Ohio. All of the
foregoing consent decrees are nearing expiration. A petition to terminate the
Allenport consent decree was filed in 1998.
The Company is aware of potential environmental liabilities
resulting from operations, including leaking underground and aboveground storage
tanks, and the disposal and storage of residuals on its property. Each of these
situations is being assessed and remediated in accordance with regulatory
requirements.
Non-current accrued environmental liabilities totaled $10.6 million
at December 31, 1997 and $12.7 million at December 31, 1998. As new information
becomes available including information provided by third parties, and changing
laws and regulation, the liabilities are reviewed and the accruals adjusted
quarterly. Management believes, based on its best estimate, that the Company has
adequately provided for its present
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environmental obligations.
Based upon information currently available, including the Company's
prior capital expenditures, anticipated capital expenditures, consent agreements
negotiated with Federal and state agencies and information available to the
Company on pending judicial and administrative proceedings, the Company does not
expect its environmental compliance costs, including the incurrence of
additional fines and penalties, if any, relating to the operation of its
facilities, to have a material adverse effect on the financial condition or
results of operations of the Company. However, as further information comes into
the Company's possession, it will continue to reassess such evaluations.
GENERAL LITIGATION
On October 27, 1998, the Company filed a complaint in Belmont
County, Ohio against ten trading companies, two Japanese mills and three Russian
mills alleging that it had been irreparably harmed as a result of sales of
hot-rolled steel by the defendants at prices below the cost of production. The
Company asked the Court for injunctive relief to prohibit such sales. On
November 6, 1998, defendants removed the case from Belmont County to the US
District Court for the Southern District of Ohio. The Company filed a motion in
the US District Court asking the Court to remand the case to Belmont County. On
November 19, 1998, the US District Court denied the Company's motion to remand
the case to Belmont County. However, the Court permitted the Company to amend
its complaint to allege violations of federal law. On November 20, 1998, the
Company filed an amended complaint in the US District Court against nine trading
companies. The Company added a claim under the 1916 Antidumping Act to its
existing state law claims. The amended complaint seeks treble damages and
injunctive relief.
The defendants filed a motion to dismiss the Company's amended
complaint and a motion to strike the Company's request for injunctive relief
under the 1916 Act. The Court granted defendants' motion to dismiss the
Company's state law causes of action, but denied defendants' motion to dismiss
the Company's claims under the 1916 Antidumping Act. The Court has not yet
issued its decision on defendants' motion to strike the Company's request for
injunctive relief. The case has been set for trial on August 16, 1999. The
Company has reached out-of-court settlements with four of the nine steel trading
companies named in its 1916 Act law suit. While terms of the settlements are
confidential, the settling defendants agreed to certain restrictions on the
importation of foreign steel in the future and agreed to purchase certain steel
products from the Company.
The Company is a party to various litigation matters including
general liability claims covered by insurance. In the opinion of management,
such claims are not expected to have a material adverse effect on the financial
condition or results of operations of the Company.
-12-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
OMITTED
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
NOT APPLICABLE
-13-
ITEM 6 SELECTED FINANCIAL DATA
FIVE-YEAR STATISTICAL (THOUSANDS OF DOLLARS)
====================================================================================================================================
1994 1995 1996* 1997* 1998
====================================================================================================================================
CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS):
Net sales $ 1,193,878 $ 1,267,869 $ 1,110,684 $ 489,662 $ 1,111,541
Cost of products sold (excluding
depreciation and profit sharing) 980,044 1,059,622 988,161 585,609 950,080
Depreciation 61,094 65,760 66,125 46,203 76,321
Profit sharing 9,257 6,718 -- -- --
Selling, administrative and general expense 60,832 55,023 54,903 52,222 61,523
Special charge -- -- -- 92,701 --
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 82,651 80,746 1,495 (287,073) 23,617
Interest expense on debt 22,581 22,431 23,763 27,204 36,699
Other income (expense) 6,731 3,234 9,476 (221) 3,478
B & LE settlement 36,091 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes, extraordinary items
and change in accounting method 102,892 61,549 (12,792) (314,498) (9,604)
Tax provision (benefit) 21,173 3,030 (7,509) (110,035) (3,101)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary items
and change in accounting method 81,719 58,519 (5,283) (204,463) (6,503)
Extraordinary items - net of tax -- (3,043) -- (25,990) --
Cumulative effect on prior years of accounting
change - net of tax (9,984) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 71,735 55,476 (5,283) (230,453) (6,503)
Preferred stock dividends 5,688 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common stock $ 66,047 $ 55,476 $ (5,283) $ (230,453) $ (6,503)
====================================================================================================================================
FINANCIAL POSITION:
Cash, cash equivalents and short term investments $ 12,778 $ 42,826 $ 35,950 $ -- $ 6,731
Working capital 141,913 147,799 109,022 9,169 43,836
Property, plant and equipment - net 732,615 748,999 710,999 694,108 651,086
Plant additions and improvements 69,139 81,554 31,188 33,755 33,595
Total assets 1,266,372 1,340,035 1,245,892 1,424,568 1,256,367
====================================================================================================================================
Long-term debt (including current portion) 292,825 288,740 269,414 350,103 349,992
Stockholders' equity 246,194 343,770 338,487 114,712 171,282
====================================================================================================================================
EMPLOYMENT
Employment costs $ 328,584 $ 325,976 $ 303,115 $ 183,550 $ 283,304
Average number of employees 5,402 5,333 5,228 3,878 4,296
====================================================================================================================================
PRODUCTION AND SHIPMENTS:
Raw steel production - tons 2,270,000 2,199,000 1,782,000 663,000 2,446,000
Shipments of steel products - tons 2,397,000 2,385,000 2,105,000 851,000 2,243,000
====================================================================================================================================
WHEELING-PITTSBURGH CORPORATION
* The financial results of the Company for the fourth quarter of 1996 and all
of 1997 were adversely affected by the strike.
-14-
NOTES TO FIVE-YEAR STATISTICAL SUMMARY
The Company adopted Statement of Financial Accounting Standard No. 112,
"Accounting for Postemployment Benefits" (SFAS 112) as of January 1, 1994. SFAS
112 establishes accounting standards for employers who provide benefits to
former or inactive employees after employment but before retirement. Those
benefits include, among others, disability, severance and workers' compensation.
The Company recorded a charge of $12.2 million ($10.0 million net of tax) in the
1994 first quarter as a result of the cumulative effect on prior years of
adoption of the change in accounting method.
The Company and its subsidiaries were reorganized into a new holding
company structure on July 26, 1994. The transactions were accounted for as a
reorganization of entities under common control. On the merger date, WHX had the
same consolidated net worth as WPC and its subsidiaries prior to the
reorganization.
In 1995 the Company recorded an extraordinary charge of $3.0 million, net
of taxes, to reflect the coal retiree medical benefits for additional retirees
assigned to the Company by the Social Security Administration and the effect of
recording the liability at its net present value.
In 1996 the Company experienced a work stoppage which began October 1,
1996 and continued through August 12, 1997 at eight of its plants in Ohio,
Pennsylvania and West Virginia. No steel products were produced at or shipped
from these facilities during the strike. These facilities account for
approximately 80% of the tons shipped by the Company on an annual basis.
In 1997 the Company recorded a special charge of $92.7 million related to
a new labor agreement which ended the ten-month strike. The special charge
included $66.7 million for enhanced retirement benefits, $15.5 million for
signing and retention bonuses, $3.8 million for special assistance and other
employee benefits payments and $6.7 million for a grant of 1.0 million stock
options to WPN Corp.
In 1997 the Company also recorded an extraordinary charge of $26.0
million, net of tax, related to premium and interest charges required to defease
its 9 3/8% Senior Unsecured Notes of $24.3 million and coal miner retiree
medical benefits of $1.7 million.
-15-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The Company was reorganized on January 3, 1991 with a business
strategy of shifting its product mix to value-added products through downstream
expansion and acquisitions. In July 1994, a new holding company, WHX, which
separated the steel related operations from non-steel related businesses, was
created. The Company comprises primarily all of the steel related operations of
WHX. The reader is referred to the WHX Form 10-K for further information
regarding its parent-company's operations.
In August 1997, the Company and the USWA entered into a new
five-year labor agreement which settled a ten-month strike. The strike directly
affected facilities accounting for approximately 80% of the Company's steel
shipments. The new labor agreement provides for a restructuring of work rules
and staffing requirements and a reduction in the expense associated with retiree
healthcare costs. The improved work rules allowed the Company to eliminate 850
hourly jobs (approximately 20% of the work force). Partially offsetting these
savings are hourly wage increases and the costs of a defined benefit pension
plan, which included a retirement incentive.
The strike materially affected the financial performance of the
Company in the fourth quarter of 1996 and for all of 1997, and will be the
primary reason for differences in year to year comparisons. All of WPC's
production facilities resumed operations as of September 30, 1997. Raw steel
production achieved 90% of capacity in the fourth quarter of 1997. By June 30,
1998, the Company was producing at its pre-strike production levels and shipping
at its historical mix of products.
Effective May 31, 1998, WHX merged WPC's defined benefit pension
plan with those of its wholly owned Handy & Harman ("H&H") subsidiary. The
pension obligations will be accounted for by the parent company as a
multi-employer plan. The merger will eliminate WPC cash funding obligations
estimated in excess of $135.0 million over the next four years. WPC pension
expense will be allocated and charged quarterly, and will offset the net prepaid
pension asset recorded by the common parent. Pension expense allocated to the
Company under this plan in 1998 totaled $9.8 million.
1998 COMPARED TO 1997
Net sales for 1998 totaled $1.1 billion on shipments of 2.2 million
tons of steel products, compared to $489.7 million on shipments of 850.5
thousand tons in 1997. The increase in sales and tons shipped is primarily
attributable to the work stoppage at eight plants during the 1997 period.
Production and shipment of steel products at these plants closed on October 1,
1996 and the work stoppage continued to August 12, 1997. Average sales prices
decreased from $576 per ton shipped to $496 per ton shipped primarily due to a
shift to a lower valued mix of products and a decrease of 2.7% in steel prices,
reflecting severe pressure on steel prices due to the significant increase in
low-priced steel imports.
Cost of goods sold decreased from $689 per ton shipped in 1997 to
$424 in 1998. The 1998 costs reflect lower pension expense due to the merged,
fully funded pension plans, while the 1997 costs reflect the effect of high
fixed cost and low capacity utilization and higher levels of external steel
purchases due to the work stoppage. The operating rates for 1998 and 1997 were
101.9% and 27.6%, respectively. Raw steel production was 100% continuous cast.
Depreciation expense increased 65% to $76.3 million in 1998,
compared to 1997, due to higher levels of raw steel production and its effect on
units of production depreciation methods. Raw steel production increased by
269%.
-16-
Selling, administrative and general expense increased 17.8% to $61.5
million in 1998, from $52.2 million in 1997. The increase is due to the reduced
level of operations in 1997.
Interest expense increased to $36.7 million in 1998 from $27.2
million in 1997. The increase is due primarily to the interest expense incurred
during 1998 for the Term Loan Agreement which was entered into in November of
1997.
Other income increased to $3.5 million in 1998 from $0.2 million
expense in 1997. The increase is a result of higher equity income, offset by
increased securitization fees during 1998. The increase in equity income is the
result of lower equity losses from the Company's investment in OCC. An equity
loss in OCC of $2.9 million in 1998 compared to an equity loss of $8.5 million
in 1997 for start-up of the OCC joint venture. Increased securitization fees in
1998 are due to increased borrowings under the Receivables Facility.
The tax benefits for 1998 and 1997 were $3.1 million and $110.0
million, respectively, before recording a tax benefit related to extraordinary
charges in 1997.
Loss before extraordinary items in 1998 totaled $6.5 million,
compared to $204.5 million in 1997.
The 1997 extraordinary charge of $40.0 million ($26.0 million net of
tax) reflects the premium and interest of $37.4 million on the legal defeasance
of long term debt, and $2.6 million for coal miner retiree medical expense
attributable to the allocation of additional retirees to the Company by the
Social Security Administration (SSA).
Net loss totaled $6.5 million in 1998, compared to a net loss of
$230.5 million in 1997.
1997 COMPARED TO 1996
Net sales for 1997 totaled $489.7 million on shipments of 850.5
thousand tons of steel products, compared to $1.1 billion on shipments of 2.1
million tons in 1996. The decrease in sales and tons shipped is primarily
attributable to the work stoppage at eight plants located in Ohio, Pennsylvania
and West Virginia. Production and shipment of steel products at these plants
closed on October 1, 1996 and the work stoppage continued to August 12, 1997.
Average net sales per ton increased to $576 per ton shipped in 1997 from $528
per ton shipped in 1996 because higher value-added products continued to be
shipped during the strike from other locations.
Cost of goods sold increased from $469 per ton shipped in 1996 to
$689 in 1997. This increase reflects the effect of high fixed cost and low
capacity utilization and higher levels of external steel purchases due to the
work stoppage, higher costs for natural gas and a higher value-added product
mix. In addition, costs were adversely affected by a door rehabilitation program
at the Company's number 8 battery. The operating rate for 1997 was 27.6%. The
operating rate for the nine months prior to the work stoppage in October of
1996, was 98.9%, but dropped to 74.0% for the full year of 1996. Raw steel
production was 100% continuous cast.
Depreciation expense decreased 30.1% to $46.2 million in 1997,
compared to 1996, due to lower levels of raw steel production and its effect on
units of production depreciation methods. Raw steel production decreased by
62.8%.
Selling, administrative and general expense decreased 4.9% to $52.2
million in 1997, from $54.9 million in 1996. The decrease is due to the reduced
level of operations.
Interest expense increased to $27.2 million in 1997 from $23.8
million in 1996. The increase is due primarily to higher levels of borrowings
under the Revolving Credit Facility.
Other income decreased to $0.2 million expense in 1997 from $9.5
million in 1996. The decrease is
-17-
due primarily to equity losses of $8.5 million for start-up of the OCC joint
venture. In 1997 OCC had a net loss of $14.3 million primarily attributable to
start-up costs. In 1996, WCC recorded a $0.9 million gain on the sale of assets.
The tax benefits for 1997 and 1996 were $110.0 million and $7.5
million, respectively, before recording a tax benefit related to extraordinary
charges in 1997.
Loss before extraordinary items in 1997 totaled $204.5 million,
compared to $5.3 million in 1996.
The 1997 extraordinary charge of $40.0 million ($26.0 million net of
tax) reflects the premium and interest of $37.4 million on the legal defeasance
of long term debt, and $2.6 million for coal miner retiree medical expense
attributable to the allocation of additional retirees to the Company by the
Social Security Administration (SSA).
Net loss totaled $230.5 million in 1997, compared to a net loss of
$5.3 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow provided by operating activities for 1998 totaled
$72.8 million reflecting income of $66.7 million before depreciation and taxes.
Working capital accounts (excluding cash, short term borrowings and current
maturities of long-term debt) used $5.2 million of funds, principally due to the
prolonged work stoppage and related start-up cost resulting from its labor
settlement on August 12, 1997. Accounts receivable decreased $5.1 million
(excluding $26 million sale of trade receivables under the securitization
agreement) due to decreased sales reflecting a reduction in pricing. Inventories
valued principally by the LIFO method for financial reporting purposes, totaled
$259.3 million at December 31, 1998, an increase of $3.5 million from the prior
year end. Trade payables and accruals decreased $25.5 million due to a return to
normal payment terms subsequent to the strike. Net cash flow used in investing
activities for 1998 totaled $28.0 million including capital expenditures of
$33.6 million. Net cash flow used in financing activities totaled $38.1 million
including repayments under the Revolving Credit Facility of $22.8 million and an
increase in net intercompany receivables of $16.7 million. At December 31, 1998,
total liquidity, comprising cash, cash equivalents and funds available under our
Revolving Credit Facility and Receivables Facility, totaled $54.4 million
compared with $84.2 million at December 31, 1997. At December 31, 1998, funds
available under our Revolving Credit Facility and Receivables Facility totaled
$47.7 million.
For the year ended December 31, 1998, the Company spent $33.6
million (including capitalized interest) on capital improvements, including $9.5
million on environmental control projects. Capital expenditures were lower than
in recent years due to the work stoppage. Non-current accrued environmental
accruals totaled $10.6 million at December 31, 1997 and $12.7 million at
December 31, 1998. These accruals were initially determined by the Company in
January 1991, based on all available information. As new information becomes
available, including information provided by third parties, and changing laws
and regulations, the accruals are reviewed and adjusted quarterly. Based upon
information currently available, including the Company's prior capital
expenditures, anticipated capital expenditures, consent agreements negotiated
with Federal and state agencies and information available to the Company on
pending judicial and administrative proceedings, the Company does not expect its
environmental compliance and liability costs, including the incurrence of
additional fines and penalties, if any, relating to the operation of its
facilities, to have a material adverse effect on the financial condition or
results of operations of the Company. However, as further information comes into
the Company's possession, it will continue to reassess such evaluations.
Net cash flow used in operating activities for 1997 totaled $175.5
million. Working capital accounts (excluding cash, short term investments, short
term borrowings and current maturities of long-term debt) used $24.1 million of
funds, principally due to the prolonged work stoppage and related start-up costs
resulting from its labor settlement on August 12, 1997. Accounts receivable
increased $19.8 million (excluding $24 million sale of trade receivables under
the securitization agreement) due to increased sales reflecting resolution
-18-
of the labor dispute. Inventories valued principally by the LIFO method for
financial reporting purposes, totaled $255.9 million at December 31, 1997, an
increase of $62.5 million from the prior year end. Trade payables and accruals
increased $69.8 million due to the strike.
For the year ended December 31, 1997, the Company spent $33.8
million (including capitalized interest) on capital improvements, including
$12.4 million on environmental control projects. Capital expenditures were lower
than in prior years due to the strike. Non-current accrued environmental
liabilities totaled $7.8 million at December 31, 1996 and $10.6 million at
December 31, 1997.
Continuous and substantial capital and maintenance expenditures will
be required to maintain and, where necessary, upgrade operating facilities to
remain competitive, and to comply with environmental control requirements. It is
anticipated that necessary capital expenditures, including required
environmental expenditures, in future years will approximate depreciation
expense and represent a material use of operating funds. The Company anticipates
funding its capital expenditures in 1999 from cash on hand, the sale of
receivables under the Receivables Facility, availability under the Revolving
Credit Facility, and funds generated from operations.
The Company has a commitment to fund the working capital
requirements of each of OCC and Wheeling-Nisshin in proportion to its ownership
interest if cash requirements of such joint ventures are in excess of
internally-generated and available borrowed funds. The Company anticipates that
Wheeling-Nisshin will not have such funding requirements in the foreseeable
future. As of December 31, 1998, the Company's investment in OCC was $17.9
million. The Company does not anticipate that additional funding requirements
will be needed in 1999. OCC may require future working capital contributions
from its equity partners; however, the Company does not believe that any such
required funding will be material to the Company's liquidity.
In 1994, a special purpose wholly-owned subsidiary of WPSC entered
into an agreement to sell (up to $75 million on a revolving basis) an undivided
percentage ownership in a designated pool of accounts receivable generated by
WPSC and two of the Company's Subsidiaries, Wheeling Construction Products, Inc.
("WCPI") and Pittsburgh Canfield Company ("PCC") (the Receivables Facility). The
Receivables Facility expires in August 1999. In July 1995 WPSC amended such
agreement to sell an additional $20 million on similar terms and conditions. In
October 1995 WPSC entered into an agreement to include the receivables generated
by Unimast Incorporated ("Unimast"), a wholly-owned subsidiary of WHX, in the
pool of accounts receivable sold. Accounts receivable at December 31, 1998,
exclude $95.0 million representing uncollected accounts receivable sold with
recourse limited to the extent of uncollectible balances. Fees paid by WPSC
under the Receivables Facility were based upon variable rates that range from
5.5438% to 8.50%. Based on the Company's collection history, the Company
believes that credit risk associated with the above arrangement is immaterial.
WPSC has a Revolving Credit Facility ("RCF") with Citibank, N.A. as
agent, which is guaranteed by WPC and two subsidiaries of the Company. The RCF
provides for borrowings for general corporate purposes up to $150 million and a
$35 million sub-limit for Letters of Credit. The RCF expires May 3, 1999.
Interest rates are based on the Citibank prime rate plus 1.0% and/or a
Eurodollar rate plus 2.25%, but the margin over the prime rate and the
Eurodollar rate can fluctuate based upon performance. A commitment fee of .5% is
charged on the unused portion. The letter of credit fee is 2.25% and is also
performance based. Borrowings are secured primarily by 100% of the eligible
inventory of WPSC, PCC and WCPI, subsidiaries of the Company, and the terms of
the RCF contain various restrictive covenants, limiting among other things,
dividend payments or other distribution of assets, as defined in the RCF.
Certain financial covenants associated with leverage, net worth, capital
spending, cash flow and interest coverage must be maintained. The Company, PCC,
and WCPI have each guaranteed all of the obligations of WPSC under the RCF.
Borrowings outstanding against the RCF at December 31, 1998 totaled $67.0
million. Letters of credit outstanding under the RCF were $8.6 million at
December 31, 1998.
WPSC also has a separate facility with Citibank, N.A. for letters of
credit up to $50 million. At
-19-
December 31, 1998 letters of credit totaling $7.7 million were outstanding under
this facility. The letters of credit are collateralized at 105% with U.S.
Government securities owned by the Company, and are subject to an administrative
charge of .4% per annum on the amount of outstanding letters of credit.
Unimast is a participant in the Receivables Facility, and its
receivables are included in the pool of receivables sold. Unimast, WHX and the
Company entered into an intercreditor agreement upon the consummation of the
November offering of 9 1/4% Senior Notes which provides, among other things,
that Unimast and WHX will be solely responsible if the Receivables Facility is
terminated as a result of a breach of such agreement by Unimast. The Company has
agreed to indemnify WHX and Unimast if the Receivables Facility is terminated as
a result of a breach of such agreement by the Company. There can be no
assurance, however, that in the event of a default by Unimast or WHX, that
either Unimast or WHX will be able to make any payments to the Company required
by such intercreditor agreement.
The Company is currently negotiating replacement facilities for the
Receivables Facility and the RCF.
In November 1997 WPSC issued $275.0 million principal amount of 9
1/4% Senior Notes. In April 1998 the Company filed a registration statement
relating to an exchange offer for the Notes under the Securities Act of 1933.
In November 1997 the Company entered into the Term Loan Agreement
with DLJ Capital Funding, Inc., as syndication agent pursuant to which the
Company borrowed $75.0 million. Interest on the Term Loan is payable quarterly
on March 15, June 15, September 15 and December 15 as to Base rate loans, and
with respect to LIBOR loans on the last day of each applicable interest period,
and if such interest period shall exceed 3 months at intervals of 3 months after
the first day of such interest period. Amounts outstanding under the Term Loan
Agreement bear interest at the Base rate (as defined therein) plus 2.25% or the
LIBOR rate (as defined therein) plus 3.25%. The Company's obligations under the
Term Loan Agreement are guaranteed by its present and future operating
subsidiaries. The Company may prepay the obligations under the Term Loan
Agreement beginning on November 15, 1998, subject to a premium of 2.0% of the
principal amount thereof. Such premium declines to 1.0% on November 15, 1999
with no premium on or after November 15, 2000.
The proceeds from the 9 1/4% Senior Unsecured Notes and the Term
Loan Agreement were used to defease $266.2 million of 9 3/8% Senior Secured
Notes and to pay down borrowings under the RCF. The Company recorded an
extraordinary charge of $40.0 million ($26.0 million net of tax) to cover the
premium and interest of $37.4 million on the legal defeasance of long term debt.
Under the terms of the new labor agreement, the Company established
a defined benefit pension plan for USWA - represented employees and recorded an
unfunded accumulated pension benefit obligation for the defined benefit plan of
approximately $167.3 million, of which approximately 75% was required to be
funded over the next five years. In accordance with ERISA regulations, the
Company was not required to and did not make significant contributions to fund
the obligations of the new plan in 1998. Effective May 31, 1998, WHX merged
WPC's defined benefit pension plan with those of its wholly owned Handy & Harman
("H&H") subsidiary. The pension obligations will be accounted for by the parent
company as a multi-employer plan. As a result of the merger of the pension plans
and based on current actuarial assumptions, on a consolidated basis, WHX will
report a net prepaid pension asset of $44.5 million. The merger will eliminate
WPC cash funding obligations estimated in excess of $135.0 million over the next
four years. The pension liability on the WPC books at the time of the pension
merger, net of the deferred tax asset, was eliminated and credited to
paid-in-capital. WPC pension expense will be allocated and charged quarterly,
and will offset the net prepaid pension asset recorded by the parent company.
Pension expense allocated to WPC under this plan in 1998 totaled $9.8 million.
WPC's company wide Year 2000 Project is proceeding on schedule. The
project addresses all aspects of computing at WPC including mainframe systems,
external data interfaces to customers, suppliers, banks and government,
mainframe controlling software, voice and data systems, internal networks and
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personal computers, plant process control systems, building controls, and in
addition surveying WPSC's major suppliers and customers to assure their
readiness.
Mainframe business systems were 97% Year 2000 compliant at December
31, 1998 and expected to be 100% compliant by March 31, 1999; external data
interfaces, mainframe software, voice and data systems and internal networks and
personal computers are anticipated to be Year 2000 compliant by March 31, 1999;
process control systems are anticipated to be compliant by June 30, 1999.
Building controls are Year 2000 compliant at this time. Supplier and customer
survey's are 50% complete at this time and completion is expected by June
30,1999.
The total costs associated with the required modifications to become
Year 2000 compliant is not expected to be material to the Company's financial
condition or results of operations. The estimated total cost of the Year 2000
Project is $2.0 million. The total amount expended on the project through
December 31, 1998 is approximately $1.7 million. Funds are being provided to the
project through departmental expenses budgeted for at the beginning of this
project.
Failure to correct a Year 2000 problem could result in an
interruption of certain normal business activities or operations. The Year 2000
project is expected to eliminate any issues that would cause such an
interruption. WPSC believes that the implementation of the Year 2000 project
changes will minimize any interruptions. WPSC is currently in the process of
developing contingency plans regarding component failure of any Year 2000
non-compliant segment of the business.
Short-term liquidity is dependent, in large part, on cash on hand,
investments, availability under the Revolving Credit Facility, sale of
receivables under the Receivables Facility, general economic conditions and
their effect on steel demand and prices. Long-term liquidity is dependent upon
the Company's ability to sustain profitable operations and control costs during
periods of low demand or pricing in order to sustain positive cash flow. The
Company satisfies its working capital requirements through cash on hand,
investments, the Receivables Facility, borrowing availability under the RCF and
funds generated from operations. The Company believes that, based on current
levels of operations and anticipated improvements in operating results, cash
flows from operations and borrowings available under the RCF will enable the
Company to fund its liquidity and capital expenditure requirements for the
foreseeable future, including scheduled payments of interest on the Notes and
payments of interest and principal on the Company's other indebtedness,
including borrowings under the Term Loan Agreement. However, external factors,
such as worldwide steel production and demand and currency exchange rates could
materially affect the Company's results of operations and financial condition.
There can be no assurance that the Company will be able to maintain its
short-term and/or its long-term liquidity. A failure by the Company to maintain
its liquidity could have a material adverse effect on the Company.
When used in the Management's Discussion and Analysis, the words
"anticipate", "estimate" and similar expressions are intended to identify
forward-looking statements. Within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, which are intended to be covered by the
safe harbors created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty, including without limitation, the
ability of the Company to develop market and sell its products, the effects of
competition and pricing and Company and industry shipment levels. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could be inaccurate, and therefore, there
can be no assurance that the forward-looking statements included herein will
prove to be accurate.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
COMMODITY PRICE RISK AND RELATED RISKS
In the normal course of business, the Company is exposed to price
fluctuations related to the
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purchase of natural gas, steel products, coal, coke, electricity and certain
nonferrous metals used as raw materials. The Company's market risk strategy has
generally been to obtain competitive prices for its products and services and
allow operating results to reflect market price movements dictated by supply and
demand.
INTEREST RATE RISK
The Company is subject to the effects of interest rate fluctuations
on certain of its financial instruments. A sensitivity analysis of the projected
incremental effect of a hypothetical 10% change in 1998 year-end interest rates
on the fair value of WPC's financial instruments is provided in the following
table:
Carrying Market Incremental(1)
Value Value Incr./(decr.)
----- ----- -------------
(Dollars in Thousands)
Financial liabilities:
Fixed-rate long-term debt (including
amounts due within one year) $274,071 $255,750 $15,345
(1) Reflects a 10% decrease in interest rates for financial liabilities.
Fair value of cash and cash equivalents, receivables, short-term
borrowings, accounts payable, and accrued interest and variable rate long-term
debt approximate their carrying values and are relatively insensitive to changes
in interest rates due to the short-term maturity of the instruments or the
variable nature of the underlying interest rates. Accordingly, these items have
been excluded from the above table.
The Company attempts to maintain a reasonable balance between fixed-
and floating-rate debt in an attempt to keep financing costs as low as possible.
At December 31, 1998, a majority of the Company's portfolio of long-term debt
consisted of fixed-rate instruments. Accordingly, the fair value of such
instruments may be relatively sensitive to effects of interest rate
fluctuations. In addition, the fair value of such instruments is also affected
by investors' assessments of the risks associated with industries in which the
Company operates as well as the Company's overall creditworthiness and ability
to satisfy such obligations upon their maturity. However, the Company's
sensitivity to interest rate declines and other market risks that might result
in a corresponding increase in the fair value of its fixed-rate debt portfolio
would only have an unfavorable effect on the Company's results of operations and
cash flows to the extent that the Company elected to repurchase or retire all of
a portion of its fixed-rate debt portfolio at an amount in excess of the
corresponding carrying value.
See Note H to the consolidated financial statements for additional
information concerning the Company's long-term debt arrangements.
SAFE HARBOR
The Company's quantitative and qualitative disclosures about market
risk include forward-looking statements with respect to management's opinion
about the risks associated with the Company's financial instruments. These
statements are based on certain assumptions with respect to market prices,
interest rates and other industry-specific risk factors. To the extent these
assumptions prove to be inaccurate, future outcomes may differ materially from
those discussed above.
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS No. 130), effective January 1, 1998.
This Statement establishes standards for reporting and display of comprehensive
income and its components in the financial statements.
-22-
The Company does not have any items of comprehensive income other than net
income.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1
addresses costs incurred in connection with the implementation of internal-use
software, and specifies the circumstances under which such costs should be
capitalized or expensed. The Company will be required to adopt SOP 98-1 in the
first quarter of 1999. At this time, management does not anticipate the adoption
of SOP 98-1 will have a material impact on the Company's results of operations
or financial position.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This pronouncement requires all
derivative instruments to be reported at fair value on the balance sheet;
depending on the nature of the derivative instrument, changes in fair value will
be recognized either in net income or as an element of comprehensive income.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. The
Company has not engaged in significant activity with respect to derivative
instruments or hedging activities in the past. Management of the Company has not
yet determined the impact, if any, of the adoption of SFAS 133 on the Company's
financial position or results of operations.
-23-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Wheeling-Pittsburgh Corporation (a wholly-owned subsidiary of
WHX Corporation)
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, and of cash flows present fairly,
in all material respects, the financial position of Wheeling-Pittsburgh
Corporation and its subsidiaries (the Company) at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 18, 1999
-24-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WHEELING-PITTSBURGH CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF WHX CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
1996 1997 1998
---- ---- ----
(Dollars in thousands)
REVENUES:
Net sales ........................................... $ 1,110,684 $ 489,662 $ 1,111,541
COST AND EXPENSES:
Cost of products sold, excluding
depreciation ...................................... 988,161 585,609 950,080
Depreciation ........................................ 66,125 46,203 76,321
Selling, administrative and general expense ......... 54,903 52,222 61,523
Special charge ...................................... -- 92,701 --
----------- ----------- -----------
1,109,189 776,735 1,087,924
----------- ----------- -----------
Operating income (loss) ............................. 1,495 (287,073) 23,617
Interest expense on debt ............................ 23,763 27,204 36,699
Other income (expense) .............................. 9,476 (221) 3,478
----------- ----------- -----------
Loss before taxes
and extraordinary item ............................ (12,792) (314,498) (9,604)
Tax provision (benefit) ............................. (7,509) (110,035) (3,101)
----------- ----------- -----------
Loss before
extraordinary item ................................ (5,283) (204,463) (6,503)
Extraordinary charge--net of tax .................... -- (25,990) --
----------- ----------- -----------
Net loss ............................................ $ (5,283) $ (230,453) $ (6,503)
=========== =========== ===========
See Notes to Consolidated Financial Statements
-25-
WHEELING-PITTSBURGH CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF WHX CORPORATION)
CONSOLIDATED BALANCE SHEET
December 31,
1997 1998
---- ----
(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents .......................................................................... $ 0 $ 6,731
Trade receivables, less allowances for doubtful
accounts of $1,108 and $1,095 .................................................................... 44,569 39,504
Inventories ........................................................................................ 255,857 259,339
Prepaid expenses and deferred charges .............................................................. 24,938 6,141
----------- -----------
Total current assets ......................................................................... 325,364 311,715
Investment in associated companies ................................................................... 68,742 69,075
Property, plant and equipment, at cost less
accumulated depreciation ........................................................................... 694,108 651,086
Deferred income taxes ................................................................................ 196,966 147,162
Intangible asset-pension ............................................................................. 76,714 --
Due from affiliates .................................................................................. 27,955 44,693
Deferred charges and other assets .................................................................... 34,719 32,636
----------- -----------
$ 1,424,568 $ 1,256,367
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade payables ..................................................................................... $ 116,559 $ 96,615
Short term debt .................................................................................... 89,800 66,999
Payroll and employee benefits ...................................................................... 56,212 58,522
Federal, state and local taxes ..................................................................... 11,875 8,488
Deferred income taxes--current ..................................................................... 32,196 27,156
Interest and other ................................................................................. 9,354 9,882
Long-term debt due in one year ..................................................................... 199 217
----------- -----------
Total current liabilities .................................................................... 316,195 267,879
Long-term debt ....................................................................................... 349,904 349,775
Other employee benefit liabilities ................................................................... 427,125 414,955
Pension liability .................................................................................... 166,652 --
Other liabilities .................................................................................... 49,980 52,476
----------- -----------
1,309,856 1,085,085
----------- -----------
STOCKHOLDER'S EQUITY:
Common stock - $.01 Par value; 100 shares
issued and outstanding .......................................................................... -- --
Additional paid-in capital ........................................................................... 272,065 335,138
Accumulated deficit .................................................................................. (157,353) (163,856)
----------- -----------
114,712 171,282
----------- -----------
$ 1,424,568 $ 1,256,367
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-26-
WHEELING-PITTSBURGH CORPORATION
(A WHOLLY-OWNED SUBSIDIARY OF WHX CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
---------------------------------------------------
1996 1997* 1998
---- ----- ----
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................................... $ (5,283) $(230,453) $ (6,503)
Items not affecting cash from operating activities:
Depreciation ................................................... 66,125 46,203 76,321
Other postretirement benefits .................................. 3,505 2,322 (8,174)
Coal retirees' medical benefits (net of tax) ................... -- 1,700 --
Premium on early debt retirement (net of tax) .................. -- 24,290 --
Income taxes ................................................... (6,572) (110,495) (3,594)
Special charges (net of current portion) ....................... -- 69,137 --
Pension expense ................................................ -- 9,327 9,773
Equity (income) loss in affiliated companies ................... (9,495) 1,206 (5,333)
Decrease (increase) in working capital elements:
Trade receivables .............................................. 50,061 (43,780) (20,935)
Trade receivables sold ......................................... (22,000) 24,000 26,000
Inventories .................................................... 73,247 (62,528) (3,482)
Trade payables ................................................. (48,721) 65,059 (19,944)
Other current assets ........................................... 4,033 (11,572) 18,797
Other current liabilities ...................................... (13,973) 4,744 (5,589)
Other items--net ................................................. 1,355 35,334 15,512
--------- --------- ---------
Net cash flow provided by (used in) operating activities ......... 92,282 (175,506) 72,849
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Plant additions and improvements ............................... (31,188) (33,755) (33,595)
Investments in affiliates ...................................... (17,240) (7,150) --
Proceeds from sales of assets .................................. 1,425 1,217 607
Dividends from affiliated companies ............................ 2,500 2,500 5,000
--------- --------- ---------
Net cash used in investing activities ............................ (44,503) (37,188) (27,988)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt proceeds, net of issuance cost .................. -- 340,270 --
Long-term debt retirement ...................................... (15,153) (268,277) (111)
Premium on early debt retirement ............................... -- (32,600) --
Short term debt borrowings (payments) .......................... -- 89,800 (22,801)
Letter of credit collateralization ............................. 384 16,984 1,520
Receivables from affiliates .................................... (39,886) 30,567 (16,738)
--------- --------- ---------
Net cash (used in) provided by financing activities .............. (54,655) 176,744 (38,130)
--------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ................. (6,876) (35,950) 6,731
Cash and cash equivalents at beginning of year ................... 42,826 35,950 --
--------- --------- ---------
Cash and cash equivalents at end of year ......................... $ 35,950 $ -- $ 6,731
========= ========= =========
* RECLASSIFIED
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-27-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES
The accounting policies presented below have been followed in
preparing the accompanying consolidated financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all
subsidiary companies. All significant intercompany accounts and transactions are
eliminated in consolidation. The Company uses the equity method of accounting
for investments in unconsolidated companies owned 20% or more.
EARNINGS PER SHARE
Presentation of earnings per share is not meaningful since the
Company is a wholly owned subsidiary of WHX Corporation. See Note A--Corporate
Reorganization.
BUSINESS SEGMENT
The Company is primarily engaged in one line of business and has one
industry segment, which is the making, processing and fabricating of steel and
steel products. The Company's products include hot rolled and cold rolled sheet,
and coated products such as galvanized, prepainted and tin mill sheet. The
Company also manufactures a variety of fabricated steel products including roll
formed corrugated roofing, roof deck, form deck, floor deck, culvert, bridge
form and other products used primarily by the construction, highway and
agricultural markets.
Through an extensive mix of products, the Company markets to a wide
range of manufacturers, converters and processors. The Company's 10 largest
customers (including Wheeling-Nisshin) accounted for approximately 34.9% of its
net sales in 1996, 30.2% in 1997 and 39.7% in 1998. Wheeling-Nisshin was the
only customer to account for more than 10% of net sales in 1996 and 1998. No
single customer accounted for more than 10% of net sales in 1997.
Wheeling-Nisshin accounted for 12.7% and 14.6% of net sales in 1996 and 1998,
respectively. Geographically, the majority of the Company's customers are
located within a 350-mile radius of the Ohio Valley. However, the Company has
taken advantage of its river-oriented production facilities to market via barge
into more distant locations such as the Houston, Texas and St. Louis, Missouri
areas. The Company has acquired regional facilities to service an even broader
geographical area.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and on deposit and
highly liquid debt instruments with original maturities of three months or less.
INVENTORIES
Inventories are stated at cost which is lower than market. Cost is
determined by the last-in first-out ("LIFO") method for substantially all
inventories. In 1998 and 1997, approximately 87% and 91%, respectively, of
inventories are valued using the LIFO method.
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PROPERTY, PLANT AND EQUIPMENT
Depreciation is computed on the straight line and the modified units
of production methods for financial statement purposes and accelerated methods
for income tax purposes. The modified units of production method adjusts the
straight line method based on an activity factor for operating assets. Adjusted
annual depreciation is not less than 60% nor more than 110% of straight line
depreciation. Accumulated depreciation after adjustment is not less than 75% nor
more than 110% of straight line depreciation. Interest cost is capitalized for
qualifying assets during the assets' acquisition period. Capitalized interest
cost is amortized over the life of the asset.
Maintenance and repairs are charged to income. Renewals and
betterments made through replacements are capitalized. Profit or loss on
property dispositions is credited or charged to income.
PENSIONS AND OTHER POSTRETIREMENT PLANS
The Company has a tax qualified defined benefit pension plan
covering United Steelworkers of America ("USWA") represented hourly employees
and substantially all salaried employees and tax qualified defined contribution
pension plans covering other hourly employees and substantially all salaried
employees. The defined benefit plan provides for a defined monthly benefit based
on years of service. The defined contribution plans provide for contributions
based on a percentage of compensation for salaried employees and a rate per hour
worked for hourly employees. Costs for the defined contribution plans are being
funded currently. Unfunded accumulated benefit obligations under the defined
benefit plan are subject to annual minimum cash funding requirements under the
Employees Retirement Income Security Act ("ERISA").
The Company sponsors medical and life insurance programs for
substantially all employees. Similar group medical programs extend to pensioners
and dependents. The management plan provides basic medical and major medical
benefits on a non-contributory basis through age 65.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes". Recognition is given in the accounts for the income tax effect of
temporary differences in reporting transactions for financial and tax purposes
using the deferred liability method. Tax provisions and the related tax payments
or refunds have been reflected in the Company's financial statements in
accordance with a tax sharing agreement between WHX and the Company.
ENVIRONMENTAL MATTERS
The Company accrues for losses associated with environmental
remediation obligations when such losses are probable and reasonably estimable.
Accruals for estimated losses from environmental remediation obligations
generally are recognized no later than completion of the remedial feasibility
study.
Such accruals are adjusted as further information develops or
circumstances change. Costs of future expenditures for environmental remediation
obligations are not discounted to their present value. Recoveries of
environmental remediation costs from other parties are recorded as assets when
their receipt is deemed probable.
-29-
NOTE A--CORPORATE REORGANIZATION
FORMATION OF WHX CORPORATION
On July 26, 1994 the Company and its subsidiaries were reorganized
and a new holding company, WHX Corporation (WHX), was formed. Upon effectiveness
of the merger each share of Wheeling-Pittsburgh Corporation (WPC) Common Stock,
WPC Series A Preferred Stock and each WPC Warrant were converted into a share of
WHX Common Stock, WHX Series A Preferred Stock and a WHX Warrant, respectively.
WHX also assumed the obligation to purchase the Redeemable Common Stock of the
ESOP and guaranteed substantially all of the Company's outstanding indebtedness.
See Note H. The merger was a change in legal organization and the assets and
liabilities transferred were accounted for at historical cost with carryover
basis. The merger was accounted for as a reorganization of entities under common
control whereby the basis of assets and liabilities were unchanged. WPC retained
the capital stock of the steel-related subsidiaries and equity investments.
At December 31, 1997 and 1998, amounts due from affiliates totaled
$28.0 million and $44.7 million, respectively. These amounts reflect cash
advances between affiliates, dividends paid by WPC on behalf of WHX,
intercompany tax allocations and Unimast working capital advances.
NOTE B -- COLLECTIVE BARGAINING AGREEMENT
The Company's prior labor agreement with the USWA expired on October
1, 1996. On August 1, 1997 the Company and the USWA announced that they had
reached a tentative agreement on the terms of a new collective bargaining
agreement. The tentative agreement was ratified on August 12, 1997 by
USWA-represented employees, ending a ten-month strike. The new collective
bargaining agreement provided for a defined benefit pension plan, a retirement
enhancement program, short-term bonuses and special assistance payments for
employees not immediately recalled to work and $1.50 in hourly wage increases
over its term of not less than five years. It also provides for the reduction of
850 jobs, mandatory multicrafting as well as modification of certain work
practices.
NOTE C -- SPECIAL CHARGE - NEW LABOR AGREEMENT
The Company recorded a special charge of $92.7 million in 1997. The
special charge is primarily related to certain benefits included in its new
collective bargaining agreement.
The special charges included enhanced retirement benefits paid under
the defined benefit pension program which totaled $66.7 million and were
recorded under the provisions of Statement of Financial Accounting Standard
No.88, "Employers' Accounting For Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits" (SFAS No.88), and various
other charges which totaled $26.0 million. These charges include $15.5 million
for signing and retention bonuses, $3.8 million for special assistance payments
to laid-off employees and other employee benefits and $6.7 million for the fair
value of a stock option grant to WPN Corp. for its performance in negotiating a
new labor agreement.
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NOTE D--PENSIONS, OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
PENSION PROGRAMS
The Company provides defined contribution pension programs for both
hourly and salaried employees, and prior to August 12, 1997 also provided a
defined contribution pension program for USWA-represented employees. These tax
qualified defined contribution plans provide, in the case of hourly employees,
an increasing Company contribution per hour worked based on the age of its
employees. A similar tax qualified plan for salaried employees provides defined
Company contributions based on a percentage of compensation dependent upon age
and in certain cases age and service of its employees. The Company also
established a supplemental defined benefit pension plan for its salaried
employees.
On August 12, 1997, the Company established a defined benefit
pension plan for USWA-represented employees pursuant to a new labor agreement.
The plan includes individual participant accounts of USWA-represented employees
from the hourly defined contribution plan and merges the assets of those
accounts into the defined benefit plan.
As of December 31, 1998, $120.3 million of fully vested funds are
held in trust for benefits earned under the hourly defined contribution pension
plans. Approximately 80% of the trust assets are invested in equities, 18% in
fixed income investments and 2% in cash and cash equivalents.
As of December 31, 1998, $38.3 million of fully vested funds are
held in trust for benefits earned under the salaried employees defined
contribution plan. Approximately 80% of the assets are invested in equities 18%
are in fixed income investments and 2% in cash and cash equivalents. All plan
assets are invested by professional investment managers.
All pension provisions charged against income totaled $9.3 million,
$12.6 million and $13.4 million in 1996, 1997 and 1998, respectively. In 1997,
the Company also recorded a $66.7 million charge for enhanced retirement
benefits paid under the defined benefit pension plan, pursuant to a new labor
agreement.
DEFINED BENEFIT PLAN
The plan was established pursuant to a collective bargaining
agreement ratified on August 12, 1997. Prior to that date, benefits were
provided through a defined contribution plan, the Wheeling-Pittsburgh Steel
Corporation ("WPSC"), a wholly owned subsidiary of the Company, Retirement
Security Plan ("Retirement Security Plan").
The defined benefit pension plan covers employees represented by the
USWA. The plan also includes individual participant accounts from the Retirement
Security Plan. The assets of the Retirement Security Plan were merged into the
Defined Benefit Pension Plan.
Since the plan includes the account balances from the Retirement
Security Plan, the plan includes both defined benefit and defined contribution
features. The gross benefit, before offsets, is calculated based on years of
service and the current benefit multiplier under the plan. This gross amount is
then offset for benefits payable from the Retirement Security Plan and benefits
payable by the Pension Benefit Guaranty Corporation from previously terminated
plans. Individual employee accounts established under the Retirement Security
Plan are maintained until retirement. Upon retirement, the account balances are
converted into monthly benefits that serve as an offset to the gross benefit, as
described above. Aggregate account balances held in trust in individual employee
accounts which will be available upon retirement to offset the gross benefit at
December 31, 1998 totaled $119.4 million.
As part of the new five-year labor agreement, the Company offered a
limited program of Retirement Enhancements. The Retirement Enhancement program
provide for unreduced retirement benefits to the first 850 employees who retired
after October 1, 1996. In addition, each retiring participant could elect a lump
-31-
sum payment of $25,000 or a $400 monthly supplement payable until age 62. More
than 850 employees applied for retirement under this program by December 31,
1997.
The Retirement Enhancement program represented a Curtailment and
Special Termination Benefits under SFAS No. 88. The Company recorded a charge of
$66.7 million in 1997 to cover the retirement enhancement program.
In 1998 the Company established a supplemental defined benefit plan
covering its salaried employees employed as of January 31, 1998 which provides a
guaranteed minimum benefit based on years of service and compensation. The gross
benefit from this plan is offset by the annuitized value of the defined
contribution plan account balance and any benefits payable from the Pension
Benefit Guaranty Corporation from the previously terminated defined benefit
pension plan.
Effective May 31, 1998, WHX merged WPC's defined benefit pension
plans with those of its wholly owned Handy & Harman ("H&H") subsidiary. The
pension obligations will be accounted for by the parent company as a
multi-employer pension plan. As a result of the merger of the pension plans and
based on current actuarial assumptions, on a consolidated basis, WHX will report
a net prepaid pension asset of $44.5 million. The merger will also eliminate WPC
cash funding obligations estimated in excess of $135.0 million over the next
four years. The pension liability on the WPC books at the time of the pension
merger, net of the deferred tax asset, was eliminated and credited to
paid-in-capital. WPC pension expense will be allocated and charged quarterly,
and will offset the net prepaid pension asset recorded by the parent company.
Pension expense allocated to WPC under this plan in 1998 totaled $9.8 million.
-32-
The amounts (prepaid) accrued at December 31, included the following
components.
Postretirement Benefits
Pension Benefits Other Than Pensions
---------------- -------------------
(Dollars in Thousands) (Dollars in Thousands)
1997 1998 1997 1998
--------- --------- --------- ---------
Change in benefit obligation:
Benefit Obligation at beginning of year $ -- $ 172,431 $ 361,341 $ 308,812
Service cost 2,278 1,467 3,337 2,231
Interest cost 4,172 3,518 21,573 19,172
Actuarial (gain) -- (10,390) (24,792) (3,674)
Benefits paid (12,505) (7,527) (19,100) (27,528)
Plan Amendments -Implementation 101,295 -- (45,277) --
Business Combinations -- (159,499) -- --
Curtailments/Settlements/Termination Benefits 59,506 -- 11,730 --
Transfers from DC Plans 17,685 -- -- --
--------- --------- --------- ---------
Benefit Obligation at December 31 $ 172,431 $ -- $ 308,812 $ 299,013
--------- --------- --------- ---------
Change in plan assets:
Fair value of plan assets at beginning of year $ -- $ 5,180 $ 13,010 $ 7,795
Actual return on plan assets -- 11,421 104 137
Benefits paid (12,505) (7,527) (5,319) (7,508)
Business combinations -- (9,074) -- --
Transfers from DC Plans 17,685 -- -- --
--------- --------- --------- ---------
Fair value of plan assets at December 31 $ 5,180 $ -- $ 7,795 $ 424
--------- --------- --------- ---------
Plan assets in excess of (less than)
benefit obligation $(167,252) $ -- $(301,017) $(298,589)
Unrecognized prior service cost 76,714 -- (40,486) (36,568)
Unrecognized net actuarial (gain)loss -- -- (71,942) (70,034)
--------- --------- --------- ---------
Net amount recognized at December 31 $ (90,538) $ -- $(413,445) $(405,191)
========= ========= ========= =========
Amounts recognized in the statement
of financial position consist of:
Accrued benefit liability $(167,252) $ -- $(413,445) $(405,191)
Intangible asset 76,714 -- -- --
--------- --------- --------- ---------
Net amount recognized $ (90,538) $ -- $(413,445) $(405,191)
========= ========= ========= =========
Net Periodic (credit) costs for pension and postretirement benefits other
than pensions (principally health care and life insurance) for employees and
covered dependents.
Postretirement Benefits
Pension Benefits Other Than Pensions
---------------- ----------------------
1997 1998 1996 1997 1998
---- ---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
Components of net periodic (credit) cost:
Service cost $ 2,278 $ 1,467 $ 3,953 $ 2,488 $ 2,231
Interest cost 4,172 3,518 23,982 20,950 19,172
Expected return on plan assets -- 204 -- -- (156)
Curtailment (gain)/loss 66,676 -- -- -- --
Amortization of prior service cost 2,877 2,149 -- -- (3,918)
Recognized actuarial (gain) /loss -- (288) (3,888) (7,490) (5,696)
-------- -------- -------- -------- --------
Total $ 76,003 $ 7,050 $ 24,047 $ 15,948 $ 11,633
======== ======== ======== ======== ========
-33-
The discount rate and rates of compensation increases used in
determining the benefit obligations at December 31, 1998, 1997, and 1996, and
the expected long-term rate of return on assets in each of the years 1998, 1997,
and 1996 were as follows.
1997 1998 1996 1997 1998
---- ---- ---- ---- ----
Discount rate 7.0% 7.0% 7.0% 7.0% 6.5%
Expected return on assets 10.0% 10.0% 8.0% 8.0% 8.0%
Rate of compensation increase N/A N/A -- -- --
Medical care cost trend rate N/A N/A 9.5% 9.0% 8.5%
401-K PLAN
Effective January 1, 1994 the Company began matching salaried employee
contributions to the 401(k) plan with shares of the Company's Common Stock. The
Company matches 50% of the employees contributions. The employer contribution is
limited to a maximum of 3% of an employee's salary. Matching contributions of
WHX Common Stock pursuant to the 401(k) plan are charged to the Company at
market value through the intercompany accounts. At December 31, 1996, 1997 and
1998, the 401(k) plan held 190,111 shares, 275,537 shares and 288,157 shares of
WHX Common Stock, respectively.
POSTEMPLOYMENT BENEFITS
The Company provides benefits to former or inactive employees after
employment but before retirement. Those benefits include, among others,
disability, severance and workers' compensation. The assumed discount rate used
to measure the benefit liability was 7.0% at December 31, 1997 and 6.5% at
December 31, 1998.
OTHER POSTRETIREMENT BENEFITS
The Company sponsors postretirement benefit plans that cover both
management and hourly retirees and dependents. The plans provide medical
benefits including hospital, physicians' services and major medical expense
benefits and a life insurance benefit. The hourly employees' plans provide
non-contributory basic medical and a supplement to Medicare benefits, and major
medical coverage to which the Company contributes 50% of the insurance premium
cost. The management plan has provided basic medical and major medical benefits
on a non-contributory basis through age 65.
The Company accounts for these benefits in accordance with Statement of
Financial Accounting Standards No. 106 (SFAS No. 106), "Employers' Accounting
for Post-retirement Benefits Other Than Pensions." The cost of postretirement
medical and life benefits for eligible employees are accrued during the
employee's service period through the date the employee reaches full benefit
eligibility. The Company defers and amortizes recognition of changes to the
unfunded obligation that arise from the effects of current actuarial gains and
losses and the effects of changes in assumptions. The Company funds the plans as
current benefit obligations are paid. Additionally, in 1994 the Company began
funding a qualified trust in accordance with it's collective bargaining
agreement. The new collective bargaining agreement provides for the use of those
funds to pay current benefit obligations and suspends additional funding until
2002.
For measurement purposes, medical costs are assumed to increase at annual
rates as stated above and declining gradually to 4.5% in 2004 and beyond. The
health care cost trend rate assumption has significant effect on the costs and
obligation reported. A 1% increase in the health care cost trend rate in each
year would result in approximate increases in the accumulated postretirement
benefit obligation of $24.3 million, and net periodic benefit cost of $4.3
million. A 1% decrease in the health care cost trend rate in each year would
result in approximate decreases in the accumulated postretirement benefit
obligation of $21.6 million, and net periodic benefit cost of $3.3 million.
-34-
COAL INDUSTRY RETIREE HEALTH BENEFIT ACT
The Coal Industry Retiree Health Benefit Act of 1992 ("the Act") created a
new United Mine Workers of America postretirement medical and death benefit plan
to replace two existing plans which had developed significant deficits. The Act
assigns companies the remaining benefit obligations for former employees and
beneficiaries, and a pro rata allocation of benefits related to unassigned
beneficiaries (orphans). The Company's obligation under the Act relates to its
previous ownership of coal mining operations.
At December 31, 1997 the actuarially determined accrued liability
discounted at 7% covering 532 assigned retirees and dependents and 133 orphans,
totaled $10.8 million. The Company recorded an extraordinary charge of $1.7
million (net of tax) in 1997 related to assignment of additional orphans. At
December 31, 1998, the actuarially determined liability discounted at 6.5%
covering 494 assigned retirees and dependents and 188 orphans, totaled $11.0
million.
NOTE E--INCOME TAXES
Year ended December 31,
1996 1997 1998
---- ---- ----
(Dollars in thousands)
INCOME TAXES BEFORE EXTRAORDINARY ITEMS
Current
Federal tax provision (benefit) ................... $ (1,317) $ 0 $ 93
State tax provision ............................... 380 460 400
--------- --------- ---------
Total income taxes current .......................... (937) 460 493
--------- --------- ---------
Deferred
Federal tax provision (benefit) ................... (6,572) (110,495) (3,594)
--------- --------- ---------
Income tax provision (benefit) ...................... $ (7,509) $(110,035) $ (3,101)
========= ========= =========
TOTAL INCOME TAXES
Current
Federal tax provision (benefit) ................... $ (1,317) $ -- $ 93
State tax provision ............................... 380 460 400
--------- --------- ---------
Total income taxes current .......................... (937) 460 493
--------- --------- ---------
Deferred
Federal tax provision (benefit) ................... (6,572) (124,490) (3,594)
--------- --------- ---------
Income tax provision (benefit) ...................... $ (7,509) $(124,030) $ (3,101)
========= ========= =========
COMPONENTS OF TOTAL INCOME TAXES
Operations .......................................... $ (7,509) $(110,035) $ (3,101)
Extraordinary items ................................. -- (13,995) --
--------- --------- ---------
Income tax provision (benefit) ...................... $ (7,509) $(124,030) $ (3,101)
========= ========= =========
-35-
Deferred income taxes result from temporary differences in the
financial basis and tax basis of assets and liabilities. The type of differences
that give rise to deferred income tax liabilities or assets are shown in the
following table:
DEFERRED INCOME TAX SOURCES
1997 1998
---- ----
(Dollars in millions)
ASSETS
Postretirement and postemployment employee benefits .................... $ 147.7 $ 143.6
Operating loss carryforward (expiring in 2005 to 2012) ................. 76.7 60.1
Minimum tax credit carryforwards (indefinite carryforward) ............. 49.5 51.4
Provision for expenses and losses ...................................... 87.0 47.4
Leasing activities ..................................................... 23.8 22.2
State income taxes ..................................................... 1.4 1.3
Miscellaneous other .................................................... 7.5 5.5
-------- --------
Deferred tax assets ............................................... 393.6 331.5
-------- --------
LIABILITIES
Property plant and equipment ........................................... (166.1) (155.9)
Inventory .............................................................. (34.9) (30.3)
Pension ................................................................ 0.0 (1.4)
State income taxes ..................................................... (1.0) (0.9)
Miscellaneous other .................................................... (6.8) (0.5)
-------- --------
Deferred tax liability ............................................ (208.8) (189.0)
Valuation allowance .................................................... (20.0) (22.5)
-------- --------
Deferred income tax asset--net ......................................... $ 164.8 $ 120.0
======== ========
As of December 31, 1998, for financial statement reporting purposes
a balance of approximately $20.0 million of prereorganization tax benefits
exist. These benefits will be reported as a direct addition to equity as they
are recognized. The increase to the valuation allowance during 1998 is
attributable to the recognition of tax credits that will expire prior to
realization. No prereorganization tax benefits were recognized in 1996, 1997 or
1998.
During 1994, the Company experienced an ownership change as defined
by Section 382 of the Internal Revenue Code. As the result of this event, the
Company will be limited in its ability to use net operating loss carryforwards
and certain other tax attributes to reduce subsequent tax liabilities. The
amount of taxable income that can be offset by pre-change tax attributes in any
annual period is limited to approximately $32 million per year.
A tax sharing agreement between the Company and WHX determines the
tax provision and related tax payments or refunds allocated to the Company in
years in which they are combined in a consolidated federal income tax return.
The tax sharing agreement stipulates that WPSC, shall be deemed to have
succeeded to the portion of the net operating loss and credit carryovers
attributable to the steel group on December 31, 1990.
-36-
Total federal and state income taxes paid in 1996, 1997 and 1998
were $3.5 million, $.7 million and $1.2 million, respectively.
Federal tax returns have been examined by the Internal Revenue
Service ("IRS") through 1987. The statute of limitations has expired for years
through 1994; however, the IRS can review prior years to adjust any NOL's
incurred in such years and carried forward to offset income in subsequent open
years. Management believes it has adequately provided for all taxes on income.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate to
pretax income as follows:
December 31,
-------------------------------------------------
1996 1997 1998
---- ---- ----
(Dollars in thousands)
Income (loss) before taxes and ...................................... $ (12,792) $(314,498) $ (9,604)
========= ========= =========
extraordinary item
Tax provision (benefit) at statutory rate ........................... $ (4,477) $(110,074) $ (3,361)
Increase (reduction) in tax due to:
Percentage depletion .............................................. (1,027) (1,092) (829)
Equity earnings ................................................... (2,408) 338 (1,484)
State income tax net of federal effect ............................ 260 299 260
Change in valuation allowance ..................................... -- -- 2,481
Other miscellaneous ............................................... 143 494 (168)
--------- --------- ---------
Tax provision (benefit) ............................................. $ (7,509) $(110,035) $ (3,101)
========= ========= =========
NOTE F--INVENTORIES
December 31,
---------------------------
1997 1998
---- ----
(Dollars in thousands)
Finished products ........................... $ 34,233 $ 33,936
In-process .................................. 106,270 114,416
Raw materials ............................... 105,648 74,988
Other materials and supplies ................ 19,875 33,373
--------- ---------
266,026 256,713
LIFO reserve ................................ (10,169) 2,626
--------- ---------
$ 255,857 $ 259,339
========= =========
During 1997 and 1998, certain inventory quantities were reduced,
resulting in liquidations of LIFO inventories, the effect of which increased
income by approximately $0.6 million and $1.8 million in 1997 and 1998,
respectively.
-37-
NOTE G--PROPERTY, PLANT AND EQUIPMENT
December 31,
------------------------
1997 1998
---- ----
(Dollars in thousands)
Land and mineral properties ...................... $ 7,071 $ 7,715
Buildings, machinery and equipment ............... 1,034,189 1,070,946
Construction in progress ......................... 21,741 17,185
---------- ----------
1,063,001 1,095,846
Accumulated depreciation and amortization ........ 368,893 444,760
---------- ----------
$ 694,108 $ 651,086
========== ==========
The Company utilizes the modified units of production method of
depreciation which recognizes that the depreciation of steelmaking machinery is
related to the physical wear of the equipment as well as a time factor. The
modified units of production method provides for straight line depreciation
charges modified (adjusted) by the level of raw steel production. In 1997 and
1998 depreciation under the modified units of production method was $21.6
million or 40% less and $1.1 million or 2% more, respectively, than straight
line depreciation. The 1997 reduction in depreciation primarily reflects the
ten-month strike which began October 1, 1996 and continued until August 12,
1997.
NOTE H--LONG-TERM DEBT
December 31,
-------------------
1997 1998
---- ----
(Dollars in thousands)
Senior Unsecured Notes due 2007, 9 1/4% .............. $273,966 $274,071
Term Loan Agreement due 2006, floating rate .......... 75,000 75,000
Other ................................................ 1,137 921
-------- --------
350,103 349,992
Less portion due within one year ..................... 199 217
-------- --------
Total Long-Term Debt(1) ......................... $349,904 $349,775
======== ========
(1) The fair value of long-term debt at December 31, 1997 and December 31, 1998
was $350.1 million and $331.7 million, respectively. Fair value of
long-term debt is estimated based on trading in the public market.
Long-term debt maturing in each of the next five years is as follows: 1999,
$217; 2000, $217; 2001, $233; 2002, $246 and 2003, $0.
A summary of the financial agreements at December 31, 1998 follows:
REVOLVING CREDIT FACILITY:
In December 1995, WPSC entered into a Second Amended and Restated
Revolving Credit Facility ("RCF") with Citibank, N.A. as agent. The RCF provides
for borrowings for general corporate purposes up to $150 million and a $35
million sub-limit for Letters of Credit.
The Credit Agreement expires May 3, 1999 and is currently being
renegotiated. Interest rates are based on the Citibank prime rate plus 1.0%
and/or a Eurodollar rate plus 2.25%, but, the margin over the prime rate and the
Eurodollar rate can fluctuate based upon performance. A commitment fee of .5% is
charged on the unused portion. The letter of credit fee is 2.25% and is also
performance based.
-38-
Borrowings are secured primarily by 100% of the eligible inventory
of WPSC, Pittsburgh-Canfield Corporation ("PCC") and Wheeling Construction
Products, Inc. ("WCPI"), and the terms of the RCF contain various restrictive
covenants, limiting among other things dividend payments or other distribution
of assets, as defined in the RCF. The Company is a wholly-owned subsidiary of
WHX. WPSC, PCC and WCPI are wholly-owned subsidiaries of the Company. Certain
financial covenants associated with leverage, net worth, capital spending, cash
flow and interest coverage must be maintained. WPC, PCC and WCPI have each
guaranteed all of the obligations of WPSC under the Revolving Credit Facility.
Borrowings outstanding against the RCF at December 31, 1998 totaled $67.0
million. Letters of credit outstanding under the RCF were $8.6 million at
December 31, 1998.
In August 1994 WPSC entered into a separate facility for letters of
credit up to $50 million. At December 31, 1998 letters of credit totaling $7.7
million were outstanding under this facility. The letters of credit are
collateralized at 105% with U.S. Government securities owned by the Company, and
are subject to an administrative charge of .4% per annum on the amount of
outstanding letters of credit.
9 3/8 % SENIOR NOTES DUE 2003:
In November 1997, the Company, under the terms of the 9 3/8% Senior
Notes, defeased the remaining $266.2 million 9d% Senior Notes outstanding at a
total cost of $298.8 million. The 9d% Senior Notes were placed into trusteeship
where they will be held until redemption on November 15, 2000.
9 1/4% SENIOR NOTES DUE 2007:
On November 26, 1997 the Company issued $275 million principal
amount of 9 1/4% Senior Notes. Interest on the 9 1/4% Senior Notes is payable
semi-annually on May 15 and November 15 of each year, commencing May 15, 1998.
The Senior Notes mature on November 15, 2007. The 9 1/4% Senior Notes were
exchanged for identical notes which were issued pursuant to an exchange offer
registered under the Securities Act of 1933, as amended.
The 9 1/4% Senior Notes are redeemable at the option of the Company,
in whole or in part, on or after November 15, 2002 at specified redemption
prices, plus accrued interest and liquidated damages, if any, thereon to the
date of redemption.
Upon the occurrence of a Change of Control (as defined), the Company
will be required to make an offer to repurchase all or any part of each holder's
Senior Notes at 101% of the principal amount thereof, plus accrued and unpaid
interest and liquidated damages, if any, thereon to the date of repurchase.
The 9 1/4% Senior Notes are unsecured obligations of the Company,
ranking senior in right of payment to all existing and future subordinated
indebtedness of the Company, and pari passu with all existing and future senior
unsecured indebtedness of the Company, including borrowings under the Term Loan
Agreement.
The 9 1/4% Senior Notes are fully and unconditionally guaranteed on
a joint and several and senior basis by the guarantors, which consist of the
Company's present and future operating subsidiaries. The 9 1/4% Senior Notes
indenture contains certain covenants, including, but not limited to, covenants
with respect to: (i) limitations on indebtedness; (ii) limitations on restricted
payments; (iii) limitations on transactions with affiliates; (iv) limitations on
liens; (v) limitations on sales of assets; (vi) limitations on issuance and sale
of capital stock of subsidiaries; (vii) limitations on dividends and other
payment restrictions affecting subsidiaries; and (viii) restrictions on
consolidations, mergers and sales of assets.
TERM LOAN AGREEMENT
On November 26, 1997 the Company entered into the Term Loan
Agreement with DLJ Capital
-39-
Funding Inc., as syndication agent pursuant to which it borrowed $75 million.
Amounts outstanding under the Term Loan Agreement bear interest at
the base rate (as defined therein) plus 2.25% or the LIBO rate (as defined
therein) plus 3.25%. Interest on the Term Loan is payable on March 15, June 15,
September 15 and December 15 as to Base Rate Loans, and with respect to LIBOR
loans on the last day of each applicable interest period, and if such interest
period shall exceed three months, at intervals of three months after the first
day of such interest period.
The Company's obligations under the Term Loan Agreement are
guaranteed by its present and future operating subsidiaries. The Company may
prepay the obligations under the Term Loan Agreement beginning on November 15,
1998, subject to a premium of 2.0% of the principal amount thereof. Such premium
declines to 1.0% on November 15, 1999 with no premium on or after November 15,
2000.
INTEREST COST
Aggregate interest costs on debt and amounts capitalized during the
three years ended December 31, 1998, are as follows:
1996 1997 1998
---- ---- ----
(Dollars in thousands)
Aggregate interest expense on long-term debt ..... $26,263 $29,431 $38,762
Less: Capitalized interest ....................... 2,500 2,227 2,063
------- ------- -------
Interest expense ................................. $23,763 $27,204 $36,699
======= ======= =======
Interest Paid .................................... $27,660 $29,515 $36,924
======= ======= =======
NOTE I--STOCKHOLDER'S EQUITY
Changes in capital accounts are as follows:
Common Stock Accumulated Capital
Earnings in Excess
Shares Amount (Deficit) of Par Value
------ ------ --------- ------------
(Dollars in thousands)
Balance January 1, 1996 100 $ 0 $ 78,383 $265,387
Net income (loss) -- -- (5,283) --
--- -------- --------- --------
Balance December 31, 1996 100 0 73,100 265,387
Net income (loss) -- -- (230,453) --
WPN stock option -- -- -- 6,678
--- -------- --------- --------
Balance December 31, 1997 100 0 (157,353) 272,065
Net income (loss) -- -- (6,503) --
Contribution To Capital -- -- -- 63,073
--- -------- --------- --------
Balance December 31, 1998 100 $ 0 $(163,856) $335,138
=== ======== ========= ========
Pursuant to a reorganization of the Company effective on July 26,
1994, WPC became a wholly-owned subsidiary of WHX. WHX, a new holding company,
became the publicly held issuer for all of the outstanding Common and Preferred
Stock and outstanding warrants of WPC and assumed WPC's rights and obligations
with respect to WPC's option plans, all as described below.
Pursuant to reorganization of the Company, WHX assumed the rights
and obligations of WPC under WPC's stock option plans and WHX Common Stock is
issuable in lieu of each share of WPC Common Stock required by the plans.
-40-
The Company accounts for grants of options to purchase WHX Common
Stock in accordance with Interpretation 1 to Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees". Options to purchase WHX
Common Stock are granted at market value and cash is paid to WHX when the option
is exercised. No employee compensation amounts are recorded upon the issuance of
options to purchase WHX Common Stock.
On August 4, 1997 the compensation committee of the Board of
Directors of WHX granted an option to purchase 1,000,000 shares of WHX Common
Stock to WPN Corp, at the then market price per share, subject to stockholder
approval for its performance in negotiating a new five-year labor agreement. The
Board of Directors approved such grant on September 25, 1997, and the
stockholders approved it on December 1, 1997 (measurement date). The WPN options
are exercisable with respect to one-third of the shares of Common Stock issuable
upon the exercise thereunder at any time on or after the date of stockholder
approval of the Option Grants. The options with respect to an additional
one-third of the shares of Common Stock may be exercised on the first and second
anniversaries of the Approval Date, respectively. The options, to the extent not
previously exercised, will expire on August 4, 2007, respectively.
The Company is required to record a charge for the fair value of the
1997 option grants under Statement of Financial Accounting Standards No. 123
("SFAS No.123") ("Accounting for Stock-Based Compensation"). The fair value of
the option grant is estimated on the measurement date using the Black--Scholes
option-pricing model. The following assumptions were used in the Black--Scholes
calculation: expected volatility of 48.3%, risk-free interest rate of 5.83%, an
expected life of 5 years and a dividend yield of zero. The resulting estimated
fair value of the shares granted in 1997 was $6.7 million which was recorded as
part of the special charge related to the new labor agreement.
Effective May 31, 1998, WHX merged WPC's defined benefit pension
plan with those of its wholly owned Handy & Harman ("H&H") subsidiary. The
pension obligations will be accounted for by the parent company as a
multi-employer pension plan. As a result of the merger of the pension plans and
based on current actuarial assumptions, on a consolidated basis, WHX will report
a net prepaid pension asset of $44.5 million. The merger will also eliminate WPC
cash funding obligations estimated in excess of $135.0 million over the next
four years. The pension liability on the WPC books at the time of the pension
merger, net of the deferred tax asset, was eliminated and credited to
paid-in-capital. WPC pension expense will be allocated and charged quarterly,
and will offset the net prepaid pension asset recorded by the parent company.
Pension expense allocated to WPC under this plan in 1998 totaled $9.8 million.
NOTE J --RELATED PARTY TRANSACTION
The Chairman of the Board of WHX is the President and sole
shareholder of WPN Corp. Pursuant to a management agreement effective as of
January 3, 1991, as amended, approved by a majority of the disinterested
directors of WHX, WPN Corp. provides certain financial, management advisory and
consulting services to WPC. Such services include, among others, identification,
evaluation and negotiation of acquisitions and diverstitures, responsibility for
financing matters, review of annual and quarterly budgets, supervision and
administration, as appropriate, of all WPC's accounting and financial functions
and review and supervision of reporting obligations under Federal and state
securities laws. In exchange for such services, WPN Corp. received a fixed
monthly fee of $208,333 in 1998 from the Company. In December 1997 WHX
stockholders approved a grant of an option to purchase 1,000,000 shares of
Common Stock to WPN Corp. for their performance in obtaining a new labor
agreement. The options were valued using the Black--Scholes formula at $6.7
million and recorded as a special charge related to the labor contract. The
Management Agreement has a two year term and is renewable automatically for
successive one year periods, unless terminated by either party upon 60 days'
prior written notice.
The Company regularly sells steel product to Unimast at prevailing
market prices. During 1998 and 1997, the Company shipped $27.2 million and $4.8
million, respectively of steel product. Amounts due the Company at December 31,
1998 and 1997 were $3.4 million and $12.5 million, respectively.
-41-
NOTE K-COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company has been identified as a potentially responsible party
under the Comprehensive Environmental Response, Compensation and Liability Act
("Superfund") or similar state statutes at several waste sites. The Company is
subject to joint and several liability imposed by Superfund on potentially
responsible parties. Due to the technical and regulatory complexity of remedial
activities and the difficulties attendant to identifying potentially responsible
parties and allocating or determining liability among them, the Company is
unable to reasonably estimate the ultimate cost of compliance with Superfund
laws. The Company believes, based upon information currently available, that the
Company's liability for clean up and remediation costs in connection with the
Buckeye reclamation will be between $2.5 and $3.0 million. At five other sites
(MIDC Glassport, Tex-Tin, Breslube Penn, Four County Landfill and Beazer) the
Company estimates costs to aggregate approximately $500,000. The Company is
currently funding its share of remediation costs.
The Company, as are other industrial manufacturers, is subject to
increasingly stringent standards relating to the protection of the environment.
In order to facilitate compliance with these environmental standards, the
Company has incurred capital expenditures for environmental control projects
aggregating $6.8 million, $12.4 million and $ 9.5 million for 1996, 1997 and
1998, respectively. The Company anticipates spending approximately $30.8 million
in the aggregate on major environmental compliance projects through the year
2002, estimated to be spent as follows: $7.5 million in 1999, $7.3 million in
2000, $7.2 million in 2001 and $8.8 million in 2002. Due to the possibility of
unanticipated factual or regulatory developments, the amount of future
expenditures may vary substantially from such estimates.
Non-current accrued environmental liabilities totaled $10.6 million
at December 31, 1997 and $12.7 million at December 31, 1998. These accruals were
initially determined by the Company in January 1991, based on all then available
information. As new information becomes available including information provided
by third parties, and changing laws and regulations, the liabilities are
reviewed and the accruals adjusted quarterly. Management believes, based on its
best estimate, that the Company has adequately provided for remediation costs
that might be incurred or penalties that might be imposed under present
environmental laws and regulations.
Based upon information currently available, including the Company's
prior capital expenditures, anticipated capital expenditures, consent agreements
negotiated with Federal and state agencies and information available to the
Company on pending judicial and administrative proceedings, the Company does not
expect its environmental compliance and liability costs, including the
incurrence of additional fines and penalties, if any, relating to the operation
of its facilities, to have a material adverse effect on the financial condition
or results of operations of the Company. However, as further information comes
into the Company's possession, it will continue to reassess such evaluations.
-42-
NOTE L--OTHER INCOME
December 31,
---------------------------------
1996 1997 1998
---- ---- ----
(Dollars in thousands)
Interest and investment income .......... $ 3,948 $ 4,189 $ 2,702
Equity income ........................... 9,495 (1,206) 5,333
Receivables securitization fees ......... (4,934) (3,826) (6,192)
Other, net .............................. 967 622 1,635
------- ------- -------
$ 9,476 $ (221) $ 3,478
======= ======= =======
NOTE M--SALE OF RECEIVABLES
In 1994, a special purpose wholly-owned subsidiary of WPSC, entered
into an agreement to sell (up to $75 million on a revolving basis) an undivided
percentage ownership in a designated pool of accounts receivable generated by
WPSC, WCPI and PCC. The agreement expires in August 1999. In July 1995 WPSC
amended such agreement to sell an additional $20 million on similar terms and
conditions. In October 1995 WPSC entered into an agreement to include the
receivable generated by Unimast in the pool of accounts receivable sold.
Accounts receivable at December 31, 1997 and 1998 exclude $69 million and $95
million, respectively, representing uncollected accounts receivable sold with
recourse limited to the extent of uncollectible balances. Fees paid by WPSC
under this agreement range from 5.5438% to 8.50% of the outstanding amount of
receivables sold. Based on the Company's collection history, the Company
believes that credit risk associated with the above arrangement is immaterial.
The Company is currently negotiating a replacement facility.
NOTE N--INFORMATION ON SIGNIFICANT JOINT VENTURES
The Company owns 35.7% of Wheeling-Nisshin Inc. (Wheeling-Nisshin)
Wheeling-Nisshin had total debt outstanding at December 31, 1997 and 1998 of
approximately $18.5 million and $11.6 million, respectively. The Company derived
approximately 5.1% and 14.6% of its revenues from sale of steel to
Wheeling-Nisshin in 1997 and 1998, respectively. The increase in revenue
reflects the effect of the strike on company shipments to Wheeling-Nisshin in
1997. The Company received dividends of $2.5 million annually from
Wheeling-Nisshin in 1996 and 1997 and $5.0 million in 1998. Amounts due the
Company at December 31, 1998 totaled $4.0 million. Audited financial statements
of Wheeling-Nisshin are presented at page 47 because it is considered a
significant subsidiary of the Company under SEC regulations.
The Company owns 50.0% of Ohio Coatings Company (OCC). OCC had total
debt outstanding at December 31, 1997 and 1998 of approximately $57.2 million.
The Company derived approximately 1.1% and 6.1% of its revenues from sale of
steel to OCC in 1997 and 1998 respectively. The increase in revenue reflects the
effect of the strike on the Company's shipments to OCC in 1997. Amounts due the
Company at December 31, 1998 totaled $28.0 million, including an advance of
$16.5 million.
NOTE O -- EXTRAORDINARY CHARGE
Year Ended
December 31,
1997
(Dollars in thousands)
Premium on early debt retirement ............ $ 32,600
Unamortized debt issuance cost .............. 4,770
Coal retiree medical benefits ............... 2,615
Income tax effect ........................... (13,995)
--------
$ 25,990
--------
-43-
In November 1997 the Company paid a premium of $32.6 million to
defease the remaining $266.2 million of the 9 3/8 Senior Notes at a total cost
of $298.8 million.
In 1997, a 7% discount rate was used to calculate the actuarially
determined coal retiree medical benefit liability compared to 7.5% in 1996. In
1997 the Company also incurred higher premiums for additional retirees and
orphans assigned in 1995. See Note D.
NOTE P--SUMMARIZED COMBINED FINANCIAL INFORMATION OF THE SUBSIDIARY GUARANTORS
OF THE 9 1/4% SENIOR NOTES
Year Ended December 31,
------------------------------------------------
1996 1997 1998
---- ---- ----
(Dollars in thousands)
INCOME DATA
Net sales $ 1,110,684 $ 489,662 $ 1,111,541
Cost of products sold, excluding depreciation 987,528 585,609 949,475
Depreciation 66,125 46,203 76,321
Selling, general and administrative expense 54,740 52,294 61,276
Special charge -- 92,701 --
----------- ----------- -----------
Operating income(loss) 2,291 (287,145) 24,469
Interest expense 22,983 26,071 31,408
Other income(loss) (973) (1,280) (3,904)
----------- ----------- -----------
Income (loss) before tax (21,665) (314,496) (10,843)
Tax provision(benefit) (10,615) (110,034) (3,535)
----------- ----------- -----------
Net income (loss) $ (11,050) $ (204,462) $ (7,308)
=========== =========== ===========
Year Ended December 31,
----------------------------------------------
1996 1997 1998
---- ---- ----
(Dollars in thousands)
BALANCE SHEET DATA
Assets
Current assets $ 267,055 $ 324,813 $ 311,222
Non-current assets 926,386 990,435 835,287
---------- ---------- ----------
Total assets $1,193,441 $1,315,248 $1,146,509
========== ========== ==========
Liabilities and stockholder's equity
Current liabilities $ 152,385 $ 311,723 $ 262,926
Non-current liabilities 739,762 935,834 760,127
Stockholder's equity 301,294 67,691 123,456
---------- ---------- ----------
Total liabilities and stockholder's equity $1,193,441 $1,315,248 $1,146,509
========== ========== ==========
-44-
NOTE Q--QUARTERLY INFORMATION (UNAUDITED)
Financial results by quarter for the two fiscal years ended December
31, 1997 and 1998 are as follows:
Earnings (Loss) Per Earnings
Gross Profit Extraordinary Net Income Share Before (Loss) Per
Net Sales (Loss) Charge (Loss) Extraordinary Charge Share
--------- ------ ------ ------ -------------------- -----
(Dollars in thousands)
1997:(1)
1st Quarter.......... 79,014 (34,139) -- (40,251) * *
2nd Quarter.......... 87,878 (20,825) -- (34,584)
3rd Quarter.......... 103,217 (31,621) -- (96,785)
4th Quarter.......... 219,553 (9,362) (25,990) (58,833)
1998:
1st Quarter.......... 259,121 29,182 -- (8,951) * *
2nd Quarter.......... 288,767 52,361 -- 6,092
3rd Quarter.......... 297,717 45,247 -- 1,959
4th Quarter.......... 265,936 34,671 -- (5,603)
* Earnings per share are not meaningful because the Company is a wholly-owned
subsidiary of WHX Corporation.
(1) The financial results of the Company for all four quarters of 1997 were
adversely affected by the strike. Negative impacts of the strike included
the volume effect of lower production on fixed cost absorption, higher
levels of external steel purchases, start-up costs and a higher-cost mix of
products shipped.
-45-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
NOT APPLICABLE
PART III
OMITTED
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM 8-K
(a) 2. Audited Financial Statements of Wheeling-Nisshin, Inc.
The following audited Financial Statements of Wheeling-Nisshin, Inc.
are presented because Wheeling-Nisshin is considered a significant subsidiary as
defined under SEC Regulations.
-46-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Wheeling-Nisshin, Inc.:
In our opinion, the accompanying balance sheets and the related statements of
income, shareholders' equity and of cash flows present fairly, in all material
respects, the financial position of Wheeling-Nisshin, Inc. (the Company) at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewatehouseCoopers LLP
Pittsburgh, Pennsylvania
February 16,1999
-47-
WHEELING-NISSHIN, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 21,278 $ 22,313
Investments .......................................................... 48,659 28,500
Trade accounts receivable, net of allowance for
bad debts of $250 in 1998 and 1997 (Note 8)......................... 10,262 16,364
Inventories (Note 3) ................................................. 13,797 16,793
Prepaid income taxes ................................................. 1,507 139
Deferred income taxes (Note 6) ....................................... 2,654 2,342
Other current assets ................................................. 432 622
-------- --------
Total current assets ........................................... 98,589 87,073
Property, plant and equipment, net (Note 4) ............................ 111,788 124,787
Debt issuance costs, net of accumulated amortization
of $1,792 in 1998 and $1,704 in 1997.................................. 109 197
Other assets ........................................................... 602 719
-------- --------
Total assets ................................................... $211,088 $212,776
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................... $ 5,381 $ 10,684
Due to affiliates (Note 8) ........................................... 3,968 3,356
Accrued interest ..................................................... 237 367
Other accrued liabilities ............................................ 3,970 3,260
Accrued profit sharing ............................................... 6,290 4,644
Current portion of long-term debt (Note 5) ........................... 6,775 6,835
-------- --------
Total current liabilities ...................................... 26,621 29,146
Long-term debt, less current portion (Note 5) .......................... 4,824 11,645
Deferred income taxes (Note 6) ......................................... 26,271 25,262
Other long-term liabilities (Note 9) ................................... 2,500 2,500
-------- --------
Total liabilities .............................................. 60,216 68,553
-------- --------
Commitments and contingencies (Note 8 and 9)
Shareholders' equity:
Common stock, no par value; authorized, issued
and outstanding, 7,000 shares....................................... 71,588 71,588
Retained earnings .................................................... 79,284 72,635
-------- --------
Total shareholders' equity ......................................... 150,872 144,223
-------- --------
Total liabilities and shareholders' equity ..................... $211,088 $212,776
======== ========
The accompanying notes are an integral part of the financial statements.
-48-
WHEELING-NISSHIN, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996
--------- --------- ---------
Net Sales (Note 8) .................................................. $ 379,415 $ 396,278 $ 375,658
Cost of goods sold (Note 8) ......................................... 341,877 365,967 335,071
--------- --------- ---------
Gross profit .................................................... 37,538 30,311 40,587
Selling, general and administrative expenses ........................ 6,957 5,608 6,546
--------- --------- ---------
Operating profit ................................................ 30,581 24,703 34,041
--------- --------- ---------
Other income (expense):
Interest and other income ......................................... 3,002 2,203 2,539
Interest expense .................................................. (985) (1,398) (1,909)
--------- --------- ---------
2,017 805 630
--------- --------- ---------
Income before income taxes ...................................... 32,598 25,508 34,671
Provision for income taxes (Note 6) ................................. 11,949 9,435 13,110
Net income ...................................................... $ 20,649 $ 16,073 $ 21,561
========= ========= =========
Earnings per share .................................................. $ 2.95 $ 2.30 $ 3.08
========= ========= =========
The accompanying notes are an integral part of the financial statements.
-49-
WHEELING-NISSHIN, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
Retained
Common Stock Earnings Total
------------ -------- -----
Balance at December 31, 1995 ................................ $ 71,588 $ 49,001 $ 120,589
Net income .................................................. -- 21,561 21,561
Cash dividends ($1 per share) ............................... -- (7,000) (7,000)
--------- --------- ---------
Balance at December 31, 1996 ................................ 71,588 63,562 135,150
Net income .................................................. -- 16,073 16,073
Cash dividends ($1 per share) ............................... -- (7,000) (7,000)
--------- --------- ---------
Balance at December 31, 1997 ................................ 71,588 72,635 144,223
Net income .................................................. -- 20,649 20,649
Cash dividends ($2 per share) ............................... -- (14,000) (14,000)
--------- --------- ---------
Balance at December 31, 1998 ................................ $ 71,588 $ 79,284 $ 150,872
========= ========= =========
The accompanying notes are an integral part of the financial statements.
-50-
WHEELING-NISSHIN, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1998 1997 1996
Cash flows from operating activities:
Net income ............................................................ $ 20,649 $ 16,073 $ 21,561
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ....................................... 13,396 13,065 12,952
Loss on disposal of land ............................................ 6 -- --
Deferred income taxes ............................................... 697 1,141 5,330
Net change in operating assets and liabilities:
Decrease (increase) in trade accounts receivable .................. 6,102 3,401 (730)
Decrease (increase) in inventories ................................ 2,996 5,440 (3,467)
(Increase) decrease in prepaid and accrued
income taxes..................................................... (1,368) (3,322) (51)
Decrease (increase) in other assets ............................... 190 197 (636)
(Decrease) increase in accounts payable ........................... (5,303) (10,542) 12,846
Increase (decrease) in due to affiliates .......................... 612 3,356 (6,036)
Decrease in accrued interest ...................................... (130) (130) (173)
(Decrease) increase in other accrued liabilities .................. 2,356 (1,989) 945
-------- -------- --------
Net cash provided by operating activities ....................... 40,203 26,690 42,541
-------- -------- --------
Cash flows from investing activities:
Capital expenditures, net ............................................. (222) (959) (1,173)
Proceeds from sale of land ............................................ 24 -- --
Purchase of investments ............................................... (44,214) (43,700) (19,900)
Maturity of investments ............................................... 24,055 35,100 --
-------- -------- --------
Net cash used in investing activities ........................... (20,357) (9,559) (21,073)
-------- -------- --------
Cash flows from financing activities:
Payments on long-term debt ............................................ (6,881) (6,835) (11,361)
Payment of dividends .................................................. (14,000) (7,000) (7,000)
-------- -------- --------
Net cash used in financing activities ........................... (20,881) (13,835) (18,361)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents....................................................... (1,035) 3,296 3,107
Cash and cash equivalents:
Beginning of the year ................................................. 22,313 19,017 15,910
-------- -------- --------
End of the year ....................................................... $ 21,278 $ 22,313 $ 19,017
======== ======== ========
Supplemental cash flow disclosures: Cash paid during the year for:
Interest ............................................................ $ 1,115 $ 1,528 $ 2,082
======== ======== ========
Income taxes ........................................................ $ 12,622 $ 11,616 $ 7,831
======== ======== ========
Supplemental schedule of noncash investing and financing activities:
Acquisition of property, plant and equipment
included in other long-term liabilities (Note 9) .................... $ -- $ 2,500 $ --
======== ======== ========
The accompanying notes are an integral part of the financial statements.
-51-
WHEELING-NISSHIN, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
-------
1. DESCRIPTION OF BUSINESS:
Wheeling-Nisshin, Inc. (the Company) is engaged in the production
and marketing of galvanized and aluminized steel products at a
manufacturing facility in Follansbee, West Virginia. Principally all
of the Company's sales are to ten trading companies located
primarily in the United States. At December 31, 1998, Nisshin
Holding Incorporated, a wholly-owned subsidiary of Nisshin Steel
Co., Ltd., (Nisshin), and Wheeling-Pittsburgh Corporation
(Wheeling-Pittsburgh), a wholly owned subsidiary of WHX Corporation,
owned 64.3% and 35.7% of the outstanding common stock of the
Company, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of general cash accounts and
highly liquid debt instruments with maturities of three months
or less when purchased. Substantially all of the Company's
cash and cash equivalents are maintained at one financial
institution. No collateral or other security is provided on
these deposits, other than $100 of deposits insured by the
Federal Deposit Insurance Corporation.
INVESTMENTS:
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." This
statement requires that securities be classified as trading,
held-to-maturity, or available-for-sale. The Company's
investments, which consist of certificates of deposit and
commercial paper, are classified as held-to-maturity and are
recorded at cost. The certificates of deposit amounted to $0
and $28,500 at December 31, 1998 and 1997, respectively, and
are maintained at one financial institution. Commercial paper
amounted to $48,659 and $0 at December 31, 1998 and 1997,
respectively.
INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method.
-52-
NOTES TO FINANCIAL STATEMENTS, Continued
(Dollars in thousands)
-------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost less
accumulated depreciation and amortization.
Major renewals and improvements are charged to the property
accounts, while replacements, maintenance and repairs which do
not improve or extend the useful lives of the respective
assets are expensed. Upon disposition or retirement of
property, plant and equipment, the cost and the related
accumulated depreciation or amortization are removed from the
accounts. Gains or losses on sales are reflected in other
income.
Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the
assets.
DEBT ISSUANCE COSTS:
Debt issuance costs associated with long-term debt secured to
finance the construction of the Company's original
manufacturing facility and the second production line were
capitalized and are being amortized using the effective
interest method over the term of the related debt.
INCOME TAXES:
The Company uses SFAS No. 109, "Accounting for Income Taxes",
to recognize deferred tax liabilities and assets for the
difference between the financial statement carrying amounts
and the tax basis of assets and liabilities using enacted tax
rates in effect in the years in which the differences are
expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected
to be realized.
EARNINGS PER SHARE:
In 1997, the Company adopted SFAS No. 128, "Earnings per
Share." This statement requires the disclosure of basic and
diluted earnings per share and revises the method required to
calculate these amounts.
Earnings per share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding
during each period.
-53-
NOTES TO FINANCIAL STATEMENTS, Continued
(Dollars in thousands)
-------
3. Inventories
Inventories consist of the following at December 31:
1998 1997
------- -------
Raw materials ............................ $ 7,576 $ 5,335
Finished goods ........................... 5,711 10,115
------- -------
$13,287 $15,450
------- -------
LIFO reserve ............................. 510 1,343
------- -------
$13,797 $16,793
======= =======
During 1998, the Company revised its LIFO valuation approach to
valuing inventories at December 31, 1998. The effect of this change was to
decrease inventories and income before income taxes by approximately $1,593 and
net income by approximately $1,009. Additionally, during 1998, certain inventory
quantities were reduced resulting in a liquidation of LIFO inventories, the
effect of which decreased net income by approximately $102.
4. Property, Plant and Equipment
Property, plant and equipment consists of the following at December
31:
1998 1997
--------- ---------
Buildings .......................................... $ 34,674 $ 34,665
Land improvements .................................. 3,097 3,097
Machinery and equipment ............................ 165,569 164,893
Office equipment ................................... 3,262 3,725
--------- ---------
206,602 206,380
Less accumulated depreciation and amortization ..... (95,816) (82,625)
--------- ---------
110,786 123,755
Land ............................................... 1,002 1,032
--------- ---------
$ 111,788 $ 124,787
========= =========
Depreciation expense was $13,191, $12,846 and $12,715 in 1998, 1997,
and 1996, respectively.
-54-
NOTES TO FINANCIAL STATEMENTS, Continued
(Dollars in thousands)
-------
5. Long-Term Debt
Long-term debt consists of the following at December 31:
1998 1997
---- ----
Industrial revenue bonds for the second production line
accruing interest at .625% over the LIBOR rate, as
adjusted for periods ranging from three months to
one year, as elected by the Company. The interest
rate on the bonds was 6.66% at December 31, 1998
and 6.53% at December 31, 1997. The bonds are
payable in 17 equal semi-annual installments of
$3,353 plus interest through March 2000.............. $ 11,529 $ 18,235
West Virginia Economic Development Authority
(WVEDA) loan accruing interest at 4%, payable in
monthly installments of $2 including interest
through January 2001 was repaid in 1998.............. -- 67
Capital lease obligations accruing interest at rates
ranging from 10% to 13.8%, payable in monthly
installments through January 2000.................... 70 178
------- --------
11,599 18,480
Less current portion................................... 6,775 6,835
------- --------
$ 4,824 $ 11,645
======= ========
The industrial revenue bonds are collateralized by substantially all
property, plant and equipment and are guaranteed by Nisshin. In addition, the
industrial revenue bonds provide that dividends may not be declared or paid
without the prior written consent of the lender. Such approval was obtained for
the dividends paid in years 1998, 1997 and 1996.
The annual maturities on all long-term debt for each of the five
years ending December 31 are: $6,775 in 1999; $4,824 in 2000; and $0 thereafter.
-55-
NOTES TO FINANCIAL STATEMENTS, Continued
(Dollars in thousands)
-------
6. Income Taxes
The provision for income taxes for the years ended December 31
consist of:
1998 1997 1996
------- ------- -------
Current:
U.S. Federal .................... $10,543 $ 7,771 $ 7,366
State ........................... 709 523 414
Deferred .......................... 697 1,141 5,330
------- ------- -------
$11,949 $ 9,435 $13,110
======= ======= =======
Reconciliation of the federal statutory and effective tax rates for
1998, 1997 and 1996 are as follows:
1998 1997 1996
---- ---- ----
Federal statutory rate .................. 35.0% 35.0% 35.0%
State income taxes ...................... 1.6 1.5 1.2
Other, net .............................. 0.1 0.5 1.6
---- ---- ----
36.7% 37.0% 37.8%
==== ==== ====
The deferred tax assets and liabilities recorded on the balance
sheets as of December 31 are as follows:
1998 1997
------- -------
Deferred tax assets:
Accrued expenses ............................... $ 1,143 $ 1,120
Other .......................................... 1,511 1,222
------- -------
2,654 2,342
------- -------
Deferred tax liabilities:
Depreciation and amortization .................. 22,729 23,781
Other .......................................... 3,542 1,481
------- -------
26,271 25,262
------- -------
$23,617 $22,920
======= =======
The Company has received two separate tax credits for new business
investment and jobs expansion (Supercredits) in West Virginia. The Supercredits
may only be applied to offset the West Virginia income tax liability generated
by the specific business expansion that created the credit. The first
Supercredit was granted in 1988 and expired in 1997. However, the Company has
approximately $2,500 of credit carryforwards attributed to the 1988 investment
that may be used to offset the company's West Virginia income tax liability for
the three taxable years ended 2000.
The second Supercredit granted in 1993 can be used to offset up to
$5,958 annually of West Virginia income tax attributable to the 1993 investment
through the 2002 tax year. A portion on any unused credit may be carried forward
for three taxable years thereafter.
A valuation allowance for the entire amount of the Supercredits has
been recognized in the accompanying financial statements. Accordingly, as the
Supercredits are utilized, a benefit is recognized through a reduction of the
current state income tax provision. Such benefit amounted to approximately
$1,120 in 1998, $876 in 1997 and $1,058 in 1996.
-56-
NOTES TO FINANCIAL STATEMENTS, Continued
(Dollars in thousands)
-------
7. Employee Benefit Plans
RETIREMENT PLAN:
The Company has a noncontributory, defined contribution plan which
covers eligible employees. The plan provides for Company
contributions ranging from 2% to 6% of the participant's annual
compensation based on their years of service. The Company's
contribution to the plan was $490 in 1998, $415 in 1997 and $336 in
1996.
PROFIT-SHARING PLAN:
The Company has a nonqualified profit-sharing plan for eligible
employees, providing for cash distributions to the participants in
years when income before income taxes is in excess of $500. These
contributions are based on an escalating scale from 5% to 15% of
income before income taxes. The profit-sharing expense, which
includes the profit-sharing contribution and the related employer
payroll taxes, was $6,290 in 1998, $4,644 in 1997 and $6,505 in
1996.
POSTRETIREMENT BENEFITS:
In December 1996, the Company adopted a defined benefit
postretirement plan which covers eligible employees. Generally, the
plan calls for a stated percentage of medical expenses reduced by
deductibles and other coverages. The plan is currently unfunded. The
postretirement benefit expense was $68 for 1998, 1997 and 1996.
Accrued postretirement benefits were approximately $203 and $135 at
December 31, 1998 and 1997, respectively.
8. RELATED PARTY TRANSACTIONS:
The Company has an agreement with Wheeling-Pittsburgh under which
the Company has agreed to purchase a specified portion of its
required raw materials through the year 2013. The Company purchased
$164,473, $24,533 and $161,380 of raw materials and processing
services from Wheeling-Pittsburgh in 1998, 1997 and 1996,
respectively. The amounts due Wheeling-Pittsburgh for such purchases
are included in due to affiliates in the accompanying balance
sheets.
The Company sells products to Wheeling-Pittsburgh. Such sales
totaled $1,916, $6,408, and $6,511 in 1998, 1997 and 1996,
respectively, of which $228 and $880 remained unpaid at December 31,
1998 and 1997, respectively, and are included in trade accounts
receivable in the accompanying balance sheets. The Company also
sells products to Unimast, Inc., an affiliate of
Wheeling-Pittsburgh. Such sales totaled $333, $435 and $1,537 in
1998, 1997 and 1996, respectively, of which $0 and $10 remained
unpaid at December 31, 1998 and 1997, respectively, and were
included in trade accounts receivable in the accompanying balance
sheets.
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NOTES TO FINANCIAL STATEMENTS, Continued
(Dollars in thousands)
-------
9. LEGAL MATTERS:
The Company is a party to a dispute for final settlement of charges
related to the construction of its second production line. The Company
had claims asserted against it in the amount of approximately $6,900
emerging from civil actions alleging delays on the project. In
connection with the dispute, the Company filed a separate claim for
alleged damages that it had sustained in the amount of approximately
$400.
The claims were litigated in the Court of Common Pleas of Allegheny
County, Pennsylvania, in a jury trial, which commenced on January 5,
1996. A verdict in the amount of $6,700 plus interest of $1,900 was
entered against the Company on October 2, 1996. After the verdict, the
plaintiffs requested the trial court to award counsel fees in the
amount of $2,422 against the Company. The motions for counsel fees
plus interest were granted by the court to the plaintiffs in June
1997.
The Company filed appeals from the judgments to the Superior Court of
Pennsylvania in 1997. Post-judgment interest accrues during the appeal
period. Additionally, the Company has posted a bond approximating
$12,000 that will be held by the court pending the appeals. On
December 31, 1998, a three-judge panel of the Superior Court ruled in
favor of the Company's appeals vacating the October 2, 1996 adverse
verdict and the award of counsel fees and remanded the case for a new
trial. The original plaintiffs have requested the Superior Court hear
reargument of the case. The Company has been advised by its Special
Counsel that it has various legal bases for relief, if a new trial
were to be held; however, since litigation is subject to many
uncertainties, the Company is presently unable to predict the outcome
of this matter. In 1997, the Company recorded a liability in the
amount of $2,500 related to these matters, which was capitalized in
property, plant and equipment as cost overruns in the accompanying
balance sheets. There is at least a reasonable possibility that the
ultimate resolution of these matters may have a material effect on the
Company's results of operations or cash flows in the year of final
determination. Any portion of the ultimate resolution for interest,
penalties and counsel fees will be charged to results of operations.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values and the methods used to estimate those
values are disclosed below:
INVESTMENTS:
The fair values of commercial paper and certificates of deposit were
$48,844 and $28,890 at December 31, 1998 and 1997, respectively. These
amounts were determined based on the investment cost plus interest
receivable at December 31, 1998 and 1997.
LONG-TERM DEBT:
Based on borrowing rates currently available to the Company for bank
loans with similar terms and maturities, fair value approximates the
carrying value.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, Wheeling-Pittsburgh Corporation has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wheeling, State of West Virginia on March 30, 1999.
WHEELING-PITTSBURGH CORPORATION
By:/s/ James G. Bradley
-------------------------
James G. Bradley
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
James G. Bradley and Paul J. Mooney, and each of them singly, as his true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for him, and his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
and supplements to this Registration Statement, and to file the same, with all
exhibits thereto, and all other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as full to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, as amended, this
Registration Statement has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/S/ James G. Bradley President and Chief Executive March 30, 1999
- ------------------------ Officer (Principal
James G. Bradley Executive Officer)
/S/ Paul J. Mooney Executive Vice President and March 29, 1999
- ------------------------ Chief Financial Officer
Paul J. Mooney (Principal Accounting Officer)
/S/ Ronald Labow Director March 30, 1999
- ----------------
Ronald LaBow
/S/ Robert A. Davidow Director March 30, 1999
- ---------------------
Robert A. Davidow
/S/ Marvin L. Olshan Director March 30, 1999
- ------------------------
Marvin L. Olshan
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