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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2002.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
-------------------- to
--------------------.
COMMISSION FILE NUMBER 1-10244
WEIRTON STEEL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 06-1075442
(State or other jurisdiction (IRS employer
of identification
incorporation or #)
organization)
400 THREE SPRINGS DRIVE, WEIRTON, WEST VIRGINIA 26062-4989
(Address of principal executive offices) (Zip Code)
(304)-797-2000
Registrant's telephone number, including area code:
Indicate by checkmark 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 [ ]
The number of shares of Common Stock ($.01 par value) of the Registrant
outstanding as of July 31, 2002 was 41,935,992.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEIRTON STEEL CORPORATION
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- --------- -------- ---------
NET SALES................................... $250,956 $ 240,177 $487,006 $ 492,327
OPERATING COSTS:
Cost of sales............................. 260,815 269,528 511,143 532,978
Selling, general and administrative
expenses............................... 6,362 8,777 12,588 17,107
Depreciation.............................. 17,142 16,350 33,054 32,661
Restructuring charge...................... -- -- -- 12,338
-------- --------- -------- ---------
Total operating costs.................. 284,319 294,655 556,785 595,084
-------- --------- -------- ---------
LOSS FROM OPERATIONS........................ (33,363) (54,478) (69,779) (102,757)
Income (loss) from unconsolidated
subsidiaries........................... 945 (406) 1,115 (18,480)
Interest expense.......................... (11,390) (9,545) (22,692) (18,894)
Other income, net......................... 4,380 363 7,292 771
-------- --------- -------- ---------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM...................................... (39,428) (64,066) (84,064) (139,360)
Income tax provision (benefit)............ (3,475) 153,765 (3,475) 153,765
-------- --------- -------- ---------
LOSS BEFORE EXTRAORDINARY ITEM.............. (35,953) (217,831) (80,589) (293,125)
Extraordinary gain on early extinguishment
of debt................................ 153 -- 153 --
-------- --------- -------- ---------
NET LOSS.................................... $(35,800) $(217,831) $(80,436) $(293,125)
======== ========= ======== =========
PER SHARE DATA:
Weighted average number of common shares (in
thousands):
Basic..................................... 41,936 41,576 41,935 41,573
Diluted................................... 41,936 41,576 41,935 41,573
NET LOSS PER SHARE:
Basic..................................... $ (0.85) $ (5.24) $ (1.92) $ (7.05)
Diluted................................... $ (0.85) $ (5.24) $ (1.92) $ (7.05)
The accompanying notes are an integral part of these financial statements.
2
WEIRTON STEEL CORPORATION
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2002 2001
---------- ------------
ASSETS:
Current assets:
Cash and equivalents, including restricted cash of $10,218
and $4,302, respectively............................... $ 10,483 $ 5,671
Receivables, less allowances of $5,767 and $7,487,
respectively........................................... 105,612 103,046
Inventories, net.......................................... 138,248 136,850
Other current assets...................................... 828 5,980
---------- ----------
Total current assets................................... 255,171 251,547
Property, plant and equipment, net.......................... 403,153 432,880
Intangible pension asset.................................... 19,689 19,689
Other assets and deferred charges........................... 12,294 16,419
---------- ----------
Total Assets........................................... $ 690,307 $ 720,535
========== ==========
LIABILITIES:
Current liabilities:
Senior credit facility.................................... $ 107,611 $ 92,082
Notes payable............................................. -- 243,271
Accounts payable.......................................... 94,253 71,197
Accrued employee benefits................................. 81,584 76,029
Accrued taxes other than income........................... 14,217 15,008
Other current liabilities................................. 1,756 15,916
---------- ----------
Total current liabilities.............................. 299,421 513,503
Notes and bonds payable..................................... 290,221 67,806
Accrued pension obligation.................................. 210,282 205,282
Postretirement benefits other than pensions................. 327,995 336,375
Other long term liabilities................................. 43,616 46,812
---------- ----------
Total Liabilities...................................... 1,171,535 1,169,778
Redeemable Stock, Net....................................... 68,709 20,348
STOCKHOLDERS' DEFICIT:
Common stock, $0.01 par value; 50,000,000 shares authorized;
43,814,791 and 43,812,763 shares issued, respectively..... 438 438
Additional paid-in-capital.................................. 457,396 459,871
Accumulated deficit......................................... (997,059) (916,623)
Other stockholders' equity.................................. (10,712) (13,277)
---------- ----------
Total Stockholders' Deficit............................ (549,937) (469,591)
---------- ----------
Total Liabilities, Redeemable Stock, Net, and
Stockholders' Deficit................................. $ 690,307 $ 720,535
========== ==========
The accompanying notes are an integral part of these financial statements.
3
WEIRTON STEEL CORPORATION
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-------------------------
2002 2001
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(80,436) $(293,125)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation........................................... 33,054 32,661
(Income) loss from unconsolidated subsidiaries......... (1,115) 18,480
Deferred income taxes.................................. -- 153,765
Restructuring charge................................... -- 12,338
Amortization of deferred financing costs............... 1,887 852
Gain on early extinguishment of debt................... (153) --
Cash provided (used) by working capital items:
Receivables.......................................... (2,566) (11,206)
Inventories.......................................... (1,398) 42,373
Other current assets................................. 5,152 7,665
Accounts payable..................................... 17,455 3,432
Employment costs..................................... (10,945) (6,268)
Other current liabilities............................ 11,511 (788)
Accrued pension obligation............................. 17,500 5,850
Other postretirement benefits.......................... (4,380) (6,070)
Other.................................................. (3,879) (3,202)
-------- ---------
NET CASH USED BY OPERATING ACTIVITIES....................... (18,313) (43,243)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital spending.......................................... (3,519) (7,344)
Loans and advances to unconsolidated subsidiaries......... -- (793)
-------- ---------
NET CASH USED BY INVESTING ACTIVITIES....................... (3,519) (8,137)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on senior credit facility.................. 15,529 --
Proceeds from the sale and leaseback transaction.......... 16,044 --
Issuance of long-term debt................................ -- 65,000
Deferred financing costs.................................. (4,929) --
-------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 26,644 65,000
-------- ---------
NET CHANGE IN CASH AND EQUIVALENTS.......................... 4,812 13,620
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................. 5,671 32,027
-------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD....................... $ 10,483 $ 45,647
======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of capitalized interest................ $ 10,575 $ 18,770
Income taxes refunded, net................................ (3,458) (6,829)
NONCASH FINANCING ACTIVITIES:
The Company issued $118.2 million in face amount of new Senior Secured
Notes and 1.9 million shares of Series C Redeemable Preferred Stock of $48.4
million with a mandatory redemption in 2013 in exchange for $215.0 million in
Senior Notes. The City of Weirton issued $27.3 million in principal amount of
new Series 2002 Secured Pollution Control Revenue Refunding Bonds in exchange
for $45.6 million of Series 1989 bonds, which the Company is obligated to pay
under the terms of a related loan agreement. There is approximately $5.6 million
in deferred debt issuance costs related to the exchanges included in accounts
payable at June 30, 2002.
The accompanying notes are an integral part of these financial statements.
4
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, OR IN MILLIONS OF DOLLARS
WHERE INDICATED)
NOTE 1
BASIS OF PRESENTATION
The Consolidated Condensed Financial Statements presented herein are
unaudited. The Consolidated Condensed Balance Sheet as of December 31, 2001 has
been derived from the audited balance sheet included in the Company's 2001
Annual Report on Form 10-K. Unless context otherwise requires, the terms
"Weirton," "the Company," "we," "us," "its" and "our" refer to Weirton Steel
Corporation and its consolidated subsidiaries. Entities of which the Company
owns a controlling interest are consolidated; entities of which the Company owns
a less than controlling interest are not consolidated and are reflected in the
consolidated condensed financial statements using the equity method of
accounting. All material intercompany accounts and transactions with
consolidated subsidiaries have been eliminated in consolidation.
Certain information and footnote disclosures normally prepared in
accordance with accounting principles generally accepted in the United States
have been either condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission. Although the Company believes that all
adjustments necessary for a fair presentation have been made, interim periods
are not necessarily indicative of the financial results of operations for a full
year. As such, these financial statements should be read in conjunction with the
audited financial statements and notes thereto included or incorporated by
reference in the Company's 2001 Annual Report on Form 10-K.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Certain reclassifications have been made to prior year amounts to conform
with current year presentation.
NOTE 2
INVENTORIES
Inventories consisted of the following:
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
Raw materials....................................... $ 43,479 $ 38,732
Work-in-process..................................... 35,255 29,275
Finished goods...................................... 59,514 68,843
-------- --------
$138,248 $136,850
======== ========
5
NOTE 3
LIQUIDITY AND FINANCING ARRANGEMENTS
Debt Obligations
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
Obligation under senior credit facility........ $107,611 $ 92,082
Long-Term Debt:
10% Senior Secured Notes due 4/1/08.......... 177,831 --
9% Secured Series 2002 Pollution Control
Bonds due 4/30/11......................... 45,162 --
Vendor financing obligations................. 27,574 11,531
11 3/8% Senior Notes due 7/1/04.............. 12,658 122,724
10 3/4% Senior Notes due 6/1/05.............. 16,336 121,256
8 5/8% Pollution Control Bonds due 11/1/14... 10,720 56,300
Less: Unamortized debt discount.............. (60) (734)
-------- ---------
Total debt obligations......................... 290,221 311,077
Less: Current portion.......................... -- (243,271)
-------- ---------
Long-term debt................................. $290,221 $ 67,806
======== =========
The Exchange Offers
The principal amount of notes and bonds, originally outstanding, tendered
and remaining are as follows:
OUTSTANDING PRIOR TENDERED FOR OUTSTANDING
TO EXCHANGE EXCHANGE AFTER EXCHANGE
----------------- ------------ --------------
11 3/8% Senior Notes due 2004..... $122,724 $110,066 $12,658
10 3/4% Senior Notes due 2005..... 121,256 104,920 16,336
8 5/8% Pollution Control Bonds due
11/1/14......................... 56,300 45,580 10,720
-------- -------- -------
Total............................. $300,280 $260,566 $39,714
======== ======== =======
The Company issued $118.2 million in face amount of new 10% Senior Secured
Notes due 2008 ("senior secured notes") and 1.9 million shares of Series C
Convertible Redeemable Preferred Stock ("Series C preferred stock") with a
mandatory redemption in 2013 of $48.4 million in exchange for the tendered
senior notes due 2004 and 2005 ("senior notes"). The City of Weirton issued
$27.3 million in principal amount of new Series 2002 Secured Pollution Control
Revenue Refunding Bonds ("secured series 2002 bonds") in exchange for the
tendered 8 5/8% Pollution Control Bonds ("series 1989 bonds"). The new notes and
bonds are secured by second priority interests in our hot strip mill, our No. 9
tin tandem mill, and our tin assets.
Through March 31, 2003, the new senior secured notes will accrue and pay
interest at a rate of 0.5%. From April 1, 2003 to March 31, 2005, the new senior
secured notes will accrue and pay interest at rates ranging from 0.5% to 10%.
That range includes contingent interest, which is based on the Company's "excess
cash flow" as defined in the indenture governing the new senior secured notes.
Beginning April 1, 2005, the senior secured notes will accrue and pay interest
at the rate of 10%.
Through March 31, 2003, the secured series 2002 bonds will also accrue and
pay interest at a rate of 0.5%. From April 1, 2003 to March 31, 2005, the
secured series 2002 bonds will accrue and pay interest at rates ranging from
0.5% to 9%. That range includes contingent interest, which is based on the
Company's "excess cash flow" as defined in the indenture governing the secured
series 2002 bonds. Beginning April 1, 2005, the secured series 2002 bonds will
accrue and pay interest at the rate of 9%.
During negotiations to exchange the senior notes and series 1989 bonds, the
Company did not make scheduled interest payments on those notes and bonds. The
Company's failure to pay interest resulted in events of default under the
indentures governing the senior notes and the loan agreement and the indenture
governing the
6
series 1989 bonds. Upon completion of the exchange offers, the Company is no
longer in default of any notes or bonds.
The indentures governing the new senior secured notes are similar to the
old indentures prior to the exchange offers and contain covenants that limit,
among other things, the incurrence of additional indebtedness, the declaration
and payment of dividends and distributions on the Company's capital stock,
investments in joint ventures, as well as mergers, consolidations, liens and
sales of certain assets. The new indentures do not contain any financial
maintenance covenants. The indentures covering the remaining old senior notes
and series 1989 bonds have been amended to remove substantially all restrictive
covenants.
Troubled Debt Restructuring Accounting
The new debt issues are accounted for in accordance with SFAS No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings." SFAS No.
15 requires that a comparison be made between the maximum future cash outflows
associated with the new senior secured notes and Series C preferred stock
(including principal, stated and contingent interest, and related costs on the
new senior secured notes and the mandatory redemption of the Series C preferred
stock), and the recorded assets and liabilities relating to the outstanding
senior notes as of the date of the exchange. A similar comparison was made
between the cash flows associated with the new secured series 2002 bonds and the
carrying amount of the series 1989 bonds.
The details of the comparison of the maximum future cash outflows
associated with the new securities issued and the recorded assets and
liabilities related to the previously outstanding senior notes and bonds are
summarized below:
SENIOR SERIES 1989
NOTES BONDS
---------------- -------------------
Principal value............................ $214,986 $45,580
Accrued interest........................... 23,972 2,490
Other assets and liabilities............... (2,529) (238)
-------- -------
Total associated net liability............. 236,429 47,832
SENIOR SECURED
NOTES & SERIES C SECURED SERIES
PREFERRED STOCK 2002 BONDS
---------------- -------------------
Principal value of notes and bonds......... 118,242 27,348
Future maximum interest payments........... 59,589 19,799
Issuance costs............................. 10,073 2,669
Maximum mandatory redemption value......... 48,372 --
-------- -------
Total maximum cash flow associated with
securities issued........................ 236,276 49,816
-------- -------
Excess (shortfall) of the carrying value of
assets and liabilities associated with
the exchanged instruments compared to the
total cash flow associated with the new
securities issued........................ $ 153 $(1,984)
======== =======
Because the carrying value of assets and liabilities associated with the
senior notes tendered for exchange exceeded the maximum future cash outflows
associated with the new instruments issued, we recorded an extraordinary gain of
$0.2 million. The recorded liability of the new senior secured notes is the
total future cash outflow associated with the new notes less the issuance costs
incurred during the exchange. Because all future cash payments are included in
the recorded value of the new senior secured notes, the Company will not record
interest expense on the senior secured notes and, when future payments occur,
they will be recorded as a reduction of that liability. In the event that the
Company does not pay the full amount of contingent interest, the liability will
still be reduced by the maximum interest amount and the difference between the
maximum interest amount and the actual amount of interest paid will be recorded
as an extraordinary gain.
7
In the exchange of the series 1989 bonds, the maximum future cash outflows
associated with the new series 2002 bonds exceeded the carrying value of the
assets and liabilities of the series 1989 bonds tendered for exchange.
Accordingly, no gain was recorded and the value of the new secured series 2002
bonds was initially recorded at the carrying value of the assets and liabilities
associated with the old series 1989 bonds less the issuance costs incurred
during the exchange. The Company will record interest expense on the secured
series 2002 bonds at a rate of 0.58%, which is imputed by comparing the maximum
cash flows associated with the secured series 2002 bonds and their initial
carrying value. In the event that the Company does not pay the full amount of
contingent interest, the difference between the maximum interest and the actual
interest paid will first reduce any accrued and unpaid interest recorded and
then reduce the recorded liability for the secured series 2002 bonds.
Senior Credit Facility
On May 3, 2002, the senior credit facility was amended and restated to,
among other things, allow the exchange offers to be made and to provide
additional collateral with a broader security base. The lenders under the senior
credit facility were given a first priority security interest in our No. 9 tin
tandem mill and our hot strip mill and tin mill assets in addition to our
inventory and accounts receivable. The holders of the senior secured notes and
the secured series 2002 bonds were granted a second priority security interest
in our No. 9 tin tandem mill and our hot strip mill and tin mill assets. There
were no changes made to the underlying borrowing certificate.
As part of the senior credit facility, and in conjunction with banking
arrangements entered into with Fleet, all available cash is used to pay down
amounts outstanding under the senior credit facility. Cash received in lockboxes
and other deposit accounts are required to be transferred the day after receipt
to pay down amounts outstanding under the senior credit facility. Therefore,
substantially all cash is restricted from use by the Company other than paying
amounts outstanding under the senior credit facility. Cash needs are funded via
issuances from the senior credit facility. Because the Company had not
transferred all deposits to Fleet at June 30, 2002, the Company had a restricted
cash balance of $10.2 million. This amount includes balances received into
lockboxes and other deposit accounts that had not yet been transferred to Fleet
to pay down the senior credit facility.
NOTE 4
SERIES C PREFERRED STOCK
The Company issued shares of Series C preferred stock to the holders of
senior notes who tendered their outstanding notes in the exchange offer. The
Series C preferred stock is subject to mandatory redemption on April 1, 2013 at
a redemption price of $25 per share in cash. Prior to April 1, 2013, the Company
has the option of redeeming the Series C preferred stock in whole or in part at
the end of each 12-month period beginning April 1 of each year based on the
following redemption schedule:
12-MONTH PERIOD REDEMPTION PRICE
BEGINNING APRIL 1 PER SHARE
- ------------------- ----------------
2003 12.50
2004 15.00
2005 17.50
2006 20.00
2007 22.50
2008 and thereafter 25.00
In addition, if our capital structure is amended to permit the issuance of
additional shares of common stock, we have the option to redeem all of the
outstanding shares of Series C preferred stock at any time prior to April 1,
2013 by delivering to the holders of Series C preferred stock shares of common
stock having a value equal to the then current aggregate redemption price for
all outstanding shares of Series C preferred stock.
8
The Series C preferred stock is not convertible at the option of the
holders of the Series C preferred stock. However, the Company has the option of
causing the conversion of the Series C preferred stock into shares of its common
stock prior to April 1, 2006 in connection with a "significant transaction."
The Series C preferred stock is generally non-voting stock and it is not
entitled to receive dividends.
NOTE 5
EARNINGS PER SHARE
For the three months ended June 30, 2002 and 2001, basic and diluted
earnings per share were the same; however, securities totaling 1,491,825 and
1,524,608, respectively, were excluded from both the basic and diluted earnings
per share calculations due to their anti-dilutive effect. For the six months
ended June 30, 2002 and 2001, basic and diluted earnings per share were the
same; however, securities totaling 1,493,741 and 1,527,236, respectively, were
excluded from both the basic and diluted earnings per share calculations due to
their anti-dilutive effect.
For the three months ended June 30, 2002 and 2001, there were 1,852,750 and
3,522,668 options, respectively, outstanding for which the exercise price was
greater than the average market price. For the six months ended June 30, 2002
and 2001, there were 1,924,974 and 3,522,668 options, respectively, outstanding
for which the exercise price was greater than the average market price.
NOTE 6
RESTRUCTURING CHARGES
As part of the Company's five part strategic restructuring plan, the
Company announced an operating cost savings program in 2001. In conjunction with
that program, the Company's management and the Independent Steel Workers' Union
negotiated new labor agreements that became effective in late October 2001. The
agreement for production and maintenance employees provided for the permanent
elimination of a minimum of 372 jobs. The office, clerical and technical
agreement provides for the right to eliminate a minimum of 78 jobs. The Company
also streamlined its management structure by eliminating non-core and redundant
activities resulting in a reduction of 100 management positions.
These workforce reductions, completed in April 2002, were a key component
to the operating cost savings program. Having identified the specific positions
and job classes that were subject to the reduction and having notified all
employees that were potentially subject to reduction, the Company recorded a
restructuring charge of $129.0 million in the fourth quarter of 2001. The fourth
quarter restructuring charge consisted of a $90.0 million increase in our
accrued pension cost and a $28.6 million increase in our liability for other
postretirement benefits. Also as part of the 2001 fourth quarter restructuring
charge, the Company recorded a $7.7 million liability for additional pension
benefits related to the induced early retirement of the Company's employees. As
part of the agreement under which the Company acquired its assets from National
Steel Corporation in 1984, National Steel agreed to assume the responsibility
for benefits related to employees' service prior to acquisition of the
facilities by the Company. However, under the same agreement, the Company is
required to partially reimburse National Steel for pension benefits paid by the
National Steel Pension Plan 056 if employees of Weirton are induced into
retiring early and receive benefits from said plan. The remaining $2.7 million
of the 2001 fourth quarter restructuring charge was related to other separation
and severance benefits provided to the affected employees.
In March 2001, prior to the initiation of the Company's strategic
restructuring plan, the Company established and implemented the 2001 Workforce
Downsizing Program. The program reduced non-represented staff employees by
approximately 10%. As a result, the Company recorded a 2001 first quarter
restructuring charge of $12.3 million consisting of an increase in accrued
pension cost of $5.4 million and an increase in our liability for other
postretirement benefits of $3.9 million. The remaining $3.0 million consisted of
a $0.6 million liability to reimburse the National Steel Pension Plan for
Weirton Employees and $2.4 million of other separation and severance benefits
provided to the affected employees.
9
The following table summarizes the impacts of the 2001 restructuring
charges, other than those related to pension and other postretirement benefits
costs, by the affected balance sheet liabilities:
12/31/2001 NEW CASH OTHER 6/30/2002
BALANCE CHARGES PAYMENTS ADJUSTMENTS BALANCE
---------- ------- -------- ----------- ---------
(DOLLARS IN THOUSANDS)
Current liabilities (1)............... $ 4,067 -- $ (918) -- $ 3,149
Other liabilities (2)................. 8,268 -- (650) -- 7,618
------- -- ------- -- -------
Total................................. $12,335 -- $(1,568) -- $10,767
======= == ======= == =======
- ---------------
(1) The amounts accrued in current liabilities consist of charges for salary
continuance and other termination benefits for the affected employees, as
well as legal, actuarial and other services provided in connection with the
workforce downsizing programs. The Company expects to pay the remainder of
this liability by the end of 2002.
(2) Other liabilities consist of the Company's liability to reimburse National
Steel for the benefits paid by the National Steel Plan for Weirton
employees. The reimbursement to National Steel will be made as the National
Steel Plan makes payments to Weirton Steel retirees.
NOTE 7
DEFERRED TAX ASSETS
The Company has provided a 100% valuation allowance for its deferred tax
assets during the quarter ended June 30, 2001, increasing the non-cash provision
for income taxes and net loss for that quarter by $153.8 million, or $3.70 per
diluted share. The Company will continue to provide a 100% valuation allowance
for the deferred income tax assets until it returns to an appropriate level of
cumulative financial accounting income.
The ultimate realization of the net deferred tax assets depends on the
Company's ability to generate sufficient taxable income in the future. The
Company has tax planning opportunities that could generate taxable income,
including sales of assets and timing of contributions to the pension fund. If
the Company's current plans and strategies to improve profitability for 2002 and
beyond are successful, the Company believes that its deferred tax assets may be
realized by future operating results and tax planning strategies. If the Company
is able to generate sufficient taxable income in the future, the Company will
reduce the valuation allowance through a reduction of income tax expense
(increasing stockholders' equity).
In June 2002, the Company received an income tax refund of $3.5 million in
accordance with the Job Creation and Worker Assistance Act of 2002 signed by
President Bush on March 9, 2002. This new act provides for an expansion of the
carryback of net operating losses ("NOLs") from two years to five years for NOLs
arising in 2001 and 2002. The Company was able to carryback its loss recorded in
2001 to the 1997 through 1999 tax years when it paid an alternative minimum tax.
This carryback allowed the Company to recover the entire amount of alternative
minimum taxes paid during those prior taxable years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with and is qualified in its
entirety by the unaudited consolidated condensed financial statements of the
Company and notes thereto. The unaudited consolidated condensed financial
statements of Weirton Steel Corporation include the accounts of its wholly and
majority owned subsidiaries. Unless context otherwise requires, the terms
"Weirton," "the Company," "we," "us," "its" and "our" refer to Weirton Steel
Corporation and its consolidated subsidiaries.
OVERVIEW
General. We are a major integrated producer of flat rolled carbon steel
with principal product lines consisting of tin mill products and sheet products.
Tin mill products include tin plate, chrome coated and black
10
plate steels and are consumed principally by the container and packaging
industry for food cans, general line cans and closure applications, such as caps
and lids. Tin mill products accounted for 48% of our revenues and 34% of tons
shipped in the first half of 2002. Sheet products include hot and cold rolled
and both hot-dipped and electrolytic galvanized steels and are used in numerous
end-use applications, including among others the construction, appliance and
automotive industries. Sheet products accounted for 52% of our revenues and 66%
of tons shipped in the first half of 2002. In addition, we currently are
providing tolling services at our hot strip mill for a major stainless steel
producer, which accounts for 15% to 20% of the overall capacity of our hot strip
mill.
We seek to strengthen our position as a leading domestic full range
producer of higher margin tin mill products by further shifting our product mix
toward higher margin value-added tin mill products and away from lower margin,
commodity flat-rolled sheet products.
In general, commodity sheet products are produced and sold in high volume
in standard dimensions and specifications. Tin mill and other value-added
products require further processing, and generally command higher profit margins
and typically are less affected by imports and domestic competition. The market
for tin mill products generally remains stable over the typical business cycle
as compared to more volatile markets for sheet steel products. Domestic supply
of tin mill products has been limited by the relatively small number of domestic
producers, recent facility rationalizations, and the anti-dumping determination
made by the International Trade Commission ("ITC") in August 2000. In addition,
our tin mill product sales are based upon contracts of one year or more and are,
therefore, less subject to price volatility than spot market sales.
In response to severe weaknesses in the domestic steel industry and our
worsening financial condition, in the summer of 2001 we developed a strategic
restructuring plan to reduce operating costs, improve our liquidity and working
capital position, restructure our long term debt and fundamentally reposition
our business to focus on the production and sale of tin mill products and other
higher margin value-added sheet products.
Our strategic restructuring plan has five integral steps, the first of
which have been implemented beginning in late 2001:
- reducing our operating costs on an annual basis through the full
implementation of a cost savings program which includes a workforce
reduction, reductions to our employee benefits costs and other
operating cost savings, which became effective in late October 2001
(which is expected to generate approximately $51 million in annual
cost savings);
- improving our liquidity and long-term supplier relationships through
financing programs we entered into primarily with our vendors,
including over 60 suppliers, in late October 2001 and through ongoing
negotiations with other suppliers of services and raw materials (which
have generated at least $40 million in additional near term
liquidity);
- increasing our borrowing availability and liquidity through the
refinancing of our bank credit and asset securitization facilities,
which became effective in late October 2001 (which has resulted in $30
to $35 million in additional availability compared to our prior
inventory facility and accounts receivable securitization program);
- restructuring our long term debt and lowering our debt service costs
through the exchange offers in order to increase our liquidity and
financial flexibility by approximately $27 million in 2002, 2003 and
2004, approximately $23 million in 2005 and approximately $18 million
in 2006, provided we are not required to pay contingent interest; and
- fundamental repositioning of our business to focus on tin mill and
other higher margin value-added sheet products and significantly
reduce our presence in the commodity flat-rolled product market.
Weirton, like most United States integrated steel producers, has sustained
significant operating losses and a decrease in liquidity as a result of
prolonged adverse market conditions and depressed selling prices caused in
substantial part by dramatic increases in imported steel during the period 1998
through early 2002. Many industry observers believe that the severe weaknesses
in the United States steel industry will lead to a restructuring of the
industry.
11
In June 2001, the Bush Administration initiated a trade investigation by
the ITC under section 201 of the Trade Practices Act of 1974 regarding the
illegal dumping of steel by foreign competitors. On October 22, 2001, the
International Trade Commission found that twelve steel product lines,
representing 74% of the imports under investigation, have sustained serious
injury because of foreign imports. These product lines include hot rolled, cold
rolled, galvanized sheet and coil, and tin mill products. On March 5, 2002,
President Bush decided to impose tariffs on flat-rolled products over a
three-year period at 30% in year one, 24% in year two and 18% in year three, in
addition to tariff relief with respect to other products, subject to a review
after 18 months by the ITC, which has the authority to continue or terminate the
tariffs. All of our flat-rolled product lines, including tin mill, hot rolled
and cold rolled sheet and galvanized products, have benefited and should
continue to benefit from the imposition of tariffs. In addition, imported steel
slabs are subject to an increasing annual quota of at least 5.4 million tons,
subject to the imposition of tariffs if the tonnage exceeds the quota limit,
excluding steel slabs from Mexico and Canada.
Since March 5, 2002, over 500 exclusions have been granted by the ITC,
primarily relating to steel products not produced in the United States. However,
a number of countries are now also seeking exclusions for products that are
produced domestically, including tin mill and other flat-rolled products. The
Bush Administration's decisions on specific exclusion requests will affect the
overall coverage and effectiveness of the Section 201 order.
Although a number of countries have objected to the Bush Administration's
decision and have filed appeals with the World Trade Organization ("WTO"), the
administration maintains its investigation and decision conform with WTO
regulations. If the complainants are successful, the scope, duration and
effectiveness of the tariffs could be affected in a manner adverse to us.
We believe that the imposition of tariffs under the Section 201 order has
had the effect of restricting steel imports to the United States thus far in
2002 and the selling prices and shipment volumes have improved from what we
otherwise would have realized without the imposition of tariffs. We also believe
that the improvements in selling prices and shipment volumes have been supply
driven. Some flat rolled product capacity has recently restarted, and we
anticipate further capacity may restart in the near future. If the economy does
not recover from its current state and capacity rationalizations in flat rolled
products do not happen, these improvements may be in jeopardy. Currently, there
is a challenge pending in the U.S. Court of International Trade as to the
validity of the Section 201 tariffs on tin mill products. On August 9, 2002, the
court denied the plaintiffs a temporary injunction. At a hearing scheduled for
September 4, 2002, the court will determine whether or not to permit the tin
mill product tariffs to continue. Due to this litigation and the large number
and variety of forces that impact the markets for our products, we are not able
to quantify the specific effects of the Section 201 ruling.
In another ruling, the same court vacated an August 2000 ITC ruling against
Japanese tin mill products. The commission had ruled to affix duties of 95% for
five years to certain Japanese tin producers. The Company plans to appeal this
decision.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO
THREE MONTHS ENDED JUNE 30, 2001
In the second quarter of 2002, the Company recognized a net loss of $35.8
million or $0.85 per diluted share. During the second quarter of 2002, the
Company completed its senior note and bond exchange that resulted in an
extraordinary gain on the early extinguishment of debt of $0.2 million. The
second quarter of 2002 results included the sale of the Company's excess
nitrogen oxide ("NOx") allowances for $4.4 million and a tax refund of $3.5
million. Excluding the effects of these items, the net loss for the second
quarter of 2002 was $43.8 million. This compares with a net loss of $217.8
million, or $5.24 per diluted share, for the same period in 2001. During the
second quarter of 2001, a non-cash charge of $153.8 million was recorded to
fully reserve the Company's deferred tax assets. Excluding this non-cash item,
the Company recognized a net loss for the second quarter of 2001 of $64.1
million.
Net sales in the second quarter of 2002 were $251.0 million, an increase of
$10.8 million or 4% from the second quarter of 2001. Total shipments in the
second quarter of 2002 were 579 thousand tons compared to the second quarter of
2001 shipments of 575 thousand tons. While selling prices and order rates for
sheet products
12
began to improve during the second quarter of 2002, the Company's operating
results were adversely affected by manpower movements within the plant as a
result of the Company's strategic restructuring plan.
Tin mill product net sales for the second quarter of 2002 were $115.9
million, an increase of $4.3 million from the second quarter of 2001. Shipments
of tin mill product in the second quarter of 2002 were 193 thousand tons
compared to 190 thousand tons in the second quarter of 2001.
Sheet product net sales for the second quarter of 2002 were $135.1 million,
an increase of $6.5 million from the second quarter of 2001. Shipments of sheet
product in the second quarter of 2002 were 386 thousand tons compared to 385
thousand tons in the second quarter of 2001.
Cost of sales for the second quarter of 2002 were $260.8 million, or $450
per ton, compared to $269.5 million, or $469 per ton, for the second quarter of
2001. Cost of sales per ton decreased as a result of our cost reduction efforts
and lower energy costs. The decrease was partially offset by an increase in the
Company's pension and other postretirement benefits costs.
Selling, general and administrative expenses for the second quarter of 2002
were $6.4 million, a decrease of $2.4 million from the second quarter of 2001.
As part of its operating cost savings plan, the Company has significantly
reduced its management workforce, resulting in lower selling, general and
administrative expenses.
The Company's income from unconsolidated subsidiaries during the second
quarter of 2002 is related to WeBCo International LLC ("WeBCo"). WeBCo's
increased profitability during 2002 is due to the success of its new venture in
selling excess and secondary products.
Interest expense increased $1.8 million in the second quarter of 2002 when
compared to the same period in 2001. As of June 30, 2002, the Company had $107.6
million outstanding under its senior credit facility. As of June 30, 2001, the
Company had $65.0 million outstanding under its prior working capital facility.
The Company's other income increased by $4.0 million in the second quarter
of 2002 when compared to the same period in 2001. As required by Section 126 of
the Clean Air Act, certain limitations were developed to control the NOx
emissions from industrial boilers. Because the Company does not use coal in its
boilers and has taken steps to improve energy efficiency in its operations, the
Company was able to sell a portion of its NOx allowances in June 2002 for $4.4
million.
In June 2002, the Company received an income tax refund of $3.5 million in
accordance with the Job Creation and Worker Assistance Act of 2002 signed by
President Bush on March 9, 2002. This new act provides for an expansion of the
carryback of net operating losses ("NOLs") from two years to five years for NOLs
arising in 2001 and 2002. The Company was able to carryback its loss recorded in
2001 to the 1997 through 1999 tax years when it paid an alternative minimum tax.
This carryback allowed the Company to recover the entire amount of alternative
minimum taxes paid during those prior taxable years. Continuing losses have
raised doubts about the Company's ability to realize additional deferred tax
assets in the future, such as operating loss carryforwards, prior to their
expiration. During the second quarter of 2001, a non-cash charge of $153.8
million was recorded to fully reserve the Company's deferred tax assets. The
deferred tax assets generated in the second quarter of 2002 and 2001 amounted to
approximately $14 million and $25 million, respectively, and were fully offset
by valuation allowances.
In the second quarter of 2002, the Company recognized an extraordinary gain
from the early extinguishment of debt related to the exchange offers.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO
SIX MONTHS ENDED JUNE 30, 2001
In the first half of 2002, the Company recognized a net loss of $80.4
million, or $1.92 per diluted share. The first half of 2002 results included an
extraordinary gain of $0.2 million on the early extinguishment of debt, the sale
of excess NOx allowances for $4.4 million, the sale of Prudential common stock
for $3.2 million as a result of Prudential's demutualization, and a tax refund
of $3.5 million. Excluding the effects of these items, the net loss for the
first half of 2002 was $91.6 million. Last year's first six months resulted in a
net loss of $293.1 million, or $7.05 per diluted share. The Company's net loss
for the first half of 2001 included a non-cash charge of
13
$153.8 million to fully reserve the Company's deferred tax assets, a
restructuring charge of $12.3 million associated with an involuntary reduction
program for exempt employees, and the write-off of the Company's remaining
interests in certain joint ventures totaling $18.0 million. Excluding the
effects of these items, the Company's net loss for the first half of 2001 was
$108.9 million.
Net sales in the first half of 2002 were $487.0 million, a decrease of $5.3
million from the first half of 2001. Total shipments in the first half of 2002
were 1.1 million tons compared to the first half of 2001 shipments of 1.2
million tons. While selling prices and order rates for sheet products began to
improve during the second quarter of 2002, the Company's operating results were
adversely affected by manpower movements within the plant as a result of the
Company's strategic restructuring plan.
Tin mill product net sales for the first half of 2002 were $236.2 million,
an increase of $5.6 million from the first half of 2001. Shipments of tin mill
product in the first half of 2002 were 394 thousand tons compared to 393
thousand tons for the same period in 2001.
Sheet product net sales for the first half of 2002 were $250.8 million, a
decrease of $10.9 million from the first half of 2001. Shipments of sheet
product in the first half of 2002 were 751 thousand tons compared to 770
thousand tons in the first half of 2001.
Costs of sales for the first half of 2002 were $511.1 million, or $446 per
ton, compared to $533.0 million, or $458 per ton, for the first half of 2001.
Cost of sales per ton decreased as a result of our cost reduction efforts and
lower energy costs. The decrease was partially offset by an increase in the
Company's pension and other postretirement benefits costs.
Selling, general and administrative expenses for the first half of 2002
were $12.6 million, a decrease of $4.5 million from the first half of 2001. As
part of its operating cost savings plan, the Company has significantly reduced
its management workforce, resulting in lower selling, general and administrative
expenses.
The Company established and implemented its 2001 Workforce Downsizing
Program effective March 2001. The program reduced non-represented staff
employees by approximately 10%. After the program, the Company was operating
with approximately 630 non-represented employees and approximately 3,500
represented employees. Due to the program, the Company recorded a $12.3 million
restructuring charge during the first quarter of 2001. The restructuring charge
consisted of $5.4 million of pension benefits and $3.9 million of other
postretirement benefits. The remaining $3.0 million was related to other
separation and severance benefits provided to the affected employees.
The Company's income from unconsolidated subsidiaries during the first six
months of 2002 is related to WeBCo. WeBCo's increased profitability during 2002
is due to the success of its new venture in selling excess and secondary
products. During the first quarter of 2001, the Company recorded an $18.0
million charge to loss from unconsolidated subsidiaries, writing-off its
investments in MetalSite and GalvPro.
Interest expense increased $3.8 million in the first half of 2002 when
compared to the same period in 2001. As of June 30, 2002, the Company had $107.6
million outstanding under its senior credit facility. As of June 30, 2001, the
Company had $65.0 million outstanding under its prior working capital facility.
In the first half of 2002, other income increased $6.5 million when
compared to the same period in 2001. As required by Section 126 of the Clean Air
Act, certain limitations were developed to control the NOx emissions from
industrial boilers. Because the Company does not use coal in its boilers and has
taken steps to improve energy efficiency in its operations, the Company was able
to sell a portion of its NOx allowances in June 2002 for $4.4 million. In
addition, during the first quarter of 2002, the Company received approximately
$3.2 million from the sale of Prudential Financial stock it had received upon
the demutualization of Prudential.
In June 2002, the Company received an income tax refund of $3.5 million in
accordance with the Job Creation and Worker Assistance Act of 2002 signed by
President Bush on March 9, 2002. This new act provides for an expansion of the
carryback of NOLs from two years to five years for NOLs arising in 2001 and
2002. The Company was able to carryback its loss recorded in 2001 to the 1997
through 1999 tax years when it paid an alternative minimum tax. This carryback
allowed the Company to recover the entire amount of alternative minimum taxes
paid during those prior taxable years. Continuing losses have raised doubts
about the Company's
14
ability to realize additional deferred tax assets in the future, such as
operating loss carryforwards, prior to their expiration. During the first half
of 2001, a non-cash charge of $153.8 million was recorded to fully reserve the
Company's deferred tax assets. The deferred tax assets generated in the first
half of 2002 and 2001 were approximately $31 million and $54 million,
respectively, and were fully offset by valuation allowances.
In the second quarter of 2002, the Company recognized an extraordinary gain
from the early extinguishment of debt related to the exchange offers.
LIQUIDITY AND CAPITAL RESOURCES
Total liquidity from cash and financing facilities amounted to $38.5
million at June 30, 2002 as compared to $33.6 million at December 31, 2001.
Although liquidity has improved slightly since December 31, 2001, the Company's
liquidity long-term has continued to decline primarily as a result of operating
losses from prolonged adverse market conditions. To mitigate the effects of
these prevailing adverse conditions, we have initiated a strategic restructuring
plan to reduce operating costs and enhance our liquidity. The results and status
of certain points of that strategic restructuring plan are summarized below.
As of June 30, 2002, the Company had cash and equivalents of $10.5 million
compared to $5.7 million as of December 31, 2001. The Company's statements of
cash flows for the six months ended June 30 are summarized below:
2002 2001
-------- --------
DOLLARS IN THOUSANDS
Net cash used by operating activities.................. $(18,313) $(43,243)
Net cash used by investing activities.................. (3,519) (8,137)
Net cash provided by financing activities.............. 26,644 65,000
-------- --------
Increase in cash....................................... $ 4,812 $ 13,620
======== ========
The $18.3 million net cash outflow from operating activities resulted from
adverse market conditions prevailing in the domestic steel industry. To help
offset the difficult market conditions, we undertook various measures during the
first half of 2002 and during the year 2001 to enhance our operating cash flow
by reducing overall operating costs and net working capital investment.
Reductions in our net working capital investment during the first half of 2002
had a positive impact of $19.2 million on our liquidity. This was achieved
mainly through a $17.4 million increase in accounts payable. The increase in
accounts payable is associated with our increased operating purchase activity
during the second quarter of 2002 and deferred debt issuance costs of $5.6
million related to the exchange offers. In addition, with the success of the
bond exchanges, our payment terms have improved with some of our vendors. We
have no significant past due payables.
At current production and shipment levels, we anticipate sustaining our
current levels of working capital investment, however, should the markets for
our products continue to improve, we may increase our working capital
investment, but such an increase could be funded in part by additional amounts
available under our senior credit facility. We continue to pursue strategies to
reduce our working capital investment, but opportunities for further reductions
are substantially less than those already achieved.
Net cash used by investing activities includes $3.5 million and $7.3
million of capital expenditures for the six months ended June 30, 2002 and June
30, 2001, respectively. Our senior credit facility places limits on our ability
to make certain future capital expenditures to $13.8 million in 2002 and $34.5
million in 2003, subject to increase to $40.0 million in 2003 if we meet certain
financial tests.
The $26.6 million in net cash provided by financing activities in the first
six months of 2002 consisted of $15.5 million in borrowings under our senior
credit facility and $16.1 million in cash received under our vendor financing
arrangements. Also included in financing activities for the first six months of
2002 was $4.9 million in deferred debt issue costs that had been paid in
association with the bond exchanges. As of June 30, 2001, the Company had
utilized $93.0 million under its previous working capital facilities.
The new senior credit facility was established on October 26, 2001 by
agreement with Fleet Capital Corporation, as agent for itself and other lenders,
Foothill Capital Corporation, as syndication agent, The CIT
15
Group/Business Credit, Inc. and GMAC Business Credit LLC, which serve as
co-documentation agents for the facility, and Transamerica Business Capital
Corporation. At June 30, 2002, we had borrowed $107.6 million under the senior
credit facility and we had utilized an additional $0.5 million under the letter
of credit subfacility. Taking into account outstanding letters of credit, we had
$28.0 million available for additional borrowing under the facility at June 30,
2002. Under the senior credit facility we will be able to make scheduled
semi-annual cash interest payments on all public debt, provided that these cash
payments may be reserved for against availability under the facility.
Beginning in late October 2001, we also obtained assistance from certain
key vendors and others through our vendor financing programs to improve our near
term liquidity. As of June 30, 2002 we had received $27.6 million related to the
sale and leaseback of the Foster-Wheeler Steam Generating Plant and related
financing programs. The Company is expecting to receive additional proceeds from
secured financing transactions involving the Company's general office building
and research and development building.
In the second quarter of 2002, as part of our announced strategic
restructuring plan, the Company completed an offer to exchange its outstanding
11 3/8% Senior Notes due 2004 and its outstanding 10 3/4% Senior Notes due 2005
(collectively the "senior notes") for new 10% Senior Secured Notes due 2008
("senior secured notes") and new Series C Convertible Redeemable Preferred Stock
("Series C preferred stock"). At the Company's request, the City of Weirton also
completed an offer to exchange its 8 5/8% Pollution Control Bonds due 2014
("series 1989 bonds") for new 2002 Secured Pollution Control Revenue Refunding
Bonds ("secured series 2002 bonds"). The Company's liquidity will be enhanced
through a reduction in debt service cost of up to approximately $27 million per
year in 2002, 2003 and 2004, approximately $23 million in 2005 and approximately
$18 million in 2006, provided the Company is not required to make contingent
interest payments.
At June 30, 2002, we had approximately $391 million in deferred tax assets
which were fully reserved with a valuation allowance of the same amount. These
assets, although they are fully reserved for financial accounting purposes, are
available to offset future income tax liabilities should we generate taxable
income. We have been required in the past, and may be required in the future, to
make payments under federal alternative minimum tax regulation.
Pension obligations have been excluded from the table below. At June 30,
2002, we had an accrued pension liability of $222.8 million and an accrued
liability for other postretirement benefits of $360.0 million. During the first
six months of 2002, we made no pension contribution and we paid $15.2 million
for other postretirement benefits. Under minimum funding rules, no contribution
is expected in 2002; however, substantial contributions of an average of at
least $50 million per year are likely to be required in each of 2003 through
2007. Poor year to date performance by the financial markets and continued
declines in interest rates, if not reversed, are likely to cause significant
future increases in the Company's estimated required pension contributions over
the next five years. Future funding requirements are dependent upon factors such
as funded status, regulatory requirements for funding purposes that necessitate
different and more restrictive assumptions for measuring obligations than those
used for accounting, and the level and timing of asset returns as compared with
the level and timing of expected benefit disbursements. As such, it is not
possible to be more specific with respect to anticipated contributions.
Additionally, actual future contributions may differ materially. We anticipate
that payments for other postretirement benefits will increase from the $29.8
million we paid in 2001 in future years due to an increase in the number of
retirees receiving benefits, as well as increases in per capita health care
costs.
We expect pension contributions and payments for postretirement benefits
will require a substantial amount of liquidity over the next six years. Payments
of these legacy costs may significantly affect the liquidity available for other
purposes, including capital expenditures and other operating, investing and
financing activities.
16
Liquidity Outlook
The following table sets forth the timing of our liquidity requirements in
regards to contractual obligations and commercial commitments:
(in millions)
LESS
THAN 1 4-5 AFTER 5
CONTRACTUAL OBLIGATIONS: TOTAL YEAR 2-3 YEARS YEARS YEARS
- ------------------------ ------ ------ --------- ----- -------
Long Term Debt..................................... $262.7 $ 0.5 $56.9(1) $28.1 $177.2
Capital Lease Obligation (2)....................... 27.6 0.8 3.7 4.6 18.5
Operating Leases................................... 12.7 5.4 6.0 1.3 --
Unconditional Purchase Obligations (3)
Other Long Term Obligations (4).................... 18.7 4.4 6.9 5.0 2.4
Redeemable Stock (5)............................... -- -- -- -- 48.4
------ ----- ------- ----- ------
Total Contractual Cash Obligations............... 321.7 11.1 73.5 39.0 246.5
OTHER COMMERCIAL COMMITMENTS:
Lines of Credit.................................... 107.6 -- 107.6 -- --
------ ----- ------- ----- ------
TOTAL.................................... $429.3 $11.1 $ 381.1 $39.0 $246.5
====== ===== ======= ===== ======
- ---------------
(1) The exchanges that resulted in the issuance of the senior secured notes and
secured series 2002 pollution control bonds were accounted for as troubled
debt restructurings in accordance with SFAS 115. As a result of the
accounting treatment, future interest payments are included in the carrying
value of the liability. The payments reflected herein assume the maximum
future cash flows associated with the senior secured notes and secured
series 2002 bonds. This includes all contingent interest based on excess
cash flow as defined in the indentures governing the securities. The
Company's management currently does not believe that it will generate excess
cash flow. As a result , the cash payments on long-term debt in year 2 to 3
would be reduced by $426.4 million if, as expected, we do not pay contingent
interest.
(2) The capital lease obligation arises from the sale and leaseback of the
Company's steam generating facilities as part of our vendor financing
programs. The payments reflect the scheduled principal payments on the $27.6
million obligation that had been incurred as of June 30, 2002. The Company
is not required to make payments on the obligation until the first quarter
of 2003, at which time quarterly payments will begin. The payments will
include both principal and interest. If the interest portion of the payment
had been included in the chart above, the totals would have increased from
$0.8 million to $2.5 million in less than one year, from $3.7 million to
$10.1 million in two to three years, from $4.6 million to $10.1 million in
four to five years and from $18.5 million to $30.2 million after five years.
The Company also anticipates that it will receive $3 million to $5 million
of additional proceeds from financing arrangements after the first quarter
of 2002 which will increase the total future principal and interest payments
by proportional amounts.
(3) We have entered into conditional purchase arrangements for a portion of our
coke and pellet requirements and some of our energy requirements. In
general, those requirements provide for us to purchase a minimum quantity of
material at a variable or negotiated price that approximates the market
price for those commodities. Because those purchases are conditioned on
future purchase levels and changes in market price, they are not included in
the above table.
(4) We are required to reimburse National Steel for benefits paid by the
National Steel Pension Plan for Weirton Employees to people we induce into
retiring before age 62 by offering some form of enhanced benefit. Based on
the benefit enhancements granted as of June 30, 2002, we will make the
reimbursement payments indicated.
(5) The redeemable stock includes the maximum redemption value of the Series C
preferred stock. The Company is required to redeem the outstanding Series C
preferred stock for that amount in 2013. The Company has the option to
redeem the stock earlier for lesser amounts. The redeemable stock does not
include any amounts for Series A preferred stock. Individual holders of
Series A preferred stock, all of whom
17
have received shares through distributions from the 1989 Employee Stock
Ownership Plan, can redeem the shares at market value by putting the shares
to the Company within specified windows of time after having received the
distribution from the 1989 ESOP. It is not possible to know the amount and
timing of redemption of the Series A preferred stock, therefore, it is not
included herein.
Based on the amount of cash on hand, the amount of cash expected to be
generated from operating activities, cash savings resulting from our operating
cost savings program, additional borrowing availability under our senior credit
facility and liquidity improvement as a result of the consummation of the
exchange offers, we believe that we will have sufficient liquidity through this
year and into next year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit and disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
adoption of SFAS 146 is not expected to have a material effect on the financial
position, results of operations or liquidity of the Company.
In April 2002, SFAS No. 145, "Rescission of FASB Statements 4, 44, and 64,
Amendment of FASB Statement 13, and Technical Corrections," was issued. The
Statement updates, clarifies and simplifies existing accounting pronouncements.
While the technical corrections to existing pronouncements are not substantive
in nature, in some instances, they may change accounting practice. The
provisions of this standard related to SFAS 13 are effective for transactions
occurring after May 15, 2002. All other provisions of this standard must be
applied in fiscal years beginning after May 15, 2002. The Company is currently
evaluating the effects of SFAS 145 and is preparing a plan for implementation.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-lived Assets." SFAS 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The adoption of SFAS 144 did not have a material effect on
the Company's June 30, 2002 financial statements.
FORWARD LOOKING STATEMENTS
This Item contains certain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are based on assumptions and expectations which may not be realized and are
inherently subject to risk and uncertainties, many of which cannot be predicted
with accuracy. Future events and actual results, financial and otherwise, may
differ from the results discussed in the forward-looking statements. Although
the Company believes that its assumptions made in connection with the forward-
looking statements are reasonable, there are no assurances that such assumptions
or expectations will prove to have been correct due to the foregoing and other
factors. Such forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The Company
is under no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
The Company issued $118.2 million in face amount of new 10% Senior Secured
Notes due 2008 and 1.9 million shares of Series C Convertible Redeemable
Preferred Stock with a mandatory redemption in 2014 of $48.4 million in exchange
for the tendered senior notes due 2004 and 2005. The City of Weirton issued
$27.3 million in principal amount of new Series 2002 Secured Pollution Control
Revenue Refunding Bonds in exchange for the tendered Series 1989 bonds.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
All of the Company's interest defaults were cured on June 18, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.21 -- Employment Agreement between John H. Walker and the
Company dated April 18, 2002 (filed herewith).
Exhibit 10.23 -- Employment Agreement between Mark E. Kaplan and the
Company dated April 18, 2002 (filed herewith).
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K under Items 5 and 7
thereof on July 2, 2002.
The Company filed a Current Report on Form 8-K under Item 4 thereof on
June 4, 2002. The Company subsequently amended Items 4 and 7 on June
21, 2002.
The Company filed a Current Report on Form 8-K under Items 7 and 9
thereof on February 26, 2002.
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