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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
-------------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________ TO ___________________
FOR QUARTER ENDED SEPTEMBER 30, 2003 COMMISSION FILE NUMBER 000-50300
WHEELING-PITTSBURGH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 55-0309927
(State of Incorporation) (I.R.S. Employer
Identification No.)
1134 MARKET STREET, WHEELING, WV 26003
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (304) 234-2400
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 whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
The registrant had 10,000,000 shares of its common stock, par value
$0.01 per share, issued and outstanding as of October 31, 2003.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Consolidated Statements of Operations
Reorganized Company
Two months ended September 30, 2003
Predecessor Company
One month ended July 31, 2003
Three months ended September 30, 2002
Seven months ended July 31, 2003
Nine months ended September 30, 2002
Consolidated Balance Sheet
Reorganized Company
As of September 30, 2003
As of July 31, 2003
Predecessor Company
As of December 31, 2002
Consolidated Statements of Cash Flows
Reorganized Company
Two months ended September 30, 2003
Predecessor Company
Seven months ended July 31, 2003
Nine months ended September 30, 2002
Consolidated Statement of Shareholders' Equity as of
September 30, 2003
Notes to Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
ITEM 4. Controls and Procedures
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
1
PART I FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
WHEELING-PITTSBURGH CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
REORGANIZED COMPANY PREDECESSOR COMPANY PREDECESSOR COMPANY
TWO MONTHS ENDED ONE MONTH ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2003 JULY 31, 2003 SEPTEMBER 30, 2002
------------------- ------------------- -------------------
REVENUES:
Net sales including sales to affiliates of
$38,609, $23,092 and $70,554 $ 159,789 $ 81,298 $277,868
COST AND EXPENSE:
Cost of products sold, excluding depreciation,
including cost of products sold to
affiliates of $34,656, $20,662 and $62,374 159,314 76,877 235,691
Depreciation 3,568 6,095 18,427
Selling, administrative and general expense 9,004 4,648 10,529
---------- --------- --------
Reorganization and professional fee expense -- 1,995 3,155
171,886 89,615 267,802
---------- --------- --------
Operating income (loss) (12,097) (8,317) 10,066
Reorganization income (expense)
Fair value adjustments -- (152,708) --
Gain on discharge of debt -- 557,541 --
Other reorganization entries -- (4,918) --
Interest expense on debt (3,891) (1,462) (4,307)
Other income (expense) 757 382 1,333
---------- --------- --------
Income (loss) before taxes (15,231) 390,518 7,092
Tax provision (benefit) 6 (12) 5
---------- --------- --------
Net income (loss) $ (15,237) $ 390,530 $ 7,087
========== ========= ========
Basic and diluted loss per share
attributable to common stockholders $ (1.61) * *
========== ========= ========
Weighted average common shares outstanding
basic and diluted 9,500,000 * *
========== ========= ========
* Prior to reorganization, the Company was a wholly-owned subsidiary of WHX
Corporation.
The accompanying notes are an integral part of the financial statements.
2
WHEELING-PITTSBURGH CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
REORGANIZED COMPANY PREDECESSOR COMPANY PREDECESSOR COMPANY
TWO MONTHS ENDED SEVEN MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 JULY 31, 2003 SEPTEMBER 30, 2002
------------------ ------------- ------------------
REVENUES:
Net sales, including sales to affiliates
of $38,609, $164,303 and $187,063 $ 159,789 $ 570,439 $725,591
COST AND EXPENSE:
Cost of products sold, excluding depreciation,
including cost of products sold to affiliates
of $34,656, $143,840 and $179,131 159,314 563,832 663,806
Depreciation 3,568 39,889 55,680
Selling, administrative and general expense 9,004 29,906 33,983
Reorganization and professional fee expense -- 8,140 8,455
---------- --------- --------
171,886 641,767 761,924
---------- --------- --------
Operating income (loss) (12,097) (71,328) (36,333)
Reorganization income (expense)
Fair value adjustments -- (152,708) --
Gain on discharge of debt -- 557,541 --
Other reorganization entries -- (4,758) 1,295
Interest expense on debt (3,891) (9,185) (12,168)
Other income (expense) 757 3,228 2,797
---------- --------- --------
Income (loss) before taxes (15,231) 322,790 (44,409)
Tax provision (benefit) 6 (641) 16
---------- --------- --------
Net income (loss) $ (15,237) $ 323,431 $(44,425)
========== ========= ========
Basic and diluted loss per share
attributable to common stockholders $ (1.61) * *
========== ========= ========
Weighted average common
shares outstanding basic and diluted 9,500,000 * *
========== ========= ========
* Prior to reorganization, the Company was a wholly-owned subsidiary of WHX
Corporation.
The accompanying notes are an integral part of the financial statements.
3
WHEELING-PITTSBURGH CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(UNAUDITED)
REORGANIZED COMPANY REORGANIZED COMPANY PREDECESSOR COMPANY
AS OF SEPTEMBER AS OF JULY 31, AS OF DECEMBER 31,
30, 2003 2003 2002
------------------- ------------------- -------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 9,122 $ 7,382 $ 8,543
Trade receivables, less allowance for doubtful
accounts of $2,004, $1,916 and $1,314 112,680 112,416 130,593
Inventories 154,318 154,664 184,091
Prepaid expenses and deferred charges 8,781 6,571 7,477
----------- ----------- -----------
Total current assets 284,902 281,033 330,704
Investment in associated companies 40,838 40,477 60,767
Property, plant and equipment, at cost less accumulated
depreciation of $2,740, $ 0 and $716,253 368,725 360,213 530,568
Deferred income tax benefits 23,482 23,482 27,342
Restricted cash 101,988 112,000 --
Deferred charges and other assets 60,419 61,564 9,735
----------- ----------- -----------
$ 880,355 $ 878,769 $ 959,116
=========== =========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade payables $ 66,879 $ 79,941 $ 71,048
Short term debt 73,115 36,915 135,490
Payroll and employee benefits payable 68,314 67,913 36,339
Accrued federal, state and local taxes 8,726 11,254 8,839
Deferred income tax liabilities 23,482 23,482 27,342
Accrued interest and other liabilities 9,899 10,673 8,326
Long term debt due in one year 3,210 3,755 43,575
----------- ----------- -----------
Total current liabilities 253,625 233,933 330,959
Long term debt 339,727 339,848 13,177
Liabilities subject to compromise -- -- 890,301
Other employee benefit liabilities 139,258 142,298 15,514
Other liabilities 20,065 20,190 20,336
----------- ----------- -----------
Total liabilities 752,675 736,269 1,270,287
----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock - $.01 Par value; 10 million shares
issued and outstanding 100 100 --
Additional paid-in-capital 149,900 149,900 335,138
Restricted stock (7,083) (7,500) --
Accumulated deficit (15,237) -- (646,309)
----------- ----------- -----------
127,680 142,500 (311,171)
----------- ----------- -----------
$ 880,355 $ 878,769 $ 959,116
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
4
WHEELING-PITTSBURGH CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
(DOLLARS IN THOUSANDS)
(UNAUDITED)
REORGANIZED COMPANY PREDECESSOR COMPANY PREDECESSOR COMPANY
TWO MONTHS ENDED SEVEN MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 JULY 31, 2003 SEPTEMBER 30, 2002
------------------- ------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(15,237) $ 323,431 $(44,425)
Items not affecting cash from operating
activities:
Depreciation 3,568 39,889 55,680
Other post retirement benefits (3,056) (1,565) (8,900)
Deferred income taxes -- -- --
Equity income of affiliated companies (360) (2,544) (2,269)
Reorganization expense (income) -- (160) (1,296)
Stock based compensation 417 -- --
Reorganization items
Fair value adjustments -- 152,708 --
Gain on discharge of debt -- (557,541) --
Other reorganization entries -- (4,918) --
Decrease (increase) in working capital elements:
Trade receivables (264) 17,944 (28,164)
Inventories 346 19,769 (5,634)
Trade payables (13,062) 10,227 12,661
Other current assets (3,120) 918 272
Other current liabilities (2,901) (306) 9,199
Other items - net 11,919 (9,902) (6,724)
-------- --------- --------
Net cash (used in) operating activities (21,750) (2,214) (19,600)
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Plant additions and improvements (12,044) (2,866) (7,326)
Payments from affiliates -- 600 --
Proceeds from sale of assets due to
Chapter 11 proceedings -- 201 1,320
Dividends from affiliated companies -- 2,728 1,618
-------- --------- --------
Net cash provided by (used in) investing
activities (12,044) 663 (4,388)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long term debt borrowings (666) (1,334) 17,013
Short term debt (DIP facility) borrowings -- 1,724 8,912
Short term debt borrowings (payments) 36,200 -- --
Receivables from affiliates -- -- --
-------- --------- --------
Net cash provided by financing activities 35,534 390 25,925
-------- --------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 1,740 (1,161) 1,937
Cash and cash equivalents at beginning of period 7,382 8,543 7,586
-------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,122 $ 7,382 $ 9,523
======== ========= ========
The accompanying notes are an integral part of the financial statements.
5
WHEELING-PITTSBURGH CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD ENDED SEPTEMBER 30, 2003
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ADDITIONAL
SHARES COMMON PAID-IN- DEFERRED RETAINED
OUTSTANDING STOCK CAPITAL COMPENSATION EARNINGS TOTAL
-------------------------------------------------------------------------
Balance at July 31, 2003 (prior to
restricted stock awards) 9,500,000 $ 95 $142,405 $ 0 $ 0 $142,500
Shares issued on July 31, 2003 for
restricted stock award plans 500,000 5 7,495 (7,500) -- --
Compensation expense recognized -- -- -- 417 -- 417
Net loss -- -- -- -- (15,237) (15,237)
-------------------------------------------------------------------------
Balance at September 30, 2003 10,000,000 $100 $149,900 $(7,083) $(15,237) $127,680
=========================================================================
The accompanying notes are an integral part of the financial statements.
6
WHEELING-PITTSBURGH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GENERAL
The consolidated balance sheet as of September 30, 2003, the
consolidated statement of operations for the three and nine month periods ended
September 30, 2003 and 2002, respectively, and the consolidated statement of
cash flows for the three and nine month periods ended September 30, 2003 and
2002, respectively, have been prepared by Wheeling-Pittsburgh Corporation ("WPC"
or "the Company") without audit. In the opinion of management, all recurring
adjustments necessary to present fairly the consolidated financial position at
September 30, 2003 and the results of operations and changes in cash flows for
the periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. This quarterly report on Form 10-Q
should be read in conjunction with the Company's audited consolidated financial
statements for the year ended December 31, 2002. The results of operations for
the period ended September 30, 2003 are not necessarily indicative of the
operating results for the full year.
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.
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, pre-painted 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, bridgeform
and other products used primarily by the construction, highway and agricultural
markets.
NOTE 1 - BANKRUPTCY AND REORGANIZATION
On November 16, 2000, WPC and eight of our then existing wholly-owned
subsidiaries, which represented substantially all of our business, filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the Northern District of Ohio. We
commenced the Chapter 11 proceedings in order to restructure our outstanding
debts and to improve our access to the additional funding that we needed to
continue our operations. Throughout the Chapter 11 proceedings, we remained in
possession of our properties and assets and continued to operate and manage our
businesses with the then existing directors and officers as
debtors-in-possession subject to the supervision of the Bankruptcy Court.
As part of our Chapter 11 proceedings, we filed our original Joint Plan
of Reorganization on December 20, 2002, our First Amended Joint Plan of
Reorganization on January 9, 2003, our Second Amended Joint Plan of
Reorganization on May 5, 2003 and our Third Amended Joint Plan of Reorganization
on May 19, 2003, reflecting the final negotiations with pre-petition note
holders, pre-petition trade creditors and unionized employees. Our plan of
reorganization was confirmed on June 18, 2003 and became effective on August 1,
2003. We realized approximately $558 million in cancellation of debt income as a
result of our reorganization.
Following is a summary of some of the significant transactions
consummated on or about the effective date of our plan of reorganization:
7
o WPC amended and restated its by-laws and filed a second amended
and restated certificate of incorporation with the Delaware Secretary
of State authorizing the issuance of up to an aggregate of 80 million
shares of common stock, par value $0.01 per share, and 20 million
shares of undesignated preferred stock, par value $0.001 per share.
o WPC exchanged, on a pro rata basis, $275 million in senior notes and
$75 million in term notes that existed prior to its bankruptcy filing
for an aggregate of $20 million in cash, $40 million in new Series A
secured notes issued by WPSC, which are secured by a second lien on our
tangible and intangible assets (other than our accounts receivable and
inventory) and our equity interests in our joint ventures and a third
lien on our accounts receivable and inventory, $20 million in new
Series B secured notes issued by WPSC, which are secured by a fifth
lien on our tangible and intangible assets, our equity interests in our
joint ventures, and our accounts receivable and inventory, and
3,410,000 shares of new common stock of WPC constituting 34.1% thereof.
o WPC cancelled its then-existing senior notes and related indenture and
its then-existing term notes and the related term loan agreement.
o WPC cancelled all shares of its common stock that existed prior to the
implementation of our plan of reorganization, at which point we ceased
to be a subsidiary of WHX Corporation.
o Wheeling Pittsburgh Steel Corporation ("WPSC") entered into a new $250
million senior secured term loan facility, which is guaranteed in part
by the Emergency Steel Loan Guarantee Board, the State of West
Virginia, WPC and WPSC's subsidiaries and is secured by a first lien on
our tangible and intangible assets (other than accounts receivable and
inventory) and our equity interests in our joint ventures and a second
lien on our accounts receivable and inventory. We also entered into a
new $225 million senior secured revolving credit facility, which is
guaranteed by WPC and WPSC's subsidiaries and is secured by a first
lien on our accounts receivable and inventory and a third lien on our
other tangible and intangible assets and our equity interests in our
joint ventures.
o All of our obligations under our $195 million debtor-in-possession
credit facility were satisfied in full and discharged.
o WPC and WPSC entered into an agreement with WHX Corporation providing
for, among other things, a $10 million capital contribution by WHX
Corporation, the cancellation of approximately $40 million in debt owed
by us to WHX Corporation, a $10 million unsecured loan from WHX
Corporation and an agreement with respect to our separation from WHX
Corporation's employee pension plan.
o WPC and WPSC entered into an agreement with our unionized employees
represented by the United Steelworkers of America, which modified our
existing labor agreement to provide for, among other things, future
pension arrangements with USWA and reductions in our employee-related
costs.
o WPC issued 4 million shares of its new common stock constituting 40%
thereof for the benefit of USWA retirees in satisfaction of certain
claims under our labor agreement and an additional 1 million shares of
its new common stock constituting 10% thereof to or for the benefit of
our salaried employees.
o WPC issued 1,590,000 shares of its new common stock constituting 15.9%
thereof to certain of our creditors in satisfaction of various
unsecured claims, including claims relating to trade debt.
There are still several matters pending in the Bankruptcy Court,
including the resolution of disputed unsecured and administrative claims and
certain preference actions and other litigation where we are seeking to recover
monies. Certain of the stock issued pursuant to the Plan of Reorganization has
been reserved for distribution to creditors pending resolution of certain
disputed claims. If those claims are ultimately allowed in whole or in part by
the Bankruptcy Court, the appropriate amount of stock will be distributed to
those claimants; if the claims are disallowed, the stock will be distributed to
other creditors of the same class, pro rata. To the extent that certain
administrative and secured claims are allowed by the Bankruptcy Court, those
claims will be paid in cash. If and to the extent those claims are allowed as
pre-petition unsecured claims, then those creditors will receive stock, which
has been reserved as described above. In addition, we are the
8
plaintiffs in a number of preference actions, where we are seeking to recover
monies from creditors. We do not believe that any of these remaining bankruptcy
proceedings, individually or in the aggregate, will have a material effect on
us.
NOTE 2 - FRESH-START REPORTING
In accordance with SOP 90-7, the Company adopted the provisions of
fresh-start reporting as of July 31, 2003. In adopting the requirements of
fresh-start reporting, the Company engaged an independent financial advisor to
assist in the determination of the enterprise value of the entity. This value
was based upon various valuation methods, including discounted cash flow
methodologies, analysis of comparable steel companies, and other applicable
ratios and economic industry information relevant to the operations of the
Company. The estimated total equity value of the Reorganized Company aggregating
approximately $150 million was determined after taking into account the values
of the obligations assumed in connection with the Joint Plan of Reorganization.
The following reconciliation of the Predecessor Company's consolidated
balance sheet as of July 31, 2003 to that of the Reorganized Company as of July
31, 2003 was prepared with the adjustments that give effect to the
reorganization and fresh-start reporting. Since the September 30, 2003 financial
statements have been prepared as if the Registrant is a new reporting entity, a
black line has been shown on the financial statements to separate current
results from prior-period information since they are not prepared on a
comparable basis.
The adjustments entitled "Reorganization" reflect the consummation of
the Joint Plan of Reorganization, including the elimination of existing
liabilities subject to compromise, and consolidated shareholders' deficit, and
to reflect the aforementioned $150 million equity value.
The adjustments entitled "Fair Value Adjustments" reflect the adoption
of fresh-start reporting, including the adjustments to record property and
equipment at their fair value. Such adjustments reflect refinements to
management's original pro forma allocations.
9
A reconciliation of fresh-start accounting recorded as of July 31, 2003
follows:
WHEELING-PITTSBURGH CORPORATION
AND SUBSIDIARY COMPANIES
REORGANIZED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(UNAUDITED)
PRE- POST-
REORGANIZATION REORGANIZATION FRESH START REORGANIZATION
7/31/2003 ADJUSTMENTS ADJUSTMENTS 7/31/2003
---------- --------- ---------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 7,382 -- -- $ 7,382
Trade receivables, less allowance for
doubtful accounts of $1,916 112,649 (233) -- 112,416
Inventories 164,322 -- (9,658)[d] 154,664
Prepaid expenses and deferred charges 6,559 12 -- 6,571
---------- --------- ---------- ---------
Total current assets 290,912 (221) (9,658) 281,033
Investment in associated company 59,982 -- (19,505)[d] 40,477
Property, plant and equipment, at cost less
accumulated depreciation 493,514 -- (133,301)[d] 360,213
Deferred income tax benefits 27,342 (3,860)[b][d] -- 23,482
Restricted cash - long term -- 112,000 [a] -- 112,000
Deferred charges and other assets 8,964 42,844 [g] 9,756 61,564
---------- -------- ---------- ---------
$ 880,714 $ 150,763 $ (152,708) $ 878,769
========== ======== ========== =========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade payables $ 81,275 $ (1,334) [a] $ -- $ 79,941
Short term debt 137,214 (100,299)[a] -- 36,915
Payroll and employee benefits payable 35,118 32,795 [c] -- 67,913
Accrued federal, state and local taxes 10,054 1,200 [a] -- 11,254
Deferred income tax liabilities 27,342 (3,860)[a] -- 23,482
Accrued interest and other liabilities 8,026 2,647 [a] -- 10,673
Long term debt due in one year 43,433 (39,678)[a],[c],[f] -- 3,755
---------- --------- ---------- ---------
Total current liabilities 342,462 (108,529) -- 233,933
Long Term Debt 11,985 327,863 [a],[c] -- 339,848
Other employee benefit liabilities 17,317 124,981 [c] -- 142,298
Other liabilities 17,150 3,040 [a] -- 20,190
Liabilities subject to compromise 879,455 (879,455)[c] -- --
---------- --------- ---------- ---------
Total Liabilities 1,268,369 (532,100) -- 732,269
STOCKHOLDERS EQUITY (DEFICIT)
Common Stock - $.01 Par Value; 10 million
shares issued and outstanding -- 100 [c] -- 100
Additional paid-in capital 335,138 149,900 [c][g] (335,138)[d] 149,900
Restricted stock -- (7,500)[e] -- (7,500)
Accumulated earnings (deficit) (722,793) 540,363 [b],[c],[f] 182,430 [d] --
---------- --------- ---------- ---------
(387,655) 682,863 (152,708) 142,500
---------- --------- ---------- ---------
$ 880,714 $ 150,763 $ (152,708) $ 878,769
========== ========= ========== =========
10
Footnotes:
[a] Reflects the borrowing of the $250 million term loan proceeds and
amounts under the post-petition revolver and the payments necessary to effect
the Plan of Reorganization, such as the repayment of DIP facilities, cash
distributions to creditors and the payment of fees and expenses associated with
the exit financing.
[b] Reflects the impact on retained earnings of reorganization expenses net
of tax benefit.
[c] Reflects the settlement of liabilities subject to compromise, including
the distribution of cash, notes and equity to the pre-petition creditors, the
assumption of OPEB and other pre-petition liabilities (capital leases, employee
benefits, taxes). Also, reflects the cancellation of debt income.
[d] Reflects the adjustments to reflect "Fresh Start" Accounting in
accordance with FASB 141. These entries include the write-down of property,
plant and equipment and joint venture interests to their appraised values, and
the recognition of deferred tax assets and elimination of retained earnings and
additional paid-in capital. We periodically reevaluate the treatment of these
assets from time to time in light of actual operating results and our ongoing
reconsideration of the judgments, estimates and assumptions underlying our
financial statements.
[e] Reflects restricted stock awards for the distribution of employee
equity into trust.
[f] Reflects the cancellation of debt income as a result of WHX Corporation
forgiving its portion of the DIP term loan.
[g] Reflects the pre-funding of VEBA obligations with 40% of the Company's
common stock.
NOTE 3 - INVENTORIES
Inventories are valued at the lower of cost or market value. Cost is
determined by the last-in first-out (LIFO) method for substantially all
inventories. Approximately 90% of inventories are valued using the LIFO method.
SEPTEMBER 30, 2003 JULY 31, 2003 DECEMBER 31, 2002
------------------- ------------- -----------------
Finished Products $35,828 $39,464 $ 31,705
In-Process 98,123 96,072 112,319
Raw Materials 20,340 19,027 22,544
Other Materials and Supplies 27 101 17,054
------------------- ------------- -----------------
154,318 154,664 183,622
------------------- ------------- -----------------
LIFO Reserve -- -- 469
------------------- ------------- -----------------
$154,318 $154,664 $184,091
=================== ============= =================
NOTE 4 - LOSS PER SHARE
Basic loss per share is calculated by dividing net loss attributable to
common shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted loss per share is calculated by dividing
net loss attributable to common shareholders by the weighted average number of
common shares outstanding adjusted for potentially dilutive securities.
Pursuant to the plan of reorganization, WPC cancelled all shares of its
common stock that existed prior to the implementation of our plan of
reorganization, at which point we ceased to be a subsidiary of WHX Corporation.
WPC issued ten million shares of its new common stock in satisfaction of certain
claims, pursuant to the Plan of Reorganization ("POR"), effective August 1,
2003.
11
TWO MONTHS ENDED SEPTEMBER 30, 2003
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATORS) AMOUNT
-----------------------------------------------
($ IN THOUSANDS)
BASIC EPS AND DILUTED EPS LOSS
AVAILABLE TO COMMON SHAREHOLDERS $(15,237) 9,500,000 $ (1.61)
NINE MONTHS ENDED SEPTEMBER 30, 2003
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATORS) AMOUNT
-----------------------------------------------
BASIC EPS AND DILUTED EPS LOSS
AVAILABLE TO COMMON SHAREHOLDERS $(15,237) 9,500,000 $ (1.61)
NOTE 5 - CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company negotiated settlements on several environmental liabilities
upon emergence from Chapter 11 bankruptcy on August 1, 2003. Among these are
settlements on all Superfund sites in which the Company had been designated by
USEPA as a Potentially Responsible Party. The Company now has no environmental
liability for any Superfund sites. The Company also settled with USEPA on
pre-petition environmental stipulated penalties and other non-compliance issues.
The Company's post-petition liabilities related to USEPA non-compliance issues
total $8.7 million at September 30, 2003, and include approximately $1.7 million
for Multi-Media Inspection issues, approximately $1.8 million for stipulated
penalties, and about $5.2 million for RCRA corrective action at the Company's
Coke Plant. Other liabilities related to state environmental regulatory agency
issues amount to approximately $2.6 million.
The Company is subject to increasingly stringent new environmental
compliance standards and to obligations to ameliorate past non-compliance
issues. The Company has incurred capital expenditures for environmental control
projects aggregating $0.8 million in the first nine months of 2003 and $1.7
million for the year ended December 31, 2002. The company anticipates spending
approximately $13.9 million in the aggregate on major environmental compliance
projects through the year 2005. This amount is estimated to be expended in the
following schedule: $1.3 million in 2003, $8.9 million in 2004, $3.7 million in
2005.
The Company reviews available information regarding environmental
liabilities on a quarterly basis and modifies its estimate accordingly as issues
are resolved and new issues are identified. Company management believes, 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 hearings, it has adequately provided for its
present environmental obligations.
NOTE 6 - COMMON STOCK COMPENSATION
In accordance with our Plan of Reorganization, we established a
restricted stock plan pursuant to which we have granted to selected key
employees a total of 500,000 shares of our common stock, as of the effective
date of our plan of reorganization. All of the grants made under the plan will
vest in increments of one-third of the total grant to each individual pro rata
over three years. Restricted stock expense related to the restricted stock
awards totaled $0.4 million for the two month period ended September 30, 2003.
No stock options have been granted.
12
NOTE 7 - SUMMARIZED UNAUDITED COMBINED FINANCIAL
INFORMATION OF GUARANTORS.
Effective August 1, 2003 WPSC entered into a new $250 million Senior
Secured Term Loan Facility and a new $225 million Senior Secured Revolving
Credit Facility. Both credit facilities are fully and unconditionally guaranteed
by WPC and WPSC's subsidiaries. Condensed consolidating financial information
for WPC and the subsidiary guarantors are as follows:
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 2003
(DOLLARS IN THOUSANDS)
(UNAUDITED)
------------------------------------------------------------
CONSOLIDATING AND
SUBSIDIARY ELIMINATING WPC
WPC GUARANTORS ENTRIES CONSOLIDATED
--------- ---------- ----------------- -------------
ASSETS
Cash and cash equivalents $ 44 $ 9,078 $ -- $ 9,122
Trade accounts receivable -- 112,680 -- 112,680
Inventories -- 154,318 -- 154,318
Other current assets 12 8,769 -- 8,781
Total current assets 56 284,845 -- 284,901
Intercompany receivables (654) 654 -- --
Property, plant and equipment - net - 368,725 -- 368,725
Investments and advances in affiliates 127,798 40,838 (127,798) 40,838
Other non-current assets 896 184,995 -- 185,891
----------------------------------------------------------
Total Assets $ 128,096 $880,057 $(127,798) $880,355
==========================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ -- $66,879 $ -- $ 66,879
Other current liabilities 22 186,724 -- 186,746
Total current liabilities 22 253,603 -- 253,625
Long term debt -- 339,727 -- 339,727
Other non-current liabilities 394 158,929 -- 158,323
Stockholders' equity 127,680 127,798 (127,798) 127,680
----------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 128,096 $880,057 $(127,798) $880,355
==========================================================
JULY 31, 2003
(DOLLARS IN THOUSANDS)
(UNAUDITED)
------------------------------------------------------------
CONSOLIDATING AND
SUBSIDIARY ELIMINATING WPC
WPC GUARANTORS ENTRIES CONSOLIDATED
--------- ---------- ----------------- -------------
ASSETS
Cash and cash equivalents $ 52 $ 7,330 $ -- $ 7,382
Trade accounts receivable -- 112,416 -- 112,416
Inventories -- 154,664 -- 154,664
Other current assets 12 6,559 -- 6,571
Total current assets 64 280,969 -- 281,033
Intercompany receivables (539) 539 -- --
Property, plant and equipment - net -- 360,213 -- 360,213
Investments and advances in affiliates 142,501 40,476 (142,500) 40,477
Other non-current assets 896 196,150 -- 197,046
----------------------------------------------------------
Total Assets $ 142,922 $878,347 $(142,500) $878,769
==========================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ -- $79,941 $ -- $ 79,941
Other current liabilities 28 153,964 -- 153,992
Total current liabilities 28 233,905 -- 233,933
Long term debt -- 339,848 -- 339,848
Other non-current liabilities 394 162,094 -- 162,488
Stockholder's equity 142,500 142,500 (142,500) 142,500
----------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 142,922 $878,347 $(142,500) $878,769
==========================================================
DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
------------------------------------------------------------
CONSOLIDATING AND
SUBSIDIARY ELIMINATING WPC
WPC GUARANTORS ENTRIES CONSOLIDATED
--------- ---------- ----------------- -------------
ASSETS
Cash and cash equivalents $ 37 $ 8,506 $ -- $ 8,543
Trade accounts receivable -- 130,593 -- 130,593
Inventories -- 184,091 -- 184,091
Other current assets 225 7,252 -- 7,477
Total current assets 262 330,442 -- 330,704
Intercompany receivables 189,984 235,161 (425,145) --
Property, plant and equipment - net 11,842 518,726 -- 530,568
Investments and advances in affiliates (50,602) 664 110,705 60,767
Other non-current assets 251,224 (214,147) -- 37,077
----------------------------------------------------------
Total Assets $ 407,710 $870,846 $(314,440) $959,116
==========================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ $ 71,048 $ -- $ 71,048
Other current liabilities 30 259,881 -- 259,911
Total current liabilities 30 330,929 -- 330,959
Liabilities subject to compromise 376,077 514,224 -- 890,301
Intercompany notes payables 102,485 322,660 (425,145) --
Long term debt -- 13,177 -- 13,177
Other non-current liabilities -- 35,850 -- 35,850
Stockholders' equity (75,882) (345,994) 110,705 (311,171)
----------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 402,710 $870,846 $(314,440) $959,116
==========================================================
13
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR TWO MONTHS ENDED SEPTEMBER 30, 2003
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CONSOLIDATING
SUBSIDIARY AND ELIMINATING WPC
INCOME DATA WPC GUARANTORS ENTRIES CONSOLIDATED
------- ---------- --------------- ------------
Net sales $ -- $159,789 $ -- $159,789
Cost of products sold, excluding depreciation -- 159,314 -- 159,314
Depreciation -- 3,568 -- 3,568
Selling, general and administrative expenses 88 8,916 -- 9,004
-------------------------------------------------------
Operating income (Loss) (88) (12,009) -- (12,097)
Interest expense -- (3,891) -- (3,891)
Other income including equity earnings (losses)
of affiliates (15,149) 787 15,119 757
-------------------------------------------------------
Income (loss) before tax (15,237) (15,113) 15,119 (15,231)
Tax provision (benefit) -- 6 -- 6
-------------------------------------------------------
Net Income (Loss) $(15,237) $(15,119) $15,119 $(15,237)
=======================================================
FOR THE YEAR ENDED DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
CONSOLIDATING
SUBSIDIARY AND ELIMINATING WPC
INCOME DATA WPC GUARANTORS ENTRIES CONSOLIDATED
------- ---------- --------------- ------------
Net sales $ -- $979,993 $ -- $979,993
Cost of products sold, excluding depreciation 620 893,829 -- 894,449
Depreciation -- 74,194 -- 74,194
Selling, General and Administrative Expenses 157 46,836 -- 46,993
Reorganization Expense -- 11,755 -- 11,755
-------------------------------------------------------
Operating Income (Loss) (777) (46,621) -- (47,398)
Reorganization Expense (845) (417) -- (1,262)
Interest Expense -- 11,011 4,976 15,987)
Other Income including equity earnings (losses)
of affiliates (54,716) (8,681) 67,964 4,567
-------------------------------------------------------
Income (Loss) before tax and extraordinary items (54,648) (65,896) 62,988 (57,556)
Tax Provision (Benefit) 2,919 (2,908) -- 11
-------------------------------------------------------
Income (Loss) before extraordinary items (57,567) (62,988) 62,988 (57,567)
Extraordinary charge (net of tax) -- -- -- --
-------------------------------------------------------
Net Income (Loss) $(57,567) $(62,988) $62,988 $(57,567)
=======================================================
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR TWO MONTHS ENDED SEPTEMBER 30, 2003
(DOLLARS IN THOUSANDS)
(UNAUDITED)
---------------------------------------------------------
CONSOLIDATING
SUBSIDIARY AND ELIMINATING WPC
INCOME DATA WPC GUARANTORS ENTRIES CONSOLIDATED
------- ---------- --------------- ------------
Net cash provided (used) by operating activities $ (8) $(21,742) $ -- $(21,750)
Investing activities:
Capital expenditures -- (12,044) -- (12,044)
Acquisitions -- -- -- --
Other -- -- -- --
---------------------------------------------------------
Net cash used in investing activities -- (12,044) -- (12,044)
Financing activities:
Net borrowings (repayments): -- 35,534 -- 35,534
Equity transactions -- -- -- --
Receivables from affiliates -- -- -- --
Other -- -- -- --
---------------------------------------------------------
Net cash (used in) provided by
financing activities -- 35,534 -- 35,534
Net change in cash and cash equivalents (8) 1,748 -- 1,740
Cash and cash equivalents at beginning of year 52 7,330 -- 7,382
---------------------------------------------------------
Cash and cash equivalents at end of period $ 44 $ 9,078 $ -- $ 9,122
=========================================================
FOR THE YEAR ENDED DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
---------------------------------------------------------
CONSOLIDATING
SUBSIDIARY AND ELIMINATING WPC
INCOME DATA WPC GUARANTORS ENTRIES CONSOLIDATED
------- ---------- --------------- ------------
Net cash provided (used) by operating activities $ (4) $(15,847) $ -- $(15,851)
Investing activities:
Capital expenditures -- (10,971) -- (10,971)
Other -- 3,085 -- 3,085
---------------------------------------------------------
Net cash used in investing activities -- (7,886) -- (7,886)
Financing activities:
Net borrowings (repayments): -- 24,694 -- 24,694
Equity transactions -- -- -- --
Receivables from affiliates -- -- -- --
Other -- -- -- --
---------------------------------------------------------
Net cash (used in) provided by financing
activities -- 24,694 -- 24,694
Net change in cash and cash equivalents (4) 961 -- 957
Cash and cash equivalents at beginning of year 41 7,545 -- 7,586
---------------------------------------------------------
Cash and cash equivalents at end of period $ 37 $ 8,506 $ -- $ 8,543
=========================================================
14
NOTE 8 - NEW ACCOUNTING STANDARDS
As part of the provisions of SOP 90-7, we were required to adopt on July
31, 2003 all accounting guidance that was going to be effective within a
twelve-month period.
In November 2002, the Financial Accounting Standards Board, or FASB,
issued FASB Interpretation No.45, or FIN 45, "Guarantor's Accounting and
Disclosure Requirement for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN 45 requires that upon issuance of a guarantee, a
guarantor must recognize a liability for the fair value of an obligation assumed
under a guarantee. FIN 45 also requires additional disclosures by a guarantor in
its interim and annual financial statements about the obligations associated
with guarantees issued. The recognition provisions of FIN 45 are effective for
any guarantees that are issued or modified after December 31, 2002. The
disclosure requirements are effective as of December 31, 2002. The provisions of
FIN 45 are not expected to have a material impact on the Company's results of
operations or financial position.
In January 2003, the FASB issued FASB Interpretation No.46, or FIN 46,
"Consolidation of Variable Interest Entities." FIN 46 identifies certain
off-balance sheet arrangements that meet the definition of a variable interest
entity, or VIE. The primary beneficiary of a VIE is the party that is exposed to
the majority of the risks and/or returns of the VIE. The primary beneficiary is
required to consolidate the VIE. In addition, more extensive disclosure
requirements apply to the primary beneficiary, as well as other significant
investors. FIN 46 is effective immediately for certain disclosure requirements
and variable interest entities created after January 31, 2003, and in the third
quarter of 2003 for all other variable interest entities. The provisions of FIN
46 are not expected to have a material impact on the Company's financial
statements.
In May 2003, the FASB issued SFAS No.150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", which requires
that an issuer classify financial instruments that are within the scope of SFAS
150 as a liability. Under prior guidance, these same instruments would be
classified as equity. SFAS 150 is effective for all financial instruments
entered into or modified after May 31, 2003. Otherwise it is effective on July
1, 2003. The provisions of SFAS 150 are not expected to have a material impact
on the Company.
15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain of the statements contained in this Quarterly Report on Form 10-Q,
including Management's Discussion and Analysis of Financial Condition and
Results of Operations, may contain projections or other forward-looking
statements regarding future events or the future financial performance of the
Company that involve risks and uncertainties. Readers are cautioned that these
forward-looking statements are only predictions and may differ materially from
actual future events or results. Because they discuss future events or
conditions, forward-looking statements often include words such as "anticipate",
"believe", "estimate", "expect", "intend", "plan", "project", "target", "can",
"could", "may", "should", "will", "would", or similar expressions. Readers are
referred to the "Financial Information - Risk Factors" section of the Company's
registration statement on Form 10, as filed with the Securities and Exchange
Commission, which identifies important risk factors that could cause actual
results to differ from those contained in any such forward-looking statements.
These risk factors include, among others, the Company's potential inability to
generate sufficient operating cash flow to service or refinance its
indebtedness, concerns relating to financial covenants and other restrictions
contained in its credit agreements, intense competition, dependence on suppliers
of raw materials, the difficulties involved in constructing an electric arc
furnace, and cyclical demand for steel products. In addition, any
forward-looking statements represent the Company's views only as of the date of
this filing and should not be relied upon as representing its views as of any
subsequent date. While the Company may elect to update these forward-looking
statements from time to time, it specifically disclaims any obligation to do so.
CRITICAL ACCOUNTING POLICIES/ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
judgments, estimates and assumptions that affect reported amounts of assets and
liabilities at the balance sheet date and the reported revenues and expenses for
the period. Our judgments and estimates are based on both historical experience
and our expectations for the future. As a result, actual results may differ
materially from current expectations.
We believe that the following are the more significant judgments and
estimates used in the preparation of the financial statements.
Going Concern Assumption
The financial statements have been prepared assuming our company will
continue as a going concern. This contemplates the continuity of operations, the
realization of assets and the payment of liabilities in the ordinary course of
business, as determined in our opening balance sheet.
Other Postretirement Benefits (OPEBS)
The traditional medical and life insurance benefits that we provide to
past retirees will terminate effective October 1, 2003. Pursuant to the new
labor agreement, which we entered into in connection with our plan of
reorganization, past retirees will receive medical and life insurance benefits
under the VEBA trust described above. Future retirees under the new labor
agreement will be covered by a medical and life insurance program identical to
that of active employees. Eligible pensioners and surviving spouses shall be
required to make monthly contributions for medical and prescription drug
coverage. Because these benefits provided by us will be paid in the future over
what could be many years, we use an independent actuary to help us estimate the
accrued liability at each year-end balance sheet date. The two most significant
assumptions used in determining the liability are the projected medical cost
trend rate and the discount rate.
We estimate the escalation trend in medical costs based on historical rate
experience in our plans and through consultation with health care specialists.
We have assumed an initial escalation rate of 9% in 2003. This rate is assumed
to decrease gradually to an ultimate rate of 4.75% in 2008 and remain at that
level for all future years.
The discount rate applied to our OPEB obligations is based on an estimate
of the current interest rate at which our OPEB obligations could be settled at
the balance sheet date. In estimating this rate, we consider
16
high quality bond rates and the expected payout period of our OPEB obligations.
Based on this evaluation, we lowered the discount rate used to measure our OPEB
obligation at December 31, 2002 from 7.25% to 6.5%.
Asset Impairments
Our company periodically evaluates property, plant and equipment for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Asset impairments are recognized when
the carrying value of productive assets exceeds the net projected undiscounted
cash flows from those assets. Given our integrated operations, asset impairment
evaluations are generally done on a group basis. Undiscounted cash flows are
based on longer-term projections that consider projected market conditions and
the performance and ultimate use of the assets. If future demand and market
conditions are less favorable than those projected by management, or if the
probability of disposition of the assets differs from that previously estimated
by management, asset impairments may be required.
Deferred Taxes
Realization of net deferred tax assets is dependent on the ability of our
company to generate future taxable income. Our company records a valuation
allowance to reduce deferred tax assets to an amount that is more likely than
not to be realized. During 2000, our company recorded a full valuation allowance
against our net deferred tax assets due to the uncertainties surrounding
realization as a result of the bankruptcy proceedings. Deferred tax assets that
have arisen since that time, which principally consist of net operating losses,
have also been fully reserved. However, as our operations continue, we will be
required to periodically reevaluate the tax treatment of these deferred tax
assets in light of actual operating results.
Environmental and Legal Contingencies
Our company provides for remediation costs, environmental penalties and
legal contingencies when the liability is probable and the amount of the
associated costs is reasonably determinable. Our company regularly monitors the
progress of environmental remediation and legal contingencies, and revises the
amounts recorded in the period in which changes in estimate occur. Conclusions
regarding exposure are developed in consultation with legal and environmental
counsel.
New Accounting Standards
As part of the provisions of SOP 90-7, we were required to adopt on July
31, 2003 all accounting guidance that was going to be effective within a
twelve-month period.
In November 2002, the Financial Accounting Standards Board, or FASB,
issued FASB Interpretation No.45, or FIN 45, "Guarantor's Accounting and
Disclosure Requirement for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN 45 requires that upon issuance of a guarantee, a
guarantor must recognize a liability for the fair value of an obligation assumed
under a guarantee. FIN 45 also requires additional disclosures by a guarantor in
its interim and annual financial statements about the obligations associated
with guarantees issued. The recognition provisions of FIN 45 are effective for
any guarantees that are issued or modified after December 31, 2002. The
disclosure requirements are effective as of December 31, 2002. The provisions of
FIN 45 are not expected to have a material impact on the Company's results of
operations or financial position.
In January 2003, the FASB issued FASB Interpretation No.46, or FIN 46,
"Consolidation of Variable Interest Entities." FIN 46 identifies certain
off-balance sheet arrangements that meet the definition of a variable interest
entity, or VIE. The primary beneficiary of a VIE is the party that is exposed to
the majority of the risks and/or returns of the VIE. The primary beneficiary is
required to consolidate the VIE. In addition, more extensive disclosure
requirements apply to the primary beneficiary, as well as other significant
investors. FIN 46 is effective immediately for certain disclosure requirements
and variable interest entities created after January 31, 2003, and in the first
quarter of 2004 for all other variable interest entities. The provisions of FIN
46 are not expected to have a material impact on the Company's financial
statements.
17
In May 2003, the FASB issued SFAS No.150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", which requires
that an issuer classify financial instruments that are within the scope of SFAS
150 as a liability. Under prior guidance, these same instruments would be
classified as equity. SFAS 150 is effective for all financial instruments
entered into or modified after May 31, 2003. Otherwise it is effective on July
1, 2003. The provisions of SFAS 150 are not expected to have a material impact
on the Company.
GENERAL
Beginning in 1998 and continuing through 2001, record high levels of
foreign steel imports as well as a general overcapacity in worldwide steel
production caused a marked deterioration of steel prices, resulting in huge
losses and substantial harm to the domestic steel industry. This record high
level of foreign steel imports over a four year period, coupled with the
indebtedness our company incurred as a result of a ten-month work stoppage which
ended in August 1997, and approximately $200 million of capital expenditures
used to modernize our facilities to increase quality, efficiency, safety and
environmental conditions, resulted in substantial losses and the severe erosion
of our financial position and liquidity. These losses and erosion of liquidity
continued to occur notwithstanding increases in operating efficiencies resulting
from the modernization of facilities, various cost saving measures and the
elimination of 20% of the hourly workforce negotiated in 1997.
On November 16, 2000, WPC and eight of our then existing wholly-owned
subsidiaries, which represented substantially all of our business, filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the Northern District of Ohio. We
commenced the Chapter 11 proceedings in order to restructure our outstanding
debts and to improve our access to the additional funding that we needed to
continue our operations. Throughout the Chapter 11 proceedings, we remained in
possession of our properties and assets and continued to operate and manage our
businesses with the then existing directors and officers as
debtors-in-possession subject to the supervision of the Bankruptcy Court.
As part of our Chapter 11 proceedings, we filed our original Joint Plan of
Reorganization on December 20, 2002, our First Amended Joint Plan of
Reorganization on January 9, 2003, our Second Amended Joint Plan of
Reorganization on May 5, 2003 and our Third Amended Joint Plan of Reorganization
on May 19, 2003, reflecting the final negotiations with pre-petition note
holders, pre-petition trade creditors and unionized employees. Our Third Amended
Joint Plan of Reorganization was confirmed by order of the Bankruptcy Court on
June 18, 2003, and became effective on August 1, 2003. We realized approximately
$558 million in cancellation of debt income as a result of our reorganization.
Following is a summary of some of the significant transactions consummated
on or about the effective date of our plan of reorganization.
o WPC amended and restated its by-laws and filed a second amended and
restated certificate of incorporation with the Delaware Secretary of State
authorizing the issuance of up to an aggregate of 80 million shares of
common stock, par value $0.01 per share, and 20 million shares of
undesignated preferred stock, par value $0.001 per share.
o WPC exchanged, on a pro rata basis, $275 million in senior notes and $75
million in term notes that existed prior to its bankruptcy filing for an
aggregate of $20 million in cash, $40 million in new Series A secured
notes issued by WPSC, which are secured by a second lien on our tangible
and intangible assets (other than our accounts receivable and inventory)
and our equity interests in our joint ventures and a third lien on our
accounts receivable and inventory, $20 million in new Series B secured
notes issued by WPSC, which are secured by a fifth lien on our tangible
and intangible assets, our equity interests in our joint ventures, and our
accounts receivable and inventory, and 3,410,000 shares of new common
stock of WPC constituting 34.1% thereof.
o WPC cancelled its then-existing senior notes and related indenture and its
then-existing term notes and the related term loan agreement.
18
o WPC cancelled all shares of its common stock that existed prior to the
implementation of our plan of reorganization, at which point we ceased to
be a subsidiary of WHX Corporation.
o WPSC entered into a new $250 million senior secured term loan facility,
which is guaranteed in part by the Emergency Steel Loan Guarantee Board,
the State of West Virginia, WPC and WPSC's subsidiaries and is secured by
a first lien on our tangible and intangible assets (other than accounts
receivable and inventory) and our equity interests in our joint ventures
and a second lien on our accounts receivable and inventory. We also
entered into a new $225 million senior secured revolving credit facility,
which is guaranteed by WPC and WPSC's subsidiaries and is secured by a
first lien on our accounts receivable and inventory and a third lien on
our other tangible and intangible assets and our equity interests in our
joint ventures.
o All of our obligations under our $195 million debtor-in-possession credit
facility were satisfied in full and discharged.
o WPC and WPSC entered into an agreement with WHX Corporation providing for,
among other things, a $10 million capital contribution by WHX Corporation,
the cancellation of approximately $40 million in debt owed by us to WHX
Corporation, a $10 million unsecured loan from WHX Corporation and an
agreement with respect to our separation from WHX Corporation's employee
pension plan.
o WPC and WPSC entered into an agreement with our unionized employees
represented by the United Steelworkers of America, which modified our
existing labor agreement to provide for, among other things, future
pension arrangements with USWA and reductions in our employee-related
costs.
o WPC issued 4 million shares of its new common stock constituting 40%
thereof for the benefit of USWA retirees in satisfaction of certain claims
under our labor agreement and an additional 1 million shares of its new
common stock constituting 10% thereof to or for the benefit of our
salaried employees.
o WPC issued 1,590,000 shares of its new common stock constituting 15.9%
thereof to certain of our creditors in satisfaction of various unsecured
claims, including claims relating to trade debt.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets, and
liquidation of liabilities in the ordinary course of business.
In accordance with SOP 90-7, we adopted "Fresh Start Reporting" for our
reorganized company and recorded assets and liabilities at their fair values.
Equity value was determined with the assistance of independent advisors.
Enterprise value was estimated using discounted cash flow methodologies and
analysis of comparable steel companies.
19
RESULTS OF OPERATIONS
The unaudited consolidated financial statements after the Effective Date
are those of a new reporting entity (the "Reorganized Company") and are not
comparable to the pre-confirmation periods of the old reporting entity (the
"Predecessor Company"). However, for purposes of this discussion, the
Reorganized Company's results for the two months ended September 30, 2003 have
been combined with the Predecessor Company's month ended July 31, 2003 (as
summarized in the following table) and are compared to the Predecessor Company's
results for the three months ended September 30, 2002. In addition, the
Reorganized Company's results for the two months ended September 30, 2003 have
been combined with the Predecessor Company's results for the seven months ended
July 31, 2003 (as summarized in the following table) and are compared to the
Predecessor Company's results for the nine months ended September 30, 2002.
Differences between periods due to fresh start accounting are explained when
necessary.
THIRD QUARTER 2003 COMPARED TO THIRD QUARTER 2002
2003 2002
(Dollars in Thousands)
(Unaudited)
--------- ---------
Net sales $ 241,087 $ 277,868
Cost of goods sold excluding depreciation 236,191 235,691
Depreciation 9,663 18,427
Selling, general and administrative expense 13,652 10,529
Reorganization and professional fee expense 1,995 3,155
--------- ---------
Operating income (loss) (20,414) 10,066
Fair value adjustment (152,708) --
Gain on discharge of debt 557,541 --
Other reorganization entries (4,918) --
Interest expense on debt (5,353) (4,307)
Other income 1,139 1,333
--------- ---------
Income before taxes 375,287 7,092
Tax provision (benefit) (6) 5
--------- ---------
Net Income $ 375,293 $ 7,087
========= =========
Net sales for the third quarter of 2003 totaled $241.1 million on
shipments of steel products totaling 559,272 tons. Net sales for the third
quarter of 2002 totaled $277.9 million on shipments of 571,465 tons. The
decrease in net sales is due to a decrease of 2% in the volume of tons of steel
products shipped and a decrease of 11% in average steel prices from $486 per ton
to $431 per ton.
Third quarter 2003 cost of goods sold increased to $236.2 million from
$235.7 million in the 2002 third quarter. Cost of goods sold per ton increased
to $424 per ton in the 2003 third quarter from $412 per ton in the 2002 third
quarter. The increase in operating costs per ton is primarily due to a $21 per
ton increase in raw material costs offset by a $12 per ton decrease in labor
cost.
Operating rates for the third quarter of 2003 and 2002 were 99.4% and
95.7% respectively.
Depreciation expense decreased $8.7 million to $9.7 million in the third
quarter of 2003 from $18.4 million in the comparable period in 2002 due to the
revaluation of fixed assets as a result of our emergence from bankruptcy.
Selling, administrative and general expense for the third quarter of 2003
increased $3.2 million to $13.7 million from $10.5 million in the comparable
period in 2002 due to an increase in property taxes of $1.9 million, an increase
in insurance of $0.6 million, an increase in bad debt expense of $0.8 million
and a decrease in other expenses of $0.1 million.
Reorganization and professional fee expense decreased to $2.0 million in
the third quarter of 2003 from $3.2 million in the third quarter of 2002 due to
the Company's emergence from bankruptcy. Non-recurring items totaled $399.9
million for the third quarter of 2003 as a result of the Company's emergence
from bankruptcy. The $557.5 million gain on discharge of debt reflects
pre-petition liabilities in excess of distributions made pursuant to our POR.
The $152.7 million fair value adjustment primarily reflects the revaluation of
fixed assets. Other reorganization entries amounted to a loss of $4.9 million.
20
Interest expense for the third quarter of 2003 increased $1.1 million to
$5.4 million from the comparable period in 2002 due to increased borrowings.
Net income for the 2003 third quarter totaled $375.3 million compared to
2002 third quarter net income that totaled $7.1 million.
YEAR TO DATE 2003 COMPARED TO YEAR TO DATE 2002
2003 2002
(Dollars in Thousands)
(Unaudited)
----------------------
Net sales $ 730,228 $ 725,591
Cost of goods sold excluding depreciation 723,146 663,806
Depreciation 43,457 55,680
Selling, general and administrative 3,983
expense 38,910 3
Reorganization and professional fee expense 8,140 8,455
--------- ---------
Operating loss (83,425) (36,333)
Fair value adjustments (152,708) --
Gain on discharge of debt 557,541 --
Other reorganization entries (4,758) 1,295
Interest expense on debt (13,076) (12,168)
Other income 3,985 2,797
--------- ---------
Income (loss) before taxes 307,559 (44,409)
Tax provision (benefit) (635) 16
--------- ---------
Net Income (loss) $ 308,194 ($ 44,425)
========= =========
Net sales for nine months 2003 totaled $730.2 million on shipments of
steel products totaling 1,675,772 tons. Net sales for the nine months 2002
totaled $725.6 million on shipments of 1,684,860 tons. The increase in net sales
is primarily due to a 1% increase in average steel prices from $431 per ton to
$436 per ton.
Nine months 2003 cost of goods sold increased to $723.1 million from
$663.8 million in the 2002 nine month period. Cost of goods sold per ton
increased to $432 per ton for nine months 2003 from $394 per ton for nine months
2002. The increase in operating costs per ton is primarily due to a $17 per ton
increase in raw material costs and a $16 per ton increase in fuel costs.
Operating rates for the nine months ended September 30, 2003 and 2002 were
94.9% and 97.4% respectively.
Depreciation expense decreased $12.2 million to $43.5 million for nine
months 2003 from $55.7 million in the comparable period in 2002 due to the fair
value adjustments of fixed assets as a result of the Company's emergence from
bankruptcy.
Selling, administrative and general expense for nine months 2003 increased
$4.9 million to $38.9 million from $34.0 million in the comparable period in
2002 due to an increase in property taxes of $2.2 million, an increase in
insurance of $1.4 million, an increase in bad debt expense of $1.0 million and
an increase in other expenses of $0.3 million.
Reorganization and professional fee expense decreased to $8.1 million for
nine months 2003 from $8.4 million for nine months 2002 due to the Company's
emergence from bankruptcy. Non-recurring gains totaled $399.9 million for nine
months 2003 as a result of the Company's emergence from bankruptcy. The $557.5
million gain on discharge of debt reflects pre-petition liabilities in excess of
distributions made pursuant to our POR. The $152.7 million fair value adjustment
primarily reflects the revaluation of fixed assets. Other reorganization entries
amounted to a loss of $4.8 million.
Interest expense for nine months 2003 increased $0.9 million to $13.1
million from the comparable period in 2002 due to increased borrowings.
Net income for nine months 2003 totaled $308.2 million compared to nine
months 2002 net loss of $44.4 million.
21
LIQUIDITY AND CAPITAL RESOURCES
Since our emergence from Chapter 11 bankruptcy proceedings, our primary
sources of financing have been cash flows from operations, term loans under our
$250 million senior secured term loan facility, revolving credit loans under our
$225 million senior secured revolving credit facility, and a $10 million
unsecured loan from WHX Corporation. We have used approximately $199.7 million
of the proceeds of the foregoing debt financings to pay our obligations under
our plan of reorganization, including paying off our debtor-in-possession credit
facility and paying other cash claims under our plan of reorganization. We
expect to use the remainder of the proceeds to fund our ongoing operations, to
service debt, to fund working capital, to make capital expenditures on our
existing facilities and our planned construction of an electric arc furnace, and
for general corporate purposes.
As of September 30, 2003, we had the following amounts available for our
working capital expenses and our planned capital expenditures: cash and cash
equivalents of approximately $9.1 million; $102 million of restricted cash from
borrowings under our new term loan facility for construction of the electric arc
furnace; and approximately $75.0 million from borrowings under our new revolving
credit facility. We expect that the effects of a new labor agreement,
cancellation of indebtedness pursuant to our plan of reorganization and improved
business conditions will produce positive operating cash flows through 2004.
Therefore, we currently anticipate that we should be able to fund our debt
service obligations and satisfy our long-term cash requirements without the need
for additional funding.
As discussed below, our credit agreements require us to maintain borrowing
availability of at least $50 million under our revolving credit facility or any
replacement facility through at least March 31, 2005. We currently expect that
we should be able to maintain this level of borrowing availability through the
end of the current fiscal year and beyond. This expectation is based on our
present belief that, among other things, raw material costs will not rise
significantly and that the demand for and market price of steel products will
increase in the near future. However, if costs of raw materials increase
materially or if market prices for steel products or customer demand do not rise
as anticipated, it is possible that our borrowing availability could fall below
$50 million.
The following table summarizes the categories of collateral that we have pledged
to secure our current debt obligations and the ranking of our debt obligations
with respect to all of the security interests that we have granted to date.
COLLATERAL TYPE
-------------------------------------------------------------------------------
TANGIBLE AND INTANGIBLE ASSETS AND
JOINT VENTURE EQUITY INTEREST ACCOUNTS RECEIVABLE AND INVENTORY
-------------------------------------------------------------------------------
DEBT OBLIGATION SECURED BY FIRST
SECURITY INTEREST $250 Million Term Loan $225 Million Revolving Credit Facility
DEBT OBLIGATION SECURED BY SECOND
SECURITY INTEREST $40 Million Series A Notes $250 Million Term Loan
DEBT OBLIGATION SECURED BY THIRD
SECURITY INTEREST $225 Million Revolving Credit $40 million Series A Notes Facility
DEBT OBLIGATION SECURED BY FOURTH
SECURITY INTEREST Deferred payment obligations Deferred payment obligations in
in respect of iron ore sales respect of iron ore sales agreement
agreement with Itabira Rio Doce with Itabira Rio Doce
DEBT OBLIGATION SECURED BY FIFTH
SECURITY INTEREST $20 Million Series B Notes $20 Million Series B Notes
In the event that we are unable to satisfy our payment and other
obligations under our secured debt, the lenders of our secured debt have various
rights and remedies, including the right to force the sale of our assets and to
apply the proceeds thereof to repay amounts owed by us. If such a foreclosure
were to occur, then we may be unable to maintain our operations, our business,
financial condition and results of operations could materially suffer and our
shareholders may lose all or part of their investment.
22
$250 Million Term Loan
In connection with our plan of reorganization, WPSC entered into a
five-year $250 million senior secured term loan facility with a bank group led
by Royal Bank of Canada, as administrative agent. The term loan is arranged in
three tranches with varying degrees of risk and interest rates. Term loan
interest rates range from Libor plus 2.5% to Libor plus 8.0% and prime plus
1.50% to prime plus 7.0%. The blended rate of interest is approximately 4% at
current Libor rates. The term loan is to be repaid beginning in the third
quarter of 2004 through the first quarter of 2008 in quarterly installments of
$6.25 million with a final payment of $156.25 million due at maturity.
A federal government guarantee from the Emergency Steel Loan Guarantee
Board, also referred to as the Steel Board, covers 85% or $21.25 million of the
$25 million first tranche of the term loan held by Royal Bank of Canada, and 95%
or approximately $198.75 million of the approximately $209 million second
tranche of the term loan held by various lenders. The Steel Board guarantee is a
guarantee of principal only. The Steel Board guarantee terminates only if the
administrative agent fails to make a payment demand within thirty days from the
date of any payment default or if any lender transfers its interest in the term
loan facility contrary to provisions of the appropriate sections of the
guarantee. The Steel Board guarantee expires thirteen years after the closing of
the term loan facility, or eight years after scheduled maturity. The remaining
5% of the second tranche of the term loan is backed by an unconditional
guarantee from the State of West Virginia. Additionally, the term loan is
guaranteed by WPC and WPSC's subsidiaries. Of the approximately $15.8 million
third tranche of the term loan, approximately $3.8 million is held by Danieli
Corporation as a vendor/supplier to WPSC and approximately $12 million is held
by the State of Ohio through the Ohio Department of Development. The term loan
is secured by a first lien on all of our tangible and intangible assets (other
than accounts receivable and inventory) and our equity interests in our joint
ventures, and a second lien on our accounts receivable and inventory.
A portion of the term loan was used to finance our plan of reorganization
by paying off our debtor-in-possession credit facility and paying other cash
claims under our plan of reorganization. In addition, $112 million of the term
loan has been placed in a restricted cash account for capital expenditures,
including expenses relating to the construction of an electric arc furnace.
Pursuant to the provisions of the term loan credit agreement, we are
subject to, and are currently in compliance with, various affirmative covenants
customary for a debt financing of this type, including provision of financial
reports, compliance with payment and contractual obligations and requirements of
law, maintenance of existence and property, maintenance of insurance, and
compliance with the terms and conditions of the Steel Board guarantee and the
State of West Virginia guarantee. In addition, we are subject to, and are
currently in compliance with, various negative covenants, including the
following:
o financial condition covenants (as described below);
o limitations on the incurrence of additional indebtedness or guaranty
obligations;
o limitations on creating additional liens;
o limitations on the merger, consolidation, liquidation or disposition of
all or substantially all of our property or business;
o limitations on the disposition of property, other than obsolete or worn
out property or inventory in the ordinary course of business and other
property having a fair market value not to exceed $15 million in the
aggregate;
o limitations on the sale of a subsidiary's capital stock;
o limitations on paying dividends or making distributions;
o limitations on making capital expenditures and investments;
o limitations on incurring additional debt in excess of $10 million, except
in limited circumstances;
o limitations on prepaying principal, interest or other amounts payable in
respect of our debt obligations during any default or event of default;
o limitations on amendment or modification of the terms of our debt and
other obligations contemplated by our plan of reorganization and the terms
of the principal electric arc furnace construction contracts and the
roll-changing project construction contract with Danieli Corporation;
23
o limitations on entering into any contract relating to the electric arc
furnace likely to result in aggregate payments under such contract by our
company in excess of $5 million during its term or which is identified by
the independent technical consultant as technically significant to
completion of the electric arc furnace; and
o limitations on entering into transactions with affiliates, unless such
transaction is in the ordinary course of business and upon fair and
reasonable terms comparable to an arm's length transaction.
Following is a summary of the financial condition covenants to which we
are subject under the provisions of the term loan credit agreement:
o The consolidated leverage ratio (as defined below) as at the last day of
any period for four consecutive fiscal quarters shall not exceed the ratio
of 4.0 to 1.0 for the periods ending on March 31, 2005 and June 30, 2005
and shall not exceed the ratio of 3.5 to 1.0 for the periods ending on
September 30, 2005 and thereafter. "Consolidated leverage ratio" means the
ratio of (a) our consolidated debt as of such day minus indebtedness
attributable to letters of credit which support trade obligations and
proceeds of the term loan on deposit in the restricted cash account, to
(b) our consolidated EBITDA for such period.
o The consolidated interest coverage ratio (as defined below) for any period
of four consecutive fiscal quarters ending on or after March 31, 2005
shall not be less than 3.0 to 1.0. "Consolidated interest coverage ratio"
means the ratio of (a) our consolidated EBITDA for such period to (b) our
total consolidated cash interest expense for such period with respect to
all outstanding indebtedness of our company.
o The consolidated fixed charge coverage ratio (as defined below) for any
period of four consecutive fiscal quarters shall not be less than 1.2 to
1.0 for the periods ending on March 31, 2005 through December 31, 2005 and
shall be less than 1.3 to 1.0 for the periods ending on March 31, 2006 and
thereafter.
o "Consolidated fixed charge coverage ratio" means the ratio of (a) the
difference of (i) our consolidated EBITDA for such period and our
consolidated lease expenses for such period minus (ii) the aggregate
amount actually paid by our company during such period on account of
capital expenditures, excluding the principal amount of indebtedness
incurred in connection with such capital expenditures, to (b) the sum of
(i) our total consolidated cash interest expense for such period with
respect to all outstanding indebtedness of our company plus (ii) our
consolidated leases expenses for such period plus (iii) scheduled
principal payments made during such period in respect of our company's
indebtedness.
o We are required to maintain borrowing availability under our revolving
credit facility or any replacement facility of at least $50 million until
we can evidence compliance with the negative covenants described above for
a fiscal quarter ending on or after March 31, 2005, unless, as of such
date, the consolidated fixed charge coverage ratio for the most recently
ended period of four consecutive fiscal quarters is greater than 1.0 to
1.0, in which case, and after such date, we will be required to maintain
borrowing availability of $25 million.
The preceding summaries of certain terms, conditions and covenants
contained in the term loan credit agreement do not purport to be complete and
are qualified in their entirety by reference to such agreement. The term loan
credit agreement and the revolving loan agreement, which contain substantially
similar covenants, are filed as exhibits to the Company's registration statement
on Form 10.
$225 Million Revolving Credit Facility
In connection with our plan of reorganization, WPSC entered into a
three-year $225 million senior secured revolving credit facility with a bank
group arranged by Royal Bank of Canada and GECC Capital Markets Group. The
revolving credit facility is guaranteed by WPC and WPSC's subsidiaries. The
revolving credit facility is secured by a first lien on our accounts receivable
and inventory and a third lien on our other tangible and intangible assets and
our equity interest in our joint ventures. The revolving credit facility is to
be available at agreed advance rates, subject to our audited borrowing base.
Interest rates on borrowings under
24
the revolving credit facility are initially at prime plus 2.5% and Libor plus
3.5%, and thereafter range from prime plus 2.25% to prime plus 3.0% and Libor
plus 3.25% to Libor plus 4.0%, depending on availability. To date, we have
borrowed approximately $38.9 million under the revolving credit facility and we
used all of those funds to complete payments required under our plan of
reorganization. Approximately $100 million of liquidity remains available under
the revolving credit facility. We contemplate increasing our borrowings under
our revolving credit facility to approximately $50 million within the next
thirty to sixty days.
Pursuant to the provisions of the revolving loan agreement, we are subject
to, and are currently in compliance with, various affirmative covenants and
negative covenants, including financial condition covenants, which are
substantially similar to many of those contained in the term loan credit
agreement as described above.
$40 Million Series A Notes
On August 1, 2003, pursuant to our plan of reorganization, WPSC issued new
Series A secured notes in the aggregate principal amount of $40 million in
settlement of claims under our bankruptcy proceedings. The Series A notes were
issued under an indenture between WPSC and Bank One, N.A., as trustee. The
Series A notes mature on August 1, 2011 and they have no fixed amortization,
meaning that no payment of principal shall be required until such notes become
due. The Series A notes bear interest at a rate of 5% per annum until July 31,
2008. Thereafter, such notes bear interest at a rate of 8% per annum.
The Series A notes are secured by a second lien on our tangible and
intangible assets (other than accounts receivable and inventory) and our equity
interests in our joint ventures and a third lien on our accounts receivable and
inventory. Until August 1, 2008, fifty percent of the payments to WPSC from the
Wheeling-Nisshin Inc. and Ohio Coatings Company joint ventures, in respect of
loans to, or equity interest in, such joint ventures, will be applied to
payments on the Series A notes. Thereafter, one hundred percent of such payments
from the joint ventures to WPSC will be applied to the Series A notes. However,
WPSC must pay cash interest of at least 2% per annum. In the event that at any
time the payments from the joint ventures are not adequate to pay all interest
then owing, or if WPSC is not in compliance with the terms of the term loan
facility and/or the revolving credit facility, the remaining portion of the
principal upon which cash interest has not been paid will receive
payment-in-kind interest at a rate of 8% per annum during the first five years
of the term of the Series A notes, and at a rate of 10% per annum thereafter.
In addition, the Series A notes are subrogated to the first lien and other
rights of the term loan facility and any refinancing of the scheduled amounts
due thereunder to the extent of $14.2 million plus any funds received by WPSC
from WPC, Wheeling-Nisshin, Inc. and Ohio Coatings Company subsequent to April
15, 2003 and not utilized to pay the Series A notes. We are subject to, and are
currently in compliance with, various affirmative covenants set forth in the
Series A note indenture, including payment of principal and interest on the
Series A notes, maintenance of offices or agencies, filing of various financial
and informational reports with the Securities and Exchange Commission, payment
of taxes, and maintenance of corporate existence. In addition, we are subject to
various negative covenants, including the following:
o limitations on entering into agreements which prohibit us from creating
any lien on our joint venture equity interests, restrict our ability to
receive distributions in respect of our joint venture equity interests or
reduce the amount thereof, or restrict our ability to pay the holders of
Series A notes the amount of any distributions in respect of our joint
venture equity interests received by us;
o limitations on disposition of any of our joint venture equity interests;
o limitations on entering into transactions with affiliates, unless on an
arm's length basis;
o limitations on creating liens, other than permitted liens, on any of our
joint venture equity interests;
o limitations on incurring additional indebtedness secured by any of our
joint venture equity interests, other than permitted indebtedness;
o limitations on restricting distributions from subsidiaries;
o limitations on paying dividends or making distributions; and
o limitations on the payment of consideration to holders of the Series A
notes as an inducement to any consent or amendment of any of the terms of
the Series A notes or the Series A note indenture.
25
The preceding summaries of certain terms, conditions and covenants
contained in the Series A note indenture do not purport to be complete and are
qualified in their entirety by reference to such indenture. The Series A note
indenture and the Series B note indenture, which contain substantially similar
covenants, are filed as exhibits to the Company's registration statement on Form
10.
$20 Million Series B Notes
On August 1, 2003, pursuant to our plan of reorganization, WPSC issued new
Series B secured notes in the aggregate principal amount of $20 million in
settlement of claims under our bankruptcy proceedings. The Series B notes were
issued under an indenture between WPSC and Bank One, N.A., as trustee. The
Series B notes mature on August 1, 2010 and they have no fixed amortization,
meaning that no payment of principal shall be required until such notes become
due. The Series B notes bear interest at a rate of 6% per annum to the extent
interest is paid in cash. WPSC must pay cash interest of at least 2% per annum.
Payment of cash interest in excess of 2% per annum is dependent upon our
remaining in compliance with our new credit agreements and the Series A notes.
In the event that we are not in compliance with the terms of the term loan
facility, the revolving credit facility and/or the Series A notes, or our cash
flow is insufficient to cover any or all of the interest, the remaining portion
of the principal upon which cash interest has not been paid will receive
payment-in-kind interest at a rate of 8% per annum.
In addition, the Series B notes are secured by a fifth lien on our
tangible and intangible assets, including our equity interests in our joint
ventures and our accounts receivable and inventory.
We are subject to, and are currently in compliance with, various
affirmative and negative covenants under the Series B note indenture which are
substantially similar to many of those contained in the Series A note indenture
as described above.
$10 Million Unsecured Note
On August 1, 2003, pursuant to our plan of reorganization, WPSC issued an
unsecured note in the aggregate principal amount of $10 million to WHX
Corporation, referred to as the WHX note. The WHX note matures in 8 years and
has no fixed amortization, meaning that no payment of principal shall be
required until such note becomes due. The WHX note bears interest at a rate of
6% per annum. Such note is subordinated in right of payment to our new credit
agreements, the Series A notes and the Series B notes.
Certain Other Obligations
In connection with the implementation of our plan of reorganization, we
reached agreements with various parties to defer payments of indebtedness and
reduce costs in order to preserve liquidity upon emergence from bankruptcy.
These agreements include:
o Modification and assumption agreement between WPSC and Danieli
Corporation. This agreement modifies an agreement between WPSC and Danieli
Corporation, dated July 6, 2000, pursuant to which WPSC agreed to purchase
from Danieli Corporation certain roll-changing equipment. Under the
original agreement, WPSC owed approximately $7.36 million to Danieli
Corporation. Pursuant to the modified agreement, WPSC paid Danieli
Corporation approximately $2.36 million. Approximately $3.8 million of the
balance of the amount owed to Danieli Corporation has been converted into
a portion of the secured term loans under our term loan facility that is
not secured by the Steel Board. The balance of the amount owed to Danieli
Corporation has been converted into a promissory note. In addition, WPSC
agreed to pay Danieli Corporation approximately $2.58 million (of which
approximately $96 thousand has been paid and the balance of which is to be
paid in progress payments as work is completed in 2004) to complete the
roll-changing project and for rehabilitation, storage and other costs of
Danieli Corporation.
o Loan modification agreement between WPSC and the Ohio Department of
Development. Under this agreement, we made a $2.0 million partial
prepayment of the $6.985 million owed by WPSC to the Ohio Department of
Development pursuant to a loan, dated as of January 18, 2002, from the
Ohio Department of Development and we were granted a two-year deferral of
$4.985 million of such loan at an interest rate of 3% per annum.
26
o Loan agreement between WPSC and the State of West Virginia. In connection
with WPSC's repayment of a $5 million loan from the West Virginia
Development Office, WPSC has into a $6.5 million loan agreement with the
State of West Virginia. The loan has a five-year term and bears interest
at a rate of approximately 4.669% per annum.
o Agreement among WPSC, Itabira Rio Doce Company, Ltd. and Rio Doce Limited.
This agreement provides for repayment, in equal monthly installments over
a period not to exceed eighteen months from May 1, 2003, of WPSC's $5.1
million deferred payment obligation under a certain iron ore sales
agreement, dated October 1, 2001.
In advance of our emergence from bankruptcy, we reached agreements with
various parties regarding the completion of a second paint line at our facility
in Beech Bottom, West Virginia, which was in the process of being installed at
the time of our bankruptcy filing. These agreements include:
o Secured notes issued to Fata Hunter. Pursuant to a settlement agreement,
dated November 1, 2001, between WPSC and Fata Hunter Inc., WPSC issued two
secured promissory notes in favor of Fata Hunter. The first note was
issued in the original principal amount of $3,743,926 and bears interest
at a rate of 6.5% per annum. The second note was issued in the original
principal amount of $777,693.48 and bears interest at a rate of 5.75% per
annum. Both notes are secured by a deed of trust on the real property upon
which our second paint line at our Beech Bottom, West Virginia facility is
installed, as well as a security agreement pledging the paint line
machinery and equipment. At September 30, 2003, the aggregate principal
amount outstanding under the notes was approximately $1.6 million.
o Loan and security agreement with WesBanco. Pursuant to this agreement,
dated November 1, 2001, WesBanco Bank, Inc. provided a $2 million term
loan secured by the machinery and equipment comprising our second paint
line at our Beech Bottom, West Virginia facility and guaranteed and
collateralized by the State of West Virginia. The WesBanco term loan has a
two-year term and bears interest at a rate of 4.75% per annum. At
September 30, 2003, the principal amount outstanding under the WesBanco
term loan was approximately $400,000.
In addition, we have ongoing funding obligations under our labor agreement
with the USWA. All of the obligations referenced in this section are
included in the table of contractual commitments set forth below.
Off-Balance Sheet Transactions
As of the date of this report we have no off-balance sheet transactions,
arrangements, or other relationships with unconsolidated entities or persons
that would adversely affect liquidity, availability of capital resources,
financial position or results of operations. We have investments in three joint
ventures that are accounted for under the equity method. Pursuant to the joint
venture agreements with Ohio Coatings Company and Wheeling-Nisshin, Inc., we
have an obligation to support their working capital requirements. However, we
believe it is unlikely that the joint ventures will require our working capital
support in the foreseeable future. We are not responsible for any debt of any of
these joint ventures.
27
Contractual Commitments
As of September 30, 2003, the total of our future contractual obligations,
including the repayment of debt obligations, is summarized below.
CONTRACTUAL PAYMENTS DUE
---------------------------------------------------------------
REMAINDER
OF
TOTAL 2003 2004 TO 2005 2006 TO 2007 THEREAFTER
----- --------- ------------ ------------ ----------
(DOLLARS IN MILLIONS)
Long-Term Debt (1) $424.0 $ 4.8(2) $ 63.5(3) $ 81.4(4) $274.4(5)
Capital Leases 11.5 0.1 2.9 2.1 6.4
Operating Leases:
Long Term 10.8 0.5 4.1 4.1 2.1
Month to Month 6.7 1.7 13.5 13.5 6.7
Other Long Term
Liabilities:
OPEB 99.1(6) 0.5 4.0 4.0 90.1
Coal Miner Retiree 2.4 0.1 0.4 0.4 1.5
Medical
VEBA Trust 9.3(7) 4.5 4.8 -- --
Worker's Compensation 20.1(8) 1.3 10.2 10.2 5.1
Purchase Commitments:
Oxygen Supply 80.4(9) 1.8 14.4 14.4 49.8
Electricity 125.2(10) 2.2 18.0 21.5 83.5
Coal 16.2(11) 3.2 13.0 -- --
Other 25.7 1.6 8.5 5.6 10.1
----------------------------------------------------------------
Total Contractual Obligations $831.4 $22.3 $157.3 $157.2 $530.2
================================================================
(1) The interest rate associated with the term loan is a floating rate.
Interest payment projections in respect of the term loan assume that the
interest rate for 2003 will be 4% per annum and will increase by 0.5% each
year during the projection period.
(2) Includes interest payment obligations for fourth quarter 2003 of
approximately: $2.5 million in respect of the term loan; $1.3 million in
respect of the Series A notes and the Series B notes; $250,000 in respect
of the WHX note; $50,000 in respect of the loan modification agreement with
the Ohio Department of Development; $23,000 in respect of the notes issued
to Fata Hunter; and $4,800 in respect of the loan and security agreement
with WesBanco.
(3) Includes aggregate interest payment obligations for years 2004 and 2005 of
approximately: $23.0 million in respect of the term loan; $6.4 million in
respect of the Series A notes and the Series B notes; $1.2 million in
respect of the WHX note; $611,000 in respect of the loan agreement with the
State of West Virginia; $250,000 in respect of the loan modification
agreement with the Ohio Department of Development; $170,000 in respect of
the modification and assumption agreement with Danieli Corporation; $16,000
in respect of the notes issued to Fata Hunter; and $1,000 in respect of the
loan and security agreement with WesBanco.
(4) Includes aggregate interest payment obligations for years 2006 and 2007 of
approximately: $22.6 million in respect of the term loan; $6.4 million in
respect of the Series A notes and the Series B notes; $1.2 million in
respect of the WHX note; $611,000 in respect of the loan agreement with the
State of West Virginia; and $43,000 in respect of the modification and
assumption agreement with Danieli Corporation.
(5) Includes aggregate interest payment obligations of approximately: $6.2
million in respect of the term loan; $13.9 million in respect of the Series
A notes and the Series B notes; $2.15 million in respect of the WHX note;
and $306,000 in respect of the loan agreement with the State of West
Virginia.
(6) Represents the estimated present value of our liability as of September 30,
2003. Amounts included for the fourth quarter of 2003 through 2007 and
thereafter reflect our current estimate of corporate cash outflows and
exclude the impact of interest and mortality. The forecast of cash outflows
is an estimate
28
and anticipates payment of approximately $2.0 million per year.
(7) Amounts included for the fourth quarter of 2003 through 2007 and thereafter
reflect payments commencing on October 1, 2003 of $1.5 million in each of
the first five months and $0.3 million in each of the subsequent six
months. This aggregate contribution of $9.3 million will be credited
against additional ongoing profit sharing contributions payable in cash
and/or common stock that we are required to make to the VEBA trust.
(8) Amount represents the present value of our liability as of September 30,
2003. Amounts included in "contractual payments due" for the fourth quarter
of 2003 through 2007 and thereafter reflect our current estimate of
corporate cash outflows and exclude the impact of interest and mortality.
The forecast of cash outflows is estimated based on historical cash payment
information and anticipates payment of approximately $5.1 million per year.
(9) The Company entered into a 15-year take-or-pay contract in 1999 that was
amended in 2003. The contract requires the Company to purchase oxygen,
nitrogen and argon each month with a minimum monthly charge of
approximately $0.6 million, subject to escalation clauses. Payments for
deliveries of oxygen totaled $7.0 million in 2002, $7.5 million in 2001 and
$5.5 million in 2000.
(10) The Company entered into a 20-year take-or-pay contract in 1999, that was
amended in 2003. The contract requires the Company to purchase steam and
electricity each month or pay a minimum monthly charge of approximately
$0.4 million. A variable portion of the contract is calculated as $3.75
times the number of tons of iron produced each month with an agreed to
minimum of 3,000 tons per day. Payments for deliveries of steam and
electricity totaled $13.8 million in 2002, $14.6 million in 2001 and $10.1
million in 2000. If the Company elects to terminate the contract early, as
of September 30, 2003, a maximum termination payment of $37.0 million would
be required.
(11) In 2001, the Company entered into an annually renewable take-or-pay
contract to purchase coal each month with a minimum monthly charge of
approximately $1.1 million. As of September 30, 2003, the Company is
committed to a term that expires on December 31, 2004. Payments for
deliveries of coal totaled $16.4 million in 2002, $7.3 million in 2001 and
$13.4 million in 2000. As of September 30, 2003, if the Company elects to
terminate the contract, a maximum termination payment of $16.2 million
would be required.
Projected Restructuring Capital Expenditures
The projected cost of the electric arc furnace and the other restructuring
capital projects provided for in our new business plan is approximately $141.6
million. It is anticipated these amounts will be expended over a period of three
years as set forth in the table below:
PROJECTED
RESTRUCTURING CAPITAL
EXPENDITURES
------------------------
2003 2004 2005
---- ----- ----
($Millions)
Electric Arc Furnace 19.7 91.4 4.5
Hot Strip Mill Roll Changers 2.8 6.8 5.4
Allenport Cold Mill Improvements .4 10.6 --
---- ----- ---
22.9 108.8 9.9
==== ===== ===
These capital expenditures are to be financed with operating cash flows
and borrowings under our new term loan facility and revolving credit facility,
which we entered into pursuant to our plan of reorganization. The Electric Arc
Furnace project is fully funded through a restricted cash account set up
pursuant to our POR.
VEBA TRUST
In connection with our plan of reorganization and our collective
bargaining agreement with the USWA, we established a plan to provide health care
and death benefits to certain retirees and their dependents. The trust created
under the benefits plan, which we refer to as the VEBA trust, is designed to
constitute a tax-exempt voluntary employee beneficiary association. Pursuant to
our plan of reorganization, we are to issue
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4,000,000 shares of WPC common stock to the VEBA trust. Commencing on October 1,
2003 and continuing through February 1, 2004, we are obligated to contribute
$1.5 million on the first day of each month to the VEBA trust. Thereafter, from
March 1, 2004 through August 1, 2004, we are obligated to contribute $0.3
million on the first day of each month to the VEBA trust. This aggregate
contribution of $9.3 million will be credited against additional ongoing
contributions that we are required to make to the VEBA trust. Such ongoing
contributions are payable within 45 days of the end of each fiscal quarter and
consist of an amount equal to:
o 40% of operating cash flow, between $16 and $24 of operating cash flow per
ton of steel products sold to third parties, payable in cash;
o 12% of operating cash flow, between $24 and $65 of operating cash flow per
ton of steel products sold to third parties, payable at our discretion in
cash or common stock of WPC;
o 25% of operating cash flow, above $65 of operating cash flow per ton of
steel products sold to third parties, payable in cash; and
o 15% of operating cash flow below $30 of operating cash flow per ton of
steel products sold to third parties, payable at our discretion in cash or
common stock of WPC, subject to compliance with dilution limitations.
"Operating cash flow" is defined as earnings before interest and taxes of the
Company, less any cost or expenses associated with the profit sharing plan,
calculated on a consolidated basis in accordance with United States Generally
Accepted Accounting Principles.
All payments that, in our discretion, are payable in common stock of WPC
are subject to U.S. Department of Labor restrictions on the amount of capital
stock that can be held by the VEBA trust.
Trusts that constitute voluntary employees' benefit associations are
subject to restrictions on the amount of stock that they are able to hold. We
intend to seek from the U.S. Department of Labor a waiver that would permit the
VEBA trust to continue to hold our common stock. If no waiver is granted, the
common stock is to be distributed to the beneficiaries under the welfare
benefits plan or otherwise used to provide them with benefits.
The VEBA trust has agreed to limit the number of shares of common stock
that it may sell during the four years following the effective date of our plan
of reorganization. During the first two years, the VEBA trust is not permitted
to sell any of its initial 4 million shares of common stock without our
authorization unless it holds fewer than five percent of our outstanding shares
of common stock. During each of the following two years, the VEBA trust has
agreed not to sell more than 50% of the remaining initial 4 million shares
within any consecutive twelve-month period. These restrictions will not apply to
any additional shares of common stock contributed to the VEBA trust. We and the
VEBA trust entered into an agreement imposing these stock transfer restrictions
because our ability to retain or make use of certain net operating loss carry
forwards may be affected by the number of shares of common stock that are
transferred by significant stockholders during the two year period following the
effective date of our plan of reorganization and because both we and the VEBA
trust wish to minimize the potential adverse impact that the sale of a large
number of shares might have on the market for our common stock. In connection
with the stock transfer restrictions, the VEBA trust has also agreed that it
will abstain from voting 1,300,000 shares of common stock, or such lesser number
of shares as it may hold from time to time, for the election of directors of
WPC.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our company's quantitative and qualitative disclosures about market risk
include forward-looking statements with respect to management's opinion about
the risk associated with our 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 herein.
Commodity Price Risk and Related Risks
In the normal course of business, our company is exposed to market risk or
price fluctuation related to the purchase, production or sale of steel products.
In addition, prices for our raw materials, natural gas and electricity
requirements are subject to frequent market fluctuations. Our company's market
risk strategy
30
generally has been to obtain competitive prices for our products and services
and to allow operating results to reflect market price movements dictated by
supply and demand. Additionally, we periodically enter into contracts for the
advance purchase of natural gas in an effort to hedge against market
fluctuations. Due to "mark to market" provisions in these contracts, as our
market exposure decreases, we can be required to make advance payments that
ultimately are recovered upon delivery of the commodity, but which can
temporarily reduce our liquidity until that time.
Interest Rate Risk
The fair value of cash and cash equivalents, receivables and accounts
payable approximate their carrying values and are relatively insensitive to
changes in interest rates due to their short-term maturity.
Under the Bankruptcy Code, interest is generally not allowable on
unsecured pre-petition obligations. With respect to post-petition indebtedness,
at December 31, 2002, we had outstanding $55.56 million aggregate principal
amount of debt under fixed-rate instruments and $136.68 million aggregate
principal amount of debt under variable-rate instruments. Pursuant to our POR,
substantially all of our pre-reorganization debt was repaid or otherwise
satisfied and we entered into new credit facilities. Under those new credit
facilities, at September 30, 2003, we had outstanding $83.2 million aggregate
principal amount of debt under fixed-rate instruments and $329.6 million
aggregate principal amount of debt under variable-rate instruments. Since our
portfolio of debt is comprised primarily of variable-rate instruments, the fair
value of the debt is relatively insensitive to the effects of interest rate
fluctuations. However, our interest expense is sensitive to changes in the
general level of interest rates. A 100 basis point increase in the average rate
for the variable rate debt would have increased our third quarter 2003 interest
expense by approximately $0.6 million.
Credit Risk
Counter parties expose our company to credit risk in the event of
non-performance. We continually review the creditworthiness of our
counterparties.
Foreign Currency Exchange Risk
Our company has limited exposure to foreign currency exchange risk as
almost all of our transactions are denominated in U.S. dollars.
ITEM 4 CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our subsidiaries) required to be
included in our periodic filings with the Securities and Exchange Commission.
There have been no significant changes in our internal controls or, to our
knowledge, in other factors that could significantly affect such internal
controls subsequent to the date of their evaluation.
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PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
31.1 Certificate of James G. Bradley, Chief Executive Officer
of the Registrant, filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
31.2 Certificate of Paul J. Mooney, Chief Financial Officer of
the Registrant, filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.1 Certificate of James G. Bradley, Chief Executive Officer
of the Registrant, furnished pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2 Certificate of Paul J. Mooney, Chief Financial Officer of
the Registrant, furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHEELING-PITTSBURGH CORPORATION
/s/ Paul J. Mooney
---------------------------------
Paul J. Mooney
Chief Financial Officer
(Authorized Officer, Principal Financial
Officer and Principal Accounting Officer)
NOVEMBER 14, 2003
33