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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period ended September 30, 2002.
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from
-------------------- to
--------------------.
COMMISSION FILE NUMBER 1-10244
WEIRTON STEEL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 06-1075442
(State or other jurisdiction (IRS employer
of identification
incorporation or No.)
organization)
400 THREE SPRINGS DRIVE, WEIRTON, WEST VIRGINIA 26062
(Address of principal executive offices) (Zip Code)
(304)797-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock ($0.01 par value) of the Registrant
issued and outstanding as of October 31, 2002 was 41,891,619.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEIRTON STEEL CORPORATION
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- ---------
NET SALES.................................... $273,838 $241,495 $760,844 $ 733,827
OPERATING COSTS:
Cost of sales.............................. 261,998 267,081 773,141 800,063
Selling, general and administrative
expenses................................ 6,980 8,643 19,568 25,750
Depreciation............................... 15,933 16,350 48,987 49,011
Restructuring charge....................... -- -- -- 12,338
-------- -------- -------- ---------
Total operating costs................... 284,911 292,074 841,696 887,162
-------- -------- -------- ---------
LOSS FROM OPERATIONS......................... (11,073) (50,579) (80,852) (153,335)
Income (loss) from unconsolidated
subsidiaries............................ 1,104 (38) 2,219 (18,518)
Interest expense........................... (4,617) (9,453) (27,309) (28,347)
Other income (expense), net................ 1,875 (94) 9,167 677
-------- -------- -------- ---------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM....................................... (12,711) (60,164) (96,775) (199,523)
Income tax provision (benefit)............. -- -- (3,475) 153,765
-------- -------- -------- ---------
LOSS BEFORE EXTRAORDINARY ITEM............... (12,711) (60,164) (93,300) (353,288)
Extraordinary gain on early extinguishment
of debt................................. -- -- 153 --
-------- -------- -------- ---------
NET LOSS..................................... $(12,711) $(60,164) $(93,147) $(353,288)
======== ======== ======== =========
PER SHARE DATA:
Weighted average number of common shares (in
thousands):
Basic...................................... 41,938 41,589 41,936 41,578
Diluted.................................... 41,938 41,589 41,936 41,578
NET LOSS PER SHARE:
Basic...................................... $ (0.30) $ (1.45) $ (2.22) $ (8.50)
Diluted.................................... $ (0.30) $ (1.45) $ (2.22) $ (8.50)
The accompanying notes are an integral part of these financial statements.
2
WEIRTON STEEL CORPORATION
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
ASSETS:
Current assets:
Cash and equivalents, including restricted cash of $10,820
and $4,302, respectively............................... $ 11,309 $ 5,671
Receivables, less allowances of $6,917 and $7,487,
respectively........................................... 94,643 103,046
Inventories, net.......................................... 156,602 136,850
Other current assets...................................... 2,608 5,980
----------- ----------
Total current assets................................... 265,162 251,547
Property, plant and equipment, net.......................... 389,365 432,880
Intangible pension asset.................................... 19,689 19,689
Other assets and deferred charges........................... 12,538 16,419
----------- ----------
Total Assets........................................... $ 686,754 $ 720,535
=========== ==========
LIABILITIES:
Current liabilities:
Senior credit facility.................................... $ 106,799 $ 92,082
Notes and bonds payable................................... 9,105 243,271
Accounts payable.......................................... 87,594 71,197
Accrued pension obligation................................ 59,300 --
Postretirement benefits other than pensions............... 32,000 28,000
Accrued employee benefits................................. 43,367 48,029
Accrued taxes other than income........................... 15,795 15,008
Other current liabilities................................. 2,180 15,916
----------- ----------
Total current liabilities.............................. 356,140 513,503
Notes and bonds payable..................................... 284,813 67,806
Accrued pension obligation.................................. 171,037 205,282
Postretirement benefits other than pensions................. 325,195 336,375
Other long term liabilities................................. 43,475 46,812
----------- ----------
Total Liabilities...................................... 1,180,660 1,169,778
Redeemable Stock, net....................................... 68,603 20,348
STOCKHOLDERS' DEFICIT:
Common stock, $0.01 par value; 50,000,000 shares authorized;
43,816,754 and 43,812,763 shares issued, respectively..... 438 438
Additional paid-in-capital.................................. 457,499 459,871
Accumulated deficit......................................... (1,009,770) (916,623)
Other stockholders' equity.................................. (10,676) (13,277)
----------- ----------
Total Stockholders' Deficit............................ (562,509) (469,591)
----------- ----------
Total Liabilities, Redeemable Stock, Net, and
Stockholders' Deficit................................. $ 686,754 $ 720,535
=========== ==========
The accompanying notes are an integral part of these financial statements.
3
WEIRTON STEEL CORPORATION
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2002 2001
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(93,147) $(353,288)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation........................................... 48,987 49,011
(Income) loss from unconsolidated subsidiaries......... (2,219) 18,518
Deferred income taxes.................................. -- 153,765
Restructuring charge................................... -- 12,338
Amortization of deferred financing costs............... 2,571 1,273
Gain on early extinguishment of debt................... (153) --
Cash provided (used) by working capital items:
Receivables.......................................... 8,403 3,158
Inventories.......................................... (19,752) 77,464
Other current assets................................. 3,372 7,509
Accounts payable..................................... 16,397 (1,448)
Employment costs..................................... (4,662) 37
Other current liabilities............................ 14,400 1,412
Accrued pension obligation............................. 25,055 8,775
Other postretirement benefits.......................... (7,180) (9,960)
Other.................................................. (3,347) (1,300)
-------- ---------
NET CASH USED BY OPERATING ACTIVITIES....................... (11,275) (32,736)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital spending.......................................... (6,066) (8,549)
Loans and advances to unconsolidated subsidiaries......... -- (793)
-------- ---------
NET CASH USED BY INVESTING ACTIVITIES....................... (6,066) (9,342)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on senior credit facility.................. 14,717 --
Proceeds from vendor financing............................ 16,055 --
Issuance of long-term debt................................ 3,000 65,000
Repayment of debt obligations............................. (209) (16,019)
Deferred financing costs.................................. (10,584) --
-------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 22,979 48,981
-------- ---------
NET CHANGE IN CASH AND EQUIVALENTS.......................... 5,638 6,903
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................. 5,671 32,027
-------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD....................... $ 11,309 $ 38,930
======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of capitalized interest................ $ 14,944 $ 26,668
Income taxes refunded, net................................ (3,457) (6,822)
NONCASH FINANCING ACTIVITIES:
The Company issued $118.2 million in face amount of new Senior Secured
Notes and 1.9 million shares of Series C Redeemable Preferred Stock with a
mandatory redemption of $48.4 million in 2013 in exchange for $215.0 million in
Senior Notes. The City of Weirton issued $27.3 million in principal amount of
new Series 2002 Secured Pollution Control Revenue Refunding Bonds in exchange
for $45.6 million of Series 1989 Bonds, which the Company is obligated to pay
under the terms of a related loan agreement.
The accompanying notes are an integral part of these financial statements.
4
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, OR IN MILLIONS OF DOLLARS
WHERE INDICATED)
NOTE 1
BASIS OF PRESENTATION
The Consolidated Condensed Financial Statements presented herein are
unaudited. The Consolidated Condensed Balance Sheet as of December 31, 2001 has
been derived from the audited balance sheet included in the Company's 2001
Annual Report on Form 10-K, as amended. Unless context otherwise requires, the
terms "Weirton," "the Company," "we," "us," "its" and "our" refer to Weirton
Steel Corporation and its consolidated subsidiaries. Entities of which the
Company owns a controlling interest are consolidated; entities of which the
Company owns a less than controlling interest are not consolidated and are
reflected in the consolidated condensed financial statements using the equity
method of accounting. All material intercompany accounts and transactions with
consolidated subsidiaries have been eliminated in consolidation.
Certain information and footnote disclosures normally prepared in
accordance with accounting principles generally accepted in the United States
have been either condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission. Although the Company believes that all
adjustments necessary for a fair presentation have been made, interim periods
are not necessarily indicative of the financial results of operations for a full
year. As such, these financial statements should be read in conjunction with the
audited financial statements and notes thereto included or incorporated by
reference in the Company's 2001 Annual Report on Form 10-K, as amended.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform
with current year presentation.
NOTE 2
INVENTORIES
Inventories consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Raw materials...................................... 47,215 $ 38,732
Work-in-process.................................... 39,338 29,275
Finished goods..................................... 70,049 68,843
-------- --------
$156,602 $136,850
======== ========
5
NOTE 3
LIQUIDITY AND FINANCING ARRANGEMENTS
Debt Obligations
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Obligation under senior credit facility..... $106,799 $ 92,082
Long-term Debt:
10% Senior Secured Notes due 4/1/08....... 177,662 --
9% Secured Series 2002 Pollution Control
Bonds due 4/30/11...................... 45,162 --
Vendor financing obligations (capital
lease)................................. 28,472 11,531
11 3/8% Senior Notes due 7/1/04........... 12,658 122,724
10 3/4% Senior Notes due 6/1/05........... 16,336 121,256
8 5/8% Pollution Control Bonds due
11/1/14................................ 10,720 56,300
6 1/4% Term Loan due 8/14/14.............. 2,961
Less: Unamortized debt discount........... (53) (734)
-------- ---------
Total debt obligations...................... 293,918 311,077
Less: Current portion....................... (9,105)(1) (243,271)
-------- ---------
Long-term debt.............................. $284,813 $ 67,806
======== =========
- ---------------
(1) Included in the current portion of long-term debt at September 30, 2002 was
$6.2 million in contingent interest payments. These contingent payments are
based on excess cash flow as defined in the indentures governing the
securities. The Company's management currently does not believe that it will
generate excess cash flow, thus the Company will not be required to make
these contingent interest payments. An extraordinary gain will be recognized
for any contingent payments that are not required to be distributed.
Term Loan Agreement
As permitted by its senior credit facility, on August 15, 2002, the Company
entered into a term loan agreement with Steelworks Community Federal Credit
Union under which it borrowed $3.0 million out of a maximum amount available of
$3.1 million. The loan is being amortized by equal quarterly principal payments
commencing on September 30, 2002 and a final $1.1 million principal payment due
August 14, 2014. The Company's obligations under the agreement are
collateralized by its General Office, Research and Development Facility, and
railroad rolling stock. Although the agreement imposes no independent financial
maintenance covenants on the Company, the loan contains cross default provisions
linked to certain of the default thresholds under the Company's senior credit
facility.
The Exchange Offers
The principal amount of notes and bonds, originally outstanding, tendered
and remaining are as follows:
OUTSTANDING PRIOR TENDERED FOR OUTSTANDING
TO EXCHANGE EXCHANGE AFTER EXCHANGE
----------------- ------------ --------------
11 3/8% Senior Notes due 2004....... $122,724 $110,066 $12,658
10 3/4% Senior Notes due 2005....... 121,256 104,920 16,336
8 5/8% Pollution Control Bonds due
11/1/14........................... 56,300 45,580 10,720
-------- -------- -------
Total............................... $300,280 $260,566 $39,714
======== ======== =======
In June 2002 the Company issued $118.2 million in face amount of new 10%
Senior Secured Notes due 2008 ("senior secured notes") and 1.9 million shares of
Series C Convertible Redeemable Preferred Stock ("Series C preferred stock")
with a mandatory redemption in 2013 of $48.4 million in exchange for the
tendered senior notes due 2004 and 2005 ("senior notes"). The City of Weirton
issued $27.3 million in principal amount of new Series 2002 Secured Pollution
Control Revenue Refunding Bonds ("secured series 2002 bonds") in
6
exchange for the tendered 8 5/8% Pollution Control Bonds ("series 1989 bonds").
The new notes and bonds are secured by second priority interests in our hot
strip mill, our No. 9 tin tandem mill, and our tin assets.
Through March 31, 2003, the new senior secured notes will accrue and pay
interest at a rate of 0.5%. From April 1, 2003 to March 31, 2005, the new senior
secured notes will accrue and pay interest at rates ranging from 0.5% to 10%.
That range includes contingent interest, which is based on the Company's "excess
cash flow" as defined in the indenture governing the new senior secured notes.
Beginning April 1, 2005, the senior secured notes will accrue and pay interest
at the rate of 10%.
Through March 31, 2003, the secured series 2002 bonds will also accrue and
pay interest at a rate of 0.5%. From April 1, 2003 to March 31, 2005, the
secured series 2002 bonds will accrue and pay interest at rates ranging from
0.5% to 9%. That range includes contingent interest, which is based on the
Company's "excess cash flow" as defined in the indenture governing the secured
series 2002 bonds. Beginning April 1, 2005, the secured series 2002 bonds will
accrue and pay interest at the rate of 9%.
The indentures governing the new senior secured notes are similar to the
old indentures prior to the exchange offers and contain covenants that limit,
among other things, the incurrence of additional indebtedness, the declaration
and payment of dividends and distributions on the Company's capital stock,
investments in joint ventures, as well as mergers, consolidations, liens and
sales of certain assets. The new indentures do not contain any financial
maintenance covenants, and, in general, their restrictive covenants permit the
Company more flexibility than the old indentures prior to the exchange offers.
The indentures covering the remaining senior notes and series 1989 bonds have
been amended to remove substantially all restrictive covenants.
Troubled Debt Restructuring Accounting
The new debt issues are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings." SFAS No. 15 requires that a
comparison be made between the maximum future cash outflows associated with the
new senior secured notes and Series C preferred stock (including principal,
stated and contingent interest, and related costs on the new senior secured
notes and the mandatory redemption of the Series C preferred stock), and the
recorded assets and liabilities relating to the outstanding senior notes as of
the date of the exchange. A similar comparison was made between the cash flows
associated with the new secured series 2002 bonds and the carrying amount of the
series 1989 bonds.
7
The details of the comparison of the maximum future cash outflows
associated with the new securities issued and the recorded assets and
liabilities related to the previously outstanding senior notes and bonds are
summarized below:
SENIOR SERIES 1989
NOTES BONDS
---------------- --------------
Principal value of notes and bonds.............. $214,986 $ 45,580
Accrued interest................................ 23,972 2,490
Other assets and liabilities.................... (2,529) (238)
-------- --------
Total associated net liability.................. 236,429 47,832
SENIOR SECURED
NOTES & SERIES C SECURED SERIES
PREFERRED STOCK 2002 BONDS
---------------- --------------
Principal value of notes and bonds.............. 118,242 27,348
Future maximum interest payments................ 59,589 19,799
Issuance costs.................................. 10,073 2,669
Maximum mandatory redemption value.............. 48,372 --
-------- -------
Total maximum cash flow associated with
securities issued............................. 236,276 49,816
-------- -------
Excess (shortfall) of the carrying value of
assets and liabilities associated with the
exchanged instruments compared to the total
cash flow associated with the new securities
issued........................................ $ 153 $(1,984)
======== =======
Because the carrying value of assets and liabilities associated with the
senior notes tendered for exchange exceeded the maximum future cash outflows
associated with the new instruments issued, we recorded an extraordinary gain of
$0.2 million. The recorded liability of the new senior secured notes is the
total future cash outflow associated with the new notes less the issuance costs
incurred during the exchange. Because all future cash payments are included in
the recorded value of the new senior secured notes, the Company will not record
interest expense on the senior secured notes and, when future payments occur,
they will be recorded as a reduction of that liability. In the event that the
Company does not pay the full amount of contingent interest, the liability will
still be reduced by the maximum interest amount and the difference between the
maximum interest amount and the actual amount of interest paid will be recorded
as an extraordinary gain.
In the exchange of the series 1989 bonds, the maximum future cash outflows
associated with the new series 2002 bonds exceeded the carrying value of the
assets and liabilities of the series 1989 bonds tendered for exchange.
Accordingly, no gain was recorded and the value of the new secured series 2002
bonds was initially recorded at the carrying value of the assets and liabilities
associated with the old series 1989 bonds less the issuance costs incurred
during the exchange. The Company will record interest expense on the secured
series 2002 bonds at a rate of 0.58%, which is imputed by comparing the maximum
cash flows associated with the secured series 2002 bonds and their initial
carrying value. In the event that the Company does not pay the full amount of
contingent interest, the difference between the maximum interest and the actual
interest paid will first reduce any accrued and unpaid interest recorded and
then reduce the recorded liability for the secured series 2002 bonds.
Senior Credit Facility
On May 3, 2002, our senior credit facility was amended and restated to,
among other things, allow the exchange offers to be made and to provide
additional collateral with a broader security base. The lenders under the senior
credit facility were given a first priority security interest in our hot strip
mill and tin mill assets in addition to our inventory, accounts receivable and
No. 9 tin tandem mill, which served as collateral before the amendment.
None of the amendments to the senior credit facility have changed the
Company's borrowing base or increased its maximum available credit under the
facility. However, the Company has achieved some availability
8
improvements compared to its original 2001 facility, including through the
Steelworks Community Federal Credit Union loan, the permitted disposition of
certain nitrous oxide emissions credits for cash and the removal of a higher
availability reserve under the facility in the event the Company were to
structure an acceptable additional financing relating to its No. 9 tin tandem
mill.
In conjunction with banking arrangements entered into under the senior
credit facility, all available cash from lockboxes is required to be used to pay
down amounts outstanding under the facility. As a result, substantially all cash
is restricted from use by the Company other than paying amounts outstanding
under the senior credit facility. Cash needs are funded by borrowings under the
senior credit facility. The Company's restricted cash balance of $10.8 million
at September 30, 2002 represented amounts received into lockboxes and other
deposit accounts that had not yet been transferred to pay down the senior credit
facility.
NOTE 4
SERIES C PREFERRED STOCK
The Company issued shares of Series C preferred stock to the holders of
senior notes who tendered their outstanding notes in the exchange offer. The
Series C preferred stock is subject to mandatory redemption on April 1, 2013 at
a redemption price of $25 per share in cash. Prior to April 1, 2013, the Company
has the option of redeeming the Series C preferred stock, in whole or in part in
cash, at the end of each 12-month period beginning April 1 of each year based on
the following redemption schedule:
12-MONTH PERIOD REDEMPTION PRICE
BEGINNING APRIL 1 PER SHARE
- ------------------- ----------------
2003 12.50
2004 15.00
2005 17.50
2006 20.00
2007 22.50
2008 and thereafter 25.00
In addition, if our capital structure is amended to permit the issuance of
additional shares of common stock, we have the option to redeem all of the
outstanding shares of Series C preferred stock at any time prior to April 1,
2013 by delivering to the holders of Series C preferred stock shares of common
stock having a value equal to the then current aggregate redemption price for
all outstanding shares of Series C preferred stock.
The Series C preferred stock is not convertible at the option of the
holders of the stock. However, the Company has the option of causing the
conversion of the Series C preferred stock into shares of its common stock prior
to April 1, 2006 in connection with a significant transaction. A significant
transaction is any transaction in which either an entity acquires more than 50%
of the voting power of our capital stock or we enter into a merger or other
business combination in which we are not the surviving entity.
The Series C preferred stock is generally non-voting stock and it is not
entitled to receive dividends.
NOTE 5
EARNINGS PER SHARE
For the three months ended September 30, 2002 and 2001, basic and diluted
earnings per share were the same; however, common stock equivalents totaling
3,339,417 and 3,956,104, respectively, were excluded from both the basic and
diluted earnings per share calculations due to their anti-dilutive effect. For
the nine months ended September 30, 2002 and 2001, basic and diluted earnings
per share were the same; however, common stock equivalents totaling 3,391,992
and 4,836,525, respectively, were excluded from both the basic and diluted
earnings per share calculations due to their anti-dilutive effect.
9
NOTE 6
RESTRUCTURING CHARGES
As part of its five part strategic restructuring plan, the Company began an
operating cost savings program in 2001. In conjunction with that program, the
Company's management and the Independent Steel Workers Union negotiated new
labor agreements that became effective in October 2001. The agreement for
production and maintenance employees provided for the permanent elimination of a
minimum of 372 jobs. The office, clerical and technical agreement provided for
the right to eliminate a minimum of 78 jobs. The Company also streamlined its
management structure by eliminating non-core and redundant activities resulting
in a reduction of 100 management positions.
These workforce reductions, completed in April 2002, were a key component
to the operating cost savings program. Having identified the specific positions
and job classes that were subject to the reduction and having notified all
employees that were potentially subject to reduction, the Company recorded a
restructuring charge of $129.0 million in the fourth quarter of 2001. The fourth
quarter restructuring charge consisted of a $90.0 million increase in our
accrued pension cost and a $28.6 million increase in our liability for other
postretirement benefits. Also, as part of the 2001 fourth quarter restructuring
charge, the Company recorded a $7.7 million liability for additional pension
benefits related to the induced early retirement of the Company's employees. As
part of the agreement under which the Company acquired its assets from National
Steel Corporation in 1984, National Steel agreed to assume the responsibility
for benefits related to employees' service prior to acquisition of the
facilities by the Company. However, under the same agreement, the Company is
required to partially reimburse National Steel for pension benefits paid by the
National Steel Pension plan if Company employees are induced into retiring early
and receive benefits from the National Steel plan. The remaining $2.7 million of
the 2001 fourth quarter restructuring charge was related to other separation and
severance benefits provided to the affected employees.
In March 2001, prior to the initiation of the Company's strategic
restructuring plan, the Company established and implemented the 2001 Workforce
Downsizing Program. That program reduced non-represented staff employees by
approximately 10%. As a result, the Company recorded a 2001 first quarter
restructuring charge of $12.3 million consisting of an increase in accrued
pension cost of $5.4 million and an increase in our liability for other
postretirement benefits of $3.9 million. The remaining $3.0 million consisted of
a $0.6 million liability to reimburse the National Steel Pension plan for
induced retirements and $2.4 million of other separation and severance benefits
provided to the affected employees.
The following table summarizes the impacts of the 2001 restructuring
charges, other than those related to pension and other postretirement benefits
costs, by the affected balance sheet liabilities:
12/31/2001 NEW CASH OTHER 9/30/2002
BALANCE CHARGES PAYMENTS ADJUSTMENTS BALANCE
---------- ------- -------- ----------- ---------
(DOLLARS IN THOUSANDS)
Current liabilities (1).................... $ 4,067 -- $3,119 -- $ 948
Other liabilities (2)...................... 8,268 -- 650 -- $7,618
------- -- ------ -- ------
Total...................................... $12,335 -- $3,769 -- $8,566
======= == ====== == ======
- ---------------
(1) The amounts accrued in current liabilities consist of charges for salary
continuance and other termination benefits for the affected employees, as
well as legal, actuarial and other services provided in connection with the
workforce downsizing programs. The Company expects to pay the remainder of
this liability by the end of 2002.
(2) Other liabilities consist of the Company's liability to reimburse National
Steel for the benefits paid by the National Steel Pension plan for Company
employees. The reimbursement to National Steel will be made as the National
Steel plan makes payments to Weirton Steel retirees.
10
NOTE 7
DEFERRED TAX ASSETS
The Company provided a 100% valuation allowance for its deferred tax assets
during the quarter ended September 30, 2001, increasing the non-cash provision
for income taxes and net loss for that quarter by $153.8 million, or $3.70 per
diluted share. The Company will continue to provide a 100% valuation allowance
for the deferred income tax assets until it returns to an appropriate level of
cumulative financial accounting income.
The ultimate realization of the net deferred tax assets depends on the
Company's ability to generate sufficient taxable income in the future. If the
Company is able to generate sufficient taxable income in the future, the Company
will reduce the valuation allowance through a reduction of income tax expense
(decreasing shareholders' deficit).
In June 2002, the Company received an income tax refund of $3.5 million in
accordance with the Job Creation and Worker Assistance Act of 2002 signed by
President Bush on March 9, 2002. This new act provides for an expansion of the
carryback of net operating losses ("NOLs") from two years to five years for NOLs
arising in 2001 and 2002. The Company was able to carryback its NOL recorded in
2001 to the 1997 through 1999 tax years when it paid an alternative minimum tax.
This carryback allowed the Company to recover the entire amount of alternative
minimum taxes paid during those prior taxable years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with and is qualified in its
entirety by the unaudited consolidated condensed financial statements of the
Company and notes thereto. The unaudited consolidated condensed financial
statements of Weirton Steel Corporation include the accounts of its wholly and
majority owned subsidiaries. Unless context otherwise requires, the terms
"Weirton," "the Company," "we," "us," "its" and "our" refer to Weirton Steel
Corporation and its consolidated subsidiaries.
OVERVIEW
General. We are a major integrated producer of flat rolled carbon steel
with principal product lines consisting of tin mill products and sheet products.
Tin mill products include tin plate, chrome coated and black plate steels and
are consumed principally by the container and packaging industry for food cans,
general line cans and closure applications, such as caps and lids. Tin mill
products accounted for 46% of our revenues and 34% of tons shipped in the first
nine months of 2002. Sheet products include hot and cold rolled and both
hot-dipped and electrolytic galvanized steels and are used in numerous end-use
applications, including among others the construction, appliance and automotive
industries. Sheet products accounted for 54% of our revenues and 66% of tons
shipped in the first nine months of 2002. In addition, we currently are
providing tolling services at our hot strip mill for a major stainless steel
producer, which accounts for approximately 15% of the overall capacity of our
hot strip mill.
We seek to fundamentally reposition our business to focus on the production
and sale of tin mill and other higher margin value-added products and shift our
product mix away from lower margin, commodity flat-rolled sheet products
principally through strategic acquisitions and targeted investments.
In general, commodity sheet products are produced and sold in high volume
in standard dimensions and specifications. Tin mill and other value-added
products require further processing, and generally command higher profit margins
and typically are less affected by imports and domestic competition. The market
for tin mill products generally remains stable over the typical business cycle
as compared to more volatile markets for sheet steel products. Domestic supply
of tin mill products has been limited by the relatively small number of domestic
producers, facility rationalizations, enforcement of antidumping restrictions
and tariffs. In addition, our tin mill product sales are based upon contracts of
one year or more and are, therefore, less subject to price volatility than spot
market sales.
11
In response to severe weaknesses in the domestic steel industry and our
worsening financial condition, in the summer of 2001 we developed a strategic
restructuring plan to reduce operating costs, improve our liquidity and working
capital position, restructure our long term debt and fundamentally reposition
our business to focus on the production and sale of tin mill products and other
higher margin value-added sheet products.
Our strategic restructuring plan has five integral steps, the first four of
which have been implemented beginning in late 2001:
- reducing our operating costs on an annual basis through the full
implementation of a cost savings program which included a workforce
reduction, reductions to our employee benefits costs and other
operating cost savings, which became effective in late October 2001
(which is expected to generate approximately $51 million in annual
cost savings);
- improving our liquidity and long-term supplier relationships through
financing programs we entered into primarily with our vendors,
including over 60 suppliers, in late October 2001 and through ongoing
negotiations with other suppliers of services and raw materials (which
have generated at least $40 million in additional near term
liquidity);
- increasing our borrowing availability and liquidity through the
refinancing of our bank credit and asset securitization facilities,
which became effective in late October 2001 (which has resulted in $30
to $35 million in additional availability compared to our prior
inventory facility and accounts receivable securitization program);
- restructuring our long term debt and lowering our debt service costs
through the exchange offers in order to increase our liquidity and
financial flexibility by approximately $27 million in 2002, 2003 and
2004, approximately $23 million in 2005 and approximately $18 million
in 2006, provided we are not required to pay contingent interest; and
- fundamentally repositioning our business to focus on the production
and sale of tin mill and other higher margin value-added products and
to shift our product mix away from lower margin commodity flat-rolled
sheet products principally through strategic acquisitions and targeted
investments.
Weirton, like most United States integrated steel producers, has sustained
significant losses and a decrease in liquidity as a result of prolonged adverse
market conditions and depressed selling prices caused primarily by dramatic
increases in imported steel during the period 1998 through early 2002. Many
industry observers believe that the severe weaknesses in the United States steel
industry will lead to a restructuring of the industry. This observation is
reinforced by the large number of domestic steelmakers now in bankruptcy
proceedings.
In June 2001, the Bush Administration initiated a trade investigation by
the International Trade Commission ("ITC") under Section 201 of the Trade
Practices Act of 1974 regarding the illegal dumping of steel by foreign
competitors. On October 22, 2001, the ITC found that 12 steel product lines,
representing 74% of the imports under investigation, sustained serious injury
because of foreign imports. These product lines include hot rolled, cold rolled,
galvanized sheet and coil, and tin mill products. On March 5, 2002, President
Bush decided to impose tariffs on flat-rolled products over a three-year period
at 30% in year one, 24% in year two and 18% in year three, in addition to tariff
relief with respect to other products, subject to a review after 18 months by
the ITC, which has the authority to continue or terminate the tariffs. All our
flat-rolled product lines, including tin mill, hot rolled and cold rolled sheet
and galvanized products, have benefited and should continue to benefit from the
imposition of tariffs. In addition, imported steel slabs are subject to an
increasing annual quota of at least 5.4 million tons, subject to the imposition
of tariffs if the tonnage exceeds the quota limit, excluding steel slabs from
Mexico and Canada.
From June 2002 through August 2002, the Office of the U.S. Trade
Representative granted 737 tariff exclusions. The majority of these exclusions
covered steel products not produced in the United States. The next round of
exclusion requests began in November 2002 and will continue through March 2003.
A number of countries have objected to the tariffs and have filed appeals
with the World Trade Organization ("WTO"). Although the Administration maintains
its investigation and decision conform with WTO regulations,
12
if the complainants are successful, the scope, duration and effectiveness of the
tariffs could be affected in a manner adverse to us.
We believe that the imposition of tariffs under the Section 201 order has
had the effect of restricting steel imports to the United States through the
first part of 2002, and selling prices and shipment volumes have improved from
what we otherwise would have realized without the imposition of tariffs. We also
believe that the improvements in selling prices and shipment volumes have been
supply driven. Some flat rolled product capacity has recently restarted, and we
anticipate further capacity may restart in the near future. If the economy does
not recover from its current state and capacity rationalizations in flat rolled
products do not happen, these improvements may be in jeopardy. In September
2002, the U.S. Court of International Trade ruled against several Japanese steel
companies attempting to overturn the Administration's tariff on tin mill
products; the tariff remains in effect. Due to this type of litigation and the
large number and variety of forces that impact the markets for our products, we
are not able to quantify the specific effects of the Section 201 ruling.
In another ruling, the same court vacated an August 2000 ITC ruling against
Japanese tin mill products. The commission had imposed duties of 95% for five
years on certain Japanese tin producers. The Company and the federal government
have appealed the decision. The case is pending before a federal appeals court
in Washington, D.C.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2001
In the third quarter of 2002, the Company recognized a net loss of $12.7
million or $0.30 per diluted share. This compares with a net loss of $60.2
million, or $1.45 per diluted share, for the same period in 2001. During the
third quarter of 2002, the Company received a legal settlement of $1.9 million
from one of its vendors.
Net sales in the third quarter of 2002 were $273.8 million, an increase of
$32.3 million or 13% from the third quarter of 2001. Total shipments in the
third quarter of 2002 were 579 thousand tons compared to the third quarter of
2001 shipments of 556 thousand tons. While selling prices and order rates for
sheet products continued to improve in the third quarter of 2002, the Company's
operating results continued to be temporarily adversely affected by manpower
movements within the plant as a result of the Company's strategic restructuring
plan.
Tin mill product net sales for the third quarter of 2002 were $114.7
million, a decrease of $6.1 million from the third quarter of 2001. Shipments of
tin mill product in the third quarter of 2002 were 194 thousand tons compared to
203 thousand tons in the third quarter of 2001. This decrease was primarily a
result of a decrease in tin shipments.
Sheet product net sales for the third quarter of 2002 were $159.1 million,
an increase of $38.4 million from the third quarter of 2001. Shipments of sheet
product in the third quarter of 2002 were 385 thousand tons compared to 353
thousand tons in the third quarter of 2001. The increase in sheet product net
sales was mainly attributable to an increase in sheet selling prices.
Cost of sales for the third quarter of 2002 were $262.0 million, or $453
per ton, compared to $267.1 million, or $480 per ton, for the third quarter of
2001. Cost of sales per ton decreased as a result of our cost reduction efforts
and lower energy costs. The decrease was partially offset by an increase in the
Company's pension and other postretirement benefits costs.
Selling, general and administrative expenses for the third quarter of 2002
were $7.0 million, a decrease of $1.6 million from the third quarter of 2001. As
part of its operating cost savings plan, the Company has significantly reduced
its management workforce, resulting in lower selling, general and administrative
expenses.
The Company's income from unconsolidated subsidiaries during the third
quarter of 2002 is related to WeBCo International LLC ("WeBCo"). WeBCo's
increased profitability during 2002 is due to the success of its new venture in
selling excess and secondary sheet products.
Interest expense decreased $4.8 million in the third quarter of 2002 when
compared to the same period in 2001. This decrease is a result of our successful
exchange offers partially offset by the increase in our working
13
facility. As of September 30, 2002, the Company had $106.8 million outstanding
under its senior credit facility. As of September 30, 2001, the Company had
$49.0 million outstanding under its prior working capital facility.
The Company's other income increased by $2.0 million in the third quarter
of 2002 compared to the same period in 2001. During the third quarter of 2002,
the Company received a $1.9 million legal settlement from one of its suppliers.
The deferred tax assets generated in the third quarter of 2002 and 2001
amounted to approximately $6 million and $24 million, respectively, and were
fully offset by valuation allowances.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 2001
In the first nine months of 2002, the Company recognized a net loss of
$93.1 million, or $2.22 per diluted share. The first nine months of 2002 results
included an extraordinary gain of $0.2 million on the early extinguishment of
debt, the sale of excess NOx allowances for $4.4 million, the sale of Prudential
common stock for $3.2 million as a result of Prudential's demutualization, a tax
refund of $3.5 million and a legal settlement of $1.9 million. Last year's first
nine months resulted in a net loss of $353.3 million, or $8.50 per diluted
share. The Company's net loss for the first nine months of 2001 included a
non-cash charge of $153.8 million to fully reserve the Company's deferred tax
assets, a restructuring charge of $12.3 million associated with an involuntary
reduction program for exempt employees, and the write-off of the Company's
remaining interests in certain joint ventures totaling $18.0 million.
Net sales in the first nine months of 2002 were $760.8 million, an increase
of $27.0 million from the first nine months of 2001. Total shipments in the
first nine months of 2002 and 2001 were both 1.7 million tons.
Tin mill product net sales for the first nine months of 2002 were $350.9
million, a decrease of $0.4 million from the first nine months of 2001.
Shipments of tin mill product in the first nine months of 2002 were 588 thousand
tons compared to 595 thousand tons for the same period in 2001.
Sheet product net sales for the first nine months of 2002 were $409.9
million, an increase of $27.4 million from the first nine months of 2001.
Shipments of sheet product in the first nine months of 2002 and 2001 were both
1.1 million tons. The increase in sheet product net sales was primarily a result
of increased sheet selling prices.
Costs of sales for the first nine months of 2002 were $773.1 million, or
$448 per ton, compared to $800.1 million, or $466 per ton, for the first nine
months of 2001. Cost of sales per ton decreased as a result of our cost
reduction efforts and lower energy costs. The decrease was partially offset by
an increase in the Company's pension and other postretirement benefits costs.
Selling, general and administrative expenses for the first nine months of
2002 were $19.6 million, a decrease of $6.2 million from the first nine months
of 2001. Primarily due to its operating cost savings plan, the Company has
significantly reduced its management workforce, resulting in lower selling,
general and administrative expenses.
The Company established and implemented its 2001 Workforce Downsizing
Program effective March 2001. The program reduced non-represented staff
employees by approximately 10%. After the program, the Company was operating
with approximately 630 non-represented employees and approximately 3,500
represented employees. Due to the program, the Company recorded a $12.3 million
restructuring charge during the first quarter of 2001. The restructuring charge
consisted of $5.4 million of pension benefits and $3.9 million of other
postretirement benefits. The remaining $3.0 million was related to other
separation and severance benefits provided to the affected employees.
The Company's income from unconsolidated subsidiaries during the first nine
months of 2002 is related to WeBCo. WeBCo's increased profitability during 2002
is due to the success of its new venture in selling excess and secondary sheet
products. During the first quarter of 2001, the Company recorded an $18.0
million charge to loss from unconsolidated subsidiaries, writing-off its
investments in MetalSite and GalvPro.
14
Interest expense decreased $1.0 million in the first nine months of 2002
when compared to the same period in 2001. This decrease is a result of our
successful exchange offers. As of September 30, 2002, the Company had $106.8
million outstanding under its senior credit facility. As of September 30, 2001,
the Company had $49.0 million outstanding under its prior working capital
facility.
In the first nine months of 2002, other income increased $8.5 million when
compared to the same period in 2001. During the third quarter of 2002, the
Company received proceeds from a legal settlement of $1.9 million. As required
by Section 126 of the Clean Air Act, certain limitations were developed to
control the NOx emissions from industrial boilers. Because the Company does not
use coal in its boilers and has taken steps to improve energy efficiency in its
operations, the Company was able to sell a portion of its NOx allowances in June
2002 for $4.4 million. In addition, during the first quarter of 2002, the
Company received approximately $3.2 million from the sale of Prudential
Financial stock it had received upon the demutualization of Prudential.
In June 2002, the Company received an income tax refund of $3.5 million in
accordance with the Job Creation and Worker Assistance Act of 2002 signed by
President Bush on March 9, 2002. This new act provides for an expansion of the
carryback of NOLs from two years to five years for NOLs arising in 2001 and
2002. The Company was able to carryback its loss recorded in 2001 to the 1997
through 1999 tax years when it paid an alternative minimum tax. This carryback
allowed the Company to recover the entire amount of alternative minimum taxes
paid during those prior taxable years. Continuing losses have raised doubts
about the Company's ability to realize additional deferred tax assets in the
future, such as operating loss carryforwards, prior to their expiration. During
the first nine months of 2001, a non-cash charge of $153.8 million was recorded
to fully reserve the Company's deferred tax assets. The deferred tax assets
generated in the first nine months of 2002 and 2001 were approximately $38
million and $78 million, respectively, and were fully offset by valuation
allowances.
In the second quarter of 2002, the Company recognized an extraordinary gain
from the early extinguishment of debt related to the exchange offers.
LIQUIDITY AND CAPITAL RESOURCES
Total liquidity from cash and financing facilities amounted to $46.3
million at September 30, 2002 as compared to $33.6 million at December 31, 2001.
Although liquidity has improved since December 31, 2001, the Company's liquidity
long-term has continued to decline primarily as a result of operating losses
from prolonged adverse market conditions. To mitigate the effects of these
prevailing adverse conditions, we have initiated a strategic restructuring plan
to reduce operating costs and enhance our liquidity. The results and status of
certain points of that strategic restructuring plan are summarized below.
As of September 30, 2002, the Company had cash and equivalents, including
restricted cash, of $11.3 million compared to $5.7 million as of December 31,
2001. The Company's statements of cash flows for the nine months ended September
30 are summarized below:
2002 2001
--------- ---------
DOLLARS IN THOUSANDS
Net cash used by operating activities................... $(11,275) $(32,736)
Net cash used by investing activities................... (6,066) (9,342)
Net cash provided by financing activities............... 22,979 48,981
-------- --------
Increase in cash........................................ $ 5,638 $ 6,903
======== ========
The $11.3 million net cash outflow from operating activities resulted from
adverse market conditions prevailing in the domestic steel industry during the
first half of 2002. To help offset the difficult market conditions, we undertook
various measures during the first nine months of 2002 and during the year 2001
to enhance our operating cash flow by reducing overall operating costs and net
working capital investment. Reductions in our net working capital investment
during the first nine months of 2002 had a positive impact of $17.3 million on
our liquidity. This was achieved mainly through a $16.4 million increase in
accounts payable. The increase in accounts payable is associated with our
increased operating purchase activity during the third
15
quarter of 2002. Following our successful exchange offers, our payment terms
have improved with some of our vendors. We have no significant past due
payables.
At current production and shipment levels, we anticipate sustaining our
current levels of working capital investment. However, should the markets for
our products continue to improve, we may increase our working capital investment
and could fund the increase at least in part by additional borrowings under our
senior credit facility. We continue to pursue strategies to reduce our working
capital investment, but opportunities to do so are limited and are substantially
less than those already achieved.
Net cash used by investing activities includes $6.1 million and $8.5
million of capital expenditures for the nine months ended September 30, 2002 and
September 30, 2001, respectively. Our senior credit facility places limits on
our ability to make certain future capital expenditures to $13.8 million in 2002
and $34.5 million in 2003, subject to increase to $40.0 million in 2003 if we
meet certain financial tests.
The $23.0 million in net cash provided by financing activities in the first
nine months of 2002 consisted of $14.7 million in borrowings under our senior
credit facility and $16.1 million in cash received under our vendor financing
arrangements. Also included in financing activities for the first nine months of
2002 was $10.6 million in deferred debt issuance costs that had been paid in
connection with the bond exchanges. As of September 30, 2001, the Company had
utilized $65.0 million under its previous working capital facilities.
Our new senior credit facility was established on October 26, 2001 (and was
amended and restated on May 3, 2002) under a loan and security agreement with
Fleet Capital Corporation, as agent for itself and other lenders, Foothill
Capital Corporation, as syndication agent, The CIT Group/Business Credit, Inc.
and GMAC Business Credit LLC, which serve as co-documentation agents for the
facility, and Transamerica Business Capital Corporation. At September 30, 2002,
we had borrowed $106.8 million under the senior credit facility and we had
utilized an additional $0.5 million under the letter of credit subfacility.
Taking into account outstanding letters of credit, we had $35.0 million
available for additional borrowing under the facility at September 30, 2002.
Under the senior credit facility we are allowed to make scheduled semi-annual
cash interest payments on the senior secured notes, senior notes, secured series
2002 bonds and series 1989 bonds, provided that these cash payments are reserved
against availability under the facility.
Beginning in late October 2001, we also obtained assistance from certain
key vendors and others through our vendor financing programs to improve our near
term liquidity. As of September 30, 2002 we had received $28.5 million related
to the sale and leaseback of our Foster-Wheeler Steam Generating Plant and
related financing programs.
During the third quarter of 2002, the Company received an additional $3.0
million from a secured loan involving the Company's General Office, and Research
and Development Facility and railroad rolling stock.
In the second quarter of 2002, as part of our announced strategic
restructuring plan, the Company completed an offer to exchange its outstanding
11 3/8% Senior Notes due 2004 and its outstanding 10 3/4% Senior Notes due 2005
(collectively the "senior notes") for new 10% Senior Secured Notes due 2008
("senior secured notes") and new Series C Convertible Redeemable Preferred Stock
("Series C preferred stock"). At the Company's request, the City of Weirton also
completed an offer to exchange its 8 5/8% Pollution Control Bonds due 2014
("series 1989 bonds") for new 2002 Secured Pollution Control Revenue Refunding
Bonds ("secured series 2002 bonds"). The Company's liquidity will be enhanced
through a reduction in debt service cost of up to approximately $27 million per
year in 2002, 2003 and 2004, approximately $23 million in 2005 and approximately
$18 million in 2006, provided the Company is not required to make contingent
interest payments. The Company's management currently does not believe that it
will generate "excess cash flow" in the near term, thus the Company will most
likely not be required to make the $6.2 million in contingent interest payments
included in the current portion of long-term debt at September 30, 2002.
At September 30, 2002, we had approximately $394.3 million in deferred tax
assets which were fully reserved with a valuation allowance of the same amount.
These assets, although they are fully reserved for financial accounting
purposes, are available to offset future income tax liabilities should we
generate taxable income. We have been required in the past, and may be required
in the future, to make payments under federal alternative minimum tax
regulation.
16
Pension obligations may have a serious effect on our liquidity over the
next few years. Pension obligations and other postretirement benefits have been
excluded from the Liquidity Outlook table below. At September 30, 2002, we had
an accrued pension liability of $230.3 million and an accrued liability for
other postretirement benefits of $357.2 million. During the first nine months of
2002, we made a pension contribution of $1.2 million, and we paid $23.4 million
for other postretirement benefits. Under minimum funding rules, no additional
pension contributions are required to be made in 2002; however, substantial
contributions averaging approximately $70 million per year are likely to be
required in each of 2003 through 2007. These large, unanticipated amounts arise
to a great extent from poor year to date performance by the financial markets
and continued declines in interest rates and their effect on our pension trust
assets. Future funding requirements will be dependent upon factors such as
funded status, regulatory requirements that mandate more restrictive assumptions
for measuring pension obligations than those used for accounting purposes, and
the level and timing of asset returns as compared with those of expected benefit
disbursements. These factors make it impossible to be more specific about the
Company's required future pension contributions at this time and actual future
contributions may differ materially.
We anticipate that payments for other postretirement benefits will increase
in future years from the $29.8 million we paid in 2001 due to an increase in the
number of retirees receiving benefits, as well as increases in per capita health
care costs.
We expect pension contributions and payments for postretirement benefits
will require a substantial amount of liquidity over the next five years.
Payments of these legacy costs may significantly affect the liquidity available
for other purposes, including capital expenditures and other operating,
investing and financing activities.
To address the issues created by these legacy cash requirements, the
Company is considering several steps, these include:
- Supporting the lobbying efforts of several organizations, including
the American Benefits Council Retirement Task Force. The focus of this
group has been to provide funding relief by allowing plan sponsors to
spread required contributions over a longer period of time.
- Requesting a funding waiver from the Internal Revenue Service. A
funding waiver, if granted, would allow the Company to fund required
contributions, for select plan years, over a five year period.
- Exploring changes to our existing retirement benefit plans (pension
and postretirement medical benefits) which we believe will be
necessary for us to remain competitive in light of benefit changes
taking place as the steel industry is restructured.
Although the Company is addressing the issue created by legacy cash
requirements, there can be no assurance that our efforts will be successful. If
our efforts are successful, a significant amount of cash may still be required
in the future.
Based on current conditions, we broadly estimate that a charge to
shareholders' equity of approximately $100 million may be required at December
31, 2002 to reflect increased pension obligations relative to their supporting
assets. Under accounting principles generally accepted in the United States,
changes in the market value of the assets held in trust for pension purposes can
result in significant changes in the sponsor's balance sheet. The accounting
rules provide that if, at any plan measurement date (which in our case is
December 31 of each year), the fair value of plan assets is less than the plan's
accumulated benefit obligation ("ABO"), the sponsor must establish a liability
at least equal to the amount by which the ABO exceeds the fair value of the plan
assets, and any prepaid pension assets must be removed from the balance sheet.
The sum of the liability and prepaid pension assets must be offset by the
recognition of an intangible asset and/or as a direct charge against
shareholders' equity. These adjustments have no direct impact on earnings per
share or cash. As of September 30, 2002, the fair value of plan assets for our
pension plan was $522.8 million.
Any such increase in shareholders' deficit is not expected to affect any of
our debt covenants or borrowing arrangements. The foregoing estimates are
forward looking statements. Predictions as to the value of and return on plan
assets and the resulting impact on equity are subject to substantial
uncertainties such as, among other things, investment performance and interest
rates.
17
Liquidity Outlook
The following table sets forth the timing of our liquidity requirements in
regards to contractual obligations and commercial commitments:
LESS THAN AFTER
CONTRACTUAL OBLIGATIONS: TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS 5 YEARS
- ------------------------ ------ --------- --------- --------- -------
(IN MILLIONS)
Long Term Debt................................. $265.6 $ 6.9 $ 56.9(1) $28.0 $173.8
Capital Lease Obligation (2)................... 29.3 2.2 3.8 4.8 18.5
Operating Leases............................... 18.3 8.1 9.7 0.5 --
Unconditional Purchase Obligations (3)
Other Long Term Obligations (4)................ 18.7 4.4 6.9 5.0 2.4
Redeemable Stock (5)........................... 48.4 -- -- -- 48.4
------ ----- ------ ----- ------
Total Contractual Cash Obligations........... 380.3 21.6 77.3 38.3 243.1
OTHER COMMERCIAL COMMITMENTS:
Lines of Credit................................ 106.8 -- 106.8 -- --
------ ----- ------ ----- ------
Total................................ $487.1 $21.6 $184.1 $38.3 $243.1
====== ===== ====== ===== ======
- ---------------
(1) The exchanges that resulted in the issuance of the senior secured notes and
secured series 2002 pollution control bonds were accounted for as troubled
debt restructurings in accordance with SFAS 115. As a result of this
accounting treatment, future interest payments are included in the carrying
value of the liability. The payments reflected herein assume the maximum
future cash flows associated with the senior secured notes and secured
series 2002 bonds. This includes all contingent interest based on excess
cash flow as defined in the indentures governing the securities. The
Company's management currently does not believe that it will generate excess
cash flow. As a result, the cash payments on long-term debt in years 2 and 3
would be reduced by $27.1 million if, as expected, we do not pay contingent
interest.
(2) The capital lease obligation arises from the sale and leaseback of the
Company's steam generating facilities as part of our vendor financing
programs. The payments reflect the scheduled principal payments on the $28.5
million obligation that had been incurred as of September 30, 2002. The
Company is not required to make payments on the obligation until the first
quarter of 2003, at which time quarterly payments will begin. The payments
will include both principal and interest. If the interest portion of the
payment had been included in the chart above, the totals would have
increased from $2.2 million to $3.8 million in less than one year, from $3.8
million to $10.1 million in two to three years, from $4.8 million to $10.1
million in four to five years and from $18.5 million to $29.0 million after
five years.
(3) We have entered into conditional purchase arrangements for a portion of our
coke and pellet requirements and some of our energy requirements. In
general, those requirements provide for us to purchase a minimum quantity of
material at a variable or negotiated price that approximates the market
price for those commodities. Because those purchases are conditioned on
future purchase levels and changes in market price, they are not included in
the above table.
(4) Includes required reimbursements to National Steel Corporation for induced
retirements of Company employees also covered by the National Steel Pension
plan. Based on the benefit enhancements granted as of September 30, 2002, we
will make the reimbursement payments indicated.
(5) The Redeemable Stock includes the maximum redemption value of the Series C
preferred stock which the Company is required to redeem in 2013. The Company
has the option to redeem the stock earlier for lesser amounts. The
redeemable stock does not include any amounts for Series A preferred stock.
Distributees of Series A preferred stock from the 1989 Employee Stock
Ownership Plan can require the Company to repurchase the shares for cash at
market value within specified windows of time after receiving their shares.
Series A preferred stock may also be converted into common stock or continue
to be held by the distributees after the mandatory repurchase periods. As a
result, it is not possible to know the amount and timing of redemption of
the Series A preferred stock, and it has not been included.
18
The Company's future liquidity remains largely dependent upon its cash flow
from operations, which is closely related to business conditions in the domestic
steel industry. Based upon its current commercial and operating forecasts, the
Company believes that cash flows generated from operating activities and other
available sources will be sufficient to meet its short term cash needs.
Notwithstanding its projections, the Company continues to pursue a number of
strategies to further improve liquidity and mitigate the potential effects of
any differences from forecasted results. The principal strategies include: (i)
seeking acquisitions or commercial and operational affiliations; (ii) seeking
ways to improve margins through enhancing product mix; and (iii) seeking relief
from anticipated pension contributions through a funding waiver and legislative
changes through lobbying efforts.
If actual results of operations differ materially from those forecasted and
the Company is not successful in implementing other liquidity improvement
strategies, the Company's liquidity will be adversely affected and may not be
sufficient to meet its needs.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit and disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
adoption of SFAS 146 is not expected to have a material effect on the financial
position, results of operations or liquidity of the Company.
In April 2002, SFAS No. 145, "Rescission of FASB Statements 4, 44, and 64,
Amendment of FASB Statement 13, and Technical Corrections," was issued. The
Statement updates, clarifies and simplifies existing accounting pronouncements.
While the technical corrections to existing pronouncements are not substantive
in nature, in some instances, they may change accounting practice. The
provisions of this standard related to SFAS 13 are effective for transactions
occurring after May 15, 2002. All other provisions of this standard must be
applied in fiscal years beginning after May 15, 2002. The Company is currently
evaluating the effects of SFAS 145 and is preparing a plan for implementation.
FORWARD LOOKING STATEMENTS
This Item contains certain forward looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are based on assumptions and expectations which may not be realized and are
inherently subject to risk and uncertainties, many of which cannot be predicted
with accuracy. Future events and actual results, financial and otherwise, may
differ from the results discussed in the forward looking statements. Although
the Company believes that its assumptions made in connection with the forward
looking statements are reasonable, there are no assurances that such assumptions
or expectations will prove to have been correct due to the foregoing and other
factors. Such forward looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The Company
is under no obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future events or otherwise.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
During the course of 2003, some critical raw materials, such as coke and
natural gas, may be subject to price risk caused by market changes. China, the
largest exporter of coke, is producing less and consuming more coke and is
expected to reduce exports by 3.0 million tons. Recent blast furnace start-ups
and coke plant closures have resulted in an estimated 3.0 million ton deficit in
domestic coke availability. For 2003, coke prices have risen approximately 10%
to 15% per ton domestically and approximately 20% to 30% per ton
internationally. At normal consumption levels, a $1.00 per ton change in our
coke costs would result in an estimated $1.1 million change in our annual
operating costs.
19
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures within 90 days of the
filing of this report, and they have concluded that these controls and
procedures are effective.
CHANGE IN INTERNAL CONTROLS
There are no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to within 90 days of
the filing of this report.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 -- Employment Agreement between David B. Bordo and the
Company dated September 30, 2002 (filed herewith).
Exhibit 99.1 -- Certification of Principal Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 -- Certification of Principal Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Not applicable
21
SIGNATURE
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.
WEIRTON STEEL CORPORATION
Registrant
/s/ MARK E. KAPLAN
--------------------------------------
Mark E. Kaplan
Senior Vice President-Finance and
Administration
(Principal Financial Officer)
November 14, 2002
22
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER REGARDING FACTS AND
CIRCUMSTANCES RELATING TO QUARTERLY REPORTS
I, John H. Walker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Weirton Steel
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statement made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluations as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employee who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
/s/ John H. Walker
Chief Executive Officer
November 14, 2002
23
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER REGARDING FACTS AND
CIRCUMSTANCES RELATING TO QUARTERLY REPORTS
I, Mark E. Kaplan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Weirton Steel
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statement made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluations as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employee who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
/s/ Mark E. Kaplan
Senior Vice President -- Finance and
Administration
November 14, 2002
24