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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999.
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)
<TABLE>
<S> <C>
DELAWARE 06-1075442
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification
#)
</TABLE>
400 THREE SPRINGS DRIVE, WEIRTON, WEST VIRGINIA 26062-4989
(Address of principal executive offices) (Zip Code)
(304) 797-2000
(Registrant's telephone number, including area code:)
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock ($.01 par value) of the Registrant
outstanding as of April 30, 1999 was 41,578,703.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEIRTON STEEL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
---- ----
<S> <C> <C>
NET SALES................................................... $265,138 $341,321
OPERATING COSTS:
Cost of sales.......................................... 261,516 299,436
Selling, general and administrative expenses........... 10,249 9,881
Depreciation........................................... 15,176 17,019
Provision for profit sharing........................... -- 1,123
-------- --------
Total operating costs................................ 286,941 327,459
-------- --------
INCOME (LOSS) FROM OPERATIONS............................... (21,803) 13,862
Income (loss) from unconsolidated subsidiaries......... (13) 23
Interest expense....................................... (11,024) (11,657)
Interest income........................................ 618 1,182
ESOP contribution...................................... (653) (653)
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST..... (32,875) 2,757
Income tax provision (benefit)......................... (4,916) 510
-------- --------
INCOME (LOSS) BEFORE MINORITY INTEREST...................... (27,959) 2,247
Minority interest in loss of consolidated subsidiary... 103 --
-------- --------
NET INCOME (LOSS)........................................... $(27,856) $ 2,247
======== ========
PER SHARE DATA:
Weighted average number of common shares (in thousands):
Basic.................................................. 41,578 42,926
Diluted................................................ 41,578 44,675
NET INCOME (LOSS) PER SHARE:
Basic.................................................. $ (0.67) $ 0.05
Diluted................................................ $ (0.67) $ 0.05
</TABLE>
The accompanying notes are an integral part of these financial statements.
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WEIRTON STEEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
(UNAUDITED) (AUDITED)
----------- ---------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and equivalents, includes restricted cash of $899
and $1,275 respectively............................... $ 80,775 $ 68,389
Receivables, less allowances of $7,582 and $8,574,
respectively.......................................... 122,764 112,278
Inventories............................................ 180,957 259,332
Deferred income taxes.................................. 41,254 43,254
Other current assets................................... 3,778 4,443
---------- ----------
Total current assets................................. 429,528 487,696
Property, plant and equipment, net..................... 564,034 576,238
Investment in unconsolidated subsidiaries.............. 7,925 7,938
Deferred income taxes.................................. 116,327 111,411
Other assets and deferred charges...................... 12,081 12,416
---------- ----------
Total assets...................................... $1,129,895 $1,195,699
========== ==========
LIABILITIES:
Current Liabilities:
Current portion of long term debt obligations.......... $ 84,044 $ 84,044
Payables............................................... 86,362 120,697
Employment costs....................................... 55,731 63,966
Taxes other than income taxes.......................... 13,355 15,060
Other current liabilities.............................. 14,641 10,957
---------- ----------
Total current liabilities......................... 254,133 294,724
Long term debt obligations............................. 304,711 304,626
Long term pension obligations.......................... 84,796 81,908
Postretirement benefits other than pensions............ 336,472 337,443
Other long term liabilities............................ 33,205 33,217
---------- ----------
Total liabilities................................. 1,013,317 1,051,918
---------- ----------
Redeemable stock............................................ 22,872 22,238
Stockholders' equity:
Common stock, $0.01 par value; 50,000,000 authorized;
43,561,987 and 43,178,134 shares issued............... 435 432
Additional paid-in capital............................. 457,695 457,851
Retained earnings (deficit)............................ (356,997) (329,141)
Other stockholders' equity............................. (7,427) (7,599)
---------- ----------
Total stockholders' equity........................ 93,706 121,543
---------- ----------
Total liabilities, redeemable stock and
stockholders' equity............................ $1,129,895 $1,195,699
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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WEIRTON STEEL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(27,856) $ 2,247
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation........................................... 15,176 17,019
Amortization of deferred financing costs............... 403 519
ESOP Contribution...................................... 653 653
Deferred income taxes.................................. (2,916) (990)
Cash provided (used) by working capital items:
Receivables.......................................... (10,486) (28,517)
Inventories.......................................... 78,375 50,137
Other current assets................................. 665 (3,029)
Payables............................................. (34,335) (12,675)
Other current liabilities............................ (6,256) (11,485)
Long term pension obligation........................... 2,888 140
Other.................................................. (953) (422)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 15,358 13,597
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in unconsolidated subsidiary................... -- (1,826)
Capital spending.......................................... (2,972) (9,031)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES....................... (2,972) (10,857)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt obligations............................. -- (42,163)
-------- --------
NET CASH USED BY FINANCING ACTIVITIES....................... -- (42,163)
-------- --------
NET CHANGE IN CASH AND EQUIVALENTS.......................... 12,386 (39,423)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................. 68,389 124,690
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD....................... $ 80,775 $ 85,267
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of capitalized interest................ $ 7,720 $ 9,950
Income taxes paid (refunded), net......................... (2,000) 1,500
</TABLE>
The accompanying notes are an integral part of these financial statements.
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NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, OR IN MILLIONS OF DOLLARS WHERE INDICATED)
NOTE 1
BASIS OF PRESENTATION
The Consolidated Financial Statements presented herein are unaudited.
Weirton Steel Corporation and/or Weirton Steel Corporation together with its
consolidated subsidiaries, are hereafter referred to as the "Company." Entities
of which the Company owns a majority interest are consolidated; entities of
which the Company owns a less than majority interest are not consolidated and
are reflected in the consolidated financial statements using the equity method
of accounting. All intercompany accounts and transactions with consolidated
subsidiaries have been eliminated in consolidation.
Certain information and footnote disclosures normally prepared in
accordance with generally accepted accounting principles 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 1998 Annual Report on Form 10-K.
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.
Certain prior period amounts have been reclassified, where necessary, to
conform to the presentation in the current period.
NOTE 2
INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Raw materials............................................... $ 61,331 $ 84,274
Work-in-process............................................. 40,365 82,331
Finished goods.............................................. 79,261 92,727
-------- --------
$180,957 $259,332
======== ========
</TABLE>
NOTE 3
EARNINGS PER SHARE
For the quarter ended March 31, 1999, basic and diluted earnings per share
were the same; however, securities totaling 1,678,744 were excluded from the
diluted earnings per share calculation due to their
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antidilutive effect. The following represents a reconciliation between basic
earnings per share and diluted earnings per share for the quarter ended March
31, 1998:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31, 1998
--------------------------------------
PER SHARE
INCOME SHARES AMOUNT
-------- ------------ -----------
<S> <C> <C> <C>
Basic earnings per share:
Net income.......................................... $2,247 42,925,557 $0.05
Effect of dilutive securities
Series A Preferred.................................. -- 1,727,794 --
Stock options....................................... -- 21,757 --
------ ---------- -----
Diluted earnings per share:
Net income.......................................... $2,247 44,675,108 $0.05
====== ========== =====
</TABLE>
NOTE 4
COMPREHENSIVE INCOME
Financial Accounting Standard No. 130 ("SFAS"), establishes standards for
reporting and displaying comprehensive income and its components, requires the
reporting of all changes in equity of an enterprise that result from
transactions and other economic events other than transactions with owners.
Comprehensive income is the total of net income and all other nonowner changes
in equity. Comprehensive income calculated under SFAS No. 130 is the same as the
net income reported by the Company for the quarters ended March 31, 1999 and
1998.
NOTE 5
FINANCING ARRANGEMENTS
On March 29, 1999, through its wholly owned subsidiary, Weirton Receivables
Inc. ("WRI"), the Company amended its existing Receivables Facility with a group
of three banks (the "WRI Amended Receivables Facility"). The WRI Amended
Receivables Facility provides a total commitment by the banks of up to $80.0
million, including a letter of credit subfacility of up to $25.0 million. The
amount of participation interest in the accounts receivable available for cash
sale to the banks fluctuates depending upon the nature and amounts of
receivables generated by the Company which are sold into the program, and
certain financial test applicable to them.
The financial tests that were applicable to the receivable facility prior
to March 29, 1999 were amended so that, in most cases, the amount of
participation interest available for cash sale to the banks is greater under the
WRI Amended Receivables Facility than under the pre-existing facility. The WRI
Amended Receivables Facility has a term that extends through April 2004. The
March 29, 1999 amendment also modified the events and circumstances that trigger
the termination of the facility. The other terms and conditions of the WRI
Amended Receivables Facility are substantially the same as those of the
pre-existing facility.
As of March 31, 1999, while no funded participation interest had been sold
under the WRI Amended Receivables Facility, $12.8 million in letters of credit
under the subfacility were in place. After amounts in place under the letter of
credit subfacility, the base amount available for cash sale was approximately
$43.2 million.
NOTE 6
ENVIRONMENTAL COMPLIANCE
The Company, as well as its domestic competitors, is subject to stringent
federal, state and local environmental laws and regulations concerning, among
other things, waste water discharge, air emissions and waste disposal. As a
consequence, the Company has incurred, and will continue to incur, substantial
capital expenditures and operating and maintenance expenses in order to comply
with regulatory requirements.
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As of March 31, 1999, the Company had an accrued liability of $7.0 million
for known and identifiable environmental related costs to comply with negotiated
and mandated settlements of various actions brought by the United States
Environmental Protection Agency ("EPA") and the West Virginia Department of
Environmental Protection. The EPA is also requiring the Company to conduct
investigative activities to determine the nature and extent of hazardous
materials which may be located on the Company's property and to evaluate and
propose corrective measures needed to abate any unacceptable risks. Because the
Company does not currently know the nature or the extent of hazardous material
which may be located on the property, it is possible at the present time to
estimate the ultimate cost to comply with EPA's requirements or conduct remedial
activity that may be required.
NOTE 7
COMMITMENTS AND CONTINGENCIES
The Company participates in a joint venture GalvPro L.P. ("GalvPro") with
affiliates of Koninklijke Hoogovens ("Hoogovens") to construct and operate a
300,000-ton per year hot dipped galvanizing line. The facility is expected to be
completed and become operational in the fourth quarter of 1999.
Construction of GalvPro's facility is being financed primarily through a
ten-year term loan secured by GalvPro's assets. In connection with the initial
funding of the loan in February 1999, the Company, jointly and severally with
affiliates of Hoogovens, agreed to prepay up to a total of $6.0 million of the
loan if GalvPro's facility fails to attain certain defined efficiency standards
within an allowed period of time after operations commence. Except for the
prepay agreements, the $49.0 million term loan is non-recourse to the Company
and Hoogovens affiliates. The Company and Hoogovens affiliates have each secured
their respective obligations to the other by pledging their interest in GalvPro.
The amount of the prepayment is graduated based on operating performance,
but it will not exceed $6.0 million. The Company's management believes that the
likelihood that GalvPro will fail to meet the minimum operating performance
level is remote. Notwithstanding management's belief, GalvPro, together with the
project lender, is loss payee under a policy of efficacy insurance carried by
the project's general contractor. The policy provides up to $4.0 million in
coverage in the event GalvPro fails to commence operation on schedule and up to
an additional $4.0 million if GalvPro's facility fails to operate at the defined
efficiency standards required by the loan.
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 are qualified in
their entirety by the unaudited consolidated financial statements of the Company
and notes thereto. The unaudited consolidated financial statements of Weirton
Steel Corporation include the accounts of its majority owned subsidiaries.
Weirton Steel Corporation and/or Weirton Steel Corporation together with its
subsidiaries are hereafter referred to as the "Company."
OVERVIEW
The Company is a major integrated producer of flat rolled carbon steels
with major product lines consisting of sheet and tin mill product. Sheet product
includes hot and cold rolled and both hot-dipped and electrolytic galvanized
steels. Tin mill product includes tin-plate, chrome coated and black plate.
Domestic steel producers face significant competition from foreign
producers. Beginning in the second half of 1998 and continuing through the first
quarter of 1999, foreign competition adversely affected product prices in the
United States and the tonnages sold by domestic producers. The relative strength
of foreign economies, including foreign markets for steel, and fluctuation in
the value of the United States dollar against foreign currencies substantially
affect the intensity of foreign competition. In 1998, foreign producers exported
41.4 million tons of steel to the United States, an all time record, compared to
31.2 million tons in 1997. A
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significant portion of the increase occurred in the second half of 1998 and a
significant amount of such tonnage was being dumped in violation of U.S. law.
The Company and other domestic steel producers are seeking legal and
legislative remedies to stop the flow of illegally dumped steel imported into
the United States. On September 30, 1998, the Company, eleven of its competitors
and two labor organizations filed trade cases against imported hot-rolled steel
from Brazil, Japan and Russia. After making preliminary finding, on April 29,
1999, the United States Department of Commerce assessed final anti-dumping
duties against Japanese producers ranging up to 67%.
In February 1999, the Commerce Department had assessed preliminary duties
against Brazilian and Russian producers. The Commerce Department has delayed its
final ruling on Brazilian producers until July 6, 1999. A final ruling on
Russian producers has been delayed until June 10, 1999. The Commerce Department
had proposed a tentative suspension agreement with Russian producers. It is
possible that the Commerce Department is negotiating a final suspension
agreement with both Russian and Brazilian producers. If a suspension agreement
is ratified with Russian and/or Brazil, producers from those countries could
avoid tariffs.
The International Trade Commission ("ITC") is scheduled to rule whether or
not Japanese imports have damaged the domestic steel industry in June 1999. If
they rule that Japanese imports have damaged the industry, the duties assessed
by the Commerce Department will remain in place for five years. An ITC ruling on
imports from Russia and Brazil would occur after the Commerce Department
assesses duties against producers from those nations.
On March 17, 1999, the House of Representatives passed House Bill 975, the
"Stop the Illegal Steel Trade Act of 1999" which would limit steel imports into
the United States. Although the bill is expected to be taken up promptly in the
Senate, passage by the Senate and approval by the President will be necessary
before the bill would provide any relief to the domestic steel industry.
The efforts of the Company and other domestic producers and labor
organizations have had some impact on import levels. Imports declined in the
first quarter of 1999 when compared to the average rate of imports during the
second half of 1998. However, the import surge in the second half on 1998
continued to adversely affect the domestic steel market in the first quarter of
1999. When compared to the first quarter of 1998, the Company's first quarter
1999 results reflect weaker demand and lower pricing. In response to these weak
market conditions, the Company idled its No. 4 Blast Furnace in December 1998.
It remained idle for the first quarter of 1999. The Company met its order
requirements from the output of its No. 1 Blast Furnace, the reduction of
existing inventory and sourcing slabs from third parties.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
In the first quarter of 1999, the Company recognized a net loss of $27.9
million or $0.67 per diluted share compared to net income of $2.2 million or
$0.05 per diluted share for the same period in 1998. The results for the first
quarter of 1998 included a provision for profit sharing of $1.1 million.
Net sales in the first quarter of 1999 were $265.1 million, a decrease of
$76.2 million or 22% from the first quarter of 1998. Total shipments in the
first quarter of 1999 were 580 thousand tons compared to the first quarter of
1998 shipments of 686 thousand tons. Lower shipments and sales revenue were
caused by the continuation throughout the first quarter of 1999 of the market
decline created by the record volume of imports in the second half of 1998.
Sheet product net sales for the first quarter of 1999 were $143.7 million,
a decrease of $60.2 million from the first quarter of 1998. Shipments of sheet
product in the first quarter of 1999 were 376 thousand tons compared to 468
thousand tons in the first quarter of 1998. The decrease in sheet product sales
was primarily attributable to a decrease in the average selling price of
approximately $54 per ton, as well as lower shipping volume compared to the same
period in 1998.
Tin mill product net sales for the first quarter of 1999 were $121.2
million, a decrease of $16.2 million from the first quarter of 1998. Shipments
of tin mill product in the first quarter of 1999 were 204 thousand tons
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compared to 218 thousand tons for the same period in 1998. The decrease in tin
product sales was due to lower tin mill product shipments and overall lower
average selling prices in the first quarter of 1999 compared to the same period
in 1998.
Cost of sales for the first quarter of 1999 were $261.5 million, or $451
per ton, compared to $299.4 million, or $436 per ton, for the first quarter of
1998. Despite the Company's efforts to reduce and control costs, the cost of
sales in the first quarter of 1999 reflected higher per ton costs associated
with lower production volume.
Depreciation expense decreased $1.8 million to $15.2 million in the first
quarter of 1999 when compared to the first quarter of 1998. The decrease is
primarily attributable to lower production variable depreciation caused by
idling the No. 4 Blast Furnace and lower overall production levels throughout
the Company's operation.
Interest expense decreased $0.6 million in the first quarter of 1999 when
compared to the same period in 1998. The decrease was attributable to lower
average outstanding debt during the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had cash and equivalents of $80.8 million
compared to $68.4 million as of December 31, 1998. The Company's liquidity
requirements arise primarily from working capital requirements, debt service and
capital investments. The Company's statements of cash flows for the quarters
ended March 31 are summarized below:
<TABLE>
<CAPTION>
1999 1998
-------- ---------
DOLLARS IN THOUSANDS
<S> <C> <C>
Net cash provided by operating activities................... $15,358 $ 13,597
Net cash used by investing activities....................... (2,972) (10,857)
Net cash used by financing activities....................... -- (42,163)
------- --------
Increase (decrease) in cash................................. $12,386 $(39,423)
======= ========
</TABLE>
Net cash flows from operating activities were $15.4 and $13.6 million for
the quarters ended March 31, 1999 and March 31, 1998, respectively. Despite the
negative impact imports had on the Company's operating results, the Company's
cash flow from operating activities was $1.8 million greater in the first
quarter of 1999 due primarily to the implementation of inventory reduction
programs, the absence of a pension plan contribution and an income tax refund.
Net cash used by investing activities for the quarter ended March 31, 1999
consisted of $3.0 million in capital spending. Net cash used by investing
activities for the quarter ended March 31, 1998 consisted of $9.0 million in
capital spending and $1.8 million of investments in unconsolidated subsidiaries.
The Company's planned capital expenditures for 1999 are approximately $15.0
million.
The Company had no cash flow from financing activities for the quarter
ended March 31, 1999. The Company repaid $42.2 million of senior notes in March
1998.
On March 29, 1999, Weirton Receivables Inc. ("WRI"), a wholly owned
subsidiary of the Company amended its receivables participation agreement with a
group of three banks (the "WRI Amended Receivables Facility"). The WRI Amended
Receivables Facility provides a total availability for cash sales of up to $80.0
million, including a letter of credit subfacility of $25.0 million. As of March
31, 1999, after reductions for amounts in place under its letter of credit
subfacility, the base amount available for cash sales under the WRI Amended
Receivables Facility was $43.2 million.
The Company, WRI and one of the participating banks have agreed to an
additional facility which is currently not included in the amounts available for
sale under the WRI Amended Receivables Facility. The transaction would result in
a reduction in the amount available for cash sale under the WRI Amended
Receivables Facility, however, the additional facility would increase the total
participation interest in the Company's receivables available for cash sale.
Implementation of the additional facility is subject to the execution by the
parties of definitive documentation and the satisfaction of customary conditions
by the Company and WRI.
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In order to continue to improve its liquidity position, the Company is
pursuing various operating initiatives. These include continuing inventory
reduction programs supported by purchase consignment agreements and arrangements
related to the strategic sourcing of raw materials and slabs. Further inventory
reductions are planned through changes in operating practices.
The Company's net deferred tax assets were $157.6 million as of March 31,
1999. These consisted primarily of the carrying value of net operating loss
carryforwards and other tax credits and net deductible temporary differences
available to reduce the Company's cash requirements for the payment of future
federal income tax. The Company may be required in future periods to make cash
payments for income taxes under federal alternative minimum tax regulations.
As of December 31, 1998, the Company had a pension funding credit of
approximately $83.2 million. Accordingly, the Company is not required to
contribute to its pension plan in 1999. The Company made no contribution to its
pension plan during the first quarter of 1999.
Based upon available cash on hand and the amount of cash expected to be
generated from operating activities, including planned reductions in working
capital primarily through continuing inventory reduction programs and the
pension funding position, the Company expects to have sufficient cash to meet
its short term needs, including the retirement of its 10 7/8% Senior Notes in
October 1999 and the completion of the capital spending plan.
To the extent that cash on hand and the amount of cash expected to be
generated from operating activities do not generate an adequate amount of cash,
the Company expects that its cash requirements can be met by the WRI Amended
Receivables Facility.
YEAR 2000
The Company faces difficulties resulting from computer programs being
written using two digits rather than four to define the applicable year. The
Company owns computer hardware and software and date-sensitive electronic
devices which may recognize a date using "00" as the year 1900 rather than the
year 2000. Such systems could cause disruption of operations, including
production difficulties and a temporary inability to process ordinary business
transactions.
The Company started its Year 2000 readiness effort in 1996. The Company
currently employs a task force to analyze potential areas of risk associated
with the Year 2000. The Company, led by the task force, is executing a Year 2000
readiness plan which includes:
-- prioritizing and focusing on those information technology (IT) systems
and production control (non-IT) systems which are critical to the
operations and pose the greatest operational, environmental, quality
and financial risk to the Company.
-- allocating appropriate resources to fix the Year 2000 problem.
-- communicating with, and aggressively pursuing, critical third parties
to help ensure the Year 2000 readiness of their products and services.
-- performing rigorous Year 2000 testing of critical systems.
-- participating in and exchanging Year 2000 information with industry
trade associations, such as the American Iron & Steel Institute, the
Association of Iron and Steel Engineers and the Steel Industry Systems
Association.
-- engaging qualified outside engineering and information technology
consulting firms to assist in the Year 2000 impact assessment and
readiness effort.
-- assessing the readiness of third party vendors, suppliers, customers
and service providers.
State of Readiness
The Company has targeted the third quarter of 1999 for complete Year 2000
readiness including integration testing, contingency planning and tracking the
readiness of third parties. The Company will replace or upgrade
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current systems with third-party Year 2000 ready products and services. The
availability of information and services from third-party suppliers/vendors may
affect this schedule.
The chart below provides the percentage completion of the various phases of
the Year 2000 Plan. The phases included are;
1. Y2K Inventory--identification of the systems and processes that may be
affected by the year 2000.
2. Y2K Impact Assessment--the analysis performed to determine the Year 2000
date impact of the Company's Year 2000 inventory.
3. Y2K Readiness--The percent completion of Y2K readiness of inventory of
date impacted items including items already made Year 2000 ready and
those items made Year 2000 ready through renovation/replacement. We only
consider systems ready for which testing and implementation activities
have been completed.
<TABLE>
<CAPTION>
PERCENT COMPLETED
------------------------------------
Y2K Y2K IMPACT Y2K
31-MAR-99 INVENTORY ASSESSMENT READINESS
--------- --------- ---------- ---------
<S> <C> <C> <C>
IT Systems................................. 100% 100% 82%
Non-IT Systems............................. 100% 100% 80%
</TABLE>
Third Parties
The Company depends on third-party suppliers for raw materials, energy,
utilities, telecommunications, transportation and others goods and services
critical to the operation. The Company contacted all of its critical third party
suppliers and analyzed their Year 2000 readiness based on responses to the
Company's inquiries. For suppliers who did not respond, and for suppliers whose
responses the Company considers inadequate, the Company is conducting a
follow-up process. That process includes, among other things, additional
inquiries, site visits of the Company's most critical suppliers and contacting
those suppliers that did not respond to the initial inquiry.
Costs to Achieve Year 2000 Readiness
As part of its capital plan, the Company replaced, or is in the process of
replacing certain of its business systems dealing with human resources and
financial reporting. The planned replacement of these systems was accelerated to
achieve Year 2000 readiness. Through March 31, 1999, the Company spent $11.9
million on these projects. The Company has completed implementation of the human
resources system. The Company plans to spend an additional $3.8 million to
complete the financial reporting systems.
Through March 31, 1999, in addition to the replacement of the human
resources and financial reporting systems, the Company spent approximately $5.0
million in remediation costs to achieve Year 2000 readiness. All of these
remediation costs have been properly expensed in the period incurred in the
Company's Consolidated Statements of Income.
Management anticipates that the Company will spend an additional $2.5
million to $4.5 million, including approximately $0.6 million in capital
expenditures to achieve Year 2000 readiness. As the work of the task work
progresses, the Company will continue to revise its estimates of costs required
to achieve Year 2000 readiness.
Year 2000 Risks to the Company
The Year 2000 problem poses significant operational, environmental, quality
and financial risk to the Company. Failure to achieve Year 2000 readiness goals
could result in business consequences which might include production delays and
outages, inability to obtain needed goods and services from third party vendors
and suppliers, inability to process ordinary business transactions, lost revenue
and failure of management controls. Although the Company believes internal Year
2000 compliance will be achieved by the third quarter of 1999, there can be no
assurance that the Year 2000 problem will not have a material adverse affect on
the Company's business, financial condition and results of operations.
11
<PAGE> 12
Contingency Plans
The Company is currently identifying and developing specific contingency
plans to mitigate the effects of possible Year 2000 disruptions. The Company
expects to finalize contingency plans by the third quarter of 1999.
The cost of Year 2000 readiness, the dates by which the Company believes it
will achieve Year 2000 readiness and the adequacy of the Year 2000 contingency
plans are based on management's best estimates and assumptions of future events.
There can be no guarantee that these estimates will be achieved, and actual
results could differ materially from those anticipated.
ENVIRONMENTAL COMPLIANCE
The Company, as well as its domestic competitors, is subject to stringent
federal, state and local environmental laws and regulations concerning, among
other things, waste water discharge, air emissions and waste disposal. As a
consequence, the Company has incurred, and will continue to incur, substantial
capital expenditures and operating and maintenance expenses in order to comply
with regulatory requirements. The Company spent approximately $5.6 million for
pollution control capital projects in 1998.
As of March 31, 1999, the Company had a liability of $7.0 million for known
and identifiable environmental related cost to comply with negotiated and
mandated settlements of various actions brought by the United States
Environmental Protection Agency ("EPA") and the West Virginia Department of
Environmental Protection. The EPA is also requiring the Company to conduct
investigative activities to determine the nature and extent of hazardous
materials which may be located on the Company's property and to evaluate and
propose corrective measures needed to abate any unacceptable risks. Because the
Company does not currently know the nature or the extent of hazardous material
which may be located on the property, it is not possible at the present time to
estimate the ultimate cost to comply with EPA's requirements or conduct remedial
activity that may be required.
OUTLOOK
Record breaking volumes of unfairly priced imports weakened the Company's
order entry and shipping rates and adversely affected the Company's results in
the second half of 1998 and the first quarter of 1999. While legal and
legislative solutions sought by the Company and the steel industry have helped
slow the surge of imports into the United States, the market continued to be
adversely affected by oversupply relative to demand during the first quarter.
The Company expects the market for its products will begin to improve in the
second quarter of 1999. However, the Company believes that such an improvement
will not return second quarter 1999 shipping volumes and selling prices to the
levels consistent with those prior to the import surge in the second half of
1998. The Company will continue to pursue legal and legislative remedies against
illegally dumped imports, including those against which duties and other
remedies have yet to be applied.
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, including sales levels, market
conditions, pricing and other factors 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 or anticipated 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. The Company's forward-looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995, as
embodied in the above referenced statute. 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.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes in information has occurred for the three month period
ended March 31, 1999 that would cause the information reported in this section
in the Company's 1998 Form 10-K to be inaccurate.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT 27.--FINANCIAL DATA SCHEDULE FOR THREE MONTHS ENDED MARCH 31, 1999
(FILED HEREWITH)
(b) REPORTS ON FORM 8-K
None
13
<PAGE> 14
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
By /s/ MARK E. KAPLAN
------------------------------------
Mark E. Kaplan
Vice President--Information
Technology
and Controller
(Principal Accounting Officer)
May 14, 1999
14
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