<PAGE> 1
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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 JUNE 30, 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)
DELAWARE 06-1075442
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification #)
400 THREE SPRINGS DRIVE, WEIRTON, WEST VIRGINIA 26062-4989
(Address of principal executive offices) (Zip Code)
(304) 797-2000
(Registrant's telephone number, including area code:)
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock ($.01 par value) of the Registrant
outstanding as of July 31, 1998 was 43,562,013.
- --------------------------------------------------------------------------------
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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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES...................................... $267,276 $336,417 $532,414 $677,738
OPERATING COSTS:
Cost of sales............................. 242,262 291,373 503,778 590,809
Selling, general and administrative
expense................................. 9,681 9,170 19,930 19,051
Depreciation.............................. 15,163 17,019 30,339 34,038
Provision for profit sharing.............. -- 2,590 -- 3,713
-------- -------- -------- --------
Total operating costs................ 267,106 320,152 554,047 647,611
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS.................. 170 16,265 (21,633) 30,127
Income(loss) from unconsolidated
subsidiaries............................ (80) 64 (93) 87
Interest expense.......................... (11,177) (10,755) (22,201) (22,412)
Interest income........................... 751 1,434 1,369 2,616
ESOP contribution......................... (652) (652) (1,305) (1,305)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES.............. (10,988) 6,356 (43,863) 9,113
Income tax provision (benefit)............ (1,630) 1,176 (6,546) 1,686
-------- -------- -------- --------
INCOME (LOSS) BEFORE MINORITY INTEREST......... (9,358) 5,180 (37,317) 7,427
Minority interest in loss of consolidated
subsidiary.............................. 126 -- 229 --
-------- -------- -------- --------
NET INCOME (LOSS).............................. $ (9,232) $ 5,180 $(37,088) $ 7,427
======== ======== ======== ========
PER SHARE DATA:
Weighted average number of common shares (in
thousands):
Basic..................................... 41,580 42,090 41,579 42,506
Diluted................................... 41,580 43,870 41,579 44,268
NET INCOME (LOSS) PER SHARE:
Basic..................................... $ (0.22) $ 0.12 $ (0.89) $ 0.17
Diluted................................... $ (0.22) $ 0.12 $ (0.89) $ 0.17
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
WEIRTON STEEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNT)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED) (AUDITED)
----------- ------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and equivalents, includes restricted cash of $925
and $1,275, respectively.............................. $ 64,204 $ 68,389
Receivables, less allowances of $7,352 and $8,574,
respectively.......................................... 130,403 112,278
Inventories............................................ 182,119 259,332
Deferred income taxes.................................. 41,254 43,254
Other current assets................................... 3,189 4,443
---------- ----------
Total current assets.............................. 421,169 487,696
Property, plant and equipment, net.......................... 555,834 576,238
Investment in unconsolidated subsidiaries................... 7,845 7,938
Deferred income taxes....................................... 117,957 111,411
Other assets and deferred charges........................... 11,684 12,416
---------- ----------
Total Assets...................................... $1,114,489 $1,195,699
========== ==========
LIABILITIES:
Current Liabilities:
Current portion of long term debt obligations.......... $ 84,044 $ 84,044
Payables............................................... 78,770 120,697
Employment costs....................................... 56,410 63,966
Taxes other than income taxes.......................... 15,076 15,060
Other current liabilities.............................. 11,623 10,957
---------- ----------
Total current liabilities......................... 245,923 294,724
Long term debt obligations............................. 304,796 304,626
Long term pension obligations.......................... 87,684 81,908
Postretirement benefits other than pensions............ 335,497 337,443
Other long term liabilities............................ 32,553 33,217
---------- ----------
Total Liabilities................................. 1,006,453 1,051,918
Redeemable stock, net....................................... 23,465 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............................. 457,794 457,851
Retained earnings (deficit)............................ (366,231) (329,141)
Other stockholders' equity............................. (7,427) (7,599)
---------- ----------
Total Stockholders' Equity........................ 84,571 121,543
Total Liabilities, Redeemable Stock and
Stockholders' Equity............................ $1,114,489 $1,195,699
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
WEIRTON STEEL CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(37,088) $ 7,427
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation........................................... 30,339 34,038
Amortization of deferred financing costs............... 783 922
ESOP Contribution...................................... 1,305 1,305
Deferred income taxes.................................. (6,546) (64)
Cash provided (used) by working capital items:
Receivables.......................................... (18,125) (6,734)
Inventories.......................................... 77,213 39,193
Other current assets................................. 3,254 (1,739)
Payables............................................. (41,927) (9,029)
Other current liabilities............................ (6,874) (1,809)
Long term pension obligation........................... 5,776 (6,410)
Other.................................................. (2,359) 3,119
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 5,751 60,219
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in unconsolidated subsidiaries................. -- (7,321)
Capital spending.......................................... (9,936) (19,791)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES....................... (9,936) (27,112)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock............................. -- (4,617)
Repayment of debt obligations.......................... -- (42,163)
-------- --------
NET CASH USED BY FINANCING ACTIVITIES....................... -- (46,780)
-------- --------
NET CHANGE IN CASH AND EQUIVALENTS.......................... (4,185) (13,673)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................. 68,389 124,690
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD....................... $ 64,204 $111,017
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of capitalized interest............. $ 14,517 $ 24,027
Income taxes paid (refunded), net...................... (1,982) 2,437
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
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 controlling 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>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Raw materials............................................... $ 52,743 $ 84,274
Work-in-process............................................. 43,651 82,331
Finished goods.............................................. 85,725 92,727
-------- --------
$182,119 $259,332
======== ========
</TABLE>
NOTE 3
EARNINGS PER SHARE
For the three months and the six months ended June 30, 1999, basic and
diluted earnings per share were the same; however, securities totaling 1,725,665
and 1,720,516, respectively, were excluded from the diluted
5
<PAGE> 6
earnings per share calculation due to their antidilutive effect. The following
represents a reconciliation between basic earnings per share and diluted
earnings per share for the three months and six months ended June 30, 1998.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
------------------------------- -------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share:
Net income............. $5,180 42,090,427 $0.12 $7,427 42,505,685 $0.17
Effect of dilutive
securities
Series A Preferred..... -- 1,726,189 -- -- 1,726,987 --
Stock options.......... -- 53,193 -- -- 35,766 --
------ ---------- ----- ------ ---------- -----
Diluted earnings per
share:
Net income............. $5,180 43,869,809 $0.12 $7,427 44,268,438 $0.17
====== ========== ===== ====== ========== =====
</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 three months and the six months ended
June 30, 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
other terms and conditions of the WRI Amended Receivables Facility are
substantially the same as those of the pre-existing facility.
As of June 30, 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
$43.1 million.
Because the WRI Amended Receivables Facility contains concentration
limitation provisions, from time to time, receivables from one of the Company's
major customers were ineligible to be considered in the calculation of
participation interest available for cash sale to the banks. As a result, on
August 9, 1999, WRI and one of the participating banks agreed to a second
receivable facility ("Additional Receivable Facility") based on the receivables
of the aforementioned major customer of the Company.
The Additional Receivable Facility provides for a total commitment by the
participating bank of up to $20 million. The amount of participation interest in
the accounts receivable from the major customer available for sale to the bank
fluctuates depending upon the nature and amount of receivables from the customer
generated by
6
<PAGE> 7
the Company which are sold into the program and certain financial tests
applicable to them. Events that would cause the termination of the Additional
Facility are similar to those that exist under the WRI Amended Receivables
Facility.
On August 10, 1999, the total base amount for cash sale under both the WRI
Amended Receivables Facility and the Additional Receivable Facility was $65.5
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.
As of June 30, 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 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.
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 of up to $49.0 million 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 together with the unaudited consolidated
condensed financial statements and notes thereto. The unaudited consolidated
condensed financial statements of Weirton Steel Corporation include the accounts
of its wholly and
7
<PAGE> 8
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
half 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 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 June 11, 1999, the International Trade Commission ("ITC") ruled that
hot-rolled imports from Japan had damaged the domestic steel industry. Based on
the ITC's ruling, anti-dumping duties of up to 67% imposed by the U.S.
Department of Commerce will be effective for five years.
The Company had also filed hot-rolled trade cases against Brazilian and
Russian producers. The Commerce Department negotiated voluntary restraint
agreements with producers from Russian and Brazil in lieu of imposing duties.
The agreements set a maximum annual tonnage of hot rolled exports from each
country into the domestic market. The agreements also set a minimum price for
the imported products.
On July 12, 1999, the ITC ruled unanimously that evidence existed that cold
rolled imports from twelve countries damaged the domestic steel industry in
1998. The ruling came in response to complaints brought by the Company and six
other domestic producers that foreign producers from twelve countries sold cold
rolled steel at prices that violated U.S. trade laws. The case has been
forwarded to the Commerce department which will begin its investigation on the
matter.
The efforts of the Company and other domestic producers and labor
organizations have had some impact on import levels. Imports declined in the
first half of 1999 when compared to the average rate of imports during the
second half of 1998. However, the import surge in the second half of 1998
continued to adversely affect the domestic steel market in the first half of
1999. When compared to the first half of 1998, the Company's first half 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 half 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 JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
In the second quarter of 1999, the Company recognized net loss of $9.2
million or $0.22 per diluted share compared to net income of $5.2 million or
$0.12 per diluted share for the same period in 1998. The results for the second
quarter of 1998 included a provision for profit sharing of $2.6 million.
Net sales in the second quarter of 1999 were $267.3 million, a decrease of
$69.1 million or 21% from the second quarter of 1998. Total shipments in the
second quarter of 1999 were 606 thousand tons compared to the second quarter of
1998 shipments of 695 thousand tons. Lower shipments and sales revenue reflect a
weak steel market that has not yet recovered from the record volume of imports
in the second half of 1998.
8
<PAGE> 9
Sheet product net sales for the second quarter of 1999 were $157.0 million,
a decrease of $61.4 million from the second quarter of 1998. Shipments of sheet
product in the second quarter of 1999 were 422 thousand tons compared to 507
thousand tons in the second quarter of 1998. The decrease in sheet product sales
was primarily attributable to a decrease in average selling prices as well as
lower shipping volume.
Tin mill product net sales for the second quarter of 1999 were $110.2
million, a decrease of 7.8 million from the second quarter of 1998. Shipments of
tin mill product in the second quarter of 1999 were 185 thousand tons compared
to 188 thousand tons for the same period in 1998. The decrease in tin mill
product sales was due primarily to overall lower average selling prices.
Costs of sales for the second quarter of 1999 were $242.3 million, or $400
per ton, compared to $291.4 million, or $419 per ton, for the second quarter of
1998. The negative impact of lower production volume and a higher cost product
mix were offset as a result of continuing cost reduction efforts and the
economic benefits of sourcing slabs from third parties to meet incremental
requirements
Depreciation expense decreased $1.8 million to $15.2 million in the second
quarter of 1999 when compared to the second quarter of 1998. The decrease is
primarily attributable to lower units of production depreciation caused by
idling the No. 4 Blast Furnace and lower overall production levels throughout
the Company's operation.
The increase in selling, general and administrative expense was primarily
attributable to costs incurred in the start-up of the Company's consolidated
subsidiary, MetalSite, L.P.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
In the first half of 1999, the Company recognized net loss of $37.1 million
or $0.89 per diluted share compared to net income of $7.4 million or $0.17 per
diluted share for the same period in 1998. The results for the first half of
1998 included a provision for profit sharing of $3.7 million.
Net sales in the first half of 1999 were $532.4 million, a decrease of
$145.3 million or 21% from the first half of 1998. Total shipments in the first
half of 1999 were 1,186 thousand tons compared to the first half of 1998
shipments of 1,381 thousand tons. Lower shipments and sales revenue were caused
by the continuation throughout the first half 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 half of 1999 were $300.9 million, a
decrease of $121.4 million from the first half of 1998. Shipments of sheet
product in the first half of 1999 were 798 thousand tons compared to 974
thousand tons in the first half of 1998. The decrease in sheet product sales was
attributable to a decrease in average selling prices of $68 per ton as well as
lower shipping volume.
Tin mill product net sales for the first half of 1999 were $231.5, a
decrease of $23.9 million from the first half of 1998. Shipments of tin mill
product in the first half of 1999 were 389 thousand tons compared to 407
thousand tons for the same period in 1998. The decrease in revenue from tin mill
product sales was due to lower average selling prices and lower shipment volume.
Costs of sales for the first half of 1999 were $503.8 million, or $425 per
ton, compared to $590.8 million, or $428 per ton, for the first half of 1998.
The negative impact of lower production volume and a higher cost product mix was
offset by the Company's continuing cost reduction programs and the economic
benefits of sourcing slabs from third parties.
Depreciation expense decreased $3.7 million to $30.3 million in the first
six months of 1999 when compared to the same period in 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.
The increase in selling, general and administrative expense was primarily
attributable to costs incurred in the start-up of the Company's consolidated
subsidiary, MetalSite, L.P.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had cash and equivalents of $64.2 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 six months
ended June 30 are summarized below:
<TABLE>
<CAPTION>
1999 1998
-------- ---------
DOLLARS IN THOUSANDS
<S> <C> <C>
Net cash provided by operating activities................... $ 5,751 $ 60,219
Net cash used by investing activities....................... (9,936) (27,112)
Net cash used by financing activities....................... -- (46,780)
------- --------
Decrease in cash............................................ $(4,185) $(13,673)
======= ========
</TABLE>
Net cash flows from operating activities were $5.8 million and $60.2
million for the six months ended June 30, 1999 and June 30, 1998, respectively.
The decline in cash flow from operations is primarily due to weaker operating
results created by a soft steel market. Also, while inventory reductions in 1999
exceeded those in 1998, the cash flow gains were offset by the negative cash
flow impact of decreased payables and increased receivables.
Net cash used by investing activities for the first half of 1999 consisted
of $9.9 million in capital spending. Net cash used by investing activities for
the same period in 1998 consisted of $19.8 million in capital spending and $7.3
million of investments in unconsolidated subsidiaries. The Company's planned
capital expenditures for 1999 are approximately $20.0 million.
The Company had no cash flow from financing activities for the first half
of 1999. The Company repaid $42.2 million of senior notes in March 1998 and
repurchased $4.6 million of its common stock during the second quarter of 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 June
30, 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 $43.1 million.
Because the WRI Amended Receivables Facility contains concentration
limitation provisions, from time to time, receivables from one of the Company's
major customers were ineligible to be considered in the calculation of
participation interest available for cash sale to the banks. As a result on
August 9, 1999, WRI and one of the participating banks agreed to a second
receivable facility ("Additional Receivable Facility") based on the receivables
of the aforementioned major customer of the Company.
The Additional Receivable Facility provides for a total commitment by the
participating bank of up to $20 million. The amount of participation interest in
the accounts receivable from the major customer available for sale to the bank
fluctuates depending upon the nature and amount of receivables from the customer
generated by the Company which are sold into the program and certain financial
tests applicable to them. Events that would cause the termination of the
Additional Facility are similar to those that exist under the WRI Amended
Receivables Facility.
On August 10, 1999, the total base amount for cash sale under both the WRI
Amended Receivables Facility and the Additional Receivables Facility was $65.5
million.
In order to continue to improve its liquidity position, the Company
continues to pursue 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.
10
<PAGE> 11
The Company's net deferred tax assets were $159.2 million as of June 30,
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 half of 1999.
Based upon available cash on hand, the amount of cash expected to be
generated from operating activities, and the amount of cash available under the
WRI Receivable Facility, 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.
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 (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 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.
11
<PAGE> 12
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
30-JUN-99 INVENTORY ASSESSMENT READINESS
- --------- --------- ---------- ---------
<S> <C> <C> <C>
IT Systems................................. 100% 100% 100%
Non-IT Systems............................. 100% 100% 98%
</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 certain of its business
systems dealing with human resources. The Company also replaced, or is in the
process of replacing, certain of its business systems dealing with financial
reporting. The planned replacement of these systems was accelerated to achieve
Year 2000 readiness. Through June 30, 1999, the Company spent $14.1 million on
these projects. The Company plans to spend an additional $1.5 million to
complete testing of the financial reporting systems.
Through June 30, 1999, in addition to the replacement of the human
resources and financial reporting systems, the Company spent approximately $6.0
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 $1.0
million to $3.0 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.
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.
12
<PAGE> 13
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 June 30, 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 half 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 half of 1999. The
Company expects the market for its products, which began to improve in the
second quarter will continue to improve in the third quarter of 1999. However,
the Company believes that such an improvement will not return third 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. The Company will
also continue to take necessary actions to reduce costs and improve overall
competitiveness.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
FASB has approved Statement No. 137, Accounting for Derivative Instruments and
Hedging Activities--Deferral of the effective date of FASB Statement No. 133,
which amends Statement 133 to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000 (that is January 1, 2001 for companies with
calendar years). Had the Company applied this standard currently, the effect on
the Company's results of operations for the period ended June 30, 1999 would be
immaterial.
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.
13
<PAGE> 14
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes in information has occurred for the three month and six
month periods ended June 30, 1999 that would cause the information reported in
this section in the Company's 1998 annual report on Form 10-K to be inaccurate.
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
On May 26, 1999, the Company's Annual Meeting of Stockholders was held and
the following proposals were voted upon:
(1) Affirmation of the four nominees to serve on the Board of Directors until
2001:
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD
--------- --------------
<S> <C> <C>
Craig T. Costello................................. 39,726,404 13,814,077
Earl E. Davis..................................... 49,903,343 3,637,138
Robert J. D'Anniballe............................. 49,850,395 3,690,086
George E. Doty.................................... 50,384,441 3,156,040
Mark G. Glyptis................................... 50,174,171 3,366,310
</TABLE>
(2) Affirmation of Arthur Andersen LLP as the Company's Independent Public
Accountants for the fiscal year ending December 31, 1999:
For: 47,141,047 Against: 6,231,423 Abstain: 168,011
(3) A proposal to amend the Company's Restated Certificate of Incorporation to
change the qualification limitation for service as a director from age 65 to
age 68 did not receive the required approval of 80% of the outstanding
voting stock:
For: 37,501,554 Against: 15,532,222 Abstain: 506,605
(4) A proposal to pass a resolution engaging an investment banker to auction the
Company for sale in 1999 did not receive the required approval:
For: 3,242,152 Against: 35,541,165 Abstain: 14,757,164
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
14
<PAGE> 15
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
Controller
(Principal Accounting Officer)
August 13, 1999
15
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 64,204
<SECURITIES> 0
<RECEIVABLES> 137,755
<ALLOWANCES> (7,352)
<INVENTORY> 182,119
<CURRENT-ASSETS> 421,169
<PP&E> 1,025,636
<DEPRECIATION> (469,802)
<TOTAL-ASSETS> 1,114,489
<CURRENT-LIABILITIES> 245,923
<BONDS> 304,796
23,465
233
<COMMON> 435
<OTHER-SE> 83,903
<TOTAL-LIABILITY-AND-EQUITY> 1,114,489
<SALES> 532,414
<TOTAL-REVENUES> 532,414
<CGS> 503,778
<TOTAL-COSTS> 554,047
<OTHER-EXPENSES> (200)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,201
<INCOME-PRETAX> (43,634)
<INCOME-TAX> (6,546)
<INCOME-CONTINUING> (37,088)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,088)
<EPS-BASIC> (0.89)
<EPS-DILUTED> (0.89)
</TABLE>
