<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NO. 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 No.)
400 THREE SPRINGS DRIVE,
WEIRTON, WEST VIRGINIA 26062
(Address of principal executive offices) (Zip code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 304-797-2000
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
<S> <C>
Common Stock, Par Value $0.01 Per Share New York
10 7/8% Notes due 1999 New York
11 3/8% Notes due 2004 New York
10 3/4% Notes due 2005 New York
</TABLE>
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: X No:
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
Based on the closing price as of March 19, 1999, the aggregate market value
of the voting stock held by nonaffiliates of the Registrant was $75,413,014. The
foregoing calculation includes shares allocated under the Registrant's 1984 and
1989 Employee Stock Ownership Plans to the accounts of employees who are not
otherwise affiliates and unallocated shares under the Registrant's 1989 Employee
Stock Ownership Plan subject to voting instructions of employees who are not
otherwise affiliates.)
The number of shares of Common Stock ($.01 par value) of the Registrant
outstanding as of March 19, 1999 was 41,578,068.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Certain portions of the Registrant's 1998 Annual Report to Stockholders are
incorporated by reference into Parts I, II and IV of this Annual Report on
Form 10-K to the extent provided herein.
(2) Certain portions of the Registrant's definitive Proxy Statement filed
pursuant to Regulation 14 (filed within 120 days after the end of the fiscal
year covered hereby) in connection with the Registrant's 1999 Annual Meeting
of Stockholders are incorporated by reference into Part III of this Annual
Report on Form 10-K to the extent provided herein.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
ITEM
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I................................................................ 1
1. Business.................................................... 1
2. Properties.................................................. 12
3. Legal Proceedings........................................... 13
4. Submission of Matters to a Vote of Security Holders......... 13
PART II............................................................... 13
5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 13
6. Selected Financial Data..................................... 14
7. Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 14
7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 14
8. Financial Statements and Supplementary Data................. 15
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 15
PART III.............................................................. 15
10. Directors and Executive Officers of the Registrant.......... 15
11. Executive Compensation...................................... 16
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 16
13. Certain Relationships and Related Transactions.............. 16
PART IV............................................................... 17
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 17
SIGNATURES............................................................ 21
EXHIBIT INDEX......................................................... 22
FINANCIAL STATEMENT SCHEDULES......................................... S-2
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
BACKGROUND
Weirton Steel Corporation (the "Company") and its predecessor companies
have been in the business of making and finishing steel products for nearly 90
years at the Company's facilities located in Weirton, West Virginia. From
November 1929 to January 1984, the Company's business had been operated as the
Weirton Steel Division of National Steel Corporation. Incorporated in Delaware
in November 1982, the Company acquired its principal operating assets in January
1984.
The Company is a major "integrated" steelmaker. As such, it makes carbon
steel from raw materials to industry and customer specifications. In primary
steelmaking, iron ore pellets, iron ore, coke, limestone and other raw materials
are consumed in blast furnaces to produce molten iron or "hot metal." The
Company then converts the hot metal into raw or liquid steel through its basic
oxygen furnaces where impurities are removed, recyclable scrap is added and
metallurgy for end use is determined on a batch by batch basis. The Company's
basic oxygen process shop ("BOP") is one of the largest in North America,
employing two vessels, each with a steelmaking capacity of 360 tons per heat.
Liquid steel from the BOP is then formed into slabs through the Company's multi-
strand continuous caster. The slabs are then reheated, reduced and finished into
coils by extensive rolling and shaping at the Company's modern hot strip mill
and, in many cases, by further tempering, plating or coating at the Company's
downstream finishing operations. See Item 2. "Properties" for a more detailed
description of the specific units involved in the Company's operations.
PRINCIPAL PRODUCTS AND MARKETS
The Company offers a wide range of rolled carbon steel products, including
hot and cold rolled sheet steel and both hot-dipped and electrolytic galvanized
products (collectively, "Sheet Products"), as well as a broad line of coated
steels, including tin plate, chrome coated, and black plate, comprising Tin Mill
Products ("TMP"). The Company's products emphasize the narrow to medium widths,
up to 48" wide, reflective of its rolling and finishing equipment, and cover a
broad range of gauges, finishes and performance specifications. The Company has
developed significant expertise in filling orders with demanding specifications.
The percentages of the Company's total revenues derived from the sale of
Sheet Products and TMP for each year in the five year period ended December 31,
1998 are shown in the following table. Total revenues include the sale of
"secondary" products, principally those products not meeting prime
specifications.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994(1)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Sheet products.................................. 60% 62% 59% 64% 70%
Tin mill products............................... 40 38 41 36 30
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
- ---------------
(1) The large differential in Sheet Product revenues compared to TMP revenues in
1994 resulted from strong market demand for the Company's Sheet Products and
a fire in April 1994 that severely damaged a cold rolling facility required
for the production of a substantial portion of the Company's TMP. The
facility was rebuilt and returned to normal operations in the first quarter
of 1995, which allowed the Company to resume a more traditional product mix.
1
<PAGE> 4
The following table shows the percentage of total net tons of steel
products shipped by the Company to each of its principal markets for the five
year period ended December 31, 1998.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Service Centers and Sheet and Strip Converters.... 50% 43% 48% 43% 45%
Food and Beverage................................. 27 31 30 25 25
Pipe and Tube..................................... 6 5 6 7 6
Construction...................................... 9 10 8 9 13
Consumer Durables................................. 3 3 2 3 4
Exports........................................... 3 4 2 9 0
Other............................................. 2 4 4 4 7
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
A substantial portion of the Company's revenues are derived from long-time
customers, although the Company actively seeks new customers and constantly
seeks new markets for its products. A substantial share of the Company's Sheet
Products and TMP are shipped to customers located in the eastern portion of the
United States. A strong demand worldwide for flat rolled carbon steel products
that began in 1994 continued throughout 1995. The Company responded by exporting
approximately 9% of its shipments in 1995 compared to previous years when only
nominal quantities were shipped to export markets. The Company's export efforts
were hampered in 1996 by unfavorable exchange rates and prices in foreign
markets which disadvantaged domestic producers. As a result, the Company
experienced a sharp reduction in its 1996 exports of Sheet Products, while TMP
exports actually increased. The Company's 1997 exports improved over 1996
levels, but remained adversely affected, particularly for Sheet Products, by the
continuing strength of the US Dollar. Exports decreased in 1998 compared to 1997
as a continued strong U.S. Dollar and economic difficulties in many foreign
countries caused an unfavorable export environment. The Company plans to ship
products to international markets through its joint venture, WeBCo International
LLC ("WeBCo"), when favorable economic and business conditions exist. See
"Business Strategy and Development."
The Company's products are sold through salaried Company employees who
operate from corporate headquarters and through seven regional sales offices.
Sales orders taken in the field are subject to home office approval. Several
years ago the Company combined its sales force structure from separate Sheet
Products and TMP organizations into a unified commercial sales organization. The
unified organization is closely linked with technical services personnel who
assist the Company with product engineering and development. The Company
believes that the sales organization plays an important role in identifying and
achieving a more favorable strategic market mix for the Company. In October
1996, the Company became the first major domestic producer to initiate product
sales from its Internet website. In 1998, the Company began selling its excess
and non-prime products through MetalSite L.P. (http://www.metalsite.net), a
limited partnership including the Company, LTV Corporation and Steel Dynamics,
Inc. See "Business Strategy and Development." The Company continues to explore
new means and methods of expanding customer access through electronic markets.
Trade orders on hand for the Company's products at December 31, 1998, 1997
and 1996 amounted to approximately 305, 471, and 528 thousand tons,
respectively. Substantially all orders on hand at any time are expected to be
filled within a 12 month period. Since the Company produces steel in response to
orders primarily of established grades and specifications, resulting in short
order processing time and relatively rapid inventory turnover, it does not
believe that order backlog is material to its business.
Sheet Products. Hot rolled products are sold directly from the hot strip
mill as "hot bands," or are further processed using hydrochloric acid to remove
surface scale and are sold as "hot rolled pickled" or "hot rolled pickled and
oiled." Hot roll is used for unexposed parts in machinery, construction products
and other durable goods. Most of the Company's sales of hot rolled products have
been to steel service centers, pipe and tube manufacturers and converters. In
1998, the Company shipped 747 thousand tons of hot rolled sheet, which accounted
for 18% of its total revenues.
2
<PAGE> 5
Cold rolled sheet requires further processing including additional rolling,
annealing and tempering to enhance ductility and surface characteristics. Cold
roll is used in the construction, steel service center, commercial equipment and
container markets, primarily for exposed parts where appearance and surface
quality are important considerations. In 1998, the Company shipped 336 thousand
tons of cold rolled sheet, which accounted for 11% of its total revenues.
Galvanized hot-dipped and electrolytic sheet is coated primarily with zinc
compounds to provide extended anti-corrosive properties. Galvanized is sold to
the electrical, construction, automotive, container, appliance and steel service
center markets. In 1998, the Company shipped 685 thousand tons of galvanized
products, which accounted for 31% of total revenues. The Company is seeking to
expand its participation in galvanized steel markets primarily through GalvPro
L.P. ("GalvPro") its joint venture with Hoogovens Staal B.V. See "Business
Strategy and Development."
Generally, the Company obtains relatively higher profit margins on those
Sheet Products that require more extensive processing. Differences in pricing
among these products have varied over time depending on changes in their uses,
demand and the competitive environment. Sheet Products of the hot rolled variety
are widely regarded as commodity items in the steel industry.
The following table, based on information from the American Iron and Steel
Institute ("AISI"), shows the Company's historical share of the domestic Sheet
Products market for each year in the five year period ended December 31, 1998.
SHEET PRODUCTS
HISTORICAL MARKET SHARE
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(IN THOUSANDS OF TONS)
<S> <C> <C> <C> <C> <C>
Industry shipments.................... 51,586 52,015 50,022 47,845 47,217
Company shipments (1)................. 1,771 1,918 1,957 1,955 1,991
Company market share.................. 3.4% 3.7% 3.9% 4.1% 4.2%
</TABLE>
- ---------------
(1) Includes secondary products.
While the Company's presence in the overall domestic Sheet Products market
is limited, in order to compete more effectively, the Company has concentrated
on developing offerings of more highly processed products and production
capability to provide the coil sizes favored by most of its customers. The
Company's strategy for development of its sheet business is focused on
increasing its mix of coated products, such as galvanized, while capitalizing on
developing specialty markets, such as construction, where the Company believes
that its GALFAN (registered trademark) products have potential applications in
roofing and framing. As part of its Sheet Products marketing strategy, the
Company is also making efforts to develop relationships with strip re-rollers to
increase sales of its cold rolled products, to enhance high quality end use of
its products marketed through steel service centers, and to develop the hot
rolled market for heavier gauge and higher carbon applications.
Tin Mill Products. The Company has enjoyed substantial market share and a
widely held reputation as a high quality producer of TMP. Although categorized
as "tin mill products," these products actually comprise a wide variety of light
gauge coated steels. Tin plate and black plate products are sold under the
Company name and under such registered trademarks as WEIRITE and WEIRLITE. In
addition to tin plate and black plate, the Company produces electrolytic
chromium coated steel under the registered trademark WEIRCHROME.
The Company is one of the largest domestic producers of TMP. During 1998,
the Company's market share of TMP was approximately 22%. The Company's market
share of TMP has consistently approximated that level, except for 1994 when it
achieved only a 15% share due to an extended cold rolling facility outage. TMP
shipments on an industry-wide basis have remained relatively steady in recent
years even as plastic, aluminum, composites and other materials have competed
for potential growth in some applications. The TMP market is now primarily
directed at food, beverage, and general line cans. The majority of the Company's
TMP sales have been to can manufacturing and packaging companies, a substantial
amount of whose annual requirements are
3
<PAGE> 6
established in advance. This market is characterized by a small number of
manufacturers and increasing concentration of buying power. During 1998,
shipments to the Company's five largest TMP customers accounted for 28% of total
revenues and shipments to Ball Corporation accounted for approximately 12% of
total revenues. The balance of the TMP is sold to other can manufacturers,
manufacturers of caps and closures and specialty products ranging from film
cartridges, lighting fixtures and battery jackets to cookie sheets and curtain
rods. As a result of more predictable sales patterns for TMP, the Company is
able to determine in advance a significant portion of its production
requirements, allowing it to operate its production facilities more efficiently
and adjust its marketing and production efforts for other products.
Historically, the greater predictability of the TMP market and its relative
pricing stability have served to cushion the Company against greater price
volatility in the Sheet Product market. However, TMP has long been a market with
limited opportunities for expansion on the domestic front.
The following table, based on AISI information, shows the Company's
historical share of the domestic TMP market for each year in the five year
period ended December 31, 1998.
TIN MILL PRODUCTS
HISTORICAL MARKET SHARE
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
(IN THOUSANDS OF TONS)
<S> <C> <C> <C> <C> <C>
TMP industry shipments..................... 3,714 4,058 4,108 3,942 4,137
Company shipments (1)...................... 804 854 899 763 615
Company market share....................... 22% 21% 22% 19% 15%
</TABLE>
- ---------------
(1) Includes secondary products.
The Company has the capacity to produce sufficient quantities of "clean"
steel (steel with fewer impurities) to fill anticipated TMP orders for the near
term. The Company's facilities and expertise also allow it to produce the
lightest gauges of tin plate, enhancing the manufacturing efficiencies of the
Company's customers and promoting the use of its steel in leading edge
technology products such as thin-walled containers.
The Company has been a leading innovator in the development of can making
technology through its WEIRTEC (registered trademark) research and development
center. Although highly competitive prices for aluminum have relegated steel to
an insignificant share of the domestic beverage container market in recent
years, the Company believes that two piece thin-walled steel beverage containers
have potential for growth in this sector, based primarily on improved production
efficiencies for steel cans and increased industry success in promoting the
recycling of steel. However, the Company also believes it is unlikely that this
potential will be realized without a sustained increase in aluminum prices and
an effective program by domestic TMP producers encouraging can makers to convert
beverage can lines to steel. The Company engages in other end product research
and development and provides support services to its customers. The Company
believes these services have been of significant assistance, particularly to its
TMP customers, and promote the consumption of the Company's products. See
"Research and Development."
The Company owns and operates a 1.1 million square foot Finished Products
Warehouse (the "FPW") near the Company's mill with storage and staging areas for
TMP. The FPW facilitates "just in time" production and delivery to five of the
Company's major TMP customers which are located in attached, or nearby,
manufacturing facilities. As steel coils are needed by customers' operations,
they are moved from the adjoining central storage areas and loaded directly on
to customers' production lines. This arrangement provides reductions in
transportation costs for the Company and its customers.
RELATED PRODUCTS AND SERVICES
The Company is currently rolling and finishing various types and grades of
stainless steel on its hot mill on a tolling basis for several major stainless
steelmakers. Special operating procedures and expertise, generally not possessed
by the Company's domestic integrated carbon steel competitors, are required to
roll and finish stainless
4
<PAGE> 7
steel. To date, revenues from these activities have not been material to the
Company. From time to time, the Company has produced and sold carbon steel slabs
and hot metal to other carbon steelmakers. On limited occasions, the Company has
also performed downstream processing of products for other carbon steelmakers,
as well as having its own products further processed by other steelmakers.
BUSINESS STRATEGY AND DEVELOPMENT
The Company's strategic objective is to be a first tier global provider, in
terms of cost, quality and customer service, of specialty plated, coated and
cold rolled products. The Company's business strategy seeks to achieve this
objective by: (i) continuing to implement cost and productivity improvements;
(ii) further improving its product mix toward higher value-added light gauge
cold rolled and coated products; and (iii) maximizing the utilization of its
assets.
The Company's cost and productivity projects either implemented or
currently being implemented include: new supply management programs to
coordinate and reduce costs in the procurement of material and services; new
programs to reduce energy and raw material requirements, ranging from scrap
management to enhanced blast furnace turbo blowers; and programs to rationalize
human resources with the Company's competitive needs.
The Company's product mix improvement efforts are complementary to its
productivity improvement in that they seek to take advantage of the Company's
enhanced capability to produce a greater proportion of higher value added
products. The Company's product mix improvement efforts are focused on the
targeting of selective international markets for TMP and the development of
domestic specialty markets for coated products, such as galvanized in
construction and light gauge high tensile steel in packaging, together with
enhanced sales-customer-technical coordination and improved production
management and information systems.
The Company also seeks to maximize the utilization of available assets
through a number of projects and initiatives. As indicated in Item 2
"Properties", the design capacity of the Company's hot mill (rebuilt in 1992)
exceeds the design capacity of the Company's multi-strand caster (rebuilt in
1990) to produce slabs for reduction at the hot mill. As noted in "Related
Products and Services", the Company has utilized some of its excess hot mill
capacity in tolling activities for stainless and other carbon steelmakers and in
processing purchased slabs for its own value-added products as required by the
Company's order book. The Company has also sought to increase the amount of hot
metal from blast furnace operations through the 1997 reline of its No. 1 Blast
Furnace, to improve operating practices in order to maximize steelmaking at its
BOP shop and caster, and to increase throughput at its value added downstream
finishing facilities by, among other things, enhancing its No. 9 Tandem Mill.
In response to the market conditions described below under "Competition and
Other Industry Factors", the Company has temporarily idled its No. 4 Blast
Furnace. The Company's raw steel requirements will be met by the production from
the No. 1 Blast Furnace and supplemented by outside sourcing of slabs. The
Company believes this strategy will enable it to reduce costs and better manage
inventory levels and working capital requirements.
To further implement the Company's business strategy, in September 1997, it
formed WeBCo as a joint venture with the United Kingdom-based Balli Group, plc.
WeBCo's objective is to penetrate new foreign markets for the export of the
Company's products and to expand the Company's domestic offerings with a range
of products complementary to those from its own mill.
To take advantage of expanding opportunities in the galvanized markets, the
Company, together with Dutch steelmaker Hoogovens Staal B.V., organized GalvPro
in 1997. In 1998, financing was obtained and construction began on GalvPro's
300,000 ton per year 60 inch hot dip galvanizing facility in Jeffersonville,
Indiana. Although the project experienced some delay occasioned by the need to
replace its original general contractor, production from the facility is
expected to commence during the fourth quarter of 1999.
In order to exploit e-commerce opportunities, in July 1998 the Company
formed MetalSite L.P. MetalSite's website (http://www.metalsite.net) provides a
secure web-based market place for buyers and sellers of steel. The Company has
sold its excess and secondary product through MetalSite's auction web site since
MetalSite
5
<PAGE> 8
commenced operations in November 1998. Prior to November 1998, the Company had
sold secondary and excess products through its own web site.
The Company continually develops and reviews strategies designed to enhance
the scope and improve the profitability of its business. In connection with such
activities, the Company is pursuing or considering a variety of other projects
aimed at exploiting product use, penetrating new markets or reducing operating
costs. These projects, if developed by the Company, could include joint
ventures, partnering or strategic alliances. The Company cannot predict whether,
or to what extent, the projects resulting from its ongoing business development
strategies will be implemented.
RAW MATERIALS
Unlike many of its larger competitors, the Company does not own or
participate in the ownership of raw materials, or operate production facilities,
from which it can draw its raw material requirements. As a result, the Company
must buy these materials on the open market.
The Company has a contract with a subsidiary of Cleveland-Cliffs Inc. to
purchase the Company's standard and flux grade iron ore pellet requirements.
This contract, which extends through 2005, provides for a minimum tonnage of
pellets to be supplied based on the production capacity of the mining source and
for pricing dependent on the production costs of one of the mines. The Company
has entered into an amendment to its existing agreement, with that supplier
extending, through 2004 to purchase its additional pellet requirements based on
competitive market prices.
The Company has a contract with USX Corporation to purchase blast furnace
coke for a term which extends through December 31, 2001, subject to extension.
Under the contract, the Company must give notice by mid-October of each year of
its required coke volumes for the following year and has the option to purchase
up to 100% of its coke requirements for each year, subject to a minimum of
either 80% of requirements or a fixed tonnage, depending on certain operating
configurations at the Company's blast furnaces. If the Company does not commit
to take the tonnages above minimum requirements for any year, the supplier has
the option of determining whether it will supply future tonnages above the
minimum, until such time as it actually does so, after which the Company again
has the option to take its full requirements. Accommodations have been agreed to
with USX which will adjust the minimum volume during the period the No. 4 Blast
Furnace is idle. Coke prices under the contract are based on the prevailing
market, subject to a ceiling and floor over the life of the contract, a limit on
annual change, and certain adjustments based on blast furnace operations. In
addition, the Company continues to explore and utilize alternative sources for
coke, including from overseas suppliers. The Company, like other steelmakers,
has utilized technologies calculated to achieve some reduction in the
consumption of coke in blast furnace operations. Nevertheless, if coke making
capacity available to the industry continues to decline, future coke prices may
be subject to significant escalation.
The Company obtains its limestone and other raw materials requirements, in
most cases, from multiple sources with the issue being price and quality rather
than availability of supply.
The Company utilizes scrap in its steelmaking process. Scrap is available
from multiple sources with the issue being price and quality rather than
availability of supply.
The Company operates as a 100% continuously cast producer. However, the
Company's requirements for slabs occasionally have exceeded its capacity to
produce them, and production outages from iron or steelmaking operations have
required the use of slabs from outside sources. Generally, the Company has been
able to purchase slabs as and when needed. For as long as the Company continues
to operate only one blast furnace, it will be required to source slabs from
outside suppliers. The Company has obtained commitments for delivery of a
sufficient supply of slabs during the period the No. 4 Blast Furnace is expected
to remain idle.
The primary sources of energy used by the Company in its steel
manufacturing process are natural gas, oil, and electricity. In recent years,
the Company has entered into natural gas purchase contracts with gas suppliers
and transportation contracts with transmission companies. These long term
arrangements have helped to reduce or control fluctuations in prices paid for
gas. In 1995, the Company entered into a 15-year contract for the supply of
oxygen to its steelmaking facilities. This agreement significantly reduced the
Company's oxygen supply costs.
6
<PAGE> 9
The Company generates a significant amount of electricity and steam for
processing operations from a mixture of excess blast furnace gas and natural
gas. The Company continually attempts to conserve and reduce the consumption of
energy in its steelmaking operations. A number of the Company's facilities have
alternate fuel burning capability. A substantial increase in the Company's
energy costs or a shortage in the availability of its sources could have an
adverse effect on the Company.
Management believes that the Company's long term raw materials contracts
are at generally competitive terms.
COMPARATIVE PRODUCTION AND SHIPMENTS
The rebound in domestic steel industry production and shipments which had
occurred over the five year period from 1993 through 1997 was halted in the
second half of 1998 due to record levels of imports. Capacity utilization, which
had peaked at 93% in 1995, dropped to 86% in 1998 as most domestic steelmakers,
including the Company, curtailed production in response to the oversupply
condition brought on by the import glut. In addition to curtailed production,
capacity utilization was affected by new steel production and finishing
facilities entering the market place.
In 1998, the Company produced 2.8 million tons of raw steel and shipped 2.6
million tons of finished and semi-finished steel products. The following table
sets forth annual production capability, utilization rates and shipment
information for the Company and the domestic steel industry (as reported by the
AISI) for each year in the five year period ended December 31, 1998.
PRODUCTION AND SHIPMENTS
HISTORICAL MARKET SHARE
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
(IN THOUSANDS OF TONS)
<S> <C> <C> <C> <C> <C>
Company
Raw steel production..................... 2.8 2.9 2.8 2.8 2.7
Capability............................... 3.0 3.0 3.0 3.0 3.0
Utilization.............................. 93.0% 97.0% 95.0% 95.0% 91.0%
Shipments................................ 2.6 2.8 2.9 2.7 2.6
Shipments as a percentage of industry
total................................. 2.5% 2.6% 2.9% 2.8% 2.7%
Industry
Raw steel production..................... 107.6 105.4 102.2 102.7 97.9
Capability............................... 125.3 119.0 116.1 110.4 108.2
Utilization.............................. 85.9% 88.5% 90.0% 93.0% 91.0%
Shipments................................ 102.1 105.5 100.5 97.5 95.3
</TABLE>
COMPETITION AND OTHER INDUSTRY FACTORS
The domestic steel industry is a cyclical business with intense competition
among producers. Manufacturers of products other than steel, including plastics,
aluminum, cardboard, ceramics and glass, have made substantial competitive
inroads into traditional steel markets. During recessionary periods, the
industry's high level of production capacity relative to demand levels has
resulted in the reduction of selling prices across a broad range of products.
In response to increased competition, domestic steel producers have
invested heavily in new plant and equipment, which has improved efficiency and
increased productivity and quality. Many of these improvements are in active
service and, together with the achievement of other production efficiencies,
such as manning and other work rule changes, have tended to lower costs. In
addition, it is estimated that approximately 4 to 6 million tons of new
steelmaking capacity (primarily mini-mills) will be in place over the next two
years, further threatening the viability of less efficient facilities. The
Company has responded to competitive cost reductions through its own capital
improvement program and ongoing cost reduction efforts to achieve operating
7
<PAGE> 10
efficiencies. Prior to 1993, the Company's efforts focused on its steelmaking
operations and hot mill. Since that time, the focus has shifted to downstream
operations and primary iron making.
Domestic producers face competition from foreign producers over a broad
range of products. Many foreign steel producers are aligned with governmental
interests and thereby subject to influence by political and economic policy
considerations, as well as prevailing market conditions. As a percentage of
domestic consumption, steel imports excluding semi-finished products (primarily
slabs), were at approximately 26%, 20%, and 19% in 1998, 1997 and 1996,
respectively. Steel imports of hot rolled and cold rolled steel increased 42% in
1998, compared to 1997. A strong U.S. Dollar and financial crises in Asia and
Russia created more intense competitive pressure from steel imports. 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. The cases were filed with the U.S. International Trade
Commission (the "ITC") and the U.S. Department of Commerce. Anti-dumping cases
were filed against the three countries, while a subsidy complaint was also filed
against Brazil. These cases allege the countries have engaged in dumping
practices, a violation of U.S. trade laws. On November 16, 1998, the ITC issued
its preliminary ruling that the high volumes of low-priced imported steel had
damaged the domestic steel industry.
On February 12, 1999, the Commerce Department made a preliminary ruling in
favor of the U.S. producers on the hot-rolled cases against Brazil and Japan.
The Commerce Department imposed anti-dumping duties against the steel producers
of both nations as well as countervailing duties against the Brazilian
producers. (Countervailing duties are meant to counter the effect of government
subsidization.) The anti-dumping margins ranged from 25% to 67% against Japanese
producers and from 50% to 71% against Brazilian producers. Countervailing duties
assessed against Brazilian producers ranged from 6% to 9%. A preliminary finding
was also made against Russian producers. However, the Commerce Department has
announced a tentative suspension agreement with Russia. Under this agreement,
the preliminary duties ranging from 71% to 218% will be suspended in exchange
for a six month moratorium on shipments, a price floor, and import quotas
limiting Russian hot-rolled steel to the pre-surge, 1996 levels.
The Company expects the results of trade cases will help stabilize selling
prices in the current market. However, the relative strength of the U.S. Dollar
and the weakness of many foreign economies will cause continued competitive
pricing pressures from imports.
In March 1997, the Company joined with two other domestic steel producers
and 29 domestic pipe and tube producers in requesting United States government
agencies to file a protest with the World Trade Organization (the "WTO") over
actions taken by the Republic of Korea to subsidize a Korean producer, allegedly
in violation of the WTO subsidy code, permitting the Korean producer to flood
Asian markets with low priced hot-rolled steel.
Integrated steelmakers also face increased competition from mini-mills.
Mini-mills are efficient, low-cost producers that generally produce steel by
melting scrap in electric arc furnaces, utilize new technologies, have lower
employment costs and target regional markets. Mini-mills historically have
produced lower profit margin products, such as bars, rods, wire and other
commodity-type steel products not produced by the Company. Thin cast technology
has allowed mini-mills to enter certain of the sheet markets supplied by
integrated producers. Such facilities have been placed in operation and are
competing in the hot rolled, cold rolled and galvanized marketplace, and other
entities have announced plans or are in the process of starting similar
facilities. In other instances, mini-mills seeking to capture segments of the
flat rolled market have located facilities where they are geographically
advantaged compared to their integrated competition. Mini-mills generally
continue to have a cost advantage over integrated steel producers. Most of the
new capacity in the domestic industry has resulted from growth in mini-mill
operations, some of which rival the capacity and product range of the integrated
mills.
The Company's primary competitors in Sheet Products consist of most
domestic and international integrated steel producers and mini-mills. The
Company's primary TMP competitors in recent years have been USX Corporation, LTV
Corporation, Bethlehem Steel Corporation, National Steel Corporation and
USS-POSCO Industries.
8
<PAGE> 11
The Company experiences strong competition in all its principal markets
with respect to price, service and quality. The Company believes that it
competes effectively in all these categories by focusing its marketing efforts
on creating strong customer relationships by providing high quality products at
competitive prices.
RESEARCH AND DEVELOPMENT
The Company engages in research and development for the improvement of
existing products and processes, and the development of new products and product
applications. During 1998, 1997, and 1996, the Company spent approximately $2.9
million, $3.1 million, and $3.4 million, respectively, for research and
development activities. WEIRTEC, the Company's research and development center
specializing in the advancement of steel can making technology, maintains
research and prototype steel packaging manufacturing facilities, analytical
laboratory facilities and computer simulation systems in Weirton, West Virginia.
In recent years, WEIRTEC has played a central role in the development of
thin-wall, two piece beverage can technology and other products seeking to
capitalize on the Company's production expertise, particularly in coated
products. WEIRTEC research projects have also included clean steel production
techniques, polymer to steel lamination, and the application of galvanized steel
products to the residential and commercial construction industry. WEIRTEC
assists customers in the development of new products and collaborates with the
AISI in the development of new product lines and production techniques to
increase the use and quality of steel as a material of choice. The Company
believes that the scientists, engineers, technicians and the WEIRTEC facilities
enhance the Company's technical excellence, product quality and customer
service.
The Company owns a number of patents that relate to a wide variety of
products and applications and steel manufacturing processes, has pending a
number of patent applications, and has access to other technology through
agreements with other companies. The Company believes that none of its patents
or licenses, which expire from time to time, or any group of patents or licenses
relating to a particular product or process, is of material importance in its
overall business. The Company also owns a number of registered trademarks for
its products.
ENVIRONMENTAL CONTROL
Compliance. The Company is subject to extensive federal, state and local
laws and regulations governing discharges into the air and water, as well as the
handling and disposal of solid and hazardous wastes. The Company is also subject
to federal and state requirements governing the remediation of environmental
contamination associated with past releases of hazardous substances. In recent
years, environmental regulations have been marked by increasingly strict
compliance standards. Violators of these regulations may be subject to civil or
criminal penalties, injunctions or both. Third parties also may have the right
to sue to enforce compliance.
Capital expenditures for environmental control facilities were
approximately $11.5 million in 1998, $8.4 million in 1997 and $9.4 million in
1996. For 1999, the Company has budgeted approximately $0.5 million in capital
expenditures for environmental control facilities. Given the nature of the
steelmaking industry, it can be expected that additional capital expenditures
will be required from time to time to permit the Company to remain in compliance
with current and future environmental regulations. Since the effects of future
requirements are not determinable at present, it is not possible to predict the
ultimate future cost of compliance. The Company, like its competitors, does not
expect to be able to pass on to customers cost increases specifically resulting
from compliance with environmental regulations.
In the past, the Company has resolved environmental compliance issues
through negotiated consent orders and decrees with environmental authorities,
pursuant to which the Company has paid civil penalties. The Company believes
that it is in substantial compliance with its environmental control consent
orders and decrees.
MULTIMEDIA ENFORCEMENT SETTLEMENT
In March 1996, the Environmental Protection Agency (the "EPA") and the West
Virginia Division of Environmental Protection (the "DEP") advised the Company
that they had identified a number of enforcement issues pertaining to water
discharges, air emissions and waste handling operations by the Company and were
prepared to initiate a "multimedia" enforcement action against the Company.
Multimedia actions involve
9
<PAGE> 12
coordinated enforcement proceedings related to various environmental media such
as water, air and waste. In recent years, such actions have resulted in
penalties and other commitments being obtained from many of the Company's
competitors.
The Company executed a consent decree with the governmental agencies in
October 1996 in resolution of such issues. Under the consent decree, the Company
paid a civil penalty of $3.2 million in January 1997 and was required to
undertake certain capital projects to assure compliance with water, air and
waste-related regulations in accordance with detailed construction schedules.
The consent decree also provided for stipulated penalties for non-compliance
with the decree's provisions.
The capital projects undertaken in connection with the decree included
upgrades and modifications to air emissions control equipment, wastewater
treatment systems and waste handling facilities. Construction of a majority of
the projects has been substantially completed, resulting in Company expenditures
of approximately $14.5 million through 1998. A significant portion of these
expenditures had been included in the Company's capital budget prior to the
negotiations which led to the settlement. The Company anticipates that it will
expend approximately an additional $5.3 million through 2000 to complete the
construction and implementation of the remaining capital projects.
The required capital projects, as well as other terms of the consent decree
have necessitated, and will necessitate, changes in operating procedures at the
Company's facilities. While the Company has mitigated many of the increased
operating costs attributable to these changes, operating costs are likely to
increase as a result of the requirements. Based on its experience thus far, the
Company does not believe that any such increase will be material to its results
of operations.
WATER DISCHARGE PERMITTING
In June 1994, the DEP issued a renewal National Pollutant Discharge
Elimination System ("NPDES") permit to the Company for its water discharges. The
renewal NPDES permit contained a number of new requirements and effluent
limitations. In February 1997, the Company reached a settlement with the DEP
regarding remaining NPDES issues. That settlement was amended in July 1997 and
again in 1998. Among other things, the amended settlement requires the Company
to achieve compliance by June 2001 with more stringent effluent limitations and
to conduct certain defined studies with regard to other potentially more
stringent effluent limitations. It is not possible at this time to estimate the
costs which may be necessitated to achieve compliance with the final
limitations, in part because DEP has not made final determinations regarding the
limitations.
RCRA CORRECTIVE ACTION ORDER
In connection with the multimedia consent decree in 1996, the EPA also
issued a corrective action order. The order requires 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. Areas within
the Company's property have been prioritized, and the Company has been
developing investigation workplans for the high priority areas. The Company does
not know the nature or extent of hazardous materials located on its property and
it is not possible at present to estimate the ultimate cost to comply with the
order or to conduct any required remedial activity. The Company believes that it
may be entitled to indemnification, as described below, for at least a portion
of the costs incurred by the Company to comply with the corrective action order
and to undertake any required remedial action.
Waste Sites. Under the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended ("CERCLA"), and similar state statutes,
the EPA and state regulators have authority to impose strict, joint and several
liability on waste generators, owners, operators and other potentially
responsible parties ("PRPs") for the cost of remediating contaminated
properties. By reason of the agreements pursuant to which the Company purchased
the operating assets of the Weirton Steel Division (the "Division") from
National Steel Corporation ("National"), the Company is entitled to
indemnification from National for certain environmental liabilities, including
those relating to the remediation of certain contaminated sites, as more fully
described below. The Company understands that National has provided notices to
EPA regarding a number of such sites as required by law. The Company further
understands that National has been involved, at the request of the EPA or
10
<PAGE> 13
state agencies, in voluntary remedial activities with respect to a number of
such sites. Insofar as any of those sites involve liabilities under
environmental laws or regulations for prior Division activities, the Company
believes it is indemnified by National.
The Company and/or its predecessors have been conducting steel
manufacturing and related operations at various locations, including the
Company's current plant site, for almost 90 years. Although the Company and its
predecessors utilized operating practices that were standard in the industry at
the time, hazardous substances may have been released on or under these sites.
In accordance with regulatory requirements under the previously described RCRA
order, the Company is required to investigate these prior releases and take
corrective action where deemed appropriate. See "RCRA Corrective Action Order."
In addition, the Company and its predecessors have disposed of solid and
hazardous wastes at various off-site waste disposal sites. Pursuant to CERCLA
and similar state laws, the Company may be required to remediate contamination
at some of these sites or participate in the sharing of such costs as deemed
necessary. The Company does not have sufficient information to estimate its
potential liability in connection with potential future remediation in general.
However, the Company believes that if any such remediation is required, it will
occur over an extended period of time. In addition, the Company believes that
many of these sites may also be subject to indemnity obligations by National to
the Company.
TEX TIN SITE
In September 1989, the EPA notified the Company that it was considered to
be among a number of PRPs for the disposal of wastes at the Tex Tin site near
Texas City, Texas, and requested the Company's voluntary participation in
certain remedial actions. The Company's records do not indicate any involvement
with the site by the Company. Both the Company and National were named as
defendants in a suit filed by Amoco Chemical Corporation in the U.S. District
Court for the Southern District of Texas in May 1996; the Company, however, was
never served with a summons and thus is not currently a party to the action. The
suit alleges that the Company, National and numerous other defendants are liable
for Amoco's remedial costs expended at the Tex Tin site. The Company believes
that National would be responsible for any remedial actions if there had been
prior involvement by the Division. The complaint has lapsed without proper
service on the Company, as a result of which the Company believes it cannot be
made a party to this action.
HANOVER TOWNSHIP SITE
In May 1992, the Company received notice from the Pennsylvania Department
of Environmental Resources that it was considering a closure plan and
post-closure plan for a solid waste landfill facility in Hanover Township,
Pennsylvania (the "Hanover Site") operated by Starvaggi Industries Inc. From at
least the 1960's through mid-1983, National and, after mid-1983, the Division
and the Company disposed of solid wastes at the facility. The Company believes
that while it disposed of various materials which were residual to the
steelmaking industry, such materials were not classified as hazardous wastes
under applicable law. At this time, definitive closure plans and post-closure
care plans have not been adopted. National's liability with respect to the
closure of this facility is limited to $1.0 million. Although there can be no
assurances, the Company does not anticipate that its costs for site closure will
exceed the limitation on National's liability.
SHILOH LANDFILL
The Company leases certain real property in Hancock County, West Virginia,
known as the Shiloh Landfill ("Shiloh Landfill"), from Shiloh River Corporation
("SRC"). Under an agreement with SRC, which remains the operator of the solid
waste landfill at that site, the Company is the intended sole disposer. The
Company disposed of some of its general refuse, construction and demolition
debris, and industrial non-hazardous waste materials at the Shiloh Landfill. In
February 1997, SRC received a compliance order from the DEP, which cited a
number of operational deficiencies and required Shiloh Landfill to undertake
numerous activities for the purposes of remediating alleged violations of
applicable law and regulations. Although certain of the required activities were
undertaken by Shiloh Landfill in a timely manner, SRC and the Company filed a
notice of appeal on March 11, 1997 with regard to certain other requirements and
allegations. The Company and SRC entered into settlement discussions with DEP,
and these discussions culminated in a Consent Order and Agreement ("CO&A") which
11
<PAGE> 14
was entered by the West Virginia Environmental Quality Board in September 1997.
Under the terms of the CO&A, SRC was to cease accepting waste at the Shiloh
Landfill on or before December 31, 1998, and is to complete closure activities
at the facility on or before June 30, 1999. SRC and the Company are jointly
responsible for conducting post-closure care at the facility. The Company ceased
delivering its waste to the Shiloh Landfill in October 1998 and began disposing
of its non-hazardous waste material at another site in the vicinity under a ten
year disposal agreement with its operator.
Indemnification. According to the agreements by which the Company acquired
the assets of the Division from National, the Company is entitled to
indemnification from National for liabilities, including governmental and
third-party claims, arising from violations prior to the acquisition, and
National is entitled to indemnification from the Company for such items after
the acquisition. In addition, the Company, subject to the $1.0 million
limitation applicable to the Hanover Site described above, is entitled to
reimbursement for clean-up costs related to facilities, equipment or areas
involved in the management of solid or hazardous wastes of the Division ("Waste
Sites"), as long as the Waste Sites were not used by the Company after the
acquisition. Third-party liability claims relating to Waste Sites are likewise
covered by the respective indemnifications.
The Company's ability to obtain future reimbursement or indemnification
relating to environmental claims from National depends, in addition to
National's continued financial viability, on the nature of future claims made by
the Company and on the parties' agreement as to contractual coverage of the
claims.
EMPLOYEES
At December 31, 1998, the Company, had 4,329 active employees, of whom
3,262 were engaged in the manufacture of steel products, 508 in support
services, and 154 in sales and marketing activities and 405 in management and
administration. Of the 4,329 active employees at December 31, 1998, 510 were on
short-term layoff. In 1992, the Company implemented a strategic program designed
to reduce its workforce primarily through retirement programs and attrition.
Through that program, the Company reduced its overall workforce by 19% through
1995. In 1996, the Company implemented an additional program to reduce its
supervisory and managerial workforce by approximately 20%. In 1997, the Company
reduced its represented workforce by approximately 13% from 1995 levels through
a retirement program. In 1998, the Company implemented another program to reduce
its supervisory and managerial workforce through an early retirement window. As
a result of the window, the Company expects to reduce its supervisory and
managerial workforce by 8% in 1999.
At December 31, 1998, approximately 3,530 active Company employees in
bargaining units covering production and maintenance workers, clerical workers
and nurses were represented by the Independent Steelworkers Union (the "ISU").
The Company is a party to collective bargaining agreements with the ISU for
those units and with the Independent Guard Union for security personnel, which
expire in March 2001 and May 2000, respectively. The Company believes that the
terms of its collective bargaining agreements are generally comparable to those
between other major steel producers and their unions. However, the Company's
agreements provide for the continuation of a Company-wide profit sharing plan
pursuant to which up to 35% of adjusted net earnings may be paid to employees
and substantially eliminate many restrictive workrules pertaining to the
assignment and scheduling of employees.
From January 1984 until June 1989, the Company was owned in its entirety by
its employees through the Company's 1984 Employee Stock Ownership Plan (the
"1984 ESOP"), in which substantially all employees were participants. In June
1989, the 1984 ESOP completed a public offering of common stock, resulting in
that security being listed and traded on the New York Stock Exchange.
Substantially all the Company's employees participate in its two ESOPs
which owned approximately 24.2% of the outstanding common and substantially all
of the outstanding preferred shares of the Company at March 19, 1999. These
securities represented approximately 45.8% of the voting power of the Company's
voting stock.
ITEM 2. PROPERTIES
The Company owns approximately 2,400 acres in the Weirton, West Virginia,
area which are devoted to the production and finishing of steel products,
research and development, storage, support services and administra-
12
<PAGE> 15
tion. The Company owns trackage and railroad rolling stock for materials
movement, water craft for barge docking, power generation facilities and
numerous items of heavy industrial equipment. The Company has no material leases
for real property. The Company's mill and related facilities are accessible by
water, rail and road transportation. The Company believes that its facilities
are suitable to its needs and are adequately maintained.
The Company's operating facilities include two operable blast furnaces with
an annual hot metal capacity of approximately 2.6 million tons. In March 1997,
the Company completed a planned major reline and rebuild of its largest iron
making vessel, the No. 1 Blast Furnace, as part of a capital expenditure program
for that facility approximating $85.0 million. The rebuild was designed to
increase iron production and quality, improve production efficiencies, reduce
costs and enhance environmental protection. In December 1998, the Company
temporarily idled its smaller No. 4 Blast Furnace to more closely align iron
production with reduced demand, which necessitated the purchase of some outside
slabs for finishing purposes. See Item 1. "Business--Raw Materials." The
Company's ironmaking operations through 1996 also included a sinter plant, used
to process scale, sludge and other by-products for recycling back into blast
furnace operations. In December 1996, the Company temporarily discontinued
operations at the sinter plant pending an assessment of the facility's
production equipment and the feasibility of improvements believed necessary to
assure the plant's continuing compliance with more stringent future air
pollution control standards. The facility remained idle for 1997 and 1998
pending ongoing assessment. The Company has purchased iron pellets from outside
commercial sources to replace the sinter plant output. The Company's primary
steelmaking facilities include a two vessel BOP shop with an annual capacity of
3.0 million tons of raw steel (based on a two blast furnace operation). Primary
steelmaking facilities also include a CAS-OB facility, two RH degassers, and a
four strand continuous caster with an annual slab production capacity of up to
3.0 million tons. The Company's downstream operations include a hot strip mill
with a design capacity of 3.8 million tons, two continuous picklers, three
tandem cold reduction mills, three hot dip galvanize lines, one
electro-galvanize line, two tin platers, one chrome plater, one bi-metallic
chrome/tin plating line and various annealing, temper rolling, shearing,
cleaning and edge slitting lines, together with packaging, storage and shipping
and receiving facilities. See the "Comparative Production and Shipments" section
of Item 1 for additional information regarding production capacity and
utilization rates.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved as a defendant or plaintiff in various litigation
relating to claims arising out of its operations in the normal course of
business. Such claims involving the Company as a defendant are generally covered
by insurance. It is management's opinion that any liability resulting from
existing litigation would not have a material effect on the Company's business,
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
As of March 19, 1999, there were 41,578,068 shares of common stock, $.01
par value ("Common Stock"), outstanding held by stockholders of record. The
principal market for the Common Stock is the New York Stock Exchange, on which
that security has been listed since June 1989.
Dividends on the Company's Common Stock may be paid when and as declared by
the Company's Board of Directors. The payment of dividends is subject to the
applicable provisions of Delaware corporate law governing the Company and the
discretion of the Company's Board of Directors, which, in exercising such
discretion, considers the financial performance and capital requirements of the
Company.
Under restrictive covenants relating to the Company's indebtedness, the
Company's ability to pay dividends on its stock is limited to the greater of (i)
$5.0 million or (ii) $5.0 million plus one-half of the Company's cumulative
consolidated net income since March 31, 1993, plus the net proceeds from
subsequent issuances of
13
<PAGE> 16
certain capital stock, less certain allowable payments. As of December 31, 1998,
pursuant to these covenants, the Company could pay dividends on its Common Stock
of up to $92.0 million.
As of March 19, 1999, 10,054,405 shares of Common Stock, or 24% of the
outstanding shares of Common Stock, were held by one stockholder of record,
United National Bank--North, as Trustee of the 1984 ESOP. As of that date, the
1984 ESOP had approximately 6,256 participants who were active or former
employees of the Company. In addition, as of March 19, 1999 there were 1,673,182
shares of Convertible Voting Preferred Stock, Series A (the "Series A Preferred
Stock"), outstanding. As of that date, United National Bank--North, as Trustee
of the Company's second Employee Stock Ownership Plan (the "1989 ESOP"), was the
record owner of 1,652,763 shares of the Series A Preferred Stock, or over 98% of
the outstanding shares of Series A Preferred Stock, subject to the terms and
conditions of said Plan. As of that date, the 1989 ESOP had approximately 7,118
participants who were active or former employees of the Company. The Series A
Preferred Stock is not listed for trading on any exchange. The Series A
Preferred Stock has a liquidation preference of $5 per share and is convertible
into one share of Common Stock, subject to adjustment. Each share of Series A
Preferred Stock is entitled to 10 votes in all matters presented to the
stockholders for approval. Participants in the Company's two ESOPs have full
voting rights over all shares allocated to their accounts. See "Employees" under
Item 1.
The following table sets forth, for the periods indicated, the high and low
sales prices of the Common Stock as reported in the consolidated transaction
reporting system.
<TABLE>
<CAPTION>
1997 1998 1999(1)
----------- ----------- -----------
QUARTER HIGH LOW HIGH LOW HIGH LOW
------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
First............................. 3 3/8 2 1/2 3 3/16 2 11/16 2 1/8 1 1/2
Second............................ 3 1/4 2 1/2 4 7/16 3 3/8
Third............................. 5 1/4 2 11/16 3 7/8 2 1/2
Fourth............................ 4 5/8 2 1/2 2 1/2 1 1/2
</TABLE>
- ---------------
(1) First Quarter 1999 through March 19, 1999.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by reference
to the caption "Selected Financial and Statistical Data" of the Company's 1998
Annual Report to Stockholders. With the exception of the information
specifically incorporated by reference, the 1998 Annual Report to Stockholders
is not to be deemed filed as part of this Report for purposes of this Item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is incorporated herein by reference
to the "Management's Discussion and Analysis" caption of Company's 1998 Annual
Report to Stockholders. With the exception of the information specifically
incorporated by reference, the 1998 Annual Report to Stockholders is not to be
deemed filed as part of this Report for purposes of this Item.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is incorporated by reference to the
"Quantitative and Qualitative Disclosures About Market Risk" caption within
"Management's Discussion and Analysis" in the Company's 1998 Annual Report to
Stockholders. With the exception of the information specifically incorporated by
reference, the 1998 Annual Report to Stockholders is not deemed filed as part of
this Report for purposes of this Item.
14
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item are
incorporated herein by reference to the Company's 1998 Annual Report to
Stockholders and are listed in Item 14. "Exhibits, Financial Statement Schedules
and Reports on Form 8-K" hereof. With the exception of the information
specifically incorporated by reference, the 1998 Annual Report to Stockholders
is not to be deemed filed as part of this Report for purposes of this Item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE COMPANY
The information required by this Item with respect to Directors of the
Company is incorporated herein by reference to the caption "Election of
Directors" and "Security Ownership of Certain Beneficial Owners and Management"
in the Company's definitive Proxy Statement relating to its 1999 Annual Meeting
of Stockholders. With the exception of the information specifically incorporated
by reference, said definitive Proxy Statement is not deemed to be filed as part
of this report for purposes of this item.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company as of March 19, 1999 were as follows:
<TABLE>
<CAPTION>
AGE AT
NAME MARCH 19, 1999 OFFICE
- ---- -------------- ------
<S> <C> <C>
Richard K. Riederer................... 55 President and Chief Executive Officer
Craig T. Costello..................... 51 Executive Vice President--Manufacturing and
Chief Operating Officer
Earl E. Davis, Jr..................... 50 Executive Vice President--Commercial
David L. Robertson.................... 55 Executive Vice President--Human Resources and
Corporate Law
Narendra M. Pathipati................. 41 Senior Vice President--Corporate Development and
Strategy
Thomas W. Evans....................... 62 Vice President--Materials Management
William R. Kiefer..................... 49 Vice President--Law and Secretary
Frank G. Tluchowski................... 48 Vice President--Engineering
Mark E. Kaplan........................ 37 Vice President--Information Technology and
Controller
</TABLE>
Unless otherwise indicated below, the executive officers of the Company
have held the positions described for at least the last five years.
Richard K. Riederer has been President since January 1995 and Chief
Executive Officer since November 1995. From September 1994 to January 1995, he
was Executive Vice President Finance and Chief Financial Officer. Prior to that,
he served as Vice President and Chief Financial Officer beginning in January
1989. He has been a director of the Company since October 1993.
15
<PAGE> 18
Craig T. Costello has been Chief Operating Officer since January 1997. From
September 1994 to the present, he also served as Executive Vice
President--Manufacturing. From October 1993 to September 1994 he served as Vice
President--Operations. Mr. Costello served as General Manager--Operations from
1988 to 1993. He has been a director of the Company since April 1996.
Earl E. Davis, Jr. has been Executive Vice President--Commercial since
October 1997. From July 1995 to October 1997 he served as Vice
President--Finance and Chief Financial Officer. From May 1994 to July 1995, he
served as Controller. From August 1991 to April 1994, he served as Assistant
Controller. He has been a director of the Company since October 1997.
David L. Robertson has served as the Executive Vice President--Human
Resources and Corporate Law since March 1996. Prior to that, Mr. Robertson was a
senior partner in the law firm of Volk, Robertson & Hellerstedt.
Narendra M. Pathipati has been serving as Senior Vice President--Corporate
Development and Strategy since October 1997. From July 1995 until October 1997,
Mr. Pathipati served as Vice President--Corporate Development and Strategy. He
also served as Treasurer of the Company from August 1991 to July 1995.
Thomas W. Evans has been Vice President--Materials Management since
February 1988.
William R. Kiefer has been Vice President--Law and Secretary since May
1990.
Frank G. Tluchowski was appointed to the position of Vice
President-Engineering and Technology in February 1998. Prior to that
appointment, Mr. Tluchowski served as General Manager-Engineering since
September 1996. He was also area manager of the tin mill from November 1990 to
September 1996.
Mark E. Kaplan was appointed Vice President--Information Technology and
Controller in March 1999. Mr. Kaplan has served as Controller since September
1995. Prior to that, Mr. Kaplan was employed by Arthur Andersen LLP, where he
held a number of positions, most recently as Senior Audit Manager.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item with respect to Directors of the
Company is incorporated herein by reference to the caption "Executive
Compensation" in the Company's definitive Proxy Statement relating to its 1999
Annual Meeting of Stockholders. With the exception of the information
specifically incorporated by reference, said definitive Proxy Statement is not
deemed to be filed as part of this report for purposes of this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item with respect to Directors of the
Company is incorporated herein by reference to the caption "Security Ownership
of Certain Beneficial Owners and Management" in the Company's definitive Proxy
Statement relating to its 1999 Annual Meeting of Stockholders. With the
exception of the information specifically incorporated by reference, said
definitive Proxy Statement is not deemed to be filed as part of this report for
purposes of this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
16
<PAGE> 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The list of financial statements required to be filed by Item 8.
Financial Statements and Supplementary Data of this Annual Report on Form
10-K is as follows:
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
-------------------- ----
<S> <C>
Report of Independent Public Accountants.................... (*)
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996.......................... (*)
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... (*)
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... (*)
Notes to Consolidated Financial Statements.................. (*)
Supplementary Financial Information......................... (*)
---------
* Incorporated in this Report by reference from the
Company's 1998 Annual Report to Stockholders referred to
in Exhibit 13.1 below.
</TABLE>
2. The list of financial statement schedules required to be filed by Item
8. Financial Statements and Supplementary Data of this Annual Report on
Form 10-K is as follows:
<TABLE>
<S> <C>
Report of Independent Public Accountants on Financial
Statement Schedules....................................... S-1
Schedules:
I Condensed Financial Information of Registrant........ S-2
II Valuation and Qualifying Accounts................... S-5
</TABLE>
3. Exhibits.
The following exhibits are included in this Annual Report or are
incorporated herein by reference:
<TABLE>
<S> <C>
Exhibit 3.1 Restated Certificate of Incorporation of the Company
(incorporated by Reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 filed May 3, 1989,
Commission File No. 33-28515).
Exhibit 3.2 Certificate of Amendment to the Restated Certificate of
Incorporation of The Company (incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994, Commission File No.
1-10244).
Exhibit 3.3 By-laws of the Company (incorporated by reference to Exhibit
3.3 to the Company's Registration Statement on Form S-1
filed May 3, 1989, Commission File No. 33-28515).
Exhibit 3.4 Amendment to the By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994,
Commission File No. 1-10244).
Exhibit 3.5 Certificate of the Designation, Powers, Preferences and
Rights of the Convertible Voting Preferred Stock, Series A
(incorporated by reference to Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, Commission File No. 1-10244).
</TABLE>
17
<PAGE> 20
<TABLE>
<S> <C>
Exhibit 4.1 Indenture dated October 17, 1989 between the Company and
First Bank (N.A.) as trustee, relating to the Company's
10 7/8% Senior Notes due October 15, 1999, including Form of
Note (incorporated by reference to Exhibits 4.1 and 4.2 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989, Commission File No. 1-10244).
Exhibit 4.2 Indenture dated as of June 12, 1995 between the Company and
Bankers Trust Company, as trustee, relating to $125,000,000
principal amount of 10 3/4% Senior Notes due 2003,
including Form of Note (incorporated by Reference to Exhibit
4.4 to the Company's Registration Statement on Form S-4
filed on July 27, 1995, Commission File No. 33-61345).
Exhibit 4.3 First Supplemental Indenture dated as of August 12, 1996
between the Company and Bankers Trust Company, as trustee,
relating to the Company's 10 3/4% Senior Notes due 2005
(incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, Commission File No. 1-10244).
Exhibit 4.4 Indenture dated July 3, 1996 between the Company and Bankers
Trust Company, as trustee, relating to the Company's 11 3/8%
Notes due 2004 (incorporated by reference to Exhibit 4.5 to
the Company's Registration Statement on Form S-4 filed on
July 10, 1996, Commission File No. 333-07913).
Exhibit 10.1 Redacted Pellet Sale and Purchase Agreement dated as of
September 30, 1991 between Cleveland-Cliffs Iron Company and
the Company (incorporated By reference to Exhibit 10.18 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992, Commission File No. 1-10244);
Exhibit 10.2 Coke Sale Agreement dated December 9, 1996 between the
Company and USX Corporation (incorporated by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, Commission File No.
1-10244).
Exhibit 10.3 1984 Employee Stock Ownership Plan, as amended and restated
(incorporated By reference to Exhibit 10.3 to the Company's
Annual Report on Form 10-K For the fiscal year ended
December 31, 1989, Commission File No. 1-10244).
Exhibit 10.4 1989 Employee Stock Ownership Plan (incorporated by
reference to Exhibit 10.4 to the Company's Annual Report on
Form 10-K for the fiscal year Ended December 31, 1989,
Commission File No. 1-10244).
Exhibit 10.5 Amendments to the 1984 and 1989 Employee Stock Ownership
Plans, effective May 26, 1994 (incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
Exhibit 10.6 Weirton Steel Corporation 1987 Stock Option Plan
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 filed May 3, 1989,
Commission File No. 33-28515).
Exhibit 10.7 Weirton Steel Corporation 1987 Stock Option Plan
(incorporated by reference to Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, Commission File No. 1-10244).
Exhibit 10.8 Deferred Compensation Plan for Directors (incorporated by
reference to Exhibit 10.19 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990,
Commission File No. 1-1024).
</TABLE>
18
<PAGE> 21
<TABLE>
<S> <C>
Exhibit 10.9 Weirton Steel Corporation Amended Performance Incentive Plan
for the Period 1996 through 1998 (incorporated by reference
to Exhibit 10.9 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, Commission File
No. 1-10244).
Exhibit 10.10 Weirton Steel Corporation Supplemental Senior Executive
Retirement Plan (incorporated by reference to the Exhibit
10.10 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, Commission File No.
1-10244).
Exhibit 10.11 Weirton Steel Corporation Supplemental Executive Retirement
Plan (incorporated by reference to Exhibit 10.11 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, Commission File No. 1-10244).
Exhibit 10.12 Employment Agreement between Richard K. Riederer and the
Company dated April 24, 1996 (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996, Commission File No.
1-10244).
Exhibit 10.13 Letter Agreement between Richard K. Riederer and the Company
dated December 24, 1996 (incorporated by reference to
Exhibit 10.9 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, Commission File No.
1-10244).
Exhibit 10.14 Employment Agreement between Thomas W. Evans and the Company
dated April 21, 1987, including Amendment dated July 19,
1993 (incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and Exhibit 10.28 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993, Commission File No. 1-10244).
Exhibit 10.15 Employment Agreement between Craig T. Costello and the
Company dated July, 20, 1993 (incorporated by reference to
Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993, Commission File
No. 1-10244).
Exhibit 10.16 Employment Agreement between William R. Kiefer and the
Company dated July 21, 1993 (incorporated by reference to
Exhibit 10.20 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993, Commission File
No. 1-10244).
Exhibit 10.17 Employment Agreement between David L. Robertson and the
Company dated March 11, 1996 (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996, Commission File No.
1-10244).
Exhibit 10.18 Employment Agreement between Narendra M. Pathipati and the
Company dated December 16, 1993 (incorporated by reference
to Exhibit 10.23 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993, Commission File
No. 1-10244).
Exhibit 10.19 Employment Agreement between Earl E. Davis, Jr. and the
Company, as amended dated March 25, 1998 (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended March 30, 1998, Commission File No. 1-10244).
Exhibit 10.20 Employment Agreement between Mark E. Kaplan and the Company
dated August 13, 1996 (incorporated by reference to Exhibit
10.1 on the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, Commission File No.
1-10244).
Exhibit 10.21 Employment Agreement between Frank G. Tluchowski and the
Company dated April 9, 1998 (incorporated by reference to
Exhibit 10.2 on the Company's Quarterly Report on Form 10-Q
for the quarter ended March 30, 1998 Commission File No.
1-10244).
</TABLE>
19
<PAGE> 22
<TABLE>
<S> <C>
Exhibit 13.1 1998 Annual Report to Stockholders of Weirton Steel
Corporation (filed herewith). Except for those portions of
the Annual Report specifically incorporated by reference,
such report is furnished for the information of the
Securities and Exchange Commission and is not to be deemed
filed as part of this Annual Report on Form 10-K.
Exhibit 22.1 Subsidiaries of the Company (filed herewith).
Exhibit 23.1 Consent of Arthur Andersen LLP, independent public
accountants (filed herewith).
Exhibit 27 Financial data schedule for year ended December 31, 1998
(filed herewith).
</TABLE>
(b) Reports on Form 8-K -- None
(c) The exhibits as listed under Item 14(a)(3), are filed herewith or
incorporated herein by reference.
(d) The financial statement schedules listed under Item 14(a)(2), are filed
herewith.
20
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Weirton Steel Corporation has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized,
on the 31st day of March, 1998.
WEIRTON STEEL CORPORATION
By: /s/ RICHARD K. RIEDERER
----------------------------------
Richard K. Riederer
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended this Report has been signed below by the following persons on behalf of
Weirton Steel Corporation and in the capacities indicated on the 31st day of
March, 1998.
/s/ RICHARD K. RIEDERER
- ------------------------------------------------------
Richard K. Riederer
President and Chief Executive Officer
(principal executive and financial officer)
/s/ MARK E. KAPLAN
- ------------------------------------------------------
Mark E. Kaplan
Controller
(principal accounting officer)
/s/ MICHAEL BOZIC
- ------------------------------------------------------
Michael Bozic
Director
/s/ RICHARD R. BURT
- ------------------------------------------------------
Richard R. Burt
Chairman of the Board of Directors
/s/ CRAIG T. COSTELLO
- ------------------------------------------------------
Craig T. Costello
Director
/s/ ROBERT J. D'ANNIBALLE
- ------------------------------------------------------
Robert J. D'Anniballe
Director
/s/ EARL E. DAVIS
- ------------------------------------------------------
Earl E. Davis
Director
- ------------------------------------------------------
Mark G. Glyptis
Director
- ------------------------------------------------------
Phillip A. Karber
Director
- ------------------------------------------------------
Ralph E. Reins
Director
- ------------------------------------------------------
Robert S. Reitman
Director
/s/ RICHARD F. SCHUBERT
- ------------------------------------------------------
Richard F. Schubert
Director
/s/ THOMAS R. STURGES
- ------------------------------------------------------
Thomas R. Sturges
Director
/s/ RONALD C. WHITAKER
- ------------------------------------------------------
Ronald C. Whitaker
Director
/s/ D. LEONARD WISE
- ------------------------------------------------------
D. Leonard Wise
Director
21
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<S> <C>
Exhibit 3.1 Restated Certificate of Incorporation of the Company
(incorporated by Reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 filed May 3, 1989,
Commission File No. 33-28515).
Exhibit 3.2 Certificate of Amendment to the Restated Certificate of
Incorporation of The Company (incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994, Commission File No.
1-10244).
Exhibit 3.3 By-laws of the Company (incorporated by reference to Exhibit
3.3 to the Company's Registration Statement on Form S-1
filed May 3, 1989, Commission File No. 33-28515).
Exhibit 3.4 Amendment to the By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994,
Commission File No. 1-10244).
Exhibit 3.5 Certificate of the Designation, Powers, Preferences and
Rights of the Convertible Voting Preferred Stock, Series A
(incorporated by reference to Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1989, Commission File No. 1-10244).
Exhibit 4.1 Indenture dated October 17, 1989 between the Company and
First Bank (N.A.) as trustee, relating to the Company's
10 7/8% Senior Notes due October 15, 1999, including Form of
Note (incorporated by reference to Exhibits 4.1 and 4.2 to
the Company's Annual Report on Form 10-K for the Fiscal year
ended December 31, 1989, Commission File No. 1-10244).
Exhibit 4.2 Indenture dated as of June 12, 1995 between the Company and
Bankers Trust Company, as trustee, relating to $125,000,000
principal amount of 10 3/4% Senior Notes due 2003,
including Form of Note (incorporated by Reference to Exhibit
4.4 to the Company's Registration Statement on Form S-4
filed on July 27, 1995, Commission File No. 33-61345).
Exhibit 4.3 First Supplemental Indenture dated as of August 12, 1996
between the Company and Bankers Trust Company, as trustee,
relating to the Company's 10 3/4% Senior Notes due 2005
(incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, Commission File No. 1-10244).
Exhibit 4.4 Indenture dated July 3, 1996 between the Company and Bankers
Trust Company, as trustee, relating to the Company's 11 3/8%
Notes due 2004 (incorporated by reference to Exhibit 4.5 to
the Company's Registration Statement on Form S-4 filed on
July 10, 1996, Commission File No. 333-07913).
Exhibit 10.1 Redacted Pellet Sale and Purchase Agreement dated as of
September 30, 1991 between Cleveland-Cliffs Iron Company and
the Company (incorporated By reference to Exhibit 10.18 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992, Commission File No. 1-10244):
Exhibit 10.2 Coke Sale Agreement dated December 9, 1996 between the
Company and USX Corporation (incorporated by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, Commission File No.
1-10244).
Exhibit 10.3 1984 Employee Stock Ownership Plan, as amended and restated
(incorporated By reference to Exhibit 10.3 to the Company's
Annual Report on Form 10-K For the fiscal year ended
December 31, 1989, Commission File No. 1-10244).
</TABLE>
22
<PAGE> 25
<TABLE>
<S> <C>
Exhibit 10.4 1989 Employee Stock Ownership Plan (incorporated by
reference to Exhibit 10.4 to the Company's Annual Report on
Form 10-K for the fiscal year Ended December 31, 1989,
Commission File No. 1-10244).
Exhibit 10.5 Amendments to the 1984 and 1989 Employee Stock Ownership
Plans, effective May 26, 1994 (incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
Exhibit 10.6 Weirton Steel Corporation 1987 Stock Option Plan
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 filed May 3, 1989,
Commission File No. 33-28515).
Exhibit 10.7 Weirton Steel Corporation 1998 Stock Option Plan
(incorporated by reference to Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, Commission File No. 1-10244).
Exhibit 10.8 Deferred Compensation Plan for Directors (incorporated by
reference to Exhibit 10.19 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990,
Commission File No. 1-1024).
Exhibit 10.9 Weirton Steel Corporation Amended Performance Incentive Plan
for the Period 1996 through 1998 (incorporated by reference
to Exhibit 10.9 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, Commission File
No. 1-10244).
Exhibit 10.10 Weirton Steel Corporation Supplemental Senior Executive
Retirement Plan (incorporated by reference to the Exhibit
10.10 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, Commission File No.
1-10244).
Exhibit 10.11 Weirton Steel Corporation Supplemental Executive Retirement
Plan (incorporated by reference to Exhibit 10.11 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, Commission File No. 1-10244).
Exhibit 10.12 Employment Agreement between Richard K. Riederer and the
Company dated April 24, 1996 (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996, Commission File No.
1-10244).
Exhibit 10.13 Letter Agreement between Richard K. Riederer and the Company
dated December 24, 1996 (incorporated by reference to
Exhibit 10.9 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, Commission File No.
1-10244).
Exhibit 10.14 Employment Agreement between Thomas W. Evans and the Company
dated April 21, 1987, including Amendment dated July 19,
1993 (incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and Exhibit 10.28 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993, Commission File No. 1-10244).
Exhibit 10.15 Employment Agreement between Craig T. Costello and the
Company dated July 20, 1993 (incorporated by reference to
Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993, Commission File
No. 1-10244).
Exhibit 10.16 Employment Agreement between William R. Kiefer and the
Company dated July 21, 1993 (incorporated by reference to
Exhibit 10.20 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993, Commission File
No. 1-10244).
Exhibit 10.17 Employment Agreement between David L. Robertson and the
Company dated March 11, 1996 (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996, Commission File No.
1-10244).
</TABLE>
23
<PAGE> 26
<TABLE>
<S> <C>
Exhibit 10.18 Employment Agreement between Narendra M. Pathipati and the
Company dated December 16, 1993 (incorporated by reference
to Exhibit 10.23 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993, Commission File
No. 1-10244).
Exhibit 10.19 Employment Agreement between Earl E. Davis, Jr. and the
Company, as amended dated March 25, 1998 (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended March 30, 1998, Commission File No. 1-10244).
Exhibit 10.20 Employment Agreement between Mark E. Kaplan and the Company
dated August 13, 1996 (incorporated by reference to Exhibit
10.1 on the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, Commission File No.
1-10244).
Exhibit 10.21 Employment Agreement between Frank G. Tluchowski and the
Company dated April 9, 1998 (incorporated by reference to
Exhibit 10.2 on the Company's Quarterly Report on Form 10-Q
for the quarter ended March 30, 1998 Commission File No.
1-10244).
Exhibit 13.1 1998 Annual Report to Stockholders of Weirton Steel
Corporation (filed herewith). Except for those portions of
the Annual Report specifically incorporated by reference,
such report is furnished for the information of the
Securities and Exchange Commission and is not to be deemed
filed as part of this Annual Report on Form 10-K.
Exhibit 22.1 Subsidiaries of the Company (filed herewith).
Exhibit 23.1 Consent of Arthur Andersen LLP, independent public
accountants (filed herewith).
Exhibit 27 Financial data schedule for year ended December 31, 1998
(filed herewith).
</TABLE>
24
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Weirton Steel Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Weirton Steel Corporation's
annual report to stockholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 19, 1999. Our audit was made for
the purpose of forming an opinion on those statements taken as a whole. The
schedules listed in the index in Item 14(a)2 of the Form 10-K are the
responsibility of the Company's management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not a part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
February 19, 1999
S-1
<PAGE> 28
WEIRTON STEEL CORPORATION
CONDENSED PARENT COMPANY STATEMENTS OF INCOME
SCHEDULE 1
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET SALES.............................................. $1,254,796 $1,397,204 $1,383,301
OPERATING COSTS:
Cost of sales........................................ 1,116,450 1,258,035 1,282,424
Discount on sale of finance receivables to
subsidiary........................................ 18,014 19,369 19,768
Selling, general and administrative expense.......... 34,186 32,544 35,600
Depreciation......................................... 60,677 60,855 58,019
Restructuring charge................................. 2,871 17,000 16,959
---------- ---------- ----------
Total operating costs............................. 1,232,198 1,387,803 1,412,770
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS.......................... 22,598 9,401 (29,469)
Equity income from subsidiaries...................... 5,038 8,323 8,971
Interest expense..................................... (43,687) (48,095) (43,806)
Interest income...................................... 5,929 5,597 6,191
ESOP contribution.................................... (2,610) (2,610) (2,610)
---------- ---------- ----------
LOSS BEFORE INCOME TAXES............................... (12,732) (27,384) (60,722)
Income tax benefit................................... (6,605) (9,642) (16,235)
---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY ITEM......................... (6,127) (17,742) (44,487)
Loss on early extinguishment of debt................. -- -- (5,431)
---------- ---------- ----------
NET LOSS............................................... $ (6,127) $ (17,742) $ (49,918)
========== ========== ==========
PER SHARE DATA:
Weighted average number of common shares:
Basic............................................. 41,924 42,622 42,370
Diluted........................................... 41,924 42,622 42,370
BASIC EARNINGS PER SHARE:
Loss before extraordinary item......................... $ (0.15) $ (0.42) $ (1.05)
Loss on early extinguishment of debt................... -- -- (0.13)
---------- ---------- ----------
NET LOSS PER COMMON SHARE.............................. $ (0.15) $ (0.42) $ (1.18)
========== ========== ==========
DILUTED EARNINGS PER SHARE:
Loss before extraordinary item......................... $ (0.15) $ (0.42) $ (1.05)
Loss on early extinguishment of debt................... -- -- (0.13)
---------- ---------- ----------
NET LOSS PER COMMON SHARE.............................. $ (0.15) $ (0.42) $ (1.18)
========== ========== ==========
</TABLE>
S-2
<PAGE> 29
WEIRTON STEEL CORPORATION
CONDENSED PARENT COMPANY BALANCE SHEET
SCHEDULE I
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Assets:
Current assets:
Cash and equivalents...................................... $ 53,063 $ 107,617
Receivables............................................... 229 76
Inventories............................................... 259,332 260,933
Deferred income taxes..................................... 43,254 34,437
Other current assets...................................... 4,519 4,985
---------- ----------
Total current assets................................... 360,397 408,048
---------- ----------
Property, plant and equipment, net.......................... 574,692 591,389
Investment in and advances to unconsolidated subsidiaries... 129,065 151,529
Deferred income taxes....................................... 119,013 116,952
Other assets and deferred charges........................... 12,273 14,021
---------- ----------
Total Assets.............................................. $1,195,440 $1,281,939
========== ==========
Liabilities:
Current liabilities:
Current portion of long term debt obligations............. $ 84,044 $ 42,163
Payables.................................................. 120,811 132,666
Employment costs.......................................... 63,941 61,800
Other current liabilities................................. 25,674 34,382
---------- ----------
Total current liabilities................................. 294,470 271,011
Long term debt obligations.................................. 304,626 388,997
Long term pension obligations............................... 81,908 97,542
Postretirement benefits other than pensions................. 337,441 338,474
Other long term liabilities................................. 33,214 32,809
---------- ----------
Total Liabilities...................................... 1,051,659 1,128,833
---------- ----------
Redeemable stock............................................ 22,238 20,579
Stockholders' Equity:
Common stock, $0.01 par value; 50,000,000 authorized;
43,178,134 and 42,846,184 shares issued................... 432 428
Additional paid-in capital.................................. 457,851 456,379
Retained earnings (deficit)................................. (329,141) (323,014)
Other stockholders equity................................... (7,599) (1,266)
---------- ----------
Total Stockholders' Equity............................. 121,543 132,527
---------- ----------
Total Liabilities, Redeemable Stock and Stockholders'
Equity................................................ $1,195,440 $1,281,939
========== ==========
</TABLE>
S-3
<PAGE> 30
WEIRTON STEEL CORPORATION
CONDENSED PARENT COMPANY STATEMENT OF CASH FLOWS
SCHEDULE I
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES................. $ 18,188 $ 53,800 $ 34,806
CASH FLOWS USED BY INVESTING ACTIVITIES
Investment in unconsolidated subsidiaries............... (7,561) (100) --
Other capital spending.................................. (48,691) (60,070) (67,937)
Investment in MetalSite LP.............................. (2,575) -- --
Investment in Weirton Receivables, Inc.................. 34,667 10,447 707
-------- -------- ---------
NET CASH USED BY INVESTING ACTIVITIES..................... (24,160) (49,723) (67,230)
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES
Repayment of debt obligations........................... (42,831) -- (105,676)
Proceeds from issuance of long term debt obligations.... -- -- 122,610
Common shares issuable.................................. 532 664 773
Purchase of common shares for treasury.................. (6,283) -- --
Deferred financing costs................................ -- -- (4,097)
-------- -------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES.......... (48,582) 664 13,610
NET CHANGE IN CASH AND EQUIVALENTS........................ (54,554) 4,741 (18,814)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD............... 107,617 102,876 121,690
-------- -------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD..................... $ 53,063 $107,617 $ 102,876
======== ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of capitalized interest.............. $ 45,953 $ 48,489 $ 40,275
Income taxes paid (refunded), net....................... 7,803 (2,556) (3,699)
Dividends from Weirton Receivable, Inc.................. 2,971 4,232 6,436
</TABLE>
Note
In 1998, the Company accounted for their investment in subsidiaries using the
equity method for 1998, 1997 and 1996.
S-4
<PAGE> 31
WEIRTON STEEL CORPORATION AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO BALANCE AT
BEGINNING OF COST AND END OF
DESCRIPTION YEAR PERIOD EXPENSE DEDUCTIONS PERIOD
----------- ---- ------ ------- ---------- ------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts,
discounts, claims and allowances........ 1998 $ 9,853 $32,001 $33,280 $ 8,574
1997 7,684 30,865 28,696 9,853
1996 $ 8,688 $26,832 $27,836 $ 7,684
Valuation allowance for deferred tax
assets.................................. 1998 $45,547 $ 1,321 $ -- $46,868
1997 41,249 4,298 -- 45,547
1996 $30,943 $10,306 $ -- $41,249
</TABLE>
S-5
<PAGE> 1
Exhibit 13.1
Weirton Steel Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
This following should be read in conjunction with, and is qualified in its
entirety by reference to, the Consolidated Financial Statements of Weirton Steel
Corporation (the "Company") including the notes thereto, which begin on page 26.
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.
In 1998, foreign competition adversely affected product prices in the United
States and the tonnage sold by domestic producers. Relative strength of foreign
economies 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
compared to 31.2 million tons in 1997. A significant portion of the increase
occurred in the second half of 1998.
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. The cases were filed with the U.S. International Trade
Commission (the "ITC") and the U.S. Department of Commerce. Anti-dumping cases
were filed against the three countries while a subsidy complaint was also filed
against Brazil. These cases allege the countries have engaged in dumping
practices, a violation of U.S. trade laws.
On November 16, 1998, the ITC issued its preliminary ruling that the high
volumes of low-priced imported steel had damaged the domestic steel industry.
On February 12, 1999, the Commerce Department made a preliminary ruling in
favor of the U.S. producers on the hot-rolled cases against Brazil and Japan.
The Commerce Department imposed anti-dumping duties against the steel producers
of both nations as well as countervailing duties against the Brazilian
producers. (Countervailing duties are meant to counter the effect of government
subsidization.) The anti-dumping margins ranged from 25% to 67% against Japanese
producers and from 50% to 71% against Brazilian producers. Countervailing duties
assessed against Brazilian producers ranged from 6% to 9%.
Additionally, in February 1999, the Commerce Department announced a tentative
suspension agreement with Russia. Under this agreement, the preliminary duties
ranging from 71% to 218% will be suspended in exchange for a six month
moratorium on shipments, a price floor, and import quotas limiting Russian
hot-rolled steel to the pre-surge, 1996 levels.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
1998 Compared To 1997
The net loss for 1998 was $6.1 million or $0.15 per diluted share compared to a
net loss of $17.7 million or $0.42 per diluted share in 1997. The results for
1998 and 1997 included pretax restructuring charges of $2.9 million and $17.0
million, respectively, associated with employee reduction programs. Excluding
the effect of this non-recurring item, and the resulting impact on income taxes,
the net loss for 1998 would have been $3.8 million or $0.09 per diluted share
compared to a net loss for 1997 of $4.1 million or $0.10 per diluted share.
Total shipments in 1998 were 2,575 thousand tons compared to 2,772 thousand
tons in 1997. Net sales were $1,254.8 million in 1998 compared to $1,397.2
million in 1997.
Sheet product shipments in 1998 were 1,771 thousand tons compared to 1,918
thousand tons in 1997; a decrease of 8%. Sheet mill product shipments resulted
in net sales of $755.3 million in 1998, a decrease of $107.3 million compared to
1997. The decrease in net sales is attributable to reduced shipments and a
decrease in average selling price. The lower shipments and selling prices were
the result of unfairly priced imports which drastically weakened the domestic
steel market in the second half of 1998.
Tin mill product shipments in 1998 were 804 thousand tons compared to 854
thousand tons in 1997; a decrease of 6%. Tin mill product shipments resulted in
net sales of $499.5 million in 1998, a decrease of $35.1 million compared to
1997. The decrease in net sales is primarily attributable to the decrease in tin
mill product shipments.
Cost of sales per ton decreased approximately $20 per ton from $454 per ton
in 1997 to $434 per ton in 1998. The decrease resulted primarily from a full
year's benefit of the rebuild of the No. 1 Blast Furnace, lower raw material and
employment costs and continued benefits of the Company's cost reduction
programs.
14.15
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Selling, general and administrative expenses in 1998 were $39.2 million
compared to $36.3 million in 1997. The increase is primarily attributable to
costs incurred in the start-up of the Company's consolidated subsidiary,
MetalSite LP.
During 1998, the Company initiated a special voluntary retirement window for
certain supervisory and managerial employees. As a result of the retirement
window, the Company recorded a restructuring charge of $2.9 million, consisting
of early retirement benefits.
During 1997, the Company finalized its labor agreements with its principal
union. The new contracts, among other things, provided for a retirement window
for represented retirement eligible employees. As a result of the retirement
window, the Company recorded a restructuring charge of $17.0 million in 1997.
The restructuring charge consisted of the recognition of special retirement
benefits and a lump sum payment for those choosing to retire during the
window.
Interest expense was $44.3 million in 1998, a decrease of $4.3 million from
1997. The decrease resulted from lower outstanding debt due to the repayment of
$42.2 million in senior debt in March 1998.
1997 Compared To 1996
The net loss for 1997 was $17.7 million or $0.42 per diluted share compared to a
net loss of $49.9 million or $1.18 per diluted share in 1996. The results for
1997 and 1996 included pretax restructuring charges of $17.0 million in each
year associated with employee reduction programs. The 1996 results included a
$5.4 million after-tax extraordinary loss on the early extinguishment of debt.
Excluding the effect of these non-recurring items and the resulting impact on
income taxes, net loss for 1997 would have been $4.1 million or $0.10 per
diluted share compared to a net loss for 1996 of $30.8 million or $0.73 per
diluted share.
Total shipments in 1997 were 2,772 thousand tons compared to 2,857 thousand
tons in 1996. Net sales were $1,397.2 million in 1997 compared to $1,383.3
million in 1996.
Sheet product shipments in 1997 were 1,918 thousand tons or 2% lower than in
1996. However, net sales generated by sheet product in 1997 increased $39.6
million to $862.6 million, due to overall higher average selling prices and an
improved product mix.
Tin mill product shipments in 1997 were 854 thousand tons compared to 900
thousand tons in 1996; a decrease of 5%. Tin mill product shipments resulted in
net sales of $534.6 million in 1997, a decrease of $25.7 million compared to
1996. The decrease in net sales is attributable to the decrease in tin mill
product shipments.
Cost of sales as a percentage of net sales was 90% in 1997 compared to 93% in
1996 reflecting higher average selling prices and lower operating costs in 1997
due to lower employment levels and improved operations after the rebuild of the
No. 1 Blast Furnace. Operating costs in the fourth quarter of 1996 were
adversely affected by the planned shut down of the No. 1 Blast Furnace. Higher
operating costs associated with the No. 1 Blast Furnace carried into 1997, but
were offset by lower operating costs after start-up in the first quarter of the
year.
Selling, general and administrative expenses in 1997 were $36.3 million
compared to $39.1 million in 1996. The decrease is primarily attributable to
lower salaries resulting from the managerial and supervisory workforce reduction
in 1996.
Depreciation expense increased $2.9 million to $60.9 million in 1997. This
increase was the result of a higher depreciable asset base as a result of the
capital expenditures associated with the No. 1 Blast Furnace rebuild.
During 1997, the Company finalized its labor agreements with its principal
union. The new contracts, among other things, provided for a retirement window
for represented retirement eligible employees. As a result of the retirement
window, the Company recorded a restructuring charge of $17.0 million in 1997.
The restructuring charge consisted of the recognition of special retirement
benefits and a lump sum payment for those choosing to retire during the window.
During 1996, the Company recognized a $17.0 million restructuring charge
associated with an approximately 20% reduction in the supervisory and managerial
workforce. The charge related to this employee reduction consisted of early
retirement benefits for those eligible to retire and severance benefits for
those choosing not to retire or ineligible to retire.
Interest expense was $48.7 million in 1997, an increase of $4.3 million from
1996. The increase resulted from a net increase of approximately $23.0 million
of senior debt obligations during the second half of 1996, the full effect of
which was not realized until 1997.
In July 1996, the Company refinanced approximately $100.0 million of its
senior notes through the issuance of $125.0 million principal amount of 11-3/8%
Senior Notes due 2004. The refinancing resulted in the recognition of a $5.4
million after-tax extraordinary loss on the early extinguishment of debt in
1996.
WEIRTON STEEL CORPORATION
<PAGE> 3
Weirton Steel Corporation
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash and equivalents of $68.4 million
compared to $124.7 million as of December 31, 1997. 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 years
indicated are summarized below:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Net cash provided by operating activities $ 50,224 $ 72,104
Net cash used by investing activities (57,943) (60,170)
Net cash provided (used) by financing activities (48,582) 664
-------- --------
Increase (decrease) in cash $(56,301) $ 12,598
======== ========
</TABLE>
Net cash flows from operating activities were $50.2 million and $72.1 million
during 1998 and 1997, respectively. The decline in cash flow from operations
from 1998 to 1997 resulted from a weaker steel market in the second half of 1998
and payment of federal alternative minimum tax.
The Company's investing activities included capital spending for property,
plant and equipment of $50.4 million and $60.1 million in 1998 and 1997,
respectively. The Company used these expenditures to purchase, modernize or
upgrade production equipment, maintain facilities and comply with environmental
regulations. The Company's planned capital expenditures for 1999 are
approximately $15.0 million. Included in the Company's planned capital
expenditures are approximately $0.5 million for environmental control projects.
In addition, investing activities included investments in unconsolidated
subsidiaries of $7.8 million and $0.1 million in 1998 and 1997, respectively.
Net cash flows used by financing activities were $48.6 million for 1998. Net
cash flows provided by financing activities were $0.7 million in 1997. The
Company repaid $42.2 million of senior notes in 1998. The Company also purchased
$6.3 million of its common stock in 1998 which is being held in treasury.
Through a wholly owned subsidiary, Weirton Receivables Inc. ("WRI"), the
Company has in place a receivables participation agreement with a group of four
banks (the "WRI Receivables Participation Agreement"). The facility, which is
AAA rated by Standard and Poor's Rating Service, provides for a total commitment
by the banks of up to $85.0 million, including a letter of credit subfacility of
up to $25.0 million. The WRI Receivables Participation Agreement, as amended,
makes the facility available to WRI through April, 2003. As of December 31,
1998, after reductions from amounts in place under the letter of credit
subfacility, the base amount of participation interests available for cash sales
was approximately $34.4 million.
As of March 19, 1999, after reductions from amounts in place under the letter
of credit subfacility, the base amount of participation interest available for
cash sales was approximately $44.2 million. The Company, WRI and the banks have
agreed on amendments to the Receivables Participation Agreement in order to
increase the amounts of participation interest available for cash sale.
Implementation of the amendments is subject to the execution by the parties of
definitive documentation and the satisfaction of customary conditions by the
Company and WRI.
In order to improve its liquidity position, the Company is also pursuing
various operating initiatives. These include inventory reduction programs
supported by purchase consignment agreements and recent 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 $154.7 million as of December 31,
1998, which 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 was required in 1998 and 1997, and may be
required in future periods, to make cash payments for income taxes under federal
alternative minimum tax regulations.
As of December 31, 1998 and 1997, the Company had pension funding credits of
approximately $83.2 million and $89.0 million, respectively. Accordingly, the
Company is not required to contribute to its pension plan in 1999, nor was the
Company required to contribute to its pension plan in 1998. However, during
1998, the Company did contribute $43.0 million to its pension fund.
Based upon available cash on hand, the amount of cash expected to be
generated from operating activities, including planned reductions in working
capital primarily through 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 the 10-7/8% Senior Notes in 1999 and the
completion of the 1999 capital spending plan.
To the extent that cash on hand and cash generated from operating activities
do not generate an adequate amount of cash, the Company expects that its cash
requirements can be met by the WRIReceivables Participation Agreement.
16.17
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
YEAR 2000
The Company (like most companies) 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:
o 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
risks to the Company.
o allocating appropriate resources to fix the Year 2000 problem.
o communicating with, and aggressively pursuing, critical third parties to
help ensure the Year 2000 readiness of their products and services.
o performing rigorous Year 2000 testing of critical systems.
o 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.
o engaging qualified outside engineering and information technology
consulting firms to assist in the Year 2000 impact assessment and readiness
effort.
o 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.
3. Y2K Readiness - The Year 2000 readiness of Y2K inventory including items
already made Year 2000 ready and those items made Year 2000 ready through
renovation/replacement. The Company only considers systems ready after
testing and implementation activities have been completed.
<TABLE>
<CAPTION>
March 19, 1999
-------------------------------------
Percent Completed
Y2K Y2K Impact Y2K
Inventory Assessment Readiness
- ----------------------------------------------------------
<S> <C> <C> <C>
IT Systems 100% 100% 75%
Non-IT Systems 100% 100% 65%
- ----------------------------------------------------------
</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 has begun 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.
WEIRTON STEEL CORPORATION
<PAGE> 5
Weirton Steel Corporation
- --------------------------------------------------------------------------------
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 December 31, 1998, the Company spent $10.8
million on these projects. The Company plans to spend an additional $4.9 million
to complete these projects.
Through December 31, 1998, in addition to the replacement of the human
resources and financial reporting systems, the Company spent approximately $3.8
million in remediation costs to achieve Year 2000 readiness. All of these
remediation costs have properly been expensed in the Company's Consolidated
Statements of Income. Management anticipates that the Company will spend an
additional $4.0 million to $6.0 million, including approximately $1.0 million in
capital expenditures to achieve Year 2000 readiness. As the work of the task
force 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 risks to the Company. Failure to achieve Year 2000 readiness goals
would 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 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 MATTERS
In March 1996, the West Virginia Department of Environmental Protection ("DEP")
and the United States Environmental Protection Agency ("EPA") advised the
Company that they had identified a number of enforcement issues pertaining to
waste water discharge, air emissions and waste handling operations of the
Company. In September 1996, the Company, DEP and EPA reached a settlement
regarding these water, air and waste-related issues. Under the settlement, the
Company was required to pay a total penalty of $3.2 million. Such payment was
made in 1997.
Under the settlement, the Company is required to conduct certain remedial
activity at one of its waste disposal sites. Additionally, the Company is
required to undertake certain capital projects to assure compliance with air,
water and waste-related regulations. Such capital costs will include upgrades
and modifications to air emissions control equipment, wastewater treatment
systems and waste handling facilities. Under the settlement, the Company has
committed to environmental related capital projects totaling approximately $19.8
million. Through December 31, 1998, the Company had expended $14.5 million
related to these capital commitments.
In connection with the negotiations, the EPA issued a corrective action
order, effective October 18, 1996, 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.
The Company has accrued approximately $7.0 million related to environmental
related liabilities, including costs associated with the corrective action
order. Because the Company does not currently know the nature nor the extent of
hazardous waste located on the property, it is not presently possible to
estimate the ultimate cost to comply with the corrective action order or conduct
remedial activity that may be required.
The Company believes that National Steel Corporation ("NSC") is obligated to
reimburse the Company for a portion of the costs that may be incurred by the
Company to comply with the corrective action order and to undertake any required
remedial action. Pursuant to the agreement whereby the Company purchased the
former Weirton Steel Division of NSC in 1984, NSC retained liability for cleanup
costs related to solid or hazardous waste facilities, areas or equipment as long
as such were not used by the Company in its operations subsequent to the
acquisition. The Company has not recorded any receivables from NSC related to
potential reimbursable costs.
18.19
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Fair values of cash and cash equivalents, receivables and accounts payable
approximate carrying values and were relatively insensitive to changes in
interest rates at December 31, 1998 due to the short term maturity of the
instruments.
The Company's market risk strategy has generally been to obtain competitive
prices for its products and services and allow operating results to reflect
market price movements dictated by supply and demand for the Company's
products.
In the normal course of business, the Company is exposed to market risk or
price fluctuations related to the purchase of iron ore pellets and blast furnace
coke. The Company is also exposed to market risk or price fluctuations on
purchases of scrap, tin, zinc, oxygen, nitrogen, natural gas, power and other
raw materials and utility requirements. As part of its market risk strategy, the
Company has entered into fixed price contracts, lasting at least until December
31, 1999, for its iron ore pellet, oxygen, natural gas and nitrogen
requirements. The Company has entered into a contract to purchase approximately
80% of its coke requirements. Under the contract, the price of coke fluctuates
with the market, subject to a ceiling and a floor. The remaining 20% of the
Company's coke requirements are sourced from the open market and are subject to
market risk. Scrap, tin, zinc and other raw materials are generally purchased in
the open market and subject to price fluctuation. As of December 31, 1998, the
Company had no significant derivative financial instruments or derivative
commodity instruments outstanding.
As of December 31, 1998, the Company had the following financial liabilities
where the fair value differed from the carrying value:
<TABLE>
<CAPTION>
Carrying Value Fair Value
- -------------------------------------------------------------
<S> <C> <C>
Long term debt $304,626 $277,925
Series A Redeemable Preferred Stock $ 23,543 $ 2,651
</TABLE>
- --------------------------------------------------------------------------------
OUTLOOK
Flat rolled steel product demand in the Company's end user markets remains
steady. However, record breaking volumes of unfairly priced imports weakened the
Company's order entry and shipping rates and caused reduction in prices in the
second half of 1998. While duties imposed on steel imported from Japan and
Brazil and the suspension agreement with Russia will help stabilize selling
prices, the market continues to be adversely affected by oversupply relative to
demand, including unfairly priced imported products against which duties and
other remedies have yet to be applied.
In response to these conditions, the Company idled its No. 4 Blast Furnace
and reduced its workforce through layoffs. Consequently, the Company expects a
loss in the first quarter of 1999.
- --------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives and
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet as
an asset or liability measured at its fair value. The statement requires that
changes in the fair value of derivatives be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999. Management does not believe the
adoption of SFAS No. 133 will have a material impact on the Company's financial
position or its results of operations.
- --------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
This annual report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and 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 our assumptions made in connection with the
forward-looking statements are reasonable, there are no assurances that our
assumptions and 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.
WEIRTON STEEL CORPORATION
<PAGE> 7
Weirton Steel Corporation
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $1,254,796 $1,397,204 $1,383,301
Operating costs:
Cost of sales 1,117,465 1,258,035 1,282,923
Selling, general and administrative expense 39,219 36,308 39,102
Depreciation 60,822 60,855 58,019
Restructuring charge 2,871 17,000 16,959
---------- ---------- ----------
TOTAL OPERATING COSTS 1,220,377 1,372,198 1,397,003
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 34,419 25,006 (13,702)
Income (loss) from unconsolidated subsidiaries 34 (12) --
Interest expense (44,338) (48,683) (44,366)
Interest income 4,684 4,259 5,415
ESOP contribution (2,610) (2,610) (2,610)
---------- ---------- ----------
LOSS BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND MINORITY INTEREST (7,811) (22,040) (55,263)
Income tax benefit (1,391) (4,298) (10,776)
---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY ITEM AND MINORITY INTEREST (6,420) (17,742) (44,487)
Loss on early extinguishment of debt -- -- 5,431
---------- ---------- ----------
LOSS BEFORE MINORITY INTEREST (6,420) (17,742) (49,918)
Minority interest in loss of consolidated subsidiary 293 -- --
---------- ---------- ----------
NET LOSS $ (6,127) $ (17,742) $ (49,918)
========== ========== ==========
PER SHARE DATA:
Weighted average number of common shares outstanding (in thousands):
Basic 41,924 42,622 42,370
Diluted 41,924 42,622 42,370
BASIC EARNINGS PER SHARE:
Loss before extraordinary item $ (0.15) $ (0.42) $ (1.05)
Loss on early extinguishment of debt -- -- (0.13)
---------- ---------- ----------
NET LOSS PER COMMON SHARE $ (0.15) $ (0.42) $ (1.18)
========== ========== ==========
DILUTED EARNINGS PER SHARE:
Loss before extraordinary item $ (0.15) $ (0.42) $ (1.05)
Loss on early extinguishment of debt -- -- (0.13)
---------- ---------- ----------
NET LOSS PER COMMON SHARE $ (0.15) $ (0.42) $ (1.18)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
20.21
<PAGE> 8
CONSOLIDATED BALANCE SHEETS
YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and equivalents, includes restricted cash of $1,275 and $2,046, respectively $ 68,389 $ 124,690
Receivables, less allowances of $8,574 and $9,853, respectively 112,278 140,843
Inventories 259,332 260,933
Deferred income taxes 43,254 34,437
Other current assets 4,443 4,803
---------- ----------
TOTAL CURRENT ASSETS 487,696 565,706
Property, plant and equipment, net 576,238 591,389
Investment in unconsolidated subsidiaries 7,938 88
Deferred income taxes 111,411 111,148
Other assets and deferred charges 12,416 14,209
---------- ----------
TOTAL ASSETS $1,195,699 $1,282,540
========== ==========
LIABILITIES:
CURRENT LIABILITIES:
Current portion of long term debt obligations $ 84,044 $ 42,163
Payables 120,697 132,666
Employment costs 63,966 61,800
Taxes other than income taxes 15,060 22,417
Other current liabilities 10,957 12,571
---------- ----------
TOTAL CURRENT LIABILITIES 294,724 271,617
Long term debt obligations 304,626 388,997
Long term pension obligation 81,908 97,542
Postretirement benefits other than pensions 337,443 338,474
Other long term liabilities 33,217 32,804
---------- ----------
TOTAL LIABILITIES $1,051,918 $1,129,434
REDEEMABLE STOCK:
Preferred stock, Series A, $0.10 par value; 1,694,636 and 1,738,163
shares authorized and issued; 1,678,576 and 1,729,325 subject to put 23,852 24,652
Less: Preferred treasury stock, Series A, at cost, 21,454 and 10,892 shares (309) (158)
Deferred ESOP compensation (1,305) (3,915)
---------- ----------
TOTAL REDEEMABLE STOCK 22,238 20,579
STOCKHOLDERS' EQUITY:
Preferred stock, Series A, $0.10 par value: 16,060 and 8,838 shares not subject to put 233 128
Common stock, $0.01 par value; 50,000,000 authorized;
43,178,134 and 42,846,184 shares issued 432 428
Additional paid-in capital 457,851 456,379
Common stock issuable, 383,562 and 288,423 shares 532 664
Deferred compensation (492) (471)
Retained earnings (deficit) (329,141) (323,014)
Less: Common treasury stock, at cost 1,983,561 and 209,514 shares (7,872) (1,587)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY $ 121,543 $ 132,527
---------- ----------
TOTAL LIABILITIES, REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY $1,195,699 $1,282,540
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
WEIRTON STEEL CORPORATION
<PAGE> 9
Weirton Steel Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (6,127) $(17,742) $ (49,918)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation 60,822 60,855 58,019
Amortization of deferred financing costs 1,662 1,836 1,982
Restructuring charge 2,871 17,000 16,959
ESOP Contribution 2,610 2,610 2,610
Loss on early extinguishment of debt -- -- 5,431
Deferred income taxes (9,080) (1,742) (7,078)
Cash provided (used) by working capital items:
Receivables 28,565 13,583 (4,213)
Inventories 1,601 (1,794) (3,779)
Other current assets 360 1,606 4,131
Payables (11,969) (16,932) 24,743
Other current liabilities (6,805) 838 (35,188)
Long term pension obligation (17,713) 368 6,973
Other 3,427 11,618 13,936
---------- -------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 50,224 72,104 34,608
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in unconsolidated subsidiaries (7,561) (100) --
Capital spending (50,382) (60,070) (67,937)
---------- -------- ---------
NET CASH USED BY INVESTING ACTIVITIES (57,943) (60,170) (67,937)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt obligations (42,831) -- (105,676)
Purchase of treasury stock (6,283) -- --
Proceeds from issuance of debt obligations -- -- 122,610
Common shares issuable 532 664 773
Deferred financing costs -- -- (4,097)
---------- -------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (48,582) 664 13,610
---------- -------- ---------
NET CHANGE IN CASH AND EQUIVALENTS (56,301) 12,598 (19,719)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 124,690 112,092 131,811
---------- -------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD $ 68,389 $124,690 $ 112,092
========== ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of capitalized interest $ 45,953 $ 48,489 $ 40,275
Income taxes paid (refunded), net 7,803 (2,556) (3,699)
</TABLE>
The accompanying notes are an integral part of these statements.
22.23
<PAGE> 10
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------- Additional
(Dollars in thousands, except per share data) Shares Amount Paid-in Capital
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKHOLDERS' EQUITY CONSOLIDATED AT DECEMBER 31, 1995 42,289,944 $423 $454,197
Net loss -- -- --
Conversion of preferred stock 7,142 -- 94
Exercise of preferred stock put options -- -- 13
Purchase of treasury stock -- -- --
Employee stock purchase plan:
Shares issued 295,764 3 1,034
Shares issuable -- -- --
Board of Directors deferred compensation plan:
Shares issued -- -- (27)
Shares issuable -- -- --
Deferred compensation -- -- --
- --------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY CONSOLIDATED AT DECEMBER 31, 1996 42,592,850 426 455,311
Net loss -- -- --
Conversion of preferred stock 24,560 -- 356
Exercise of preferred stock put options -- -- 77
Purchase of treasury stock -- -- 1
Reclassification of preferred Series A not subject to put -- -- --
Employee stock purchase plan:
Shares issued 228,774 2 679
Shares issuable -- -- --
Board of Directors deferred compensation plan:
Shares issued -- -- (45)
Shares issuable -- -- --
Deferred compensation -- -- --
- --------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY CONSOLIDATED AT DECEMBER 31, 1997 42,846,184 428 456,379
Net loss -- -- --
Conversion of preferred stock 43,527 2 631
Exercise of preferred stock put options -- -- 177
Purchase of treasury stock -- -- 2
Reclassification of preferred Series A not subject to put -- -- --
Employee stock purchase plan:
Shares issued 247,865 2 564
Shares issuable -- -- --
Board of Directors compensation plans:
Shares issued 40,558 -- 98
Shares issuable -- -- --
Deferred compensation -- -- --
- --------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY CONSOLIDATED AT DECEMBER 31, 1998 43,178,134 $432 $457,851
==========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
WEIRTON STEEL CORPORATION
<PAGE> 11
Weirton Steel Corporation
<TABLE>
<CAPTION>
Common
Shares Issuable Retained
------------------ Deferred Earnings
(Dollars in thousands, except per share data) Shares Amount Compensation (Deficit)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY CONSOLIDATED AT DECEMBER 31, 1995 332,076 $ 1,170 $ -- $(255,354)
Net loss -- -- -- (49,918)
Conversion of preferred stock -- -- -- --
Exercise of preferred stock put options -- -- -- --
Purchase of treasury stock -- -- -- --
Employee stock purchase plan:
Shares issued (295,764) (1,037) -- --
Shares issuable 228,774 681 -- --
Board of Directors deferred compensation plan:
Shares issued (36,312) (133) -- --
Shares issuable 30,403 92 -- --
Deferred compensation -- -- (385) --
- ----------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY CONSOLIDATED AT DECEMBER 31, 1996 259,177 773 (385) (305,272)
Net loss -- -- -- (17,742)
Conversion of preferred stock -- -- -- --
Exercise of preferred stock put options -- -- -- --
Purchase of treasury stock -- -- -- --
Reclassification of preferred Series A not subject to put -- -- -- --
Employee stock purchase plan:
Shares issued (228,774) (681) -- --
Shares issuable 247,865 566 -- --
Board of Directors deferred compensation plan:
Shares issued (30,403) (92) -- --
Shares issuable 40,558 98 (98) --
Deferred compensation -- -- 12 --
- ----------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY CONSOLIDATED AT DECEMBER 31, 1997 288,423 664 (471) (323,014)
Net loss -- -- -- (6,127)
Conversion of preferred stock -- -- -- --
Exercise of preferred stock put options -- -- -- --
Purchase of treasury stock -- -- -- --
Reclassification of preferred Series A not subject to put -- -- -- --
Employee stock purchase plan:
Shares issued (247,865) (566) -- --
Shares issuable 285,430 379 -- --
Board of Directors compensation plans:
Shares issued (40,558) (98) -- --
Shares issuable 98,132 153 (153) --
Deferred compensation -- -- 132 --
- ----------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY CONSOLIDATED AT DECEMBER 31, 1998 383,562 $ 532 $(492) $(329,141)
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Common Preferred Series A
Treasury Stock Not Subject to Put
------------------- ------------------ Stockholders'
(Dollars in thousands, except per share data) Shares Amount Shares Amount Equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY CONSOLIDATED AT DECEMBER 31, 1995 275,829 $(1,882) 5,074 $ 74 $198,628
Net loss -- -- -- -- (49,918)
Conversion of preferred stock -- -- -- -- 94
Exercise of preferred stock put options -- -- -- -- 13
Purchase of treasury stock 131 (1) -- -- (1)
Employee stock purchase plan:
Shares issued -- -- -- -- --
Shares issuable -- -- -- -- 681
Board of Directors deferred compensation plan:
Shares issued (36,312) 160 -- -- --
Shares issuable -- -- -- -- 92
Deferred compensation -- -- -- -- (385)
- --------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY CONSOLIDATED AT DECEMBER 31, 1996 239,648 (1,723) 5,074 74 149,204
Net loss -- -- -- -- (17,742)
Conversion of preferred stock -- -- (542) (8) 348
Exercise of preferred stock put options -- -- -- -- 77
Purchase of treasury stock 269 (1) -- -- --
Reclassification of preferred Series A not subject to put -- -- 4,306 62 62
Employee stock purchase plan:
Shares issued -- -- -- -- --
Shares issuable -- -- -- -- 566
Board of Directors deferred compensation plan:
Shares issued (30,403) 137 -- -- --
Shares issuable -- -- -- -- --
Deferred compensation -- -- -- -- 12
- --------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY CONSOLIDATED AT DECEMBER 31, 1997 209,514 (1,587) 8,838 128 132,527
Net loss -- -- -- -- (6,127)
Conversion of preferred stock -- -- (491) (7) 626
Exercise of preferred stock put options -- -- -- -- 177
Purchase of treasury stock 1,774,047 (6,285) -- -- (6,283)
Reclassification of preferred Series A not subject to put -- -- 7,713 112 112
Employee stock purchase plan:
Shares issued -- -- -- -- --
Shares issuable -- -- -- -- 379
Board of Directors compensation plans:
Shares issued -- -- -- -- --
Shares issuable -- -- -- -- --
Deferred compensation -- -- -- -- 132
- --------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY CONSOLIDATED AT DECEMBER 31, 1998 1,983,561 $(7,872) 16,060 $233 $121,543
================================================================================================================================
</TABLE>
24.25
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, OR IN MILLIONS OF DOLLARS
WHERE INDICATED)
- --------------------------------------------------------------------------------
NOTE 1
Basis of Presentation
The financial statements herein include the accounts of Weirton Steel
Corporation and its consolidated subsidiaries. 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. Weirton Steel Corporation together with its
subsidiaries are herein referred to as the "Company."
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 reclassifications have been made to prior year amounts to conform
with current year presentation.
- --------------------------------------------------------------------------------
NOTE 2
Organization and Background
The Company and its predecessor companies have been in the business of making
and finishing steel products for nearly 90 years. From November 1929 to January
1984, the Company's business was operated as either a subsidiary or a division
of National Steel Corporation ("NSC"). Incorporated in Delaware in November
1982, the Company acquired the principal assets of NSC's former Weirton Steel
Division in January 1984.
Prior to 1989, the Company was owned in its entirety by its employees through
an Employee Stock Ownership Plan (the "1984 ESOP"). In June 1989, the 1984 ESOP
sold 4.5 million shares of the Company's common stock in a public offering. In
connection with the public offering of common stock in June 1989, the Company
sold 1.8 million shares of voting Redeemable Preferred Stock, Series A (the
"Series A Preferred") to a new Employee Stock Ownership Plan (the "1989 ESOP").
Each share of Series A Preferred is convertible at any time into one share of
common stock, subject to adjustment, and is entitled to 10 times the number of
votes allotted to the common stock into which it is convertible.
In May 1994, the Company's stockholders approved an amendment to the
Company's Restated Certificate of Incorporation increasing the number of
authorized shares of common stock from 30.0 million shares to 50.0 million
shares. The amendment provided that 15.0 million shares of such increase were to
be issued only in conjunction with public offerings and that up to 5.0 million
shares of such increase were to be issued only pursuant to employee benefit
plans. In August 1994, the Company and the Pension Plan participated in a public
sale of the Company's common stock and sold 15.0 million and 4.55 million
shares, respectively.
Substantially all of the Company's employees participate in the 1984 ESOP and
the 1989 ESOP which owned approximately 24.7% of the issued and outstanding
common shares and substantially all the preferred shares of the Company as of
December 31, 1998. The common and preferred shares held by the 1984 ESOP and the
1989 ESOP collectively represent 46.1% of the voting power of the Company's
voting stock as of December 31, 1998.
- --------------------------------------------------------------------------------
NOTE 3
SIGNIFICANT ACCOUNTING POLICIES
Cash
The liability representing outstanding checks drawn against a zero-balance
general disbursement bank account is included in accounts payable for financial
statement presentation. Such amounts were $0.8 million and $21.8 million as of
December 31, 1998 and 1997, respectively.
Cash Equivalents
Cash equivalents, which consist primarily of certificates of deposit, commercial
paper and time deposits, are stated at cost, which approximates fair value. For
financial statement presentation, the Company considers all highly liquid
investments purchased with an original maturity of 90 days or less to be cash
equivalents.
Inventories
Inventories are stated at the lower of cost or market, cost being determined by
the first-in, first-out method. Inventory costs include materials, labor and
manufacturing overhead.
Property, Plant and Equipment
Property, plant and equipment is valued at cost. Major additions are
capitalized, while the cost of maintenance and repairs which do not improve or
extend the lives of the respective assets is charged to expense in the year
incurred.
WEIRTON STEEL CORPORATION
<PAGE> 13
Weirton Steel Corporation
- --------------------------------------------------------------------------------
Interest costs applicable to facilities under construction are capitalized.
Gains or losses on property dispositions are credited or charged to income.
Depreciation of steelmaking facilities is determined by the
production-variable method which adjusts straight-line depreciation to reflect
actual production levels. The cost of relining blast furnaces is amortized over
the estimated production life of the lining. All other assets are depreciated on
a straight-line basis.
Employee Stock Ownership Plan (ESOP) Accounting
The Company recognizes as compensation expense an amount based upon its required
contributions to the ESOPs. The resulting expense approximates the cost to the
ESOPs for the shares allocated to participants for the period. The number of
shares allocated to participants for the period is determined based on the ratio
of the period's debt principal payment to the total estimated debt principal
payments. Shares are then allocated to individual participants based on the
participant's relative compensation.
Employee Profit Sharing
The provision for employee profit sharing is calculated in accordance with the
Profit Sharing Plan. There were no provisions for employee profit sharing in
1998, 1997 and 1996.
Research and Development
The Company incurs research and development costs to improve existing products,
develop new products and develop more efficient operating techniques. The costs
are charged to expense as incurred and totalled $2.9 million, $3.1 million and
$3.4 million in 1998, 1997, and 1996, respectively.
Comprehensive Income
In June 1997 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 which established 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 is the
same as the net income reported by the Company for 1998, 1997 and 1996.
NOTE 4
INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
- ----------------------------------------------------------
<S> <C> <C>
Raw materials $ 84,274 $ 97,974
Work-in-process 82,331 69,418
Finished goods 92,727 93,541
-------- --------
$259,332 $260,933
======== ========
</TABLE>
- --------------------------------------------------------------------------------
NOTE 5
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
- ----------------------------------------------------------
<S> <C> <C>
Land $ 1,119 $ 1,115
Buildings 9,327 9,088
Machinery, equipment and other 963,852 988,105
Construction-in-progress 41,392 39,581
---------- ----------
1,015,690 1,037,889
Less: Allowances for depreciation (439,452) (446,500)
---------- ----------
$ 576,238 $ 591,389
========== ==========
</TABLE>
Capitalized interest applicable to facilities under construction for the
years ended December 31, 1998, 1997 and 1996, amounted to $0.4 million, $0.5
million and $1.1 million, respectively.
- --------------------------------------------------------------------------------
NOTE 6
FINANCING ARRANGEMENTS
Debt Obligations
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
- ----------------------------------------------------------
<S> <C> <C>
11-1/2% Senior Notes due 3/1/98 $ -- $ 42,163
10-7/8% Senior Notes due 10/15/99 84,044 84,712
11-3/8% Senior Notes due 7/1/2004 125,000 125,000
10-3/4% Senior Notes due 6/1/2005 125,000 125,000
8-5/8% Pollution Control Bonds
due 11/1/2014 56,300 56,300
-------- --------
390,344 433,175
Less: Unamortized debt discount (1,674) (2,015)
-------- --------
Total debt obligations 388,670 431,160
Less: Current portion of long term
debt obligations (84,044) (42,163)
-------- --------
$304,626 $388,997
======== ========
</TABLE>
26.27
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, OR IN MILLIONS OF DOLLARS
WHERE INDICATED)
- --------------------------------------------------------------------------------
During 1998, the Company made principal payments of $42.2 million to redeem
the 11-1/2% Senior Notes at maturity. In addition, the Company repurchased $0.7
million of its 10-7/8% Senior Notes due 1999 at prices approximating par.
In July 1996, the Company completed a private offering of $125.0 million of
its 11-3/8% Senior Notes due 2004. The net proceeds of the offering were $118.5
million, of which $105.7 million was used to repurchase $65.0 million principal
amount of the 10-7/8% Senior Notes and $35.0 million principal amount of 11-1/2%
Senior Notes. The privately placed notes were subsequently exchanged for
publicly registered notes. The Company recognized a $5.4 million after tax
extraordinary loss on the early extinguishment of debt, which included the
premiums paid to retire the notes and the recognition of previously deferred
financing costs.
The indentures governing the senior notes are substantially similar 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, as well as mergers, consolidations, liens and sales of
certain assets. Under covenants affecting the Company's ability to pay dividends
on its common stock, the Company is limited as to the payment of aggregate
dividends after March 31, 1993, to the greater of (i) $5.0 million or (ii) $5.0
million plus one-half of the Company's cumulative consolidated net income since
March 31, 1993, plus the net proceeds from future issuances of certain capital
stock less certain allowable payments. As of December 31, 1998, pursuant to this
covenant, the Company's ability to pay dividends on its common stock was limited
to $92.0 million. Upon the occurrence of a change in control, as defined under
the indentures, holders of the Senior Notes will have the option to cause the
Company to repurchase their Senior Notes at 101% of the principal amount, plus
accrued interest to the date of repurchase.
The Company has scheduled principal payments of $84.0 million on its 10-7/8%
Senior Notes in 1999. No other principal payments become due until 2004.
Receivables Participation Agreement
The Company has in place, through a subsidiary, a receivables participation
agreement with a group of four banks. The facility provides for a total
commitment by the banks of up to $85.0 million, including a letter of credit
subfacility of up to $25.0 million. The Company sells substantially all of its
accounts receivable as they are generated, to its wholly-owned subsidiary,
Weirton Receivables Inc. ("WRI"). WRI finances its ongoing receivable purchases
from a combination of cash collections on receivables already in the pool, short
term intercompany obligations and issuances of redeemable preferred stock to
Weirton Steel Corporation. As of December 31, 1998, while no funded
participation interests had been sold under the facility, $12.8 million in
letters of credit under the subfacility were in place. The amount of
participation interests committed to be purchased by the banks fluctuates
depending upon the amounts and nature of receivables generated by the Company
which are sold into the program, and certain financial tests applicable to them.
With respect to the receivables comprising the pool and the financial tests
applicable to such, and after reduction for amounts in place under the letter of
credit subfacility, the base amount available for cash sale was approximately
$34.4 million as of December 31, 1998.
Funded purchases of participation interests by the banks under the facility
are generally available on a revolving basis for three years, subject to
extension as agreed to by the banks. In 1998, the Participation Agreement was
extended through April 2003. Weirton Steel Corporation continues to act as
servicer of the assets sold into the program and continues to make billings and
collections in the ordinary course of business according to its established
credit practices. Except for warranties given by Weirton Steel Corporation
concerning the eligibility of receivables sold to WRI under the program, the
transactions under the facility are generally nonrecourse. WRI's commitments to
the banks, which do not include warranties as to collectibility of the
receivables, include those typical of sellers of similar property and are
secured by its interest in the receivables and related security. WRI is subject
to certain restrictions regarding its indebtedness, liens, asset sales not
contemplated by the facility, guarantees, investments, other transactions with
its affiliates, including Weirton Steel Corporation, and the maintenance of a
minimum net worth of not less than the greater of $5.0 million or 10% of the
outstanding receivables. As of December 31, 1998, WRI had a net worth of $90.9
million and outstanding receivables of $119.4 million. The banks and other
creditors of WRI have a priority claim on all assets of WRI prior to those
assets becoming available to any of Weirton Steel Corporation's creditors.
Leases
The Company uses certain lease arrangements to supplement its financing
activities.
Rental expense under operating leases was $8.0 million, $6.4 million and $5.6
million for the years ended December 31,
WEIRTON STEEL CORPORATION
<PAGE> 15
Weirton Steel Corporation
- --------------------------------------------------------------------------------
1998, 1997, and 1996, respectively. The minimum future lease payments under
noncancelable operating leases are $8.4 million, $7.7 million, $7.2 million,
$6.0 million and $4.4 million for the years ending 1999 through 2003,
respectively, and $4.6 million thereafter.
- --------------------------------------------------------------------------------
NOTE 7
EMPLOYEE RETIREMENT BENEFITS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits." SFAS No. 132 establishes amended
standards for pension and other postretirement benefits disclosures.
The standard disclosures established in SFAS No. 132 are included herein.
Pensions
The Company has a noncontributory defined benefit pension plan which covers
substantially all employees (the "Pension Plan"). The Pension Plan provides
benefits that are based generally upon years of service and compensation during
the final years of employment.
The Company's funding policy is influenced by its general cash requirements
but, at a minimum, complies with the funding requirements of federal laws and
regulations. During the years ended December 31, 1998, 1997 and 1996, the
Company contributed $43.0 million, $41.1 million and $40.5 million,
respectively, to the Pension Plan. The Pension Plan's assets are held in trust,
the investments of which consist primarily of common stocks, fixed income
securities and short term investments.
Following are the components of the Company's net pension cost recognized in
1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 15,704 $ 18,629 $ 20,221
Interest cost on projected
benefit obligation 48,902 53,935 49,773
Expected return on
plan assets (54,471) (47,591) (38,773)
Amortization of
transition amount 7,390 7,390 7,390
Amortization of prior
service cost 9,089 9,085 9,074
Recognized gain (1,367) -- --
-------- -------- --------
$ 25,247 $ 41,448 $ 47,685
======== ======== ========
</TABLE>
The following table reconciles the funded status of the Pension Plan to the
accrued pension obligation recognized as of December 31:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation $684,938 $643,421
Effect of projected compensation
increases 87,229 111,024
-------- --------
Actuarial present value of projected
benefit obligation 772,167 754,445
Plan assets at fair value 687,537 588,303
-------- --------
Projected benefit obligation in excess
of plan assets 84,630 166,142
Items not yet recognized:
Prior service cost (79,866) (88,955)
Actuarial gains 108,106 58,707
Remaining net obligation at transition (30,962) (38,352)
-------- --------
Accrued pension obligation $ 81,908 $ 97,542
======== ========
</TABLE>
The following table displays the changes in benefit obligation and plan
assets for the years ended December 31:
1998 1997
- ----------------------------------------------------------
Changes in Benefit Obligation:
Projected benefit obligation
at beginning of year $754,445 $707,397
Service cost 15,704 18,629
Interest cost 48,902 53,935
Amendments -- 190
Actuarial (gain) or loss (4,593) 6,400
Special termination benefits 2,079 10,424
Benefits paid (44,370) (42,530)
-------- --------
Projected benefit obligation
at end of year $772,167 $754,445
======== ========
Change in Plan Assets:
Fair value of plan assets
at beginning of year $588,303 $499,211
Actual return on plan assets 100,644 90,542
Employer contributions 42,960 41,080
Benefits paid (44,370) (42,530)
-------- --------
Fair value of plan assets
at end of year $687,537 $588,303
======== ========
28.29
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, OR IN MILLIONS OF DOLLARS
WHERE INDICATED)
- --------------------------------------------------------------------------------
The Company's projected, accumulated and vested pension obligations and
expense have been actuarially measured through the use of certain significant
assumptions. The table below depicts the assumptions used to measure the
Company's pension obligations and its net periodic expense.
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
Weighted average interest
rate used to discount
the projected,
accumulated and vested
benefit obligations to
present value 6.75% 7.00% 7.75%
Expected rate of return
on plan assets 9.25% 9.25% 9.25%
Assumed increase in
compensation levels 2% for 2% for 4.00%
3 years 4 years
and 3% and 3%
thereafter thereafter
</TABLE>
The assumed weighted average interest rate used to discount the pension
obligations to present value is based upon the rates of return on high-quality,
fixed-income investments currently available.
Benefits Other Than Pensions
The Company provides healthcare and life insurance benefits to substantially all
of the Company's retirees and their dependents. The health care plans contain
cost-sharing features including co-payments, deductibles and lifetime maximums.
The life insurance benefits provided to retirees are generally based upon annual
base pay at retirement for salaried employees and specific amounts for
represented employees.
The amount of net periodic expense for postretirement health care and life
insurance benefits recognized in 1998, 1997 and 1996 is comprised of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits
earned during period $ 5,462 $ 6,852 $ 5,766
Interest cost on
accumulated
postretirement
benefit obligation 24,136 25,917 23,767
Amortization of
prior service cost (4,325) (4,325) (4,688)
------- ------- -------
$25,273 $28,444 $24,845
======= ======= =======
</TABLE>
The actuarially determined net periodic expense in 1998, 1997 and 1996 for
retiree medical and life insurance benefits exceeded the $22.3 million, $18.1
million and $16.0 million cash outlay for providing such benefits by
approximately $3.0 million, $10.3 million and $8.8 million, respectively.
The following table sets forth the components of the accumulated
postretirement benefit obligation and the reconciliation of amounts recognized
as of December 31:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------
<S> <C> <C>
Total accumulated postretirement
benefit obligation $336,857 $338,050
Items not yet recognized:
Actuarial losses (30,023) (5,321)
Prior service cost 52,609 23,745
-------- --------
Accrued postretirement
benefit obligation $359,443 $356,474
======== ========
</TABLE>
The accrued postretirement benefit obligation as of December 31, is
classified for financial statement presentation as follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------
<S> <C> <C>
Accrued postretirement benefits,
a component of accrued
employment costs $ 22,000 $ 18,000
Postretirement benefits
other than pensions 337,443 338,474
-------- --------
$359,443 $356,474
======== ========
</TABLE>
The following table displays the change in accumulated benefit obligation and
plan assets for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------
<S> <C> <C>
Change in Benefit Obligation:
Accumulated benefit obligation
beginning of year $338,050 $334,611
Service cost 5,462 6,852
Interest cost 24,136 25,917
Amendments (33,189) --
Actuarial (gain) or loss 24,702 (11,206)
Benefits paid (22,304) (18,124)
-------- --------
Accumulated benefit obligation
end of year $336,857 $338,050
======== ========
Change in Plan Assets:
Fair value of plan assets
at beginning of year $ -- $ --
Employer contributions 22,304 18,124
Benefits paid (22,304) (18,124)
-------- --------
Fair value of plan assets
at end of year $ -- $ --
======== ========
</TABLE>
WEIRTON STEEL CORPORATION
<PAGE> 17
Weirton Steel Corporation
- --------------------------------------------------------------------------------
Consistent with the Company's approach to measuring its accumulated benefit
obligation for pensions, the interest rate used to measure the obligation as of
December 31, 1998, was decreased to 6.75%. The interest rate used to discount
the accumulated postretirement obligation to present value as of December 31,
1997, was 7.00%.
The medical cost and administrative expense rates used to project anticipated
cash flows and measure the Company's postretirement benefit obligation as of
December 31, 1998, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
For retirees who For retirees who
have not yet are age 65
reached age 65 and older
--------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Base medical cost trend:
Rate in first year 7.25% 8.00% 8.75% 6.50% 7.25% 7.75%
Ultimate rate 4.00% 4.25% 4.75% 4.00% 4.25% 4.75%
Year in which ultimate rate is reached 2003 2003 2003 2003 2003 2003
Major medical cost trend:
Rate in first year 8.50% 9.50% 10.50% N/A N/A N/A
Ultimate rate 4.00% 4.25% 4.75% N/A N/A N/A
Year in which ultimate rate is reached 2003 2003 2003 N/A N/A N/A
Administrative expense trend 4.00% 4.25% 4.75% 4.00% 4.25% 4.75%
</TABLE>
A one percentage point increase in the assumed health care trend rates for
each future year would have increased the aggregate service and interest cost
components of the net periodic expense by $1.7 million, $2.6 million and $2.0
million in 1998, 1997 and 1996, respectively, and would have increased the
accumulated postretirement benefit obligation by $16.8 million and $25.1 million
as of December 31, 1998 and 1997, respectively.
A one percentage point decrease in the assumed health care trend rates in
1998 would have reduced the aggregate service and interest cost components of
the net periodic expense by $2.0 million, and would have decreased the
accumulated postretirement benefit obligation by $18.1 million.
For purposes of measuring life insurance benefits as of December 31, 1998 and
1997, increases in compensation levels in 1998 and 1997 were assumed to be 2%
through 2000 and 3% thereafter.
During 1998, the Company amended its retiree healthcare plans to provide
eligible retirees an option to elect coverage under a Medicare Plus Choice
Program (the "Program"). For participants in the Program, medicare, major
medical coverage and the Company's medical benefits coverage are replaced by a
single insurance plan. Rather than funding coverage under the current
supplemental plan, the Company will pay a portion of the Program premiums
totaling $60 per participant per month. The amendment resulted in a $33.2
million decrease in the Company's accumulated postretirement benefit obligation.
Other
As a condition of the purchase of the Company's assets from NSC, NSC agreed to
retain liability for pension service and the cost of life and health insurance
for employees of the Company's predecessor business who retired through May 1,
1983. NSC also retained the liability for pension service through May 1, 1983,
for employees of the predecessor business who subsequently became active
employees of the Company.
- --------------------------------------------------------------------------------
NOTE 8
POSTEMPLOYMENT BENEFITS
The components comprising the Company's obligations for postemployment benefits
are (i) workers' compensation; (ii) severance programs which include medical
coverage continuation; and (iii) sickness and accident protection, which
includes medical and life insurance benefits.
Actuarial assumptions and demographic data, as applicable, that were used to
measure the postemployment benefit obligation as of December 31, 1998 and 1997,
were consistent with those used to measure pension and other postretirement
benefit obligations for each respective year. As of December 31, 1998 and 1997,
the Company had accrued $27.6 million and $25.4 million, respectively for
postemployment benefit obligations.
30.31
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, OR IN MILLIONS OF DOLLARS
WHERE INDICATED)
- --------------------------------------------------------------------------------
NOTE 9
RESTRUCTURING CHARGES
In 1998, the Company recognized a $2.9 million restructuring charge stemming
from a special voluntary retirement window offered to certain supervisory and
managerial employees. The charge related to early retirement benefits.
In 1997, the Company recognized a $17.0 million restructuring charge stemming
from a retirement window offered to its represented employees as a result of a
collective bargaining agreement. Approximately $10.4 million of the
restructuring charge related to pension benefits with the remainder resulting
from other separation benefits for employees retiring during the window.
In 1996, the Company reduced its supervisory and managerial workforce by
approximately 20%. The restructuring charge of $17.0 million included
approximately $10.1 million of severance benefits (including compensation,
healthcare and outplacement services), approximately $3.8 million related to
special retirement supplements for eligible employees and $3.1 million related
to other termination related benefits.
- --------------------------------------------------------------------------------
NOTE 10
INCOME TAXES
Deferred income tax assets and liabilities are recognized reflecting the future
tax consequences of net operating loss and tax credit carryforwards and
differences between the tax basis and the financial reporting basis of assets
and liabilities. The components of the Company's deferred income tax assets and
liabilities were as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
- --------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss and
tax credit carryforwards $ 103,625 $ 113,348
Deductible temporary differences:
Allowance for doubtful accounts 2,407 3,354
Inventories 17,262 14,399
Pensions 31,909 17,592
Workers' compensation 10,050 8,912
Postretirement benefits other
than pensions 140,923 139,024
Other deductible temporary
differences 20,169 20,586
Valuation allowance (46,868) (45,547)
--------- ---------
279,477 271,668
Deferred tax liabilities:
Accumulated depreciation (124,812) (126,083)
--------- ---------
Net deferred tax asset $ 154,665 $ 145,585
========= =========
</TABLE>
As of December 31, 1998, the Company had available, for federal and state
income tax purposes, regular net operating loss carryforwards of approximately
$199.1 million expiring in 2007 through 2011; an alternative minimum tax credit
of approximately $14.9 million; and general business tax credits of
approximately $11.1 million expiring in 1999 to 2005.
In 1998, 1997 and 1996, as a result of its deferred tax attributes, the
Company did not generate any liability for regular federal income tax purposes.
The Company recognized alternative minimum tax of $3.3 million and $2.2 million
in 1998 and 1997, respectively. The Company recognized no alternative minimum
tax in 1996.
The Company's deferred tax assets increased during 1998 due primarily to an
increase in expenses in excess of deductible amounts for pension.
At December 31, 1998, the deferred tax asset related to postretirement
benefits other than pensions was $140.9 million. Based upon the length of the
period during which this deferred tax asset can be utilized and the Company's
expectations that under its current business strategy it will be able to
generate taxable income over the long term, the Company believes that it is more
likely than not that future taxable income will be sufficient to fully offset
these future deductions.
The length of time associated with the carryforward period available to
utilize net operating losses and certain tax credits not associated with
postretirement benefits other than pensions liabilities is more definite. A
significant portion of these net operating losses are attributable to the
realization of differences between the tax basis and financial reporting basis
of the Company's fixed assets. In the aggregate, such differences, including
depreciation, are expected to reverse within the allowable carryforward periods.
In addition, certain tax planning strategies that include, but are not limited
to, changes in methods of depreciation for tax purposes, adjustments to employee
benefit plan funding strategies and potential sale leaseback arrangements, could
be employed to avoid expiration of the attributes. Not withstanding the
Company's belief that it be able to utilize its deferred tax assets, the Company
has recorded a valuation allowance of $46.9 million against its deferred tax
assets.
WEIRTON STEEL CORPORATION
<PAGE> 19
The elements of the Company's deferred income taxes associated with its
results for the years ended December 31, 1998, 1997 and 1996, respectively, are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Current income tax
provision (benefit):
Federal $ 3,265 $(2,556) $ (3,699)
Deferred income tax
benefit (5,977) (6,040) (16,067)
Valuation allowance 1,321 4,298 8,990
------- ------- --------
Income tax
benefit (1,391) (4,298) (10,776)
Deferred income tax
benefit allocated to
extraordinary item -- -- (1,316)
------- ------- --------
Total income tax
benefit $(1,391) $(4,298) $(12,092)
======= ======= ========
</TABLE>
The total income tax provision (benefit) recognized by the Company for the
years ended December 31, 1998, 1997 and 1996, reconciled to that computed under
the federal statutory corporate rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Tax benefit at federal
statutory rate $(2,631) $(7,714) $(19,342)
State income taxes,
net of federal (301) (882) (2,211)
Other 220 -- 1,787
Change in valuation
allowance 1,321 4,298 8,990
------- ------- --------
Income tax benefit $(1,391) $(4,298) $(10,776)
======= ======= ========
</TABLE>
NOTE 11
REDEEMABLE STOCK
In June 1989, the Company sold 1.8 million shares of the Series A Preferred to
the 1989 ESOP. The 1989 ESOP financed the purchase by issuing to the Company a
$26.1 million promissory note, payable ratably over a 10 year period. Each share
of Series A Preferred is convertible at any time into one share of common stock,
subject to adjustment, is entitled to 10 times the number of votes allotted to
the common stock into which it is convertible, and has a preference on
liquidation over common stock of $5 per share. The Series A Preferred has no
preference over common stock as to dividends. The Series A Preferred is not
intended to be readily tradable on an established market. As such, shares of
Series A Preferred distributed to 1989 ESOP participants following termination
of service are given a right, exercisable for limited periods prescribed by law,
to cause the Company to repurchase the shares at fair value. The Company also
has a right of first refusal upon proposed transfers of distributed shares of
Series A Preferred which it has agreed, to the extent it is permitted, to
exercise and to contribute or sell reacquired shares to the 1989 ESOP. In 1994,
the 1989 ESOP was amended to provide that shares of Series A Preferred
reacquired by the 1989 ESOP be reallocated annually among active employee
participants on a per capita basis. If not repurchased by the Company or
reacquired by the 1989 ESOP, shares of Series A Preferred automatically convert
into common stock upon transfer by a distributee.
32.33
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, OR IN MILLIONS OF DOLLARS
WHERE INDICATED)
NOTE 12
STOCK PLANS
The Company has two stock option plans (the "1987 Stock Option Plan" and the
"1998 Stock Option Plan"), an employee stock purchase plan (the "1994 Employee
Stock Purchase Plan") and a deferred compensation plan for non-employee members
of the board of directors (the "Directors Deferred Compensation Plan").
The Company may grant options for up to 750,000 shares under the 1987 Stock
Option Plan. Under the plan the option exercise price equals the stock's market
price on the date of grant. Generally, the options granted under the 1987 Stock
Option Plan vest in one-third increments beginning after the date of grant, with
the remaining two-thirds becoming exercisable after the second and third years.
Activity under the 1987 Stock Option Plan is summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of period 581,666 $7.71 750,000 $7.84 748,000 $8.38
Granted 173,000 3.13 -- -- 65,000 2.50
Repurchased/Forfeited (169,666) 8.53 (168,334) 8.30 (63,000) 8.69
Exercised -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 585,000 6.12 581,666 7.71 750,000 7.84
Exercisable at end of period 473,057 $6.83 431,303 $7.80 430,000 $8.10
Weighted average fair value of option granted $1.90 $-- $4.01
</TABLE>
On January 17, 1999, 30,000 of the 1987 Stock Option Plan options with an
exercise price of $8.33 that were outstanding and exercisable at December 31,
1998 expired. The remaining 1987 Stock Option Plan options have exercises
between $2.50 and $8.88, with a weighted average exercise price of $6.00 and a
weighted average remaining contractual life of 7.14 years. Of these options,
443,057 are exercisable; their weighted average exercise price is $6.72.
The fair value of each 1987 Stock Option Plan option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions for grants in 1998 and 1996.
There were no option grants in 1997.
<TABLE>
<CAPTION>
1998 1996
- -------------------------------------------------------------
<S> <C> <C>
Average risk free interest rate 5.53% 6.56%
Expected dividend yield 0% 0%
Expected life of options 7 years 7 years
Expected volatility rate 0.53 0.50
</TABLE>
Under the 1998 Stock Option Plan, the Company may grant options for up to
3,250,000 shares. The option price and vesting requirements are determined by a
Stock Option Committee appointed by the board of directors. In 1998, the Stock
Option Committee granted 2,875,000 options with an exercisable price of $3.88
under the 1998 Stock Option Plan. The exercise price equaled the market price of
the Company's common stock on the date of grant. The options granted had a fair
market value of $0.70, as determined using the Black-Scholes option pricing
model. In determining the fair value of options, granted under the 1998 Stock
Option Plan, an average risk free interest rate of 6.3%, a dividend yield of 0%,
an expected life of five years and an expected volatility rate of 0.391 were
used. All options granted and outstanding will vest on June 23, 2002. The
options expire the following day. The options are subject to accelerated vesting
based on the attainment of certain market prices for the Company's common stock.
The options that vest pursuant to the accelerated provision will expire on June
23, 2002. As of December 31, 1998, the 2,875,000 options that had been granted
were still outstanding. None of the options vested.
WEIRTON STEEL CORPORATION
<PAGE> 21
Weirton Steel Corporation
- --------------------------------------------------------------------------------
In October 1994, the Company registered an additional 5.0 million shares of
its common stock to be offered over a five-year period beginning January 1,
1995, to eligible employees under its 1994 Employee Stock Purchase Plan. The
1994 Employee Stock Purchase Plan provides for participants to purchase the
Company's common stock at 85% of the lesser of the stock's closing price at the
beginning or the end of each year. As of December 31, 1998, 285,430 shares
valued at approximately $0.4 million were issuable in accordance with the 1994
Employee Stock Purchase Plan.
During 1991, the Company adopted a deferred compensation plan (the "Directors
Deferred Compensation Plan") to permit nonemployee members of the Board of
Directors to receive shares of common stock in lieu of cash payments for total
compensation or a portion thereof for services provided in their capacity as
members of the Board of Directors. The Company reserved 300,000 shares for
issuance under the Directors' Deferred Compensation Plan. Shares to directors
are issued to a rabbi trust until such time as the shares are distributed to the
directors. The cost of the shares held in the rabbi trust are accounted for as a
reduction of equity. The liability to compensate the directors is retained and
accounted for until such time as the shares are issued from the rabbi trust. The
Director's Deferred Compensation Plan provides for the stock portion of the
directors compensation to be valued at 90% of the lesser of the stock's average
trading price at the beginning and the end of each year. As of December 31,
1998, 78,368 shares valued at $0.1 million were issuable to the directors who
selected deferred compensation and 110,622 shares with a cost of $0.5 million
were held by the trust.
During 1998, the Company's independent directors received a portion of their
fees payable entirely in the Company's common stock. As of December 31, 1998,
19,764 shares were issuable to independent directors. The directors may elect to
defer all or a portion of the shares to the rabbi trust.
NOTE 13
STOCK BASED COMPENSATION
The Company accounts for it stock plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," under which
compensation costs, if applicable, have been determined. Had compensation costs
for these plans been determined consistent with Statement on Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation," (SFAS
No. 123), net income (loss) and earnings per share would have been reduced to
the following:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Net loss:
As reported $(6,127) $(17,742) $(49,918)
pro forma (6,598) (18,041) (50,221)
Basic and diluted loss per share:
As reported $ (0.15) $ (0.42) $ (1.18)
pro forma (0.16) (0.42) (1.19)
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation costs may
not be representative of that expected in future years.
- --------------------------------------------------------------------------------
NOTE 14
ESOP FINANCING
The purchase by the 1989 ESOP of the Series A Preferred was financed through the
issuance of a $26.1 million promissory note to the Company payable ratably over
a 10 year period. The Company's contribution to the 1989 ESOP for the principal
and interest components of debt service was immediately returned. As such, the
respective interest income and expense on the ESOP notes were entirely offset
within the Company's net financing costs. As of December 31, 1998, 1,562,763
shares of Series A Preferred were allocated to participants of the 1989 ESOP.
- --------------------------------------------------------------------------------
NOTE 15
PURCHASES OF TREASURY STOCK
During April 1998, the Company announced that it had been authorized by the
board of directors to repurchase up to 10%, or approximately 4.2 million shares
of its outstanding common stock. During 1998, the Company paid $6.3 million to
repurchase approximately 1.8 million shares of its outstanding common stock at
prices ranging from $1.75 to $4.50 per share.
34.35
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, OR IN MILLIONS OF DOLLARS
WHERE INDICATED)
- --------------------------------------------------------------------------------
NOTE 16
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128).
SFAS No. 128 differs from prior accounting guidance in that earnings per share
is classified as basic earnings per share and diluted earnings per share,
compared to primary earnings per share and fully diluted earnings per share
under current standards. Basic earnings per share differs from primary earnings
per share in that it includes only the weighted average common shares
outstanding and does not include any dilutive common stock equivalents in the
calculation. Diluted earnings per share under the new standard differs in
certain calculations compared to fully diluted earnings per share under the
existing standards. For the years ended December 31, 1998, 1997 and 1996, basic
and diluted earnings per share were the same; however, securities totaling
1,725,548 shares, 1,760,090 shares and 1,753,198 shares, respectively, were
excluded from the diluted earnings per share calculation due to their
anti-dilutive effect.
- --------------------------------------------------------------------------------
NOTE 17
ENVIRONMENTAL COMPLIANCE, LEGAL PROCEEDINGS AND COMMITMENTS AND CONTINGENCIES
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 discharges, air emission and waste disposal. The
Company spent approximately $5.6 million for pollution control capital projects
in 1998.
In March 1996, the West Virginia Department of Environmental Protection
("DEP") and the United States Environmental Protection Agency ("EPA") advised
the Company that they had identified a number of enforcement issues pertaining
to waste water discharge, air emissions and waste handling operations of the
Company. In September 1996, the Company and DEP and EPA reached a settlement
regarding these water, air and waste-related issues. Under the settlement, the
Company was required to pay a total penalty of $3.2 million in 1997.
Under the settlement the Company is required to conduct certain remedial
activity at one of its waste disposal sites. Additionally, the Company is
required to undertake certain capital projects to assure compliance with air,
water and waste-related regulations. Such capital costs will include upgrades
and modifications to air emissions control equipment, wastewater treatment
systems and waste handling facilities. Under the settlement, the Company has
committed to environmental related capital projects totaling approximately $19.8
million. Through December 31, 1998, the Company had expended $14.5 million
related to these capital commitments.
In connection with the negotiations, EPA issued a corrective action order,
effective October 18, 1996, 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.
The Company has accrued approximately $7.0 million related to environmental
related liabilities, including costs associated with the corrective action
order. Because the Company does not currently know the nature or the extent of
hazardous waste located on the property, it is not presently possible to
estimate the ultimate cost to comply with the corrective action order or
conduct remedial activity that may be required.
The Company believes that NSC is obligated to reimburse the Company for a
portion of the costs that may be incurred by the Company to comply with the
corrective action order and to undertake any required remedial action. Pursuant
to the agreement whereby the Company purchased the former Weirton Steel Division
of NSC in 1984, NSC retained liability for cleanup costs related to solid or
hazardous waste facilities, areas or equipment as long as such were not used by
the Company in its operations subsequent to the acquisition. The Company has not
recorded any receivables from NSC related to potential reimbursable costs.
WEIRTON STEEL CORPORATION
<PAGE> 23
Weirton Steel Corporation
- --------------------------------------------------------------------------------
Legal Proceedings
The Company, in the ordinary course of business, is the subject of, or party to,
various pending or threatened legal actions. The Company believes that any
ultimate liability resulting from these actions will not have a material adverse
effect on its financial position or results of operations.
Commitments and Contingencies
In October 1991, the Company entered into a supply agreement with a subsidiary
of Cleveland-Cliffs Inc. to provide the majority of its iron ore pellet
requirements beginning in 1992 and extending through 2005.
In 1995, the Company entered into a 15-year agreement to purchase 100% of its
oxygen and nitrogen requirements from an independent party. The contract
specifies that the Company will pay a base monthly charge that is adjusted
annually based upon a percentage of the change in the producers price index for
industrial commodities.
In 1996, the Company entered into an agreement commencing on January 1, 1997,
through December 31, 2000, with USX Corporation to purchase blast furnace coke.
The agreement provides for the purchase of the greater of 850,000 tons of blast
furnace coke annually, or 80% of the actual annual requirement of the Company.
Such quantities are subject to adjustment based upon changes in the Company's
operating configuration. The price is to be the prevailing market price (subject
to a ceiling and floor) for blast furnace coke.
The Company has guaranteed debt incurred by GalvPro LP as described in Note
20 "Subsidiaries and Joint Ventures".
- --------------------------------------------------------------------------------
NOTE 18
OPERATING SEGMENT INFORMATION
In June of 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way public companies report information about operating segments and it
establishes standards for related disclosures about products, services,
geographic areas and major customers.
The Company operates a single segment, the making and finishing of carbon
steel products including sheet and tin mill products. One customer accounted for
12%, 11% and 10% of net sales in 1998, 1997 and 1996, respectively.
Approximately 83% of the Company's workforce is covered under collective
bargaining agreements with the Independent Steelworkers Union (the "ISU") and
Independent Guard Union (the "IGU"). In 1997, the Company reached agreements
with the ISU and IGU which extend into 2001.
- --------------------------------------------------------------------------------
NOTE 19
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS AND SIGNIFICANT GROUP
CONCENTRATIONS OF CREDIT RISK
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Equivalents
The carrying amount approximates fair value because of the short maturity of
those investments.
Redeemable Preferred Stock
The fair value of the Series A Preferred stock was determined based upon an
independent appraisal performed as of December 31, 1998 and 1997.
Long Term Debt Obligations
The fair values of the Company's long term debt obligations are estimated based
upon quoted market prices.
The estimated fair values of the Company's financial instruments are as
follows as of December 31, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and equivalents $ 68,389 $ 68,389 $124,690 $124,690
Series A Redeemable
Preferred stock 23,543 2,651 24,494 4,726
Long term debt
obligations 304,626 277,925 388,997 404,068
</TABLE>
Significant Group Concentrations of Credit Risk
As of December 31, 1998 and 1997, the Company had trade receivables outstanding
of $12.8 and $20.6 million, respectively, from customers who had been acquired
in leveraged transactions.
One customer accounted for 21% of trade receivables as of December 31, 1998.
36.37
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, OR IN MILLIONS OF DOLLARS
WHERE INDICATED)
- --------------------------------------------------------------------------------
NOTE 20
SUBSIDIARIES AND JOINT VENTURES
In the fourth quarter of 1998, the Company, with LTV Corporation and Steel
Dynamics Inc. entered into a partnership venture called MetalSite L.P.
("MetalSite"). MetalSite will offer a secure Web-based marketplace for the
online purchase of metal products from various U.S. suppliers and will provide
the latest industry news and information. The Company has a majority interest in
MetalSite and consolidates its results.
The Company currently has investments in three joint ventures which the
Company accounts for using the equity method of accounting;
o WeBco International LLC ("WeBco") was formed in 1997 with the Balli Group,
plc. The primary function of WeBco is to market and sell the Company's
products globally.
o GALVPRO LP ("GALVPRO" formerly "Galvstar LP") was formed in 1997 with
affiliates of Koninklijke Hoogovens ("Hoogovens") for the purpose of
constructing and operating a 300,000 ton hot-dipped galvanizing line.
Construction of GALVPRO's Indiana facility commenced in the second quarter
of 1998, and final production is expected to commence during the fourth
quarter of 1999. During 1998, the Company invested $6.9 million in GALVPRO.
o W&A Manufacturing LLC was formed in 1998 with ATAS International for the
purpose of manufacturing steel roofing products. During 1998, the Company
invested $0.9 million in W&A Manufacturing LLC.
Construction of GALVPRO's facility is being financed primarily through a
secured ten year term loan of up to $49.0 million. 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. 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. Not withstanding
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
providing up to $4.0 million coverage in the event GALVPRO fails to commence
operations on schedule and up to an additional $4.0 million if GALVPRO fails to
operate at a defined level within a certain period of time after operations
commence.
The Company's purchases from unconsolidated subsidiaries totaled $27.7
million in 1998. The Company's sales of steel to unconsolidated subsidiaries
totaled $6.0 million in 1998. These transactions arose in the ordinary course of
business and were transacted at arms-length. The Company had no purchases from
or sales to unconsolidated subsidiaries in 1997 or 1996. Pursuant to certain
service agreements, the Company provided services to unconsolidated
subsidiaries. The Company billed the unconsolidated subsidiary for the service
at amounts approximating the cost to provide the service. Such amounts totaled
$0.4 million in 1998 and $0.1 million in 1997. At December 31, 1998, the Company
had outstanding receivables from unconsolidated subsidiaries of $1.7 million.
WEIRTON STEEL CORPORATION
<PAGE> 25
Weirton Steel Corporation
MANAGEMENTS' RESPONSIBILITY STATEMENT
- --------------------------------------------------------------------------------
The accompanying consolidated financial statements of the Company are the
responsibility of its management and have been prepared in conformity with
generally accepted accounting principles.
The Company has a system of internal controls, including a Code of Ethics,
designed to provide reasonable assurance that assets are safeguarded, financial
statements are reliable and a high standard of business conduct is maintained.
Management monitors the system for compliance, and internal auditors
independently measure its effectiveness.
The Company's independent public accountants, Arthur Andersen LLP, audit its
financial statements in accordance with generally accepted auditing standards.
The report of the independent public accountants is included in this report.
The Board of Directors pursues its oversight role for the financial
statements through its Audit Committee. The Audit Committee continued its
practice of meeting regularly to review the financial affairs of the Company and
to interface with the internal audit staff and independent public accountants.
Both the independent public accountants and the internal auditors have full and
free access to the Audit Committee.
Management believes that the existing system of internal controls, the
independent audit and the Audit Committee provide reasonable assurance that the
Company's financial accounting system adequately maintains accountability for
assets, assures the integrity of financial statements and maintains its
commitment to a high standard of business conduct.
/s/ RICHARD K. RIEDERER
- -------------------------------
Richard K. Riederer
President,
Chief Executive Officer
/s/ MARK E. KAPLAN
- -------------------------------
Mark E. Kaplan
Controller and
Principal Accounting Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors of Weirton Steel Corporation:
We have audited the accompanying consolidated balance sheets of Weirton Steel
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Weirton Steel
Corporation and subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
- ----------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
February 23, 1999
38.39
<PAGE> 26
SELECTED FINANCIAL AND STATISTICAL DATA
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------
(Dollars in millions, except per share data) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 1,255 $ 1,397 $ 1,383 $ 1,352 $ 1,261
Operating costs 1,220 1,372 1,397 1,252 1,212
Depreciation 61 61 58 55 46
Income taxes (benefit) (1.4) (4.3) (10.8) 13.3 7.5
Profit sharing -- -- -- 24 17.6
Contribution to ESOP 3 3 3 3 3
Net income (loss) (6.1) (17.7) (49.9) 48.4 35.2
Net income (loss) per diluted share (0.15) (0.42) (1.18) 1.10 0.95
Total assets 1,196 1,283 1,301 1,314 1,231
Additions to property, plant and equipment 50 45 83 52 112
Long term debt obligations 305 389 431 408 395
Redeemable preferred stock, net 22 21 18 16 14
Working capital $ 193 $ 294 $ 291 $ 340 $ 256
Number of common shares
outstanding at year end, (in thousands) 41,195 42,637 42,353 42,014 41,654
Number of preferred shares
outstanding at year end, (in thousands) 1,657 1,727 1,748 1,729 1,767
Stockholders' equity $ 122 $ 133 $ 149 $ 199 $ 149
Stockholders' equity per common share $ 2.95 $ 3.12 $ 3.52 $ 4.73 $ 3.57
</TABLE>
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
Quarterly periods in 1998 Quarterly periods in 1997
--------------------------------------------------------------------
(Dollars in millions,except per share data) 4th 3rd 2nd 1st 4th 3rd 2nd 1st
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 262 $ 315 $ 336 $ 341 $ 325 $ 359 $ 364 $ 350
Gross profit 18 33 45 42 38 42 37 23
Operating profit (loss) (6) 10 16 14 15 17 (4) (4)
Net income (loss) (13) (1) 5 2 3 4 (13) (12)
Basic earnings (loss) per share $(0.32) $(0.01) $0.12 $0.05 $0.07 $0.10 $(0.30) $(0.29)
Diluted earnings (loss) per share $(0.32) $(0.01) $0.12 $0.05 $0.07 $0.10 $(0.30) $(0.29)
</TABLE>
WEIRTON STEEL CORPORATION
<PAGE> 27
WEIRTON STEEL CORPORATION
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Richard R. Burt, Chairman(A, B, D)
Chairman
IEPAdvisors, Inc.
Washington, DC
Michael Bozic(B, C, E)
Vice Chairman
Kmart Corporation
Troy, Michigan
Earl E. Davis, Jr.(B, D)
Executive Vice President
Commercial
Weirton Steel Corporation
Weirton, West Virginia
Craig T. Costello(B)
Executive Vice President - Manufacturing
and Chief Operating Officer
Weirton Steel Corporation
Weirton, West Virginia
Robert J. D'Anniballe, Jr.(A, D)
Partner
Alpert, D'Anniballe & Visnic
Weirton, West Virginia
Mark G. Glyptis(B, D, E)
President
Independent Steelworkers Union
Weirton, West Virginia
Phillip A. Karber(B, D)
Chairman of the Board of
Directors of JFKInternational
Air Terminal
New York, New York
Ralph E. Reins(A, B)
Former President and CEO
A.P. Parts International
Scottsdale, Arizona
Robert S. Reitman(B, C, E)
Principal
Riverbend Advisors
Gates Mill, Ohio
Richard K. Riederer(E)
President and Chief Executive Officer
Weirton Steel Corporation
Weirton, West Virginia
Richard F. Schubert(C, D)
Former President and CEO
The Points of Light Foundation
Washington, DC
Thomas R. Sturges(A, D)
Executive Vice President
The Harding Group, Inc.
Greenwich, Connecticut
Ronald C. Whitaker(B, C, E)
Former President and CEO
Johnson Worldwide Associates
Sturtevant, Wisconsin
D. Leonard Wise(A, B, C, D, E)
Former President and CEO
Carolina Steel Corp.
Greensboro, North Carolina
EXECUTIVE OFFICERS OF THE COMPANY
Richard K. Riederer
President and Chief Executive Officer
Craig T. Costello
Executive Vice President - Manufacturing
and Chief Operating Officer
Earl E. Davis, Jr.
Executive Vice President - Commercial
David L. Robertson
Executive Vice President
Human Resources and Corporate Law
Narendra M. Pathipati
Senior Vice President
Corporate Development and Strategy
Thomas W. Evans
Vice President
Materials Management
William R.Kiefer
Vice President - Law and Secretary
Frank G. Tluchowski
Vice President
Engineering and Technology
Mark E. Kaplan
Vice President -
Information Technology
and Controller
Richard W. Garan
Assistant Treasurer
A Member of Audit Committee
B Member of Finance and Strategic Planning Committee
C Member of Management Development and Compensation Committee
D Member of Corporate Responsibility Committee
E Member of Nominating Committee
40.41
<PAGE> 28
WEIRTON STEEL CORPORATION
- --------------------------------------------------------------------------------
ENVIRONMENTAL MISSION STATEMENT
Protection of the environment, employees and the community is a basic commitment
in both the day-to-day operations and long-term planning of Weirton Steel
Corporation. The company is committed to devote the personnel and capital
resources necessary to achieve these objectives and is further committed to:
1. Continually review and, as appropriate, take steps to further enhance
environmental quality and to achieve and maintain compliance with relevant
federal, state and local environmental requirements;
2. Develop and/or evaluate waste prevention, waste minimization, reuse and
recycling efforts to conserve energy and natural resources;
3. Communicate this Environmental Mission Statement to Weirton Steel personnel;
and
4. Develop and revise, as necessary, objectives, targets and/or other indicators
to measure Weirton Steel's success
in fulfilling these commitments.
STOCKHOLDER INFORMATION
Additional financial information including this Annual Report or reports filed
with the Securities and Exchange Commission, and the Company's news and earnings
releases can be obtained by accessing our Internet World Wide Web site at
http://www.weirton.com and clicking on Investor Relations. Requests can also be
submitted by writing to:
Investor Relations
Weirton Steel Corporation
400 Three Springs Drive
Weirton, West Virginia 26062-4989
Telephone (304) 797-2728.
NOTICE OF ANNUAL MEETING
A notice of the annual meeting and proxy statement and a proxy voting card as
well as a copy of the current Annual Report will be mailed to each stockholder
prior to the meeting.
ESOP INFORMATION
Inquiries about Employee Stock Ownership Plan accounts should be directed to the
Weirton Steel Corporation ESOPAdministrator at the Executive Offices.
EXECUTIVE OFFICES
Weirton Steel Corporation
400 Three Springs Drive
Weirton, West Virginia 26062-4989
Telephone (304) 797-2000
STOCK TRANSFER AGENT AND REGISTRAR
The Company's transfer agent and registrar for its common stock is Harris Trust
and Savings Bank. Stockholders wishing to transfer their shares of the Company's
common stock to someone else or to change the name on a stock certificate should
contact the Shareholder Communications Department, Harris Trust and Savings
Bank, P.O. Box 1878, Chicago, Illinois 60690-9312, Telephone (800) 942-5908 for
assistance.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
2100 One PPG Place
Pittsburgh, Pennsylvania 15222
WEIRTON STEEL CORPORATION
<PAGE> 1
EXHIBIT 22.1
SUBSIDIARIES OF WEIRTON STEEL CORPORATION
<TABLE>
<CAPTION>
Percentage owned
Subsidiary by Registrant State of Incorporation
- ---------- ------------- ----------------------
<S> <C> <C>
Weirton Receivables, Inc. 100% Delaware
Weirton Venture Holdings Corp. 100% Delaware
Weirton Coatings L.L.C. 100% Delaware
MetalSite General Partner, LLC 94%* Delaware
MetalSite, L.P. 92%* Delaware
</TABLE>
*Percentage indicated is Weirton Steel Corporation's economic interest in the
subsidiary
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports, included or incorporated by reference in this Form 10-K, into the
Company's previously filed Registration Statements on Form S-8, Registration No.
33-31429, relating to the Company's 1989 Employee Stock Purchase Plan and
Registration No. 33-56251, relating to the Company's 1994 Employee Stock
Purchase Plan and Deferred Compensation Plan for Directors.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 68,389
<SECURITIES> 0
<RECEIVABLES> 120,852
<ALLOWANCES> 8,574
<INVENTORY> 112,278
<CURRENT-ASSETS> 487,696
<PP&E> 1,015,690
<DEPRECIATION> 439,452
<TOTAL-ASSETS> 1,195,699
<CURRENT-LIABILITIES> 294,724
<BONDS> 304,626
22,238
233
<COMMON> 432
<OTHER-SE> 120,878
<TOTAL-LIABILITY-AND-EQUITY> 1,195,699
<SALES> 1,254,796
<TOTAL-REVENUES> 1,254,796
<CGS> 1,117,465
<TOTAL-COSTS> 1,220,377
<OTHER-EXPENSES> (2,401)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,338
<INCOME-PRETAX> (7,518)
<INCOME-TAX> (1,391)
<INCOME-CONTINUING> (6,127)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,127)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
