10-Q 1 j9559001e10vq.txt PERIOD ENDED 6/30/2002 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2002. or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from -------------------- to --------------------. COMMISSION FILE NUMBER 1-10244 WEIRTON STEEL CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 06-1075442 (State or other jurisdiction (IRS employer of identification incorporation or #) organization)
400 THREE SPRINGS DRIVE, WEIRTON, WEST VIRGINIA 26062-4989 (Address of principal executive offices) (Zip Code) (304)-797-2000 Registrant's telephone number, including area code: Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of Common Stock ($.01 par value) of the Registrant outstanding as of July 31, 2002 was 41,935,992. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WEIRTON STEEL CORPORATION UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- --------------------- 2002 2001 2002 2001 -------- --------- -------- --------- NET SALES................................... $250,956 $ 240,177 $487,006 $ 492,327 OPERATING COSTS: Cost of sales............................. 260,815 269,528 511,143 532,978 Selling, general and administrative expenses............................... 6,362 8,777 12,588 17,107 Depreciation.............................. 17,142 16,350 33,054 32,661 Restructuring charge...................... -- -- -- 12,338 -------- --------- -------- --------- Total operating costs.................. 284,319 294,655 556,785 595,084 -------- --------- -------- --------- LOSS FROM OPERATIONS........................ (33,363) (54,478) (69,779) (102,757) Income (loss) from unconsolidated subsidiaries........................... 945 (406) 1,115 (18,480) Interest expense.......................... (11,390) (9,545) (22,692) (18,894) Other income, net......................... 4,380 363 7,292 771 -------- --------- -------- --------- LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM...................................... (39,428) (64,066) (84,064) (139,360) Income tax provision (benefit)............ (3,475) 153,765 (3,475) 153,765 -------- --------- -------- --------- LOSS BEFORE EXTRAORDINARY ITEM.............. (35,953) (217,831) (80,589) (293,125) Extraordinary gain on early extinguishment of debt................................ 153 -- 153 -- -------- --------- -------- --------- NET LOSS.................................... $(35,800) $(217,831) $(80,436) $(293,125) ======== ========= ======== ========= PER SHARE DATA: Weighted average number of common shares (in thousands): Basic..................................... 41,936 41,576 41,935 41,573 Diluted................................... 41,936 41,576 41,935 41,573 NET LOSS PER SHARE: Basic..................................... $ (0.85) $ (5.24) $ (1.92) $ (7.05) Diluted................................... $ (0.85) $ (5.24) $ (1.92) $ (7.05)
The accompanying notes are an integral part of these financial statements. 2 WEIRTON STEEL CORPORATION UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 2002 2001 ---------- ------------ ASSETS: Current assets: Cash and equivalents, including restricted cash of $10,218 and $4,302, respectively............................... $ 10,483 $ 5,671 Receivables, less allowances of $5,767 and $7,487, respectively........................................... 105,612 103,046 Inventories, net.......................................... 138,248 136,850 Other current assets...................................... 828 5,980 ---------- ---------- Total current assets................................... 255,171 251,547 Property, plant and equipment, net.......................... 403,153 432,880 Intangible pension asset.................................... 19,689 19,689 Other assets and deferred charges........................... 12,294 16,419 ---------- ---------- Total Assets........................................... $ 690,307 $ 720,535 ========== ========== LIABILITIES: Current liabilities: Senior credit facility.................................... $ 107,611 $ 92,082 Notes payable............................................. -- 243,271 Accounts payable.......................................... 94,253 71,197 Accrued employee benefits................................. 81,584 76,029 Accrued taxes other than income........................... 14,217 15,008 Other current liabilities................................. 1,756 15,916 ---------- ---------- Total current liabilities.............................. 299,421 513,503 Notes and bonds payable..................................... 290,221 67,806 Accrued pension obligation.................................. 210,282 205,282 Postretirement benefits other than pensions................. 327,995 336,375 Other long term liabilities................................. 43,616 46,812 ---------- ---------- Total Liabilities...................................... 1,171,535 1,169,778 Redeemable Stock, Net....................................... 68,709 20,348 STOCKHOLDERS' DEFICIT: Common stock, $0.01 par value; 50,000,000 shares authorized; 43,814,791 and 43,812,763 shares issued, respectively..... 438 438 Additional paid-in-capital.................................. 457,396 459,871 Accumulated deficit......................................... (997,059) (916,623) Other stockholders' equity.................................. (10,712) (13,277) ---------- ---------- Total Stockholders' Deficit............................ (549,937) (469,591) ---------- ---------- Total Liabilities, Redeemable Stock, Net, and Stockholders' Deficit................................. $ 690,307 $ 720,535 ========== ==========
The accompanying notes are an integral part of these financial statements. 3 WEIRTON STEEL CORPORATION UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ------------------------- 2002 2001 ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(80,436) $(293,125) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation........................................... 33,054 32,661 (Income) loss from unconsolidated subsidiaries......... (1,115) 18,480 Deferred income taxes.................................. -- 153,765 Restructuring charge................................... -- 12,338 Amortization of deferred financing costs............... 1,887 852 Gain on early extinguishment of debt................... (153) -- Cash provided (used) by working capital items: Receivables.......................................... (2,566) (11,206) Inventories.......................................... (1,398) 42,373 Other current assets................................. 5,152 7,665 Accounts payable..................................... 17,455 3,432 Employment costs..................................... (10,945) (6,268) Other current liabilities............................ 11,511 (788) Accrued pension obligation............................. 17,500 5,850 Other postretirement benefits.......................... (4,380) (6,070) Other.................................................. (3,879) (3,202) -------- --------- NET CASH USED BY OPERATING ACTIVITIES....................... (18,313) (43,243) CASH FLOWS FROM INVESTING ACTIVITIES: Capital spending.......................................... (3,519) (7,344) Loans and advances to unconsolidated subsidiaries......... -- (793) -------- --------- NET CASH USED BY INVESTING ACTIVITIES....................... (3,519) (8,137) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on senior credit facility.................. 15,529 -- Proceeds from the sale and leaseback transaction.......... 16,044 -- Issuance of long-term debt................................ -- 65,000 Deferred financing costs.................................. (4,929) -- -------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES................... 26,644 65,000 -------- --------- NET CHANGE IN CASH AND EQUIVALENTS.......................... 4,812 13,620 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................. 5,671 32,027 -------- --------- CASH AND EQUIVALENTS AT END OF PERIOD....................... $ 10,483 $ 45,647 ======== ========= SUPPLEMENTAL CASH FLOW INFORMATION Interest paid, net of capitalized interest................ $ 10,575 $ 18,770 Income taxes refunded, net................................ (3,458) (6,829)
NONCASH FINANCING ACTIVITIES: The Company issued $118.2 million in face amount of new Senior Secured Notes and 1.9 million shares of Series C Redeemable Preferred Stock of $48.4 million with a mandatory redemption in 2013 in exchange for $215.0 million in Senior Notes. The City of Weirton issued $27.3 million in principal amount of new Series 2002 Secured Pollution Control Revenue Refunding Bonds in exchange for $45.6 million of Series 1989 bonds, which the Company is obligated to pay under the terms of a related loan agreement. There is approximately $5.6 million in deferred debt issuance costs related to the exchanges included in accounts payable at June 30, 2002. The accompanying notes are an integral part of these financial statements. 4 NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, OR IN MILLIONS OF DOLLARS WHERE INDICATED) NOTE 1 BASIS OF PRESENTATION The Consolidated Condensed Financial Statements presented herein are unaudited. The Consolidated Condensed Balance Sheet as of December 31, 2001 has been derived from the audited balance sheet included in the Company's 2001 Annual Report on Form 10-K. Unless context otherwise requires, the terms "Weirton," "the Company," "we," "us," "its" and "our" refer to Weirton Steel Corporation and its consolidated subsidiaries. Entities of which the Company owns a controlling interest are consolidated; entities of which the Company owns a less than controlling interest are not consolidated and are reflected in the consolidated condensed financial statements using the equity method of accounting. All material intercompany accounts and transactions with consolidated subsidiaries have been eliminated in consolidation. Certain information and footnote disclosures normally prepared in accordance with accounting principles generally accepted in the United States have been either condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Although the Company believes that all adjustments necessary for a fair presentation have been made, interim periods are not necessarily indicative of the financial results of operations for a full year. As such, these financial statements should be read in conjunction with the audited financial statements and notes thereto included or incorporated by reference in the Company's 2001 Annual Report on Form 10-K. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made to prior year amounts to conform with current year presentation. NOTE 2 INVENTORIES Inventories consisted of the following:
JUNE 30, DECEMBER 31, 2002 2001 -------- ------------ Raw materials....................................... $ 43,479 $ 38,732 Work-in-process..................................... 35,255 29,275 Finished goods...................................... 59,514 68,843 -------- -------- $138,248 $136,850 ======== ========
5 NOTE 3 LIQUIDITY AND FINANCING ARRANGEMENTS Debt Obligations
JUNE 30, 2002 DECEMBER 31, 2001 ------------- ----------------- Obligation under senior credit facility........ $107,611 $ 92,082 Long-Term Debt: 10% Senior Secured Notes due 4/1/08.......... 177,831 -- 9% Secured Series 2002 Pollution Control Bonds due 4/30/11......................... 45,162 -- Vendor financing obligations................. 27,574 11,531 11 3/8% Senior Notes due 7/1/04.............. 12,658 122,724 10 3/4% Senior Notes due 6/1/05.............. 16,336 121,256 8 5/8% Pollution Control Bonds due 11/1/14... 10,720 56,300 Less: Unamortized debt discount.............. (60) (734) -------- --------- Total debt obligations......................... 290,221 311,077 Less: Current portion.......................... -- (243,271) -------- --------- Long-term debt................................. $290,221 $ 67,806 ======== =========
The Exchange Offers The principal amount of notes and bonds, originally outstanding, tendered and remaining are as follows:
OUTSTANDING PRIOR TENDERED FOR OUTSTANDING TO EXCHANGE EXCHANGE AFTER EXCHANGE ----------------- ------------ -------------- 11 3/8% Senior Notes due 2004..... $122,724 $110,066 $12,658 10 3/4% Senior Notes due 2005..... 121,256 104,920 16,336 8 5/8% Pollution Control Bonds due 11/1/14......................... 56,300 45,580 10,720 -------- -------- ------- Total............................. $300,280 $260,566 $39,714 ======== ======== =======
The Company issued $118.2 million in face amount of new 10% Senior Secured Notes due 2008 ("senior secured notes") and 1.9 million shares of Series C Convertible Redeemable Preferred Stock ("Series C preferred stock") with a mandatory redemption in 2013 of $48.4 million in exchange for the tendered senior notes due 2004 and 2005 ("senior notes"). The City of Weirton issued $27.3 million in principal amount of new Series 2002 Secured Pollution Control Revenue Refunding Bonds ("secured series 2002 bonds") in exchange for the tendered 8 5/8% Pollution Control Bonds ("series 1989 bonds"). The new notes and bonds are secured by second priority interests in our hot strip mill, our No. 9 tin tandem mill, and our tin assets. Through March 31, 2003, the new senior secured notes will accrue and pay interest at a rate of 0.5%. From April 1, 2003 to March 31, 2005, the new senior secured notes will accrue and pay interest at rates ranging from 0.5% to 10%. That range includes contingent interest, which is based on the Company's "excess cash flow" as defined in the indenture governing the new senior secured notes. Beginning April 1, 2005, the senior secured notes will accrue and pay interest at the rate of 10%. Through March 31, 2003, the secured series 2002 bonds will also accrue and pay interest at a rate of 0.5%. From April 1, 2003 to March 31, 2005, the secured series 2002 bonds will accrue and pay interest at rates ranging from 0.5% to 9%. That range includes contingent interest, which is based on the Company's "excess cash flow" as defined in the indenture governing the secured series 2002 bonds. Beginning April 1, 2005, the secured series 2002 bonds will accrue and pay interest at the rate of 9%. During negotiations to exchange the senior notes and series 1989 bonds, the Company did not make scheduled interest payments on those notes and bonds. The Company's failure to pay interest resulted in events of default under the indentures governing the senior notes and the loan agreement and the indenture governing the 6 series 1989 bonds. Upon completion of the exchange offers, the Company is no longer in default of any notes or bonds. The indentures governing the new senior secured notes are similar to the old indentures prior to the exchange offers and contain covenants that limit, among other things, the incurrence of additional indebtedness, the declaration and payment of dividends and distributions on the Company's capital stock, investments in joint ventures, as well as mergers, consolidations, liens and sales of certain assets. The new indentures do not contain any financial maintenance covenants. The indentures covering the remaining old senior notes and series 1989 bonds have been amended to remove substantially all restrictive covenants. Troubled Debt Restructuring Accounting The new debt issues are accounted for in accordance with SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings." SFAS No. 15 requires that a comparison be made between the maximum future cash outflows associated with the new senior secured notes and Series C preferred stock (including principal, stated and contingent interest, and related costs on the new senior secured notes and the mandatory redemption of the Series C preferred stock), and the recorded assets and liabilities relating to the outstanding senior notes as of the date of the exchange. A similar comparison was made between the cash flows associated with the new secured series 2002 bonds and the carrying amount of the series 1989 bonds. The details of the comparison of the maximum future cash outflows associated with the new securities issued and the recorded assets and liabilities related to the previously outstanding senior notes and bonds are summarized below:
SENIOR SERIES 1989 NOTES BONDS ---------------- ------------------- Principal value............................ $214,986 $45,580 Accrued interest........................... 23,972 2,490 Other assets and liabilities............... (2,529) (238) -------- ------- Total associated net liability............. 236,429 47,832
SENIOR SECURED NOTES & SERIES C SECURED SERIES PREFERRED STOCK 2002 BONDS ---------------- ------------------- Principal value of notes and bonds......... 118,242 27,348 Future maximum interest payments........... 59,589 19,799 Issuance costs............................. 10,073 2,669 Maximum mandatory redemption value......... 48,372 -- -------- ------- Total maximum cash flow associated with securities issued........................ 236,276 49,816 -------- ------- Excess (shortfall) of the carrying value of assets and liabilities associated with the exchanged instruments compared to the total cash flow associated with the new securities issued........................ $ 153 $(1,984) ======== =======
Because the carrying value of assets and liabilities associated with the senior notes tendered for exchange exceeded the maximum future cash outflows associated with the new instruments issued, we recorded an extraordinary gain of $0.2 million. The recorded liability of the new senior secured notes is the total future cash outflow associated with the new notes less the issuance costs incurred during the exchange. Because all future cash payments are included in the recorded value of the new senior secured notes, the Company will not record interest expense on the senior secured notes and, when future payments occur, they will be recorded as a reduction of that liability. In the event that the Company does not pay the full amount of contingent interest, the liability will still be reduced by the maximum interest amount and the difference between the maximum interest amount and the actual amount of interest paid will be recorded as an extraordinary gain. 7 In the exchange of the series 1989 bonds, the maximum future cash outflows associated with the new series 2002 bonds exceeded the carrying value of the assets and liabilities of the series 1989 bonds tendered for exchange. Accordingly, no gain was recorded and the value of the new secured series 2002 bonds was initially recorded at the carrying value of the assets and liabilities associated with the old series 1989 bonds less the issuance costs incurred during the exchange. The Company will record interest expense on the secured series 2002 bonds at a rate of 0.58%, which is imputed by comparing the maximum cash flows associated with the secured series 2002 bonds and their initial carrying value. In the event that the Company does not pay the full amount of contingent interest, the difference between the maximum interest and the actual interest paid will first reduce any accrued and unpaid interest recorded and then reduce the recorded liability for the secured series 2002 bonds. Senior Credit Facility On May 3, 2002, the senior credit facility was amended and restated to, among other things, allow the exchange offers to be made and to provide additional collateral with a broader security base. The lenders under the senior credit facility were given a first priority security interest in our No. 9 tin tandem mill and our hot strip mill and tin mill assets in addition to our inventory and accounts receivable. The holders of the senior secured notes and the secured series 2002 bonds were granted a second priority security interest in our No. 9 tin tandem mill and our hot strip mill and tin mill assets. There were no changes made to the underlying borrowing certificate. As part of the senior credit facility, and in conjunction with banking arrangements entered into with Fleet, all available cash is used to pay down amounts outstanding under the senior credit facility. Cash received in lockboxes and other deposit accounts are required to be transferred the day after receipt to pay down amounts outstanding under the senior credit facility. Therefore, substantially all cash is restricted from use by the Company other than paying amounts outstanding under the senior credit facility. Cash needs are funded via issuances from the senior credit facility. Because the Company had not transferred all deposits to Fleet at June 30, 2002, the Company had a restricted cash balance of $10.2 million. This amount includes balances received into lockboxes and other deposit accounts that had not yet been transferred to Fleet to pay down the senior credit facility. NOTE 4 SERIES C PREFERRED STOCK The Company issued shares of Series C preferred stock to the holders of senior notes who tendered their outstanding notes in the exchange offer. The Series C preferred stock is subject to mandatory redemption on April 1, 2013 at a redemption price of $25 per share in cash. Prior to April 1, 2013, the Company has the option of redeeming the Series C preferred stock in whole or in part at the end of each 12-month period beginning April 1 of each year based on the following redemption schedule:
12-MONTH PERIOD REDEMPTION PRICE BEGINNING APRIL 1 PER SHARE ------------------- ---------------- 2003 12.50 2004 15.00 2005 17.50 2006 20.00 2007 22.50 2008 and thereafter 25.00
In addition, if our capital structure is amended to permit the issuance of additional shares of common stock, we have the option to redeem all of the outstanding shares of Series C preferred stock at any time prior to April 1, 2013 by delivering to the holders of Series C preferred stock shares of common stock having a value equal to the then current aggregate redemption price for all outstanding shares of Series C preferred stock. 8 The Series C preferred stock is not convertible at the option of the holders of the Series C preferred stock. However, the Company has the option of causing the conversion of the Series C preferred stock into shares of its common stock prior to April 1, 2006 in connection with a "significant transaction." The Series C preferred stock is generally non-voting stock and it is not entitled to receive dividends. NOTE 5 EARNINGS PER SHARE For the three months ended June 30, 2002 and 2001, basic and diluted earnings per share were the same; however, securities totaling 1,491,825 and 1,524,608, respectively, were excluded from both the basic and diluted earnings per share calculations due to their anti-dilutive effect. For the six months ended June 30, 2002 and 2001, basic and diluted earnings per share were the same; however, securities totaling 1,493,741 and 1,527,236, respectively, were excluded from both the basic and diluted earnings per share calculations due to their anti-dilutive effect. For the three months ended June 30, 2002 and 2001, there were 1,852,750 and 3,522,668 options, respectively, outstanding for which the exercise price was greater than the average market price. For the six months ended June 30, 2002 and 2001, there were 1,924,974 and 3,522,668 options, respectively, outstanding for which the exercise price was greater than the average market price. NOTE 6 RESTRUCTURING CHARGES As part of the Company's five part strategic restructuring plan, the Company announced an operating cost savings program in 2001. In conjunction with that program, the Company's management and the Independent Steel Workers' Union negotiated new labor agreements that became effective in late October 2001. The agreement for production and maintenance employees provided for the permanent elimination of a minimum of 372 jobs. The office, clerical and technical agreement provides for the right to eliminate a minimum of 78 jobs. The Company also streamlined its management structure by eliminating non-core and redundant activities resulting in a reduction of 100 management positions. These workforce reductions, completed in April 2002, were a key component to the operating cost savings program. Having identified the specific positions and job classes that were subject to the reduction and having notified all employees that were potentially subject to reduction, the Company recorded a restructuring charge of $129.0 million in the fourth quarter of 2001. The fourth quarter restructuring charge consisted of a $90.0 million increase in our accrued pension cost and a $28.6 million increase in our liability for other postretirement benefits. Also as part of the 2001 fourth quarter restructuring charge, the Company recorded a $7.7 million liability for additional pension benefits related to the induced early retirement of the Company's employees. As part of the agreement under which the Company acquired its assets from National Steel Corporation in 1984, National Steel agreed to assume the responsibility for benefits related to employees' service prior to acquisition of the facilities by the Company. However, under the same agreement, the Company is required to partially reimburse National Steel for pension benefits paid by the National Steel Pension Plan 056 if employees of Weirton are induced into retiring early and receive benefits from said plan. The remaining $2.7 million of the 2001 fourth quarter restructuring charge was related to other separation and severance benefits provided to the affected employees. In March 2001, prior to the initiation of the Company's strategic restructuring plan, the Company established and implemented the 2001 Workforce Downsizing Program. The program reduced non-represented staff employees by approximately 10%. As a result, the Company recorded a 2001 first quarter restructuring charge of $12.3 million consisting of an increase in accrued pension cost of $5.4 million and an increase in our liability for other postretirement benefits of $3.9 million. The remaining $3.0 million consisted of a $0.6 million liability to reimburse the National Steel Pension Plan for Weirton Employees and $2.4 million of other separation and severance benefits provided to the affected employees. 9 The following table summarizes the impacts of the 2001 restructuring charges, other than those related to pension and other postretirement benefits costs, by the affected balance sheet liabilities:
12/31/2001 NEW CASH OTHER 6/30/2002 BALANCE CHARGES PAYMENTS ADJUSTMENTS BALANCE ---------- ------- -------- ----------- --------- (DOLLARS IN THOUSANDS) Current liabilities (1)............... $ 4,067 -- $ (918) -- $ 3,149 Other liabilities (2)................. 8,268 -- (650) -- 7,618 ------- -- ------- -- ------- Total................................. $12,335 -- $(1,568) -- $10,767 ======= == ======= == =======
--------------- (1) The amounts accrued in current liabilities consist of charges for salary continuance and other termination benefits for the affected employees, as well as legal, actuarial and other services provided in connection with the workforce downsizing programs. The Company expects to pay the remainder of this liability by the end of 2002. (2) Other liabilities consist of the Company's liability to reimburse National Steel for the benefits paid by the National Steel Plan for Weirton employees. The reimbursement to National Steel will be made as the National Steel Plan makes payments to Weirton Steel retirees. NOTE 7 DEFERRED TAX ASSETS The Company has provided a 100% valuation allowance for its deferred tax assets during the quarter ended June 30, 2001, increasing the non-cash provision for income taxes and net loss for that quarter by $153.8 million, or $3.70 per diluted share. The Company will continue to provide a 100% valuation allowance for the deferred income tax assets until it returns to an appropriate level of cumulative financial accounting income. The ultimate realization of the net deferred tax assets depends on the Company's ability to generate sufficient taxable income in the future. The Company has tax planning opportunities that could generate taxable income, including sales of assets and timing of contributions to the pension fund. If the Company's current plans and strategies to improve profitability for 2002 and beyond are successful, the Company believes that its deferred tax assets may be realized by future operating results and tax planning strategies. If the Company is able to generate sufficient taxable income in the future, the Company will reduce the valuation allowance through a reduction of income tax expense (increasing stockholders' equity). In June 2002, the Company received an income tax refund of $3.5 million in accordance with the Job Creation and Worker Assistance Act of 2002 signed by President Bush on March 9, 2002. This new act provides for an expansion of the carryback of net operating losses ("NOLs") from two years to five years for NOLs arising in 2001 and 2002. The Company was able to carryback its loss recorded in 2001 to the 1997 through 1999 tax years when it paid an alternative minimum tax. This carryback allowed the Company to recover the entire amount of alternative minimum taxes paid during those prior taxable years. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with and is qualified in its entirety by the unaudited consolidated condensed financial statements of the Company and notes thereto. The unaudited consolidated condensed financial statements of Weirton Steel Corporation include the accounts of its wholly and majority owned subsidiaries. Unless context otherwise requires, the terms "Weirton," "the Company," "we," "us," "its" and "our" refer to Weirton Steel Corporation and its consolidated subsidiaries. OVERVIEW General. We are a major integrated producer of flat rolled carbon steel with principal product lines consisting of tin mill products and sheet products. Tin mill products include tin plate, chrome coated and black 10 plate steels and are consumed principally by the container and packaging industry for food cans, general line cans and closure applications, such as caps and lids. Tin mill products accounted for 48% of our revenues and 34% of tons shipped in the first half of 2002. Sheet products include hot and cold rolled and both hot-dipped and electrolytic galvanized steels and are used in numerous end-use applications, including among others the construction, appliance and automotive industries. Sheet products accounted for 52% of our revenues and 66% of tons shipped in the first half of 2002. In addition, we currently are providing tolling services at our hot strip mill for a major stainless steel producer, which accounts for 15% to 20% of the overall capacity of our hot strip mill. We seek to strengthen our position as a leading domestic full range producer of higher margin tin mill products by further shifting our product mix toward higher margin value-added tin mill products and away from lower margin, commodity flat-rolled sheet products. In general, commodity sheet products are produced and sold in high volume in standard dimensions and specifications. Tin mill and other value-added products require further processing, and generally command higher profit margins and typically are less affected by imports and domestic competition. The market for tin mill products generally remains stable over the typical business cycle as compared to more volatile markets for sheet steel products. Domestic supply of tin mill products has been limited by the relatively small number of domestic producers, recent facility rationalizations, and the anti-dumping determination made by the International Trade Commission ("ITC") in August 2000. In addition, our tin mill product sales are based upon contracts of one year or more and are, therefore, less subject to price volatility than spot market sales. In response to severe weaknesses in the domestic steel industry and our worsening financial condition, in the summer of 2001 we developed a strategic restructuring plan to reduce operating costs, improve our liquidity and working capital position, restructure our long term debt and fundamentally reposition our business to focus on the production and sale of tin mill products and other higher margin value-added sheet products. Our strategic restructuring plan has five integral steps, the first of which have been implemented beginning in late 2001: - reducing our operating costs on an annual basis through the full implementation of a cost savings program which includes a workforce reduction, reductions to our employee benefits costs and other operating cost savings, which became effective in late October 2001 (which is expected to generate approximately $51 million in annual cost savings); - improving our liquidity and long-term supplier relationships through financing programs we entered into primarily with our vendors, including over 60 suppliers, in late October 2001 and through ongoing negotiations with other suppliers of services and raw materials (which have generated at least $40 million in additional near term liquidity); - increasing our borrowing availability and liquidity through the refinancing of our bank credit and asset securitization facilities, which became effective in late October 2001 (which has resulted in $30 to $35 million in additional availability compared to our prior inventory facility and accounts receivable securitization program); - restructuring our long term debt and lowering our debt service costs through the exchange offers in order to increase our liquidity and financial flexibility by approximately $27 million in 2002, 2003 and 2004, approximately $23 million in 2005 and approximately $18 million in 2006, provided we are not required to pay contingent interest; and - fundamental repositioning of our business to focus on tin mill and other higher margin value-added sheet products and significantly reduce our presence in the commodity flat-rolled product market. Weirton, like most United States integrated steel producers, has sustained significant operating losses and a decrease in liquidity as a result of prolonged adverse market conditions and depressed selling prices caused in substantial part by dramatic increases in imported steel during the period 1998 through early 2002. Many industry observers believe that the severe weaknesses in the United States steel industry will lead to a restructuring of the industry. 11 In June 2001, the Bush Administration initiated a trade investigation by the ITC under section 201 of the Trade Practices Act of 1974 regarding the illegal dumping of steel by foreign competitors. On October 22, 2001, the International Trade Commission found that twelve steel product lines, representing 74% of the imports under investigation, have sustained serious injury because of foreign imports. These product lines include hot rolled, cold rolled, galvanized sheet and coil, and tin mill products. On March 5, 2002, President Bush decided to impose tariffs on flat-rolled products over a three-year period at 30% in year one, 24% in year two and 18% in year three, in addition to tariff relief with respect to other products, subject to a review after 18 months by the ITC, which has the authority to continue or terminate the tariffs. All of our flat-rolled product lines, including tin mill, hot rolled and cold rolled sheet and galvanized products, have benefited and should continue to benefit from the imposition of tariffs. In addition, imported steel slabs are subject to an increasing annual quota of at least 5.4 million tons, subject to the imposition of tariffs if the tonnage exceeds the quota limit, excluding steel slabs from Mexico and Canada. Since March 5, 2002, over 500 exclusions have been granted by the ITC, primarily relating to steel products not produced in the United States. However, a number of countries are now also seeking exclusions for products that are produced domestically, including tin mill and other flat-rolled products. The Bush Administration's decisions on specific exclusion requests will affect the overall coverage and effectiveness of the Section 201 order. Although a number of countries have objected to the Bush Administration's decision and have filed appeals with the World Trade Organization ("WTO"), the administration maintains its investigation and decision conform with WTO regulations. If the complainants are successful, the scope, duration and effectiveness of the tariffs could be affected in a manner adverse to us. We believe that the imposition of tariffs under the Section 201 order has had the effect of restricting steel imports to the United States thus far in 2002 and the selling prices and shipment volumes have improved from what we otherwise would have realized without the imposition of tariffs. We also believe that the improvements in selling prices and shipment volumes have been supply driven. Some flat rolled product capacity has recently restarted, and we anticipate further capacity may restart in the near future. If the economy does not recover from its current state and capacity rationalizations in flat rolled products do not happen, these improvements may be in jeopardy. Currently, there is a challenge pending in the U.S. Court of International Trade as to the validity of the Section 201 tariffs on tin mill products. On August 9, 2002, the court denied the plaintiffs a temporary injunction. At a hearing scheduled for September 4, 2002, the court will determine whether or not to permit the tin mill product tariffs to continue. Due to this litigation and the large number and variety of forces that impact the markets for our products, we are not able to quantify the specific effects of the Section 201 ruling. In another ruling, the same court vacated an August 2000 ITC ruling against Japanese tin mill products. The commission had ruled to affix duties of 95% for five years to certain Japanese tin producers. The Company plans to appeal this decision. THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001 In the second quarter of 2002, the Company recognized a net loss of $35.8 million or $0.85 per diluted share. During the second quarter of 2002, the Company completed its senior note and bond exchange that resulted in an extraordinary gain on the early extinguishment of debt of $0.2 million. The second quarter of 2002 results included the sale of the Company's excess nitrogen oxide ("NOx") allowances for $4.4 million and a tax refund of $3.5 million. Excluding the effects of these items, the net loss for the second quarter of 2002 was $43.8 million. This compares with a net loss of $217.8 million, or $5.24 per diluted share, for the same period in 2001. During the second quarter of 2001, a non-cash charge of $153.8 million was recorded to fully reserve the Company's deferred tax assets. Excluding this non-cash item, the Company recognized a net loss for the second quarter of 2001 of $64.1 million. Net sales in the second quarter of 2002 were $251.0 million, an increase of $10.8 million or 4% from the second quarter of 2001. Total shipments in the second quarter of 2002 were 579 thousand tons compared to the second quarter of 2001 shipments of 575 thousand tons. While selling prices and order rates for sheet products 12 began to improve during the second quarter of 2002, the Company's operating results were adversely affected by manpower movements within the plant as a result of the Company's strategic restructuring plan. Tin mill product net sales for the second quarter of 2002 were $115.9 million, an increase of $4.3 million from the second quarter of 2001. Shipments of tin mill product in the second quarter of 2002 were 193 thousand tons compared to 190 thousand tons in the second quarter of 2001. Sheet product net sales for the second quarter of 2002 were $135.1 million, an increase of $6.5 million from the second quarter of 2001. Shipments of sheet product in the second quarter of 2002 were 386 thousand tons compared to 385 thousand tons in the second quarter of 2001. Cost of sales for the second quarter of 2002 were $260.8 million, or $450 per ton, compared to $269.5 million, or $469 per ton, for the second quarter of 2001. Cost of sales per ton decreased as a result of our cost reduction efforts and lower energy costs. The decrease was partially offset by an increase in the Company's pension and other postretirement benefits costs. Selling, general and administrative expenses for the second quarter of 2002 were $6.4 million, a decrease of $2.4 million from the second quarter of 2001. As part of its operating cost savings plan, the Company has significantly reduced its management workforce, resulting in lower selling, general and administrative expenses. The Company's income from unconsolidated subsidiaries during the second quarter of 2002 is related to WeBCo International LLC ("WeBCo"). WeBCo's increased profitability during 2002 is due to the success of its new venture in selling excess and secondary products. Interest expense increased $1.8 million in the second quarter of 2002 when compared to the same period in 2001. As of June 30, 2002, the Company had $107.6 million outstanding under its senior credit facility. As of June 30, 2001, the Company had $65.0 million outstanding under its prior working capital facility. The Company's other income increased by $4.0 million in the second quarter of 2002 when compared to the same period in 2001. As required by Section 126 of the Clean Air Act, certain limitations were developed to control the NOx emissions from industrial boilers. Because the Company does not use coal in its boilers and has taken steps to improve energy efficiency in its operations, the Company was able to sell a portion of its NOx allowances in June 2002 for $4.4 million. In June 2002, the Company received an income tax refund of $3.5 million in accordance with the Job Creation and Worker Assistance Act of 2002 signed by President Bush on March 9, 2002. This new act provides for an expansion of the carryback of net operating losses ("NOLs") from two years to five years for NOLs arising in 2001 and 2002. The Company was able to carryback its loss recorded in 2001 to the 1997 through 1999 tax years when it paid an alternative minimum tax. This carryback allowed the Company to recover the entire amount of alternative minimum taxes paid during those prior taxable years. Continuing losses have raised doubts about the Company's ability to realize additional deferred tax assets in the future, such as operating loss carryforwards, prior to their expiration. During the second quarter of 2001, a non-cash charge of $153.8 million was recorded to fully reserve the Company's deferred tax assets. The deferred tax assets generated in the second quarter of 2002 and 2001 amounted to approximately $14 million and $25 million, respectively, and were fully offset by valuation allowances. In the second quarter of 2002, the Company recognized an extraordinary gain from the early extinguishment of debt related to the exchange offers. SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 In the first half of 2002, the Company recognized a net loss of $80.4 million, or $1.92 per diluted share. The first half of 2002 results included an extraordinary gain of $0.2 million on the early extinguishment of debt, the sale of excess NOx allowances for $4.4 million, the sale of Prudential common stock for $3.2 million as a result of Prudential's demutualization, and a tax refund of $3.5 million. Excluding the effects of these items, the net loss for the first half of 2002 was $91.6 million. Last year's first six months resulted in a net loss of $293.1 million, or $7.05 per diluted share. The Company's net loss for the first half of 2001 included a non-cash charge of 13 $153.8 million to fully reserve the Company's deferred tax assets, a restructuring charge of $12.3 million associated with an involuntary reduction program for exempt employees, and the write-off of the Company's remaining interests in certain joint ventures totaling $18.0 million. Excluding the effects of these items, the Company's net loss for the first half of 2001 was $108.9 million. Net sales in the first half of 2002 were $487.0 million, a decrease of $5.3 million from the first half of 2001. Total shipments in the first half of 2002 were 1.1 million tons compared to the first half of 2001 shipments of 1.2 million tons. While selling prices and order rates for sheet products began to improve during the second quarter of 2002, the Company's operating results were adversely affected by manpower movements within the plant as a result of the Company's strategic restructuring plan. Tin mill product net sales for the first half of 2002 were $236.2 million, an increase of $5.6 million from the first half of 2001. Shipments of tin mill product in the first half of 2002 were 394 thousand tons compared to 393 thousand tons for the same period in 2001. Sheet product net sales for the first half of 2002 were $250.8 million, a decrease of $10.9 million from the first half of 2001. Shipments of sheet product in the first half of 2002 were 751 thousand tons compared to 770 thousand tons in the first half of 2001. Costs of sales for the first half of 2002 were $511.1 million, or $446 per ton, compared to $533.0 million, or $458 per ton, for the first half of 2001. Cost of sales per ton decreased as a result of our cost reduction efforts and lower energy costs. The decrease was partially offset by an increase in the Company's pension and other postretirement benefits costs. Selling, general and administrative expenses for the first half of 2002 were $12.6 million, a decrease of $4.5 million from the first half of 2001. As part of its operating cost savings plan, the Company has significantly reduced its management workforce, resulting in lower selling, general and administrative expenses. The Company established and implemented its 2001 Workforce Downsizing Program effective March 2001. The program reduced non-represented staff employees by approximately 10%. After the program, the Company was operating with approximately 630 non-represented employees and approximately 3,500 represented employees. Due to the program, the Company recorded a $12.3 million restructuring charge during the first quarter of 2001. The restructuring charge consisted of $5.4 million of pension benefits and $3.9 million of other postretirement benefits. The remaining $3.0 million was related to other separation and severance benefits provided to the affected employees. The Company's income from unconsolidated subsidiaries during the first six months of 2002 is related to WeBCo. WeBCo's increased profitability during 2002 is due to the success of its new venture in selling excess and secondary products. During the first quarter of 2001, the Company recorded an $18.0 million charge to loss from unconsolidated subsidiaries, writing-off its investments in MetalSite and GalvPro. Interest expense increased $3.8 million in the first half of 2002 when compared to the same period in 2001. As of June 30, 2002, the Company had $107.6 million outstanding under its senior credit facility. As of June 30, 2001, the Company had $65.0 million outstanding under its prior working capital facility. In the first half of 2002, other income increased $6.5 million when compared to the same period in 2001. As required by Section 126 of the Clean Air Act, certain limitations were developed to control the NOx emissions from industrial boilers. Because the Company does not use coal in its boilers and has taken steps to improve energy efficiency in its operations, the Company was able to sell a portion of its NOx allowances in June 2002 for $4.4 million. In addition, during the first quarter of 2002, the Company received approximately $3.2 million from the sale of Prudential Financial stock it had received upon the demutualization of Prudential. In June 2002, the Company received an income tax refund of $3.5 million in accordance with the Job Creation and Worker Assistance Act of 2002 signed by President Bush on March 9, 2002. This new act provides for an expansion of the carryback of NOLs from two years to five years for NOLs arising in 2001 and 2002. The Company was able to carryback its loss recorded in 2001 to the 1997 through 1999 tax years when it paid an alternative minimum tax. This carryback allowed the Company to recover the entire amount of alternative minimum taxes paid during those prior taxable years. Continuing losses have raised doubts about the Company's 14 ability to realize additional deferred tax assets in the future, such as operating loss carryforwards, prior to their expiration. During the first half of 2001, a non-cash charge of $153.8 million was recorded to fully reserve the Company's deferred tax assets. The deferred tax assets generated in the first half of 2002 and 2001 were approximately $31 million and $54 million, respectively, and were fully offset by valuation allowances. In the second quarter of 2002, the Company recognized an extraordinary gain from the early extinguishment of debt related to the exchange offers. LIQUIDITY AND CAPITAL RESOURCES Total liquidity from cash and financing facilities amounted to $38.5 million at June 30, 2002 as compared to $33.6 million at December 31, 2001. Although liquidity has improved slightly since December 31, 2001, the Company's liquidity long-term has continued to decline primarily as a result of operating losses from prolonged adverse market conditions. To mitigate the effects of these prevailing adverse conditions, we have initiated a strategic restructuring plan to reduce operating costs and enhance our liquidity. The results and status of certain points of that strategic restructuring plan are summarized below. As of June 30, 2002, the Company had cash and equivalents of $10.5 million compared to $5.7 million as of December 31, 2001. The Company's statements of cash flows for the six months ended June 30 are summarized below:
2002 2001 -------- -------- DOLLARS IN THOUSANDS Net cash used by operating activities.................. $(18,313) $(43,243) Net cash used by investing activities.................. (3,519) (8,137) Net cash provided by financing activities.............. 26,644 65,000 -------- -------- Increase in cash....................................... $ 4,812 $ 13,620 ======== ========
The $18.3 million net cash outflow from operating activities resulted from adverse market conditions prevailing in the domestic steel industry. To help offset the difficult market conditions, we undertook various measures during the first half of 2002 and during the year 2001 to enhance our operating cash flow by reducing overall operating costs and net working capital investment. Reductions in our net working capital investment during the first half of 2002 had a positive impact of $19.2 million on our liquidity. This was achieved mainly through a $17.4 million increase in accounts payable. The increase in accounts payable is associated with our increased operating purchase activity during the second quarter of 2002 and deferred debt issuance costs of $5.6 million related to the exchange offers. In addition, with the success of the bond exchanges, our payment terms have improved with some of our vendors. We have no significant past due payables. At current production and shipment levels, we anticipate sustaining our current levels of working capital investment, however, should the markets for our products continue to improve, we may increase our working capital investment, but such an increase could be funded in part by additional amounts available under our senior credit facility. We continue to pursue strategies to reduce our working capital investment, but opportunities for further reductions are substantially less than those already achieved. Net cash used by investing activities includes $3.5 million and $7.3 million of capital expenditures for the six months ended June 30, 2002 and June 30, 2001, respectively. Our senior credit facility places limits on our ability to make certain future capital expenditures to $13.8 million in 2002 and $34.5 million in 2003, subject to increase to $40.0 million in 2003 if we meet certain financial tests. The $26.6 million in net cash provided by financing activities in the first six months of 2002 consisted of $15.5 million in borrowings under our senior credit facility and $16.1 million in cash received under our vendor financing arrangements. Also included in financing activities for the first six months of 2002 was $4.9 million in deferred debt issue costs that had been paid in association with the bond exchanges. As of June 30, 2001, the Company had utilized $93.0 million under its previous working capital facilities. The new senior credit facility was established on October 26, 2001 by agreement with Fleet Capital Corporation, as agent for itself and other lenders, Foothill Capital Corporation, as syndication agent, The CIT 15 Group/Business Credit, Inc. and GMAC Business Credit LLC, which serve as co-documentation agents for the facility, and Transamerica Business Capital Corporation. At June 30, 2002, we had borrowed $107.6 million under the senior credit facility and we had utilized an additional $0.5 million under the letter of credit subfacility. Taking into account outstanding letters of credit, we had $28.0 million available for additional borrowing under the facility at June 30, 2002. Under the senior credit facility we will be able to make scheduled semi-annual cash interest payments on all public debt, provided that these cash payments may be reserved for against availability under the facility. Beginning in late October 2001, we also obtained assistance from certain key vendors and others through our vendor financing programs to improve our near term liquidity. As of June 30, 2002 we had received $27.6 million related to the sale and leaseback of the Foster-Wheeler Steam Generating Plant and related financing programs. The Company is expecting to receive additional proceeds from secured financing transactions involving the Company's general office building and research and development building. In the second quarter of 2002, as part of our announced strategic restructuring plan, the Company completed an offer to exchange its outstanding 11 3/8% Senior Notes due 2004 and its outstanding 10 3/4% Senior Notes due 2005 (collectively the "senior notes") for new 10% Senior Secured Notes due 2008 ("senior secured notes") and new Series C Convertible Redeemable Preferred Stock ("Series C preferred stock"). At the Company's request, the City of Weirton also completed an offer to exchange its 8 5/8% Pollution Control Bonds due 2014 ("series 1989 bonds") for new 2002 Secured Pollution Control Revenue Refunding Bonds ("secured series 2002 bonds"). The Company's liquidity will be enhanced through a reduction in debt service cost of up to approximately $27 million per year in 2002, 2003 and 2004, approximately $23 million in 2005 and approximately $18 million in 2006, provided the Company is not required to make contingent interest payments. At June 30, 2002, we had approximately $391 million in deferred tax assets which were fully reserved with a valuation allowance of the same amount. These assets, although they are fully reserved for financial accounting purposes, are available to offset future income tax liabilities should we generate taxable income. We have been required in the past, and may be required in the future, to make payments under federal alternative minimum tax regulation. Pension obligations have been excluded from the table below. At June 30, 2002, we had an accrued pension liability of $222.8 million and an accrued liability for other postretirement benefits of $360.0 million. During the first six months of 2002, we made no pension contribution and we paid $15.2 million for other postretirement benefits. Under minimum funding rules, no contribution is expected in 2002; however, substantial contributions of an average of at least $50 million per year are likely to be required in each of 2003 through 2007. Poor year to date performance by the financial markets and continued declines in interest rates, if not reversed, are likely to cause significant future increases in the Company's estimated required pension contributions over the next five years. Future funding requirements are dependent upon factors such as funded status, regulatory requirements for funding purposes that necessitate different and more restrictive assumptions for measuring obligations than those used for accounting, and the level and timing of asset returns as compared with the level and timing of expected benefit disbursements. As such, it is not possible to be more specific with respect to anticipated contributions. Additionally, actual future contributions may differ materially. We anticipate that payments for other postretirement benefits will increase from the $29.8 million we paid in 2001 in future years due to an increase in the number of retirees receiving benefits, as well as increases in per capita health care costs. We expect pension contributions and payments for postretirement benefits will require a substantial amount of liquidity over the next six years. Payments of these legacy costs may significantly affect the liquidity available for other purposes, including capital expenditures and other operating, investing and financing activities. 16 Liquidity Outlook The following table sets forth the timing of our liquidity requirements in regards to contractual obligations and commercial commitments: (in millions)
LESS THAN 1 4-5 AFTER 5 CONTRACTUAL OBLIGATIONS: TOTAL YEAR 2-3 YEARS YEARS YEARS ------------------------ ------ ------ --------- ----- ------- Long Term Debt..................................... $262.7 $ 0.5 $56.9(1) $28.1 $177.2 Capital Lease Obligation (2)....................... 27.6 0.8 3.7 4.6 18.5 Operating Leases................................... 12.7 5.4 6.0 1.3 -- Unconditional Purchase Obligations (3) Other Long Term Obligations (4).................... 18.7 4.4 6.9 5.0 2.4 Redeemable Stock (5)............................... -- -- -- -- 48.4 ------ ----- ------- ----- ------ Total Contractual Cash Obligations............... 321.7 11.1 73.5 39.0 246.5 OTHER COMMERCIAL COMMITMENTS: Lines of Credit.................................... 107.6 -- 107.6 -- -- ------ ----- ------- ----- ------ TOTAL.................................... $429.3 $11.1 $ 381.1 $39.0 $246.5 ====== ===== ======= ===== ======
--------------- (1) The exchanges that resulted in the issuance of the senior secured notes and secured series 2002 pollution control bonds were accounted for as troubled debt restructurings in accordance with SFAS 115. As a result of the accounting treatment, future interest payments are included in the carrying value of the liability. The payments reflected herein assume the maximum future cash flows associated with the senior secured notes and secured series 2002 bonds. This includes all contingent interest based on excess cash flow as defined in the indentures governing the securities. The Company's management currently does not believe that it will generate excess cash flow. As a result , the cash payments on long-term debt in year 2 to 3 would be reduced by $426.4 million if, as expected, we do not pay contingent interest. (2) The capital lease obligation arises from the sale and leaseback of the Company's steam generating facilities as part of our vendor financing programs. The payments reflect the scheduled principal payments on the $27.6 million obligation that had been incurred as of June 30, 2002. The Company is not required to make payments on the obligation until the first quarter of 2003, at which time quarterly payments will begin. The payments will include both principal and interest. If the interest portion of the payment had been included in the chart above, the totals would have increased from $0.8 million to $2.5 million in less than one year, from $3.7 million to $10.1 million in two to three years, from $4.6 million to $10.1 million in four to five years and from $18.5 million to $30.2 million after five years. The Company also anticipates that it will receive $3 million to $5 million of additional proceeds from financing arrangements after the first quarter of 2002 which will increase the total future principal and interest payments by proportional amounts. (3) We have entered into conditional purchase arrangements for a portion of our coke and pellet requirements and some of our energy requirements. In general, those requirements provide for us to purchase a minimum quantity of material at a variable or negotiated price that approximates the market price for those commodities. Because those purchases are conditioned on future purchase levels and changes in market price, they are not included in the above table. (4) We are required to reimburse National Steel for benefits paid by the National Steel Pension Plan for Weirton Employees to people we induce into retiring before age 62 by offering some form of enhanced benefit. Based on the benefit enhancements granted as of June 30, 2002, we will make the reimbursement payments indicated. (5) The redeemable stock includes the maximum redemption value of the Series C preferred stock. The Company is required to redeem the outstanding Series C preferred stock for that amount in 2013. The Company has the option to redeem the stock earlier for lesser amounts. The redeemable stock does not include any amounts for Series A preferred stock. Individual holders of Series A preferred stock, all of whom 17 have received shares through distributions from the 1989 Employee Stock Ownership Plan, can redeem the shares at market value by putting the shares to the Company within specified windows of time after having received the distribution from the 1989 ESOP. It is not possible to know the amount and timing of redemption of the Series A preferred stock, therefore, it is not included herein. Based on the amount of cash on hand, the amount of cash expected to be generated from operating activities, cash savings resulting from our operating cost savings program, additional borrowing availability under our senior credit facility and liquidity improvement as a result of the consummation of the exchange offers, we believe that we will have sufficient liquidity through this year and into next year. RECENT ACCOUNTING PRONOUNCEMENTS In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this Statement are effective for exit and disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS 146 is not expected to have a material effect on the financial position, results of operations or liquidity of the Company. In April 2002, SFAS No. 145, "Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement 13, and Technical Corrections," was issued. The Statement updates, clarifies and simplifies existing accounting pronouncements. While the technical corrections to existing pronouncements are not substantive in nature, in some instances, they may change accounting practice. The provisions of this standard related to SFAS 13 are effective for transactions occurring after May 15, 2002. All other provisions of this standard must be applied in fiscal years beginning after May 15, 2002. The Company is currently evaluating the effects of SFAS 145 and is preparing a plan for implementation. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption of SFAS 144 did not have a material effect on the Company's June 30, 2002 financial statements. FORWARD LOOKING STATEMENTS This Item contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based on assumptions and expectations which may not be realized and are inherently subject to risk and uncertainties, many of which cannot be predicted with accuracy. Future events and actual results, financial and otherwise, may differ from the results discussed in the forward-looking statements. Although the Company believes that its assumptions made in connection with the forward- looking statements are reasonable, there are no assurances that such assumptions or expectations will prove to have been correct due to the foregoing and other factors. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company is under no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES The Company issued $118.2 million in face amount of new 10% Senior Secured Notes due 2008 and 1.9 million shares of Series C Convertible Redeemable Preferred Stock with a mandatory redemption in 2014 of $48.4 million in exchange for the tendered senior notes due 2004 and 2005. The City of Weirton issued $27.3 million in principal amount of new Series 2002 Secured Pollution Control Revenue Refunding Bonds in exchange for the tendered Series 1989 bonds. ITEM 3. DEFAULTS UPON SENIOR SECURITIES All of the Company's interest defaults were cured on June 18, 2002. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10.21 -- Employment Agreement between John H. Walker and the Company dated April 18, 2002 (filed herewith). Exhibit 10.23 -- Employment Agreement between Mark E. Kaplan and the Company dated April 18, 2002 (filed herewith). (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K under Items 5 and 7 thereof on July 2, 2002. The Company filed a Current Report on Form 8-K under Item 4 thereof on June 4, 2002. The Company subsequently amended Items 4 and 7 on June 21, 2002. The Company filed a Current Report on Form 8-K under Items 7 and 9 thereof on February 26, 2002. 19