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FIRST QUARTER - 2003
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2003
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 1-2438
I.R.S. EMPLOYER IDENTIFICATION NUMBER 36-1262880
ISPAT INLAND INC.
(a Delaware Corporation)
3210 Watling Street
East Chicago, Indiana 46312
Telephone: (219) 399-1200
Registrant meets the conditions set forth in General Instruction H(1)(a) and (b)
of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No x
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 100 shares of the Company's
Common Stock ($.01 par value per share) were outstanding as of May 9, 2003.
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2003 and 2002 2
Condensed Consolidated Statements of Comprehensive Income for the Three
Months Ended March 31, 2003 and 2002 2
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2003 and 2002 3
Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002 4
Notes to Condensed Consolidated Financial Statements 5 - 15
ITEM 2. Management's Narrative Analysis of Results of Operations 16
ITEM 4. Controls and Procedures 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 17
ITEM 5. Other 17
ITEM 6. Exhibits and Reports on Form 8-K 17
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED
MARCH 31
2003 2002
--------- ---------
NET SALES $ 553.9 $ 532.0
--------- ---------
OPERATING COSTS AND EXPENSES
Cost of goods sold 478.4 510.1
Selling, general and
administrative expenses 6.7 6.3
Depreciation 24.4 24.5
--------- ---------
Total 509.5 540.9
--------- ---------
OPERATING PROFIT (LOSS) 44.4 (8.9)
Other expense (income), net 1.8 (15.0)
Interest expense on debt 17.8 19.2
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
CHANGE IN ACCOUNTING PRINCIPLE 24.8 (13.1)
PROVISION (BENEFIT) FOR INCOME TAXES 8.4 (5.4)
--------- ---------
NET INCOME (LOSS) BEFORE CHANGE IN
ACCOUNTING PRINCIPLE 16.4 (7.7)
Cumulative effect of change in
accounting principle (Note 9) (1.6) -
--------- ---------
NET INCOME (LOSS) $ 14.8 $ (7.7)
========= =========
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED
MARCH 31
2003 2002
-------- --------
Net income (loss) $ 14.8 $ (7.7)
Other comprehensive income, net of tax - -
------- --------
COMPREHENSIVE INCOME (LOSS) $ 14.8 $ (7.7)
======= ========
See notes to unaudited condensed consolidated financial statements
2
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED
MARCH 31
2003 2002
-------- --------
OPERATING ACTIVITIES
Net income (loss) $ 14.8 $ (7.7)
-------- --------
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Gain on early extinguishment of debt (0.8) (14.0)
Gain on sale of property, plant and equipment (0.1) -
Change in accounting principle 2.5 -
Depreciation 24.4 24.5
Deferred employee benefit cost 3.9 (1.9)
Amortization of debt premium (0.3) (0.3)
Undistributed earnings from joint ventures (9.8) (3.9)
Deferred income taxes 7.5 (5.3)
Change in:
Receivables 49.9 (10.4)
Inventories (41.3) 61.7
Prepaid expenses and other assets 3.1 (1.5)
Accounts payable 15.0 3.7
Payables to/receivables from related companies (0.1) (9.4)
Other accrued liabilities 6.9 1.9
Pension contribution (54.5)
Other items 2.6 1.0
-------- --------
Net adjustments 8.9 46.1
-------- --------
Net cash from operating activities 23.7 38.4
INVESTING ACTIVITIES
Capital expenditures (9.7) (4.1)
Proceeds from sale of property, plant and equipment 0.1 -
Distributions from joint ventures, net of advances 11.0 3.1
-------- --------
Net cash from investing activities 1.4 (1.0)
FINANCING ACTIVITIES
Payments on long-term debt (3.1) (9.2)
Dividends paid (1.9) -
Proceeds from note payable from related company - 1.3
Bank overdrafts (1.3) (15.8)
Repayments of revolver borrowings, net (12.0) (18.0)
-------- --------
Net cash from financing activities (18.3) (41.7)
-------- --------
Net increase (decrease) in cash and cash equivalents 6.8 (4.3)
Cash and cash equivalents - beginning of period 10.0 24.2
-------- --------
Cash and cash equivalents - end of period $ 16.8 $ 19.9
======== ========
Non-cash activity:
Asset Retirement Obligation Impact on:
Property 3.8 -
Other long-term obligations 6.3 -
See notes to unaudited condensed consolidated financial statements
3
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN MILLIONS)
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 16.8 $ 10.0
Receivables, less provision for allowances, claims and 207.6 257.5
doubtful accounts of $13.9 and $17.0
Receivables from related companies 4.8 8.0
Inventories 484.4 443.1
Prepaid expenses and other - 2.8
Deferred income taxes 35.9 35.9
----------- -----------
Total current assets 749.5 757.3
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES 213.6 214.8
PROPERTY, PLANT AND EQUIPMENT, NET 1,723.0 1,733.9
NOTE RECEIVABLE FROM RELATED COMPANIES 6.1 6.1
DEFERRED INCOME TAXES 314.3 321.8
PENSION INTANGIBLE ASSET 73.4 73.4
OTHER ASSETS 56.2 56.5
----------- -----------
Total Assets $ 3,136.1 $ 3,163.8
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 193.7 $ 178.7
Bank overdrafts 7.2 8.5
Payables to related companies 4.5 7.8
Pension contribution - 54.5
Accrued expenses and other liabilities 146.7 139.8
Long-term debt due within one year
Related companies (Note 5) 7.0 7.0
Other 0.8 -
----------- -----------
Total current liabilities 359.9 396.3
LONG-TERM DEBT
Related companies (Note 5) 815.6 817.3
Other 409.3 424.6
DEFERRED EMPLOYEE BENEFITS 1,709.3 1,705.4
OTHER LONG-TERM OBLIGATIONS 67.3 58.4
----------- -----------
Total liabilities 3,361.4 3,402.0
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' DEFICIT
Preferred stock 90.0 90.0
Common stock 320.0 320.0
Accumulated deficit (151.6) (164.5)
Accumulated other comprehensive loss (483.7) (483.7)
----------- -----------
Total stockholders' deficit (225.3) (238.2)
----------- -----------
Total Liabilities and Stockholders' Deficit $ 3,136.1 $ 3,163.8
=========== ===========
See notes to unaudited condensed consolidated financial statements
4
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements of Ispat Inland Inc. (the
"Company") are unaudited, but in the opinion of management, contain all
adjustments necessary to present fairly the financial position and results of
operations and cash flows for the periods presented. All significant
intercompany accounts and transactions have been eliminated. These financial
statements should be read in conjunction with the financial statements and
related notes contained in the Annual Report on Form 10-K for the year ended
December 31, 2002.
The results of operations for the interim periods shown in this report are not
necessarily indicative of the results to be expected for a full year.
Certain amounts on the 2002 Condensed Consolidated Financial Statements have
been reclassified to conform with current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations", which is effective for all fiscal years beginning after
June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 requires the fair value of
liabilities for asset retirement obligations to be recognized in the period in
which the obligations are incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. The impact of adopting SFAS No. 143 on
January 1, 2003, the effective date, is an increase in assets and liabilities of
$3.8 and $6.3, respectively. A charge of $1.6 (net of tax of $0.9) is reflected
on the Consolidated Statement of Operations as of January 1, 2003 as a
Cumulative Effect of Change in Accounting Principle (See Note 9).
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Among other items, this statement rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement, SFAS
No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements".
Upon adoption of SFAS No. 145, any gain or loss on extinguishments of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the criteria in APB Opinion No. 30, Reporting the Results of Operations --
Reporting the effects of disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, for classification
as an extraordinary item shall be reclassified. The Company adopted the
provisions of SFAS No. 145 as of January 1, 2003 and reclassified $14.0 of
extraordinary gains to the "Other expense (income), net" line item for the
quarter ended March 31, 2002 in accordance with SFAS No. 145.
In June of 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities". SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for under EITF 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 scope of SFAS No. 146 also includes
costs related to terminating a contract that is not a capital lease and
termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS No. 146 will
be effective for exit or disposal activities that are initiated after December
31, 2002.
5
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure: An amendment of FASB Statement No. 123".
This Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation",
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirement of SFAS No.123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The disclosure provisions of SFAS
No. 148 are applicable for fiscal years ending after December 15, 2002. As of
December 31, 2002, the Company adopted the disclosure provision of SFAS No. 148.
In November 2002, the FASB issued Financial Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires certain
guarantees to be recorded at fair value and requires a guarantor to make
significant new disclosures, even when the likelihood of making any payments
under the guarantee is remote. Generally, FIN 45 applies to certain types of
financial guarantees that contingently require the guarantor to make payments to
the guaranteed party based on changes in an underlying that is related to an
asset, a liability, or an equity security of the guaranteed party; performance
guarantees involving contracts which require the guarantor to make payments to
the guaranteed party based on another entity's failure to perform under an
obligating agreement; indemnification agreements that contingently require the
guarantor to make payments to an indemnified party based on changes in an
underlying that is related to an asset, a liability, or an equity security of
the indemnified party; or indirect guarantees of the indebtedness of others.
Disclosure requirements under FIN 45 were adopted as of December 31, 2002 and
are applicable to all guarantees issued by the guarantor subject to FIN 45's
scope, including guarantees issued prior to FIN 45. The initial recognition and
initial measurement provisions of FIN 45 are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" with the objective of improving
financial reporting by companies involved with variable interest entities. A
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights, or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities.
Historically, entities generally were not consolidated unless the entity was
controlled through voting interests. FIN 46 changes that by requiring a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. A
company that consolidates a variable interest entity is called the "primary
beneficiary" of that entity. FIN 46 also requires disclosures about variable
interest entities that a company is not required to consolidate but in which it
has a significant variable interest. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements of FIN 46 apply to existing entities in the first
fiscal year or interim period beginning after June 15, 2003. Also, certain
disclosure requirements apply to all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established. The
Company has determined that FIN 46 will not have an impact on its financial
condition, results of operations or cash flows.
6
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 2 - INVENTORIES
Inventories consist of the following:
MARCH 31, 2003 DECEMBER 31, 2002
---------------- -------------------
In process and finished steel $ 350.4 $ 294.3
Raw materials and supplies:
Iron ore 52.0 72.0
Scrap and other raw materials 50.8 48.3
Supplies 31.2 28.5
----------- -----------
134.0 148.8
----------- -----------
Total $ 484.4 $ 443.1
=========== ===========
NOTE 3 - LONG-TERM DEBT
In connection with the financing of the acquisition of Ispat Inland, an
affiliate of the Company and wholly owned indirect subsidiary of Ispat
International N.V. ("Ispat"), Ispat Inland, L.P. (the "Borrower"), entered into
a Credit Agreement dated July 16, 1998, as amended (the "Credit Agreement") for
a senior secured term credit facility and letter of credit with a syndicate of
financial institutions for whom Credit Suisse First Boston is the agent (the
"Agent"). The Credit Agreement consists of a $350 Tranche B Term Loan due July
16, 2005 (the "Tranche B Loan"), a $350 Tranche C Term Loan due July 16, 2006
(the "Tranche C Loan" and together with the Tranche B Loan, the "Term Loans")
and a $160 standby letter of credit that expires on July 9, 2003 that has not
been drawn upon (the "LC" and together with the Term Loans, the "Facilities").
The LC was provided in favor of the Pension Benefit Guarantee Corporation
("PBGC") pursuant to a preliminary agreement the Company entered into with the
PBGC in 1998 that was subsequently formalized in 2000 (the "PBGC Agreement") to
provide certain financial assurances with respect to the Company's pension plan
obligations. The LC expires on July 9, 2003, and the Company believes that it is
unlikely to be renewed. Each of the Tranche B Loan and Tranche C Loan has
scheduled principal repayments of $0.875 per quarter until maturity.
The Company is engaged in discussions with the PBGC to determine whether other
types of collateral can be substituted in place of the LC or other alternative
arrangements can be made to provide financial assurances to the PBGC with
respect to the Company's pension plan obligations. If the Company is unable to
reach a satisfactory revised agreement with the PBGC, the PBGC may draw on the
LC prior to its expiration. If the PBGC draws on the LC, and the LC lenders
determine to enforce the reimbursement obligation of the Company associated with
the LC, borrowing arrangements of the Company, including the Credit Agreement,
would be negatively impacted (See "Commitments and Contingencies" Note 7).
On July 16, 1998, the Company issued $875 of First Mortgage Bonds as security
both for the Facilities and for an interest rate hedge (not as defined under
SFAS No. 133) owned by the Borrower as required under the Credit Agreement (the
"Hedge"). Series U, in a principal amount of $700, was issued to an indirect
subsidiary of the Borrower which, in turn, pledged the Bonds to the Agent for
the benefit of the Term Loan lenders. Series V, in a principal amount of $160,
was issued to the Agent for the benefit of the LC lenders. Series W, in a
principal amount of $15, was issued to the Agent for the benefit of the
counterparty to the Hedge.
As a further credit enhancement under the Credit Agreement, the Facilities and
the Hedge are fully and unconditionally guaranteed for as long as the
obligations are outstanding by the Company, certain subsidiaries of the Company
and Ispat. The Company could be required to perform under the guarantee if an
event of default as defined in the Credit Agreement occurs under the Facilities.
At March 31, 2003, the Company recorded $666.7 and $0 for the Term Loans and the
Hedge, respectively in its Consolidated Balance Sheet.
7
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 3 - LONG-TERM DEBT (CONT.)
With the exception of Series U, V and W, the First Mortgage Bonds are the
obligation solely of the Company and have not been guaranteed or assumed by or,
otherwise, become the obligation of Ispat or any of its other subsidiaries. Each
series of First Mortgage Bonds issued by the Company is limited to the principal
amount outstanding, with the Pollution Control Series 1977 Bonds and the Series
R First Mortgage Bonds subject to a sinking fund. A substantial portion of the
property, plant and equipment owned by the Company at its Indiana Harbor Works
is subject to the lien of the First Mortgage. This property is also subject to a
subordinate lien in favor of the United Steelworkers of America to secure a post
retirement health benefit.
Under terms of the Credit Agreement, the Company must maintain a minimum
Consolidated EBITDA (as defined in the Credit Agreement). The Company was in
compliance with this covenant at March 31, 2003. The Credit Agreement also
contains other covenants that, among other things, prohibit or limit the ability
of the Company or the Borrower to pay dividends and other restricted payments,
incur indebtedness, create liens, engage in transactions with affiliates, sell
assets and engage in mergers and consolidations.
Ispat Inland Administrative Service Company ("IIASC"), a wholly owned subsidiary
of the Company established to provide a supplemental source of funds to the
Company, has a $165 committed revolving credit facility with a group of banks,
extending to November of 2005. The Company has agreed to sell substantially all
of its receivables to IIASC to secure this facility. Provisions of the credit
agreement limit or prohibit the Company from merging, consolidating, or selling
its assets and require IIASC to meet minimum net worth and leverage ratio tests.
Under terms of the secured revolving credit agreement, based on the level of the
leverage ratio and net worth calculations of the Company, beginning early in
2002, the trustee retained initial control over cash lockbox receipts. On a
daily basis, the trustee will remit the remaining cash to the Company after
first using the receipts to make any payments prescribed by the secured
revolving credit agreement. This change in practice has no impact on cash
available to the Company under the facility. At March 31, 2003, based on the
amount of eligible collateral, there was $15 of availability under the line.
Drawings under the line included $143 of loans and $7 of letters of credit
issued for the purchase of commodities on the international market and as
security under various insurance and workers compensation coverages.
In 1999, the Company established a five-year $120 revolving credit facility with
a group of banks. The Company has agreed to sell substantially all of its raw
material, in-process and finished goods inventory to Ispat Inland Inventory, LLC
("III"), a wholly owned subsidiary of the Company, to secure this facility.
Provisions of the credit agreement require III to maintain a minimum net worth.
At March 31, 2003, based on the amount of eligible collateral, there was $48 of
availability under the line with $70 of loans outstanding.
At March 31, 2003 and December 31, 2002, the amounts outstanding under both the
IIASC and III revolving credit facilities were shown as a long term obligation.
The Company has the ability and intent to refinance these obligations as they
mature under the respective credit agreements as modified. See Footnote 11 for
recent modifications to revolving credit facilities.
In the first quarter of 2002, the Company purchased $14.3 of its Pollution
Control Series 1993 bonds, $0.8 of its Pollution Control Series 1977, $3.8 of
its Pollution Control Series 1995 and $0.9 of its Series R Bonds at a discount
from face value. As a result of this early redemption, the Company recognized a
gain of $14.5.
In the first quarter of 2003, the Company purchased $0.1 of its Pollution
Control Series 1977, $0.9 of its Pollution Control Series 1993, and $1.0 of its
Pollution Control Series 1995 Bonds at a discount from face value. As a result
of this early redemption, the Company recognized a gain of $0.8.
Interest cost incurred by the Company totaled $18.5 and $19.6 for the quarter
ended March 31, 2003 and 2002, respectively. Included in these totals is
capitalized interest of $0.7 and $0.4 for the quarter ended March 31, 2003 and
2002, respectively.
8
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 4 - STOCK OPTION PLANS
Under the terms of the Ispat International N.V. Global Stock Option Plan, Ispat
may grant options to senior management of Ispat and its affiliates for up to
6,000,000 shares of common stock. The exercise price of each option equals not
less than the fair market value of Ispat stock on the date of grant, and an
option's maximum term is 10 years. Options are granted at the discretion of the
Ispat Board of Director's Plan Administration Committee or its delegate. The
options vest either ratably upon each of the first three anniversaries of the
grant date or upon the death, disability or retirement of the participant. The
Company has chosen to account for stock-based compensation using the intrinsic
value method prescribed in APB No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options was measured as the excess, if any, of the quoted market price of
Ispat stock at the date of the grant over the amount an employee must pay to
acquire the stock. Had compensation cost for the option plan been determined
based on the fair value at the grant date for awards in 2003 and 2002 consistent
with the provisions of SFAS No. 123, as amended by SFAS No. 148, the Company's
net income (loss) for the three months ended March 31, 2003 and 2002 would have
been decreased (increased) to the pro forma amounts indicated below:
THREE MONTHS ENDED MARCH 31
2003 2002
- -----------------------------------------------------------------------------------------------------------
Net Income (Loss) -- as reported $14.8 $(7.7)
Deduct: Total stock-based
employee compensation expense
determined under fair value based
method for all awards, net of
related tax effects (0.2) (0.3)
----- -----
Net Income (Loss) -- pro forma $14.6 $(8.0)
- -----------------------------------------------------------------------------------------------------------
NOTE 5 - EQUITY
Common Stock
On March 31, 2003 and December 31, 2002, the Company had 1,000 shares authorized
of common stock, $.01 par value ("Common Stock"), of which 100 shares were
issued, outstanding and owned by a wholly owned subsidiary of Ispat.
Cumulative Preferred Stock
On March 31, 2003 and December 31, 2002, the Company had 100 shares authorized,
issued and outstanding of Series A 8% Cumulative Preferred Stock, $.01 par value
("Preferred Stock"), which is owned by a wholly owned subsidiary of Ispat. The
Preferred Stock has liquidation preference over the Common Stock.
NOTE 6 - RELATED PARTY TRANSACTIONS
The Company was charged $3.3 and $0.4 by Ispat for the three months ended March
31, 2003 and 2002, respectively, for management, financial and legal services
provided to the Company. The Company was also charged $0.2 and $0.4 by Ispat
North America Holding Inc. for corporate expense allocations for the three
months ended March 31, 2003 and 2002.
9
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 6 - RELATED PARTY TRANSACTIONS (CONT.)
The Company purchased $18.0 and $3.3 of inventory from subsidiaries of Ispat
during the three months ended March 31, 2003 and 2002, respectively. The Company
sold $2.0 and $1.4 of inventory to subsidiaries of Ispat for the three months
ended March 31, 2003 and 2002, respectively.
I/N Tek is a joint venture which owns and operates a cold-rolling facility and
is 60% owned by a wholly-owned subsidiary of the Company. Under a tolling
arrangement between the Company and I/N Tek, the Company was charged $34.6 and
$37.2 for such tolling services for the three months ended March 31, 2003 and
2002, respectively.
I/N Kote is a joint venture that owns and operates an electrogalvanizing line
and hot-dip galvanizing line which is 50% owned by a wholly-owned subsidiary of
the Company. The Company recorded sales of cold rolled steel to I/N Kote of
$93.6 and $84.7 for the three months ended March 31, 2003 and 2002,
respectively.
The Company's debt due to related companies of $822.5 and $824.3 as of March 31,
2003 and December 31, 2002, respectively, consists of $666.7 and $668.5,
respectively, payable to Ispat Inland Finance LLC, a wholly owned subsidiary of
the Borrower and Ispat and of $155.8 and $155.8, respectively, advances from
other subsidiaries of Ispat. Under the Credit Agreement, these advances cannot
be repaid until the Company's leverage falls to specified levels. At March 31,
2003, the Company has both the ability and the intent to refinance the related
unpaid interest as the obligations mature, therefore it has been shown as
long-term.
The Company's note receivable from a related company of $6.1 at both March 31,
2003 and December 31, 2002 is due from Ispat Inland, L.P. Amounts relate to
costs associated with the financing of the acquisition of the Company by Ispat
and costs incurred in relation to settlement of the interest collar (Note 8).
Payment is due on July 16, 2006 unless Ispat Inland, L.P. chooses to prepay.
The Company's receivable from related companies of $4.8 and $8.0 at March 31,
2003 and December 31, 2002, respectively, consists of trade and other
intercompany receivables. The Company's payable to related companies of $4.5 and
$7.8 at March 31, 2003 and December 31, 2002, respectively, consists of trade
and other intercompany expenses.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
At March 31, 2003, the Company guaranteed $60.9 of long-term debt attributable
to I/N Kote, one of its equity investments. Since the Company accounts for its
investment in I/N Kote under the equity method, the debt which matures on
January 12, 2007 is not recorded in the Company's consolidated balance sheet.
The Company's guarantee could be invoked in an event of default as defined in
the provisions of the I/N Kote loan agreement. In addition to III Kote Inc's (a
wholly owned subsidiary of the Company which holds the 50% investment of I/N
Kote) 50% share of the remaining principal balance, the Company also guarantees
any outstanding interest due, both of which bear interest at a rate equal to the
higher of (1) the prescribed borrowing rate on the loan, or (2) the Bank's
(Mizuho Corporate Bank Limited) prime rate, plus 2%. If the Company performed on
its guarantee, it would continue to own its share of I/N Kote, subject to the
security interest of the Bank in the assets of I/N Kote.
The Company entered into an agreement (the "Agreement") with the Pension Benefit
Guaranty Corporation (the "PBGC") in 1998 to provide certain financial
assurances with respect to the Company's Pension Plan. The Agreement has a term
of at least five years or until certain financial tests are met, whichever is
later. It is likely that the Agreement will continue beyond its five year
original term. In accordance with the Agreement, the Company provided the PBGC a
letter of credit in the amount of $160, and has made a total of $242 of
contributions to the Pension Trust, including a payment of $54.5 in the first
quarter of 2003. All of the contributions that the Company made to the Pension
Trust under the Agreement were, at the time made, in excess of ERISA minimum
funding requirements. In addition, the Company granted to the PBGC a first
priority lien on selected assets. Also, under the Agreement, Ryerson Tull, Inc.,
the former parent of the Company, provided a $50 guarantee of the Company's
payment obligations with respect to its pension plan. In 2001, Ryerson Tull
provided the PBGC a $50 letter of
10
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONT.)
credit in support of the guaranty. The $160 letter of credit currently expires
on July 9, 2003, and the $50 Ryerson Tull guarantee, with its supporting letter
of credit, currently expires on July 16, 2003. Prior to the expiration of such
instruments, the PBGC will require, pursuant to the Agreement, that it be
provided with replacement security in a form acceptable to it. The Company is in
negotiations with the PBGC regarding alternative arrangements to the $160 letter
of credit and guaranty, and in discussions with Ryerson Tull regarding the
guaranty/letter of credit. If the Company is unable to make alternative
arrangements with the PBGC regarding the Ryerson Tull guaranty/letter of credit,
the Agreement provides that Ryerson Tull must renew its letter of credit, or
place up to $50 million in an escrow account for possible application by the
PBGC to certain shortfalls in funding of the Company Pension Trust. The Company
believes that it will reach agreement with the PBGC and with Ryerson Tull.
However, if the Company cannot reach a resolution of these matters acceptable to
the PBGC, and the LC lenders determine to enforce the reimbursement obligation
of the Company associated with the LC, the borrowing arrangements of the
Company, including the Credit Agreement, would be negatively impacted. The
consequences of such series of events could have a material adverse effect on
the financial condition and results of operations of the Company.
In 1998, the Company entered into an agreement with a third party to purchase
1.2 million tons of coke annually for approximately 15 years on a take-or-pay
basis at prices determined by certain cost factors from a heat recovery coke
battery facility located on land leased from the Company. Under a separate
tolling agreement with another third party, the Company has committed to pay
tolling charges over approximately 15 years to desulphurize flue gas from the
coke battery and to convert the heat output from the coke battery to electrical
power and steam. The Company advanced $30 during construction of the project,
which is recorded as a deferred asset on the balance sheet and will be credited
against required cash payments during the second half of the energy tolling
arrangement. As of March 31, 2003 and December 31, 2002, the estimated minimum
tolling charges remaining over the life of this agreement were approximately
$220 and $225, respectively.
In 2002, the Company entered into an agreement with Cleveland-Cliffs, Inc. to
purchase from subsidiaries of Cleveland-Cliffs, Inc. all of its pellet
requirements beyond those produced by the Minorca Mine for twelve years. The
price of the pellets is fixed for the first two years and then, adjusted over
the term of the agreement based on various market index factors.
On June 10, 1993, the U.S. District Court for the Northern District of Indiana
entered a consent decree that resolved all matters raised by a lawsuit filed by
the EPA in 1990 (the "Consent Decree") against, among others, Ispat Inland Inc.
The Consent Decree assessed a $3.5 cash fine, required $7 in environmentally
beneficial projects at the Indiana Harbor Works, and required that $19, plus
interest, be spent in assessing and remediating sediment in portions of the
Indiana Harbor Ship Canal and Indiana Harbor Turning Basin ("Sediment
Remediation"). In addition, the Consent Decree required remediation of the
Company's Indiana Harbor Works (the "Corrective Action"). The Corrective Action
liability is a distinct and separate responsibility under the Consent Decree.
The Consent Decree establishes a three-step process for the Corrective Action,
each of which requires approval by the EPA, consisting of: (1) assessment of the
site in two separate phases (including stabilization measures), (2) evaluation
of remediation alternatives and (3) remediation of the site where required. The
Company is presently working on the assessment step of the Corrective Action. At
the completion of the second phase of assessments, the Company will be able to
estimate the required Corrective Action cleanup costs. The Company currently
expects to expend $2 to $4 per year over the next several years to perform the
required Assessments. The Company paid the $3.5 fine on July 9, 1993 and
recognized the fine in the early 1990s prior to Ispat's acquisition. In
addition, pursuant to the Consent Decree, the Company completed $14, more than
the required $7, in environmentally beneficial projects at the Indiana Harbor
Works. The environmentally beneficial projects consisted of the installation of
sludge dewatering and sludge briquetting and recycling equipment which have
allowed the re-use of these former waste products into the process. The required
environmentally beneficial projects have been fully completed and no additional
beneficial projects are required. The Sediment Remediation is currently in the
assessment phase. The Company's reserve for the remaining environmental
obligations under the Consent Decree totaled $27.8 and $27.7 as of March 31,
2003 and December 31, 2002, respectively, reflecting the $19 plus interest for
the Sediment Remediation liabilities, and amounts for the Corrective Action
assessments. Because the nature and extent of the contamination and the required
11
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONT.)
remedial actions cannot be determined until the first two phases of assessments
have been completed, the Company cannot presently reasonably estimate the costs
of or the time required to satisfy its Corrective Action obligations under the
Consent Decree. It is expected that assessment and remediation of the site will
require significant expenditures over the next several years that may be
material to the Company's financial position and results of operations.
Insurance coverage with respect to work required under the Consent Decree is not
significant.
It is anticipated that the Company will make capital expenditures of $2 to $5
annually in each of the next five years for the construction, and have ongoing
annual expenditures (non-capital) of $35 to $40 for the operation of air and
water pollution control facilities to comply with current federal, state and
local laws and regulations. The Company is involved in various environmental and
other administrative or judicial actions initiated by governmental agencies.
While it is not possible to predict the results of these matters, the Company
does not expect environmental expenditures, excluding amounts that may be
required in connection with the 1993 consent decree in the 1990 EPA lawsuit, to
materially affect the Company's results of operations or financial position.
Corrective actions relating to the EPA consent decree may require significant
expenditures over the next several years that may be material to the results of
operations or financial position of the Company. At March 31, 2003 and December
31, 2002, the Company's reserves for environmental liabilities totaled $27.8 and
$27.7, respectively, $21.8 and $21.7 of which is related to the sediment
remediation under the 1993 EPA consent decree.
The total amount of firm commitments of the Company and its subsidiaries to
contractors and suppliers, primarily in connection with additions to property,
plant and equipment, was $64.6 and $6.9 at March 31, 2003 and December 31, 2002,
respectively. The amount of firm commitments as of March 31, 2003 include the
commitments for the reline of the #7 Blast Furnace.
In 1993, the Company established a partnership, PCI Associates, with a
subsidiary of NIPSCO, Inc. to lease from General Electric Capital Corporation
certain equipment located at the Indiana Harbor Works relating to the injection
of pulverized coal into the Company's blast furnaces. The term of the lease is
18 years from the Lease Closing Date, August 31, 1993. Upon the failure of PCI
Associates, the Indiana General Partnership, to pay certain amounts due or to
perform certain duties under the PCI Lease or the insolvency of any of the
NIPSCO parties or of the Company partner, the Company will be required, so long
as it is the operator of the facility, to reimburse the lessor for certain
amounts due, or to perform such actions, under the Lease relating to its
operations. The guaranteed amounts and duties do not pertain to the base rents
due under the Lease, which are the responsibility of the NIPSCO subsidiary. The
Company could be responsible for its percentage of the liabilities, costs or
expenses associated with specified misrepresentations or covenant breaches,
discounted at 10%. The Company cannot reasonably estimate the amounts which
could be due under this guarantee, however, it is not likely that resulting
payment obligations in connection with any such arrangements could materially
affect the financial condition or results of operations of the Company. The
Company has not recognized any liability associated with this guarantee.
The Company and an independent, unaffiliated producer of raw materials are
parties to a long-term supply agreement under which the Company was obligated to
fund an escrow account to indemnify said producer of raw materials for the
continuing availability of certain tax credits under the US Tax code, which
credits extend until January 1, 2008. Contributions to the escrow were
determined by the agreement and the funds were restricted from Company use while
in the escrow. The Company received full recovery of $39.1, the escrowed amount,
in April of 2001. No further contributions to the escrow are required at this
time as the Company believes the likelihood of the specific contingency
occurring is remote. If there is any loss, disallowance or reduction in the
allowable tax credits applicable to the raw materials previously sold to the
Company, the Company is required to repay the independent, unaffiliated producer
the amount by which the cost of the raw materials was decreased as a result of
such tax credits, subject to certain adjustments, plus interest. As of March 31,
2003, the Company's cumulative cost reduction due to such tax credits totaled
$136.2. The current carrying amount of this indemnification is $0.
12
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONT.)
In October 1996, the Indiana Department of Environmental Management, as lead
administrative trustee, notified the Company and other potentially responsible
parties that the natural resource trustees (which also include the Indiana
Department of Natural Resources, the U.S. Department of the Interior, the Fish
and Wildlife Service and the National Park Service) intend to perform a natural
resource damage assessment on the Grand Calumet River and Indiana Harbor Canal
System. The notice states that the Company has been identified as a potentially
responsible party due to alleged releases of hazardous substances from its
Indiana Harbor Works facility. Ispat and the Company have notified Ryerson Tull,
Inc. of their intention to seek indemnification and other remedies under the May
27, 1998 Merger Agreement among Ispat, the Company, Inland Merger Sub, Inc. and
Inland Steel Industries, Inc. (the predecessor company to Ryerson Tull, Inc.),
as amended, and on other grounds, for any losses in connection with this matter.
At this time, it is not possible to accurately predict the amount of the
Company's potential liability or whether this potential liability could
materially affect the financial position of the Company.
The U.S. Comprehensive Environmental Response, Compensation, and Liability Act,
also known as Superfund, and analogous state laws can impose liability for the
entire cost of cleanup at a site upon any of the current or former owners or
operators or parties who sent waste to the site, regardless of fault or the
lawfulness of the activity that caused the contamination. The Company is a
potentially responsible party at several state and federal Superfund sites.
Except for the Four County Landfill described below, the Company believes its
liability at these sites is either de minimis or substantially resolved. The
Company could, however, incur additional costs or liabilities at these sites if
additional cleanup is required, private parties sue for personal injury or
property damage, or other responsible parties sue for reimbursement of costs
incurred to clean up the sites. The Company could also be named a potentially
responsible party at other sites if its wastes or its predecessor's generated
wastes were disposed of at a site that later became a Superfund site.
The Company received a Special Notice of Potential Liability from the Indiana
Department of Environmental Management (IDEM) on February 18, 1992 relating to
releases of hazardous substances from the Four County Landfill Site in Fulton
County, Indiana. The Company, along with other potentially responsible parties
(PRP's), has entered into two agreed orders with IDEM pursuant to which the
PRP's agreed to perform a remedial investigation and feasibility study for the
site, pay certain past and future IDEM costs and provide funds for operation and
maintenance necessary for stabilization of the First Operable Unit of the site.
The remedial investigation and feasibility study work is complete. With respect
to the cost of the remaining work on the First Operable Unit, IDEM's most
current estimate is $0.7. Under the terms of the PRP agreement, the Company has
an approximate 7.2% share.
In July 2001, IDEM selected the remedy for the Second Operable Unit at the Four
County Landfill. The Company is a member of a group that is negotiating with
IDEM to resolve any liability for the Second Operable Unit as well as remaining
obligations with regard to the First Operable Unit. IDEM has estimated the costs
for the Second Operable Unit to be approximately $1.0, with an additional
contingent remedy estimated to cost approximately $2.1, to be implemented only
if the selected remedy is deemed to be inadequate. The Company presently intends
to participate in the settlement that is being negotiated at a level that is
consistent with its participation in the PRP Agreement for the First Operable
Unit, which would reflect, at a maximum, approximately $0.2. IDEM has a trust
account holding approximately $0.8 for use in the implementation of the First
and Second Operable Unit remedies.
In July 2001, the United States Environmental Protection Agency (EPA) filed suit
against the Company and other PRP's, seeking recovery of past response costs
which it alleged it has expended at the Four County Landfill Site. On February
6, 2003, a Consent Decree was issued by the U.S. District Court of Northern
Indiana, which resolved the EPA's cost recovery suit. As a result of that
Consent Decree, the Company paid a de minimis amount in past response costs to
the EPA.
On July 2, 2002, the Company received a notice of violation ("NOV") issued by
the US Environmental Protection Agency against the Company, Indiana Harbor Coke
Company, L.P. ("IHCC") and Cokenergy, Inc., alleging violations of air quality
and permitting regulations for emissions from the Heat Recovery Coal
Carbonization facility
13
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONT.)
which is operated by IHCC. An amended NOV stating similar allegations was issued
on August 8, 2002. Ispat and the Company have notified Ryerson Tull, Inc. of
their intention to seek indemnification and other remedies under the May 27,
1998 Merger Agreement among Ispat, the Company, Inland Merger Sub, Inc. and
Inland Steel Industries, Inc. , as amended, and other grounds, for any losses in
connection with this matter. At this time, it is not possible to predict whether
the Company will be found liable for any violation and, if, in fact, there were
to be such a finding, the amount of the Company's potential liability or whether
this potential liability could materially affect the financial position of the
Company.
In addition to the foregoing, the Company is a party to a number of legal
proceedings arising in the ordinary course of its business. The Company does not
believe that the adverse determination of any such pending routine litigation,
either individually or in the aggregate, will have a material adverse effect on
its business, financial condition, results of operations, cash flows or
prospects.
NOTE 8 - DERIVATIVES
The Company uses futures and swap contracts to manage fluctuations in the cost
of natural gas and certain nonferrous metals, primarily zinc which is used in
the coating of steel. Timing of these transactions corresponds to the expected
need for the underlying physical commodity and is intended as a hedge (not as
defined by SFAS No. 133) against the cost volatility of these commodities. The
counterparties to these contracts are internationally recognized companies which
are not considered a credit risk by the Company. Contracts generally do not
extend out beyond two years. At March 31, 2003 and December 31, 2002, the
Company had entered into contracts for these commodities for notional amounts of
$19.6 and $14.9, respectively. For the quarters ended March 31, 2003 and 2002,
the Company recorded a $0.6 and $1.3 gain, respectively, for changes in the fair
value of derivative instruments not designated as a hedge (as defined by SFAS
No. 133). Under terms of the futures and swap contracts, the Company had
approximately $1.0 and $0.9 on deposit with counterparties at March 31, 2003 and
December 31, 2002, respectively, that was classified as an other asset on the
balance sheet.
A portion of the floating rate debt used in connection with the financing of the
acquisition of the Company was hedged by the Borrower through the use of an
interest collar. Due to the decline in interest rates during fiscal year 2002,
the fair value of the collar represented a derivative liability to the Borrower
of approximately $11.1 at March 31, 2003 and $13.7 at December 31, 2002.
NOTE 9 - ASSET RETIREMENT OBLIGATIONS
The Company adopted the provisions of SFAS No. 143 as of January 1, 2003. Based
on analysis the Company has performed, it has been determined that the only
asset for which an asset retirement obligation must be recorded is the Company's
Minorca Mine. The Minorca Mine through the Environmental Impact Statement (EIS)
process does have a reclamation plan on file with the state of Minnesota. Each
year the Minorca Mine is required by the Minnesota Department of Natural
Resources (MDNR) to submit an annual mining and reclamation summary for the year
just completed and to provide mining and reclamation plans for the coming year.
When possible the Minorca Mine reclaims abandoned areas on a yearly basis. By
doing this, the mine keeps up with the reclamation to avoid a huge cost at the
end of the mine life. Each fall the MDNR conducts a field review of prior
reclamation work, to point out deficiencies that need to be corrected. A
complete environmental site assessment was done in 1996. The Minnesota Pollution
Control Agency conducted a multi-media inspection of the entire property with no
violations. Currently, Ispat Inland Mining Company is in compliance with all
environmental standards and therefore, the Company expects little or no
environmental remediation at the time of closure of the mine. As of January 1,
2003, the estimated total future reclamation costs are $18.2 with an estimated
potential reserve of 43,000,000 gross tons of pellets. The impact of adopting
SFAS No. 143 on January 1, 2003 is an increase in assets and liabilities of $3.8
and $6.3, respectively. A charge of $1.6 (net of tax of $0.9) is reflected on
the Consolidated Statement of Operations as of January 1, 2003 as a Cumulative
Effect of Change in Accounting Principle.
14
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 10 - RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Total research and
development costs for the quarters ended March 31, 2003 and 2002 were $2.8 and
$2.9, respectively.
NOTE 11 - SUBSEQUENT EVENTS
On April 30, 2003, the Company replaced its $120 inventory-backed credit
facility with a four-year approximately $175 committed revolving credit facility
secured by its inventory, spare parts and mobile equipment.
On May 5, 2003, the Company increased the amount committed by its lenders under
its receivables-backed revolving credit facility from $165 to $185.
15
ITEM 2.
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
RESULTS OF OPERATIONS
Comparison of First Quarter 2003 to First Quarter 2002
Net sales of $553.9 for the first quarter of 2003 increased by 4.1 percent over
$532.0 in the year-ago quarter as volume decreased by 10.0 percent and average
selling price per ton increased 15.7 percent. Steel shipments were 1,268,049 net
tons for the first quarter of 2003 compared to 1,408,917 net tons for the first
quarter of 2002.
Cost of goods sold of $478.4 decreased 6.2 percent from $510.1 in the year-ago
quarter due to decreased volume.
Selling, general and administrative expenses of $6.7 increased 6.4 percent from
$6.3 in the year-ago quarter due to increased spending during the current
quarter.
Depreciation expense of $24.4 for the current quarter decreased 0.4 percent as
compared to $24.5 in the year-ago quarter.
An operating profit of $44.4 was reported for the current quarter compared to an
operating loss of $8.9 in the year-ago quarter as a result of the items noted
above.
Other expense of $1.8 decreased by $16.8 from $15.0 of income in the year-ago
quarter due to increased corporate expenses and decreased gain on the early
extinguishment of debt. The year-ago quarter included a gain on the early
extinguishment of debt of $14.5 while the current quarter included a gain on the
early extinguishment of debt of $0.8 for a change of $13.7.
Interest expense of $17.8 in the current quarter decreased 7.3 percent from
$19.2 in the year ago quarter due to a reduction in interest rates.
Information Concerning Obligations to the Pension Benefit Guaranty Corporation
The Company is in the process of negotiating a revised agreement with the
Pension Benefit Guaranty Corporation referred to in Note 7 in Part I, Item 1 in
this Form 10-Q. For details concerning these negotiations and their potential
effect upon the Company's outstanding debt, see Note 3 and Note 7 in Part I,
Item 1 of this Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, evaluations were
carried out under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934). Based upon those evaluations, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective. No significant changes have been made in
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluations.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 5. OTHER
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The exhibits required to be filed by Item 601 of
Regulation S-K are listed in the Exhibit Index which is attached
hereto, and incorporated by reference herein.
(b) REPORTS ON FORM 8-K.
None
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ISPAT INLAND INC.
By /s/ Michael G. Rippey
---------------------------------
Michael G. Rippey
Executive Vice President -
Sales, Finance &
Administration
and CFO
Principal Financial Officer
Principal Accounting Officer
and Director
Date: May 12, 2003
CERTIFICATION
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Peter D. Southwick, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Ispat Inland Inc.
(the "Registrant")
2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
2
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 12, 2003
----------------------
/s/ PETER D. SOUTHWICK
---------------------------
Name: Peter D. Southwick
Title: President & Chief
Executive Officer
3
CERTIFICATION
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael G. Rippey, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Ispat Inland Inc.
(the "Registrant")
2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
4
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 12, 2003
-----------------------
/s/ MICHAEL G. RIPPEY
-----------------------
Name: Michael G. Rippey
Title: Executive Vice
President - Sales,
Finance &
Administration and
Chief
Financial Officer
5
INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
------- ----------------------------------------------- ----------
99.1 Certification of Peter D. Southwick, President & Chief Executive
Officer of Ispat Inland Inc. Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Michael G. Rippey, Executive Vice President -
Sales, Finance & Administration and Chief Financial Officer of
Ispat Inland Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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